David R. Henderson  

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My co-blogger, Bryan, posted an excellent piece on the origins of monopoly. I think it also led to one of the highest-quality set of comments I've seen on Econlog. Here's some additional backing for Bryan's points from some of my articles.

http://www.davidrhenderson.com/articles/0600_ashorthistory.html, On Microsoft:

Does this mean that path dependence fails as a theory, or are QWERTY and VHS just bad examples? And since the issue here is Microsoft's dominant position in operating systems, are we locked into an inferior technology because of network effects and path dependence? Many experts in software development believe that we are. They find that what is needed to write software for Windows is clumsy and time-consuming. They see alternatives that are easier to work with, such as Macintosh OS X and Linux. Then they look at the fact that most of us ignorant consumers are quite happy with Windows, and they feel frustrated. Surely, they conclude, there is something to this lock-in effect.
And there is. But what overcomes it is marketing. Microsoft has done it well, and Apple Computer didn't, for a long time. Mr. Gates saw early that aggressive marketing was as vital as "insanely great" technology (Steve Jobs's description of the Macintosh). Jim Carlton's 1997 book, Apple: The Inside Story of Intrigue, Egomania, and Business Blunders, contains a revealing 1985 Gates memo to Apple CEO John Sculley. Mr. Gates, who wanted Apple to succeed because much of his profit came from selling Macintosh application software, recommended that Apple allow other manufacturers to produce the Mac. That way, reasoned Mr. Gates, Apple would "have the independent support required to gain momentum and establish a standard." This memo shows Mr. Gates as hardly the "Mac killer" that many believe him to be. More importantly, it shows that he understood network effects and thought carefully about the marketing strategy required to take advantage of them.

http://www.davidrhenderson.com/articles/0895_antitrustbusters.html On the Effects of the 19th Century Trusts on Prices:

Even the antitrust critic Richard Posner, in his 1976 book, Antitrust Law: An Economic Perspective, expressed the conventional belief that "the Sherman Act was passed in 1890 against a background of rampant cartelization and monopolization of the American economy." But the research of some economists in the '80s cast new light on the trusts of 100 years earlier. If the trusts' main impact had been to monopolize industries to the detriment of consumers, then a study of those industries should find that prices were growing more quickly and output more slowly than in industries where the trusts were not taking over. The economist Thomas DiLorenzo, who is now at Loyola University in Baltimore, did such a study in 1985. In his article, "The Origins of Antitrust: An Interest-Group Perspective," published in the International Review of Law and Economics, Mr. DiLorenzo found that between 1880 and 1890, while real gross domestic product rose 24 percent, real output in the allegedly monopolized industries for which data were available rose 175 percent, seven times the economy's growth rate. Meanwhile, prices in these industries were falling. Although the consumer price index fell 7 percent in that decade, the price of steel fell 53 percent, refined sugar 22 percent, lead 12 percent, and zinc 20 percent. The only price that fell less than 7 percent in the allegedly monopolized industries was that of coal, which stayed constant.
In his 1987 book, A Theory of Efficient Cooperation and Competition, Lester Telser, a University of Chicago economist, reinforced Mr. DiLorenzo's theme, pointing out that between 1880 and 1890 the output of petroleum products rose 393 percent and the price fell 61 percent. These findings turn the conventional wisdom on its head. Writes Mr. Telser: "The oil trust did not charge high prices because it had 90 percent of the market. It got 90 percent of the refined oil market by charging low prices."

http://www.davidrhenderson.com/articles/0895_antitrustbusters.html On Mainstream Economists' Views on Antitrust:

Although Bryan correctly notes that mainstreams are way too in favor of antitrust laws, this passage from my review of The Causes and Consequences of Antitrust: The Public Choice Perspective, edited by Fred S. McChesney and William F. Shughart II, shows that the mainstream economists who write on antitrust, even though they favor it, show that the effects are not clearly positive:

Part One presents evidence by various researchers that is inconsistent with the standard public interest view of antitrust. Part One's most striking article is Paul Rubin's "What Do Economists Think of Antitrust?: A Random Walk Down Pennsylvania Avenue." Rubin uses a simple but marvelously clever methodology. He takes all the antitrust articles cited in a major industrial organization textbook by Frederic M. Scherer and David Ross. Rubin notes that Scherer is a leading proponent of antitrust and that, therefore, any bias in the cases cited in the book would be in favor of cases where the antitrust authorities were acting to preserve or increase competition.
Rubin then summarizes each case and categorizes them, by the standards of the author writing about the case, as justified or unjustified. The bottom line: In the view of the economists writing the articles, there were 14 justified cases and nine unjustified ones. Moreover, the plaintiffs won a lower percentage of the justified cases (64 percent) than of the unjustified ones (78 percent). Concludes Rubin: "Factors other than a search for efficiency must be driving antitrust policy."

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CATEGORIES: Microeconomics



COMMENTS (14 to date)
david writes:

See, the problem with the narrative "Microsoft didn't squash Netscape through anticompetitive practices" is that Microsoft then sat on its hands for the next five incredibly painful years (ask any web developer). And then promptly got up and starting running only when Netscape's technical successor Mozilla came back with a vengeance.

The latter is obviously competition. So what's supposed to explain the interim period where the innovation in the entire market stagnated? We can't plausibly say that the market has remained competitive throughout. What happened?

Incidentally, the claim at http://www.davidrhenderson.com/articles/0600_ashorthistory.html :

Some have claimed that Microsoft is engaged in predatory pricing, trying to knock Netscape out of business so that it can charge more for its browser once the competition is out of the picture. But companies don't usually cut a price to zero to knock out a competitor that previously charged zero. Worse, it didn't work: Netscape still has a large, albeit reduced, market share.

doesn't compare favorably with history; in 2000, the datestamp of the essay, Netscape had 15%. By 2003 it had 1% and Netscape Communications was disbanded. I think we can justifiably say "it worked"...

[link edited--Econlib Ed., Jan. 15, 2011]

Patrick R. Sullivan writes:

David, do you think Microsoft 's[itting] on its hands', might have had anything to do with the Federal Govt. scrutinizing its every action?

And, competition benefits consumers, not web developers. I'm using Google Chrome right now, and might use their newly announced OS too. Why didn't Bill crush them?

david writes:

@Patrick Sullivan

I indeed think the lack of Google crush-age might have indeed something to do with both the US government and the European Union watching very carefully. Both are still watching, mind you, now more than ever, so it's hardly an explanation for the lack of innovation previously. The lack of competition is the explanation for the lack of innovation.

This has been a carefully-fought issue between the two companies. I don't know how much tech news you read, but lately Google has nudged competition authorities numerous times over Microsoft locking in browser features (especially default search settings). And desktop search, and the use of undocumented features in Windows with Microsoft's Internet Explorer, and the default inclusion of Microsoft's online services with Windows, and so on. Microsoft has generally ceded ground (new feature with Windows 7, coming this Oct 22 - you can finally uninstall Internet Explorer! I think this was part of an EU deal, if I remember correctly).

I think we can confidently say that Chrome exists because of Microsoft being controlled by competition authorities. It's worth noting that the core of Chrome, the WebKit rendering engine, was developed by Apple to replace the aging Internet Explorer 5 for Mac (development on it had halted once the five-year deal between Microsoft and Apple expired). Had Microsoft's domination of the operating system market been any more complete, there wouldn't be any Chrome now either.

Patrick R. Sullivan writes:
competition authorities

That has the whiff of oxymoron about it. Unless you're talking about consumers.

Joe Cushing writes:

It's possible that antitrust was important at one time. What the last 15 years have taught us is that markets move so fast that even a dominant position does not protect against the threat of new entrants. I once thought Microsoft was evil but today I realize that the electronics market is faster than the government's ability to regulate. It's downright silly to fine an electronics company for antitrust issues because by the time the court case is over the market environment has completely change. Aggressor could be the victim by then. There are some things I am against, however. Intel should not be able to pay computer makers to not use AMD chips. That's just unfair. If Intel bought AMD, I would not have a problem. Someone else would likely enter the market in the next 5 or 10 years. In the mean time Intel would know this and behave accordingly.

Gary writes:

In the late 80s and early 90s, prices fell by an average of 15% in the software categories in which Microsoft did not have a presence. Prices fell by 65% in the categories where Microsoft did have a presence (Liebowitz and Margolis). Awesome, huh? (Note: United States v. Microsoft didn't start until 1998.)

For those who see predatory pricing, please provide an example (Microsoft or otherwise) of a company lowering prices to destroy competition, then raising prices later. That is the fear with predatory pricing -- nobody worries that a monopolist will destroy competitors by lowering prices and keeping them there, because that's a straight up benefit to consumers.

agnostic writes:

Microsoft did not win by marketing. Consumer-oriented magazines have rated its killer-app products as better than the alternatives. Where MS's products were rated inferior, they never held the market (e.g., personal finance software). See chapters 7 - 9 of Winners, Losers, and Microsoft. All the key data are presented in charts, so you can skim it all within 10 - 15 minutes at the library. Liebowitz has some of the charts up at his website too.

Comparing them to some developer geek's ideal is committing the Nirvana fallacy. Comparing them to existing alternatives, but judging them based on how easy it is to develop websites with them, is the wrong criterion. Nobody buys Microsoft's products to do that -- it's Joe Shmoe who wants a word processor, spreadsheet, or intuitive point-and-click operating system. What's next -- whining that Wal-Mart doesn't offer bronze Donatello reproductions? Web programmers need to get a life.

BTW, I am truly surprised by these posts about monopoly, network effects, etc. I'm not an economist, so I figure that if even I know that no one has shown a real-world case where network effects have led to lock-in, that Microsoft won (where it did) by offering the highest-rated products, and so on, surely the economics people must too.

I thought Stan Liebowitz and Stephen Margolis' work over the past 20 years would be like Steven Pinker's or Jared Diamond's, to pick fields I'm more familiar with. It's strange how these myths continue.

I looked up "QWERTY" in the econ journals at JSTOR and found that it has appeared more and more frequently, even though the debate should've been over at least 15 years ago:

QWERTY-nomics in JSTOR

You might think the latest articles would all be ones poking fun at the silly ideas of yesteryear, like "epicycle" appearing in astronomy journals. But as we see, the mythology about QWERTY, Betamax, Microsoft, etc., refuse to die.

david writes:

@agnostic

Costs to producers (in this case, companies selling online services) are directly passed on to consumers. The costs in this case are all the online services consumers didn't get because the dominant web browser was that much more difficult to develop for.

It takes a peculiar kind of worldview to say, the current world is the best of all worlds, because anything better a geek's impossible Nirvana, therefore we are entitled to reject anything anyone actually familiar with the field actually has to say. And then use this stand to argue that the market has remained competitive. There's a certain sense of circularity here, I submit.

As for software ratings, I really shouldn't have to point out that software are of course rated according to how well they work with their surrounding software environment. Does that Office competitor not work with any of the (then) undocumented Office file formats? Okay, out it goes...

You can't assume the absence of vendor-lockin when citing evidence to that effect, or you're just going to get exactly what you began by assuming.

Gary writes:

david, notice that your example is one where the "monopolist" lowered its price and kept it low. They didn't raise the nominal cost or make development more difficult once Netscape died off. It took a long time for a competitor to be able to raise quality a bit and still offer the same low price. Quite a testament, IMO, to the value that IE provided. And that's from someone who has spent many hours hacking perfect code to make it work with IE.

Political Observer writes:

Bryan's discussion of the effects of 19th century trust on prices helps to put into perspective the political issue around the Sherman anti-trust legislation. What we have here is a perfect example of the "progressive" mindset that continues to exist today.

The anti trust legislation had little to do with economics nor consumer protection (though the issue was cleverly cloaked in each cover). The real issue was that there was a growing segment of the economy where individuals were appearing to become more powerful than the elected officials. Up to the late 1800s there were few individuals outside of government who could command the nations attention. With the rise of the great tycoons, there became unelected individuals who could have as much or even more influence over public opinion than the President. The poltical class became fearful to the idea that they may be overtaken by this small but powerful group of independent individuals. The only means to control that power was for the government to exert some form of control over their wealth and influence. The Sherman anti-trust act gave them the vehicle to at least break apart their ownership of productive means so as to limit both their future accumulation of wealth and power. This "progressive" victory was the continuation of the transfer of power from private individuals to the government.

Patrick R. Sullivan writes:
It takes a peculiar kind of worldview to say, the current world is the best of all worlds....

Which no one is saying. However, it's the wisdom of the ages that the perfect is the enemy of the good. Your problem is that you don't want to acknowledge that.

Otherwise, you wouldn't be so aggressive in ignoring the relevant scholarly literature on 'path dependence'. Even when handed links to some of it, thus only a mouse click away.

Speaking of peculiar world views.

Gary writes:

BTW, while I'm waiting for someone to point out a real-life example of "predatory pricing", I'll point out that even though most people think Google is innovating like mad and is providing some healthy competition, no good deed goes unpunished.

Patrick R. Sullivan writes:

Thanks for the link to your QWERTYnomics piece, agnostic.

Did you make Stan and Steve aware of it? They tell me they're planning to publish a paper next year; a 20 year retrospective of what we've learned over that time.

drobviousso writes:

I question if price is the only applicable metric for measuring the software world. Fe is Fe is Fe, so price and production make sense to measure iron production. Software is very different than iron though. You can't be pushed to make iron with more features on the same scale as with software.

I think it is very short sighted to say that the predominance of IE for half a decade had no negative effect to potential customers of web based applications and services.

I'm not suggesting that Microsoft needs to be busted (I don't have an opinion or enough info to form one)

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