February 26, 2001
Authors Expose Antitrust Trial Judges Contradictions and Muddled Thinking; Proposed Microsoft Break-up, They Say, Is Based on Weak Theory, Not Evidence, and Would Raise Prices, Hamper Innovation, and Harm Consumers
Oakland, CAThe book that The Economist magazine calls by a long way
the best single thing to read on high-tech markets and network economics has just been reissued by its publisher, The Independent Institute, to include a stinging, new critique of the Microsoft antitrust trial judges findings and the proposal to break-up the software giant.
The government has chosen and the judge has approved a defective remedy. Its key defect is its logical inconsistency with the claims made in the case, write economists Stan J. Liebowitz and Stephen E. Margolis in the new appendix to their book, Winners, Losers & Microsoft: Competition and Antitrust in High Technology.
Its difficult to avoid concluding that the purpose of the so-called remedy is not correction, but punishment, conclude Liebowitz and Margolis.
First published in 1999, and based on peer-reviewed research going back more than a decade, Winners, Losers & Microsoft argues that high-tech markets are not immune to vigorous competition and that the path dependence theory which claims such markets are prone to locking in inferior products lacks empirical support and merits no place in antitrust cases.
Even with the presence of so-called network effectsthe phenomenon of a product becoming more useful to a consumer, the greater the number of other users of the productmarkets do not lock in a market leader and thereby do not preclude the possibility that a better product will come along and dethrone it.
As Liebowitz and Margolis show, contrary to popular myth, the market success of the QWERTY keyboard format, the VHS videotape format, and various Microsoft software programs is due not to lock-in but to the fact that these products are as good or better than the competition.
In the case of Microsoft, Liebowitz and Margolis found that when its software products have dominated a market, that success can be explained by the superior reviews those products received in independent magazines. Further, Microsoft has not acted as a monopolist but has pursued a low price, high volume strategy that has led to prices falling more dramatically in markets where Microsoft competes than in markets where it does not compete.
Among Liebowitz and Margoliss criticisms of Judge Jacksons findings and remedy:
- Jackson relies upon the lock-in theory refuted in Winners, Losers & Microsoft. But if lock-in theory is true, how could Microsoft Windows have beaten out Macintosh or IBMs OS/2, which started out with plenty of applications developers?
- Jackson contends that Microsoft sought to protect an effective monopoly in desktop operating systems by reducing Netscapes considerable market share. Jackson assumed that Java applications might someday operate off of Netscape, thereby making the underlying operating system irrelevant. But this premise requires a leap of faith, say Liebowitz and Margolis. No middleware program has ever become a platform for mainstream programs or a serious alternative to an operating system (p. 280).
- Jacksons remedy of separating Microsoft into an Operating System company and an Applications companyand preventing them from conducting business with each other for ten yearsis inconsistent with his findings of fact and will weaken, not strengthen, the world of computing that surrounds the Windows operating system (p. 282).
- Jackson says that a separate Microsoft Applications company would strengthen alternative operating systems such as Linux. But even if the company found it profitable to port its applications to Linux, by the courts previous reasoning, Linux would still pose no threat to Windows. (p. 283)
- The biggest problem concerning pricing is that it is not at all certain that the new Microsoft Applications company would pursue the same low price, high volume strategy that has benefited consumers throughout Microsofts existence. (p. 287)
Conclude Liebowitz and Margolis: When the theory of an antitrust case is based on a defective view of markets, it is not surprising that the findings are flawed or that the proposed remedy will do more harm than good. The Microsoft case is based largely on a theory of lock-in through network effects, an insecure foundation at best. Network theories, we have argued, ought not be enshrined in our antitrust laws. They can be so enshrined only if conjecture is elevated above evidence.
Winners, Losers and Microsoft has been favorably reviewed in Upside, Wired News, Reason, Newsweek, Financial Times, Wall Street Journal, Red Herring, Choice, Industry Standard, Journal of Product Innovation and Management, Washington Times, American Way, and other publications.
Stan J. Liebowitz and Stephen E. Margolis are research fellows at The Independent Institute and professors of economics at, respectively, the University of Texas, Dallas, and North Carolina State University, Raleigh. Their articles on network economics have appeared in such publications as the Journal of Law and Economics, Harvard Journal of Law and Technology, New Palgrave Dictionary of Economics and the Law, Investors Business Daily, Christian Science Monitor, Upside, Reason, San Francisco Chronicle, and Wall Street Journal.