One principle lies behind nearly all of the Reagan Administration's policies concerning business and the economy: an open and competitive marketplace, free from government interference, corrects all ills. Deregulation, massive tax cuts, the shuttering of consumer-protection bureaus, the elimination of the Federal Reserve Board's margin requirements for corporate takeovers -- all these flow logically from that simple faith in the power of the free market. It is a faith, by and large, shared by America's independent businesspeople and entrepreneurs.

But one form of deregulation now threatens to undermine all of these others: the so-called reform of the antitrust laws. An earlier generation of Republicans saw these laws as necessary to preserve a truly free and competitive marketplace, and enforcement of them has been a matter of bipartisan enthusiasm. In word and deed, however, the Reagan Administration is now proceeding on the assumption that the antitrust laws have really been anticompetitive and the enthusiasm for enforcing them misguided. Consider:

* The Justice Department and the Federal Trade Commission, except in the most egregious instances of bid-rigging by contractors, have refused to bring any significant antitrust cases.

* Megamergers involving competitors in steel, oil, and electronics go unchecked.

* New Justice Department guidelines have removed from government review just about any vertical restraint a big company wants to impose on unwilling customers, distributors, or suppliers. In response, critical votes have been taken in both houses of Congress, and the attorneys general of all 50 states have issued their own set of uniform guidelines that they will use in policing vertical restraints under state law.

* Justice Department lawyers have filed a brief at the U.S. Supreme Court arguing that businesses should rarely, if ever, have standing to bring private antitrust suits against their competitors.

* The White House is recommending to Congress the most sweeping changes in the antitrust laws since President Woodrow Wilson signed the Clayton Act in 1914. The Administration proposes a five-year exemption from the antitrust laws for companies in any industry found to be hurt by unfair import competition. And it proposes to eliminate treble damage awards in most private antitrust suits, with the express purpose of reducing the likelihood that these risky and complex cases would be brought.

The economic theory behind all this is that the antitrust laws as now written artificially restrain the economy from organizing itself into units that are bigger and more vertically integrated -- units that would be more efficient in supplying goods and services at the lowest possible price, and more successful in competing for international markets. What the Reagan Administration is less eager to talk about is the unavoidable consequence of following through on that theory: that the American economy would have fewer -- and weaker -- independent businesses.

The Reagan theory is strangely at odds with recent experience. It is true, for example, that until recently, antitrust lawyers with the Justice Department did not sufficiently consider the effect of foreign competition when reviewing proposed mergers of companies within domestic industries. But it is a long leap from there to the assertion that the antitrust laws destroyed the competitiveness of American industry and now need to be suspended. Commerce Secretary Malcolm Baldrige may be the only man in America who really believes that the reason U.S. Steel, GM, and RCA have fared so poorly against foreign competition is that they just aren't big enough. If anything, these cases might suggest just the opposite: that the inability to compete is a result of being too big, not too small -- of operating in industries in which there has been too much concentration, not too little.

In defense of its laissez-faire attitude toward mergers, the Administration cites not a single example of an industry or a company that would have thrived in the marketplace but for the disruptive hand of the antitrust enforcer. Instead, these policies are prescribed on the basis of theoretical models about economic efficiency. In this context, efficiency has a special meaning. It does not mean that companies involved in mergers are themselves likely to pare operating costs, charge lower prices, or earn higher profits. In fact, F. M. Scherer, a visiting fellow at The Brookings Institution who has studied the financial reports of pre- and postmerger companies, has found that, "on average, mergers decrease efficiency" of particular companies. Rather, the Reagan theory is that the economy as a whole is more efficient in balancing overall supply and demand when companies are free to follow their instincts and attempt to monpolize the marketplace. But the theory is fundamentally flawed. It assumes, at the outset, that consumers and business managers are perfectly rational economic actors working in an ideal atomistic economy with frictionless competition. Is there anyone outside of Washington who believes this is how the economy operates?

What real businesspeople do believe is that the economy is too important to be left to government lawyers or to economists. That's why private antitrust suits filed by businesses of all sizes against predatory competitors have been so important in keeping the marketplace truly free and competitive. The Administration says it doesn't oppose these private suits -- only the punitive treble damages that are awarded after judges and juries have determined that illegal behavior has occurred. But, as a recent study prepared for Georgetown University Law Center concluded, without the possibility of winning treble damages, businesses and their high-priced attorneys will be unlikely to risk the expense and time of such complicated litigation.

There is also the deterrent effect of punitive antitrust damages to consider. Without treble damages, businesspeople will know that the only penalty for getting caught at predatory business practices will be to give back the ill-gotten gains. With so little at risk, many more will give monopolizing a try. This is hardly the policy one would expect from a self-described law-and-order administration.

Consider a couple of recent private antitrust suits that are precisely the sort that the Justice Department thinks should never have been brought, never been won, and surely never have resulted in such punitive damages:

* Data General Corp. developed a computer it called NOVA and a copyrighted operating system, or basic software, to run it. The software, it turns out, was sought by owners of computers similar to the NOVA, but Data General refused to license the software except in combination with the hardware. A jury found that the software could not be produced by other software companies, and that Data General's insistence on "tying" or "bundling" its software with its hardware led buyers that might not have bought its hardware or might have bought it for less from someone else to purchase it from Data General. The suit was brought by competitors Digidyne Corp. and Fairchild Camera & Instrument Corp. Damages have yet to be awarded.

* Eli Lilly & Co., the drugmaker, had three antibiotics it was selling: two exclusively, under patent protection, and a third that was in competition with an interchangeable drug sold by SmithKline Corp. By offering large discounts to hospitals that bought the three drugs in combination, Lilly had effectively foiled SmithKline's marketing of the competitive drug. SmithKline, in response, was forced to offer discounts of up to 35% on this one product -- discounts that made it impossible to recover the $20 million it had invested in research and market development for its competitive alternative. An appeals court upheld the finding against Lilly, saying that "price, supply, and demand" for the competing antibiotics "would have been determined by the economic laws of the competitive market" if it were not for Lilly's "monopolistic practices." The award: $9.9 million.

The argument against allowing these kinds of cases is that the marketplace will eventually "correct" for such anticompetitive behavior if it is bad for the consumer. But that argument assumes precisely what it proposes to prove -- namely that there is a truly free marketplace at work. For a free marketplace, by definition, is one in which new entry is not only theoretically possible, but practically possible as well. Yet in these and dozens of similar cases, the effect of the anticompetitive activity was to raise the threshold for market entry artificially -- so much so that even larger companies like SmithKline and Fairchild Camera could not compete.

Would the computer industry, for example, ever have spawned an entrepreneurial explosion of IBM had not been forced, under pressure of antitrust enforcement, from bundling its products and services, as Data General later tried to do?

Would you invest $20 million in developing and marketing a new antibiotic if your competitor could tie its sales of an antibiotic to another patent-protected drug for which it was the only supplier?

Beyond entry, there is the question of how free the marketplace really is once you're in it. Consider these two cases involving smaller businesses:

* Columbia Metal Culvert Co., a small manufacturer of aluminum pipe, claimed it was forced out of business by the giant Kaiser Aluminum & Chemical Corp., which was a supplier of Columbia's basic manufacturing material, in the form of aluminum coil. A jury found that when Columbia began shopping around for a better price for some of its aluminum coil, Kaiser made good on a threat of its executive by forcing Columbia out of business through a "price squeeze?: refusing to sell any coil to Columbia; using its power as a price leader to force a rise in the price of the coil industrywide; opening its own pipe-manufacturing plant 40 miles down the road from Columbia; and, the final straw, selling finished pipe for the same price as it was charging simply for the aluminum coil needed to make it. The award: $9.5 million.

* Two Mobil service station operators in Washington State were forced out of business when they refused to buy sufficient quantities of motor oil, tires, and batteries directly from Mobil Oil Corp., and refused to abide by the suggested retail price for gasoline. Mobil argued, as it has traditionally done in such cases, that vertical restraints like those are necessary to mount and finance a national marketing campaign that benefits all its dealers. But the jury took all that with a grain of salt when it heard evidence that Mobil motor oil was being sold in Washington supermarkets at a price below what Mobil was charging its own dealer. The antitrust awards totaled nearly $600,000.

The logic behind these cases is that the marketplace is not truly free if customers in oligopolistic industries are not free to shop around as best they can for supply and price and customers. Wall Street's complaint is that the benefits to the economy from Mobil or Kaiser implementing their long-term marketing strategies outweigh the costs of driving an efficient pipe company and service station out of business. But that is not the view from Main Street, where most of the innovation is taking place in the American economy, where all of the new jobs are currently being created, and where businesspeople know the real meaning of the word competition. For nearly a century, now, the antitrust laws have helped to create that kind of economic vitality and encouraged that kind of economic pluralism. The Reagan theorists consider these values romantic and softheaded.

Yes, some minor reforms in the antitrust law may be needed. Perhaps judges could be empowered to waive the full effect of treble damages when the violation is not willful or the case law applicable to a particular activity is cloudy. Maybe the law should make a clearer distinction between breach-of-contract cases, which don't deserve treble damage penalties, and bona fide antitrust cases, which do. Companies that bring blackmail suits of no legal merit should be made to pay the legal fees of both sides.

But the Reaganauts are not really interested in perfecting antitrust law. They are out to eliminate it -- and any number of independent businesses in the process. Ironically, these cheerleaders for capitalism are not the first to try to restructure a national economy according to theoretical models. The same argument was used to justify the highly planned and centralized economy of the Soviet Union, where most of the businesses are quite big, but, at last report, not very efficient.

Published on: Apr 1, 1986