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The Free Market
The Mises Institute monthly, free with membership


January 1998
Volume 16, Number 1

Reno and the Potato Heads
by Llewellyn H. Rockwell, Jr.

Competition is a process, the Austrian economists have long said, not a moment frozen in time. Today's dominant company could be tomorrow's rubble. Whether the winner can stay on top is dependent on its management, its ability to innovate, and, above all, the will of the consuming public.

But since the turn of the century these insights have been ignored by government's antitrust enforcers. Successful businesses have been sued and smashed by regulators working in cahoots with special interests. Whole industries have been turned upside down, with consumers as the ultimate losers.

Today's antitrust enforcement reduces tragedy to farce. A federal judge recently upheld the Federal Trade Commission's charge that Toys R' Us conspired to prop up the price of Mr. Potato Head. Why? Because the retail outlet liked to make exclusive deals.

Toys R' Us told manufacturers: if you sell to discount stores, we won't buy your product. The manufacturer then makes a choice, based on speculations about the most profitable path, to go with Toys R' Us or its competitors. According to the FTC, this was an illegitimate use of "market muscle." Yet the company holds only 20 percent of the market, and is constantly under the gun from its competitors.

It was the success of Toys R' Us that led discount toy stores into the market in the first place. The company started negotiating exclusive deals in a desperate attempt to shore up its position. Some manufacturers go along, others don't. The company is always taking a risk: if it doesn't carry a product, it could lose even more market share. Its so-called power is ephemeral and speculative. It's here today and gone tomorrow.

And who benefits from this struggle to get to the top and stay there? The consuming public, which has every toy retailer falling all over itself to win the public's loyalties. Whoever serves people the most and makes the best use of its resources enjoys profits, while those who do not suffer losses.

This is the way market competition is supposed to work. It's a glorious system that combines the best of man's competitive spirit with his ability to cooperate to achieve excellence.

The Toys R' Us case reached its low ebb when the FTC accused the company of "spying" on its competition. What did this spying consist of? Sending out employees to see what the competition had on its shelves and what prices they charged. It's called market research, potato heads!

The irony is bracing: lifetime government judges and bureaucrats conspiring to tell real-world entrepreneurs how to conduct their business. It's a violation of the free enterprise ethic, and also a self-evident fraud. No bureaucrat knows the proper configuration to which this or that sector should conform.

Yet Janet Reno gets on national television to proclaim that she is 100 percent sure that a computer's web browser should not be sold with its operating system. This constitutes an illegal tie-in agreement. Microsoft must cease, or hand her $1 million per day, stolen from shareholders.

This "tie-in" claim is a very old excuse for trust busting. Regulators say that the sale of one product at a price cannot be conditioned on the sale of another product. Some years ago, for example, a fishing tackle company came under investigation for selling reels with its rods.

But this principle cannot be applied consistently, since tie-ins are all around us. Gas stations sell low-priced soccer balls with a tank of gas. Is that unfair competition with the Wal-Mart down the street? Is it an attempt to "restrain trade"? No, it is competition itself, an efficient arrangement to sort resources in the most socially beneficial manner.

Another tie-in we see every day: meal deals at fast-food restaurants. If you want the special price, you have to buy a burger, fries, and drink. For that matter if you want to buy the meat, you have to buy a bun. Even the government doesn't call this illegal.

Whether a web browser should come with or without an operating system is for the market to sort out. If Microsoft pursues the wrong strategy, it will be punished. Its market "power" is only as good as its ability to do the best job for its customers and stockholders.

If it's competition we want, we can't depend on government, the inventor of the monopoly. Competition exists in the absence of government intervention. Mr. Potato Head, Microsoft Explorer, their makers and distributors and consumers, can get along just fine without Reno.

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Llewellyn H. Rockwell, Jr., is president of the Mises Institute.

FURTHER READING: Dominick Armentano, Antitrust and Monopoly (New York: Homes and Meier, 1990).

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