David R. Henderson  

The Economics of the Microsoft Case

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I don't know when it happened, but my review of Page's and Lopatka's excellent book on the Microsoft antitrust case is on-line. It appeared in the Fall issue of Regulation. It's both here and here.

My two favorite paragraphs from my review:

In the second chapter, "Decisions," Page and Lopatka methodically lay out the decisions that Judge Thomas Penfield Jackson made in presiding over the case and that the Court of Appeals made in rejecting much of what Jackson found. This chapter, though dense, will be important for those who want to know the exact details of the decisions. The chapter's discussion of the judge's misconduct is especially colorful. Two months before he issued his findings of fact, Jackson gave a series of interviews to reporters from the New Yorker and the New York Times. In the interviews, he expressed negative views about the leading Microsoft officials, including Bill Gates. He said he viewed Gates as arrogant and unethical, and referred to him as "a smart-mouthed young kid ... who needs a little discipline." And Jackson compared Microsoft's behavior to that of gangland killers. Who knew? Many of us thought Microsoft was just selling a fairly good product and figuring out how to extract from consumers as much of the value of the product as it could. Silly us. It was this conduct by Jackson that led the Court of Appeals to disqualify him and hand the case to Judge Colleen Kollar-Kotelly.

The authors don't quite come out and say this, but I will: Judge Jackson seemed to see the case as a grudge match against both Bill Gates and the Court of Appeals. In the above quote about Gates being "smart-mouthed," Jackson added a line that the book's authors don't quote. According to his interviewer, the New Yorker's Ken Auletta, Jackson said: "I've often said to colleagues that Gates would be better off if he had finished Harvard." Auletta also quotes Jackson saying that part of his motive in splitting his finding of facts from his finding of the law was "to confront the Court of Appeals with an established factual record which is a fait accompli." There's nothing wrong with that, except that Jackson confessed that "part of the inspiration for doing that is that I take mild offense at their reversal of my preliminary injunction in the consent-decree case." Rule of law, anyone?


And my other two favorite paragraphs:

Prosecutors in an antitrust case against a monopolist typically argue that restricting the monopolist's conduct or, in the extreme, breaking up the monopolist will allow more competition. Page and Lopatka write, though, that the argument the government made in the Microsoft case was that the competition was "a battle between standards for the hearts and minds of developers." Therefore, the authors point out, if the government had gotten its way, the result would not have been less monopoly but, rather, a different monopolist. They note that this discussion was prominent in the oral argument before the Court of Appeals. They reproduce a hilarious 2.5-page dialogue between one of the judges and the government's appellate counsel, Jeffrey Minear, in which the judge drags Minear to a begrudging admission of that fact.

This is not to say that the Court of Appeals was always wise. In remanding the case to a different judge, the court required the government to show that Microsoft harmed competition in the market for browsers. That sounds like a plausible thing for the court to require until you learn that the same court precluded the government from proving that such a market existed. That could be raw material for a Monty Python skit.


The more one delves into antitrust law, the uglier it looks.


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COMMENTS (18 to date)
Greg Ransom writes:

Gates patently lied under oath and generally acted like a above the law ass when testifying. He should have been held in contempt of court.

Gates has used deception and the power of the state and the capriciousness of law to empower and enrich himself -- and bully and steal ideas from others.

No one should shed any tears for Gates.

David R. Henderson writes:

Greg Ransom,
Since the issue I'm discussing here is antitrust, are you defending the antitrust suit and its outcome? Or is the above the best you've got?
Best,
David

Greg Ransom writes:

David, we need to discuss the relation between government enforced monopoly priviledges and anti-trust law.

Without government created intellectual monopolies, we wouldn't have the political, moral, and economic problems created by things like Bill Gates and Microsoft.

The existence of U.S. intllectual monopoly laws don't come from God or nature, they aren't natural properties of economic goods. And the create all kinds of problems of politics, morals, ethics, and economics, some of them adrssed crudely by anti-trust law.

Graeme writes:

I have no doubt that MS held back technology and harmed consumers by killing competition: BeOS being the most obvious case. A technologically superior product (especially for multimedia and fast development) could not get any distribution because of MS's agreements with PC manufacturers.

Penfield Jakcson may look biased, but:

1) He was angered by MS's actual behaviour
2) His remedies are far more likely to have worked than the eventual decision to do nothing effective.

I see no reason why we would have got a new monopolist. Assume MS disappeared today, what would we be left with? Several Unix variant operating systems similar enough that developers could target all of them at once without a lot of extra costs, and MacOS (and even that is a Unix variant, but developers need to do some extra work to make the best use of its GUI).

Without MS the market would be dominated by open standards, so barriers to entry would be MUCH lower and network effects would benefit the industry as a whole, rather than just MS.

david writes:

Page and Lopatka point out, though, that there is no necessary market failure from that fact alone. Citing the work of economists Stan Liebowitz and Steven Margolis, they point out that if the cost of switching from the inferior to the superior technology is less than the incremental benefit from switching, people will switch.

The authors also point out that Judge Jackson mistakenly saw network effects as something bad, but the Court of Appeals got it right, understanding that network effects add value for consumers.

Microsoft realized this as well; that's why it actively attempted to increase the cost of switching after it had gained market dominance. The switching cost is not constant and can obviously be influenced by a dominant firm!

Hence the introduction of many, many Internet-Explorer-only technologies, often via the Windows-only ActiveX framework. Don't get me wrong here, some of these technologies turned out to be beneficial - XMLHttpRequest underpins all of AJAX "Web 2.0" today. Gmail and Google Maps was a prominent early adopter.

But XMLHttpRequest isn't tied to Windows and is currently duplicated across all major browsers. South Korea is famously tied to Windows and MSIE because it indeed walked into the network-effect-trap of ActiveX technologies; where the rest of the world uses the open SSL/TLS standard, South Korea uses a proprietary ActiveX control SEED for secure internet transactions. South Korean Mac users can't buy things from South Korean websites! And, unsurprisingly, South Korea is 99.9% Windows, far higher than the rest of the developed world. Competition? What competition?

So the network effect trap was a real possibility, and more harmful than in Liebowitz et al's model.

david writes:

Which is not to imply that the government officials prosecuting the case often had dubious motivations quite apart from efficiency concerns, which was true. And Microsoft walked away with a meaningless penalty that did little to aid competition - it was not fined, it was not broken up, and it was not required to modify any of its products. It did get an effective license to continue as it did. Cue five years of stagnation in internet technology, as Netscape collapsed and reformed as Mozilla - compare with the pace of change since.

So even supporters of the efficiency cause would see the case as a series of disasters.

European Commission vs. Microsoft was much better carried out, although it is also not perfect.

Peter writes:

I agree with Greg Ransom. Bill Gates uses patent law and other gov't intervention to crush his competition and then perjures himself. There are good reasons to believe that monopoly laws don't work, but the microsoft case isn't a great example.

lukas writes:
South Korea is famously tied to Windows and MSIE because it indeed walked into the network-effect-trap of ActiveX technologies; where the rest of the world uses the open SSL/TLS standard, South Korea uses a proprietary ActiveX control SEED for secure internet transactions. South Korean Mac users can't buy things from South Korean websites! And, unsurprisingly, South Korea is 99.9% Windows, far higher than the rest of the developed world. Competition? What competition?

And SEED was imposed by... the government of the ROK. All of Microsoft's anti-competitive practices couldn't have achieved the monopoly without the government's help.

Alberto writes:

A quick question on the book. Is there anything new (an addendum, a new preface...) in the paperback version? The review (which I found both enjoyable and profound, btw) doesn't say much, on this.

Colin K writes:

The focus on the browser struck me as wrongheaded even at the time, and it looks especially @$$-backwards now.

Despite the case, IE is still the 85%+ market-share browser a decade later. Despite that, their ability to influence the direction of end-user internet apps is nearly nonexistent. MS, the DOJ, and even Netscape arguably all focused on the wrong ball here.

MS's real monopoly is in the Office suite, which in the earlier days they built with fang and claw, and the OS itself. As with Google, that was a fait acomplis years before anyone in DC even noticed that something was going on.

David R. Henderson writes:

To various commenters who have a different view of the Microsoft case than mine: I really do recommend that you read the Page and Lopatka book and see if it changes your minds.

To Alberto: I don't know if there's anything new in the paperback. The paperback is the only version I read.

To lukas: Good point about ROK. An additional similar point with U.S. government: I finally quit using Wordperfect, which I much preferred to Word, only because my employer, the Department of Defense, announced that all memos sent to various officials in DoD, including, even, the Provost of my school, had to be in Word.

To Colin K: One thing that the "Microsoft monopolizes through its operating system" claimants have never dealt with satisfactorily is that Microsoft has a huge market share in Office even with Mac computers. Huge market shares are not sufficient evidence of monopoly.

Patrick writes:

Anti-trust looks even worse if you look at all the firms that have been denied mergers by the whims of a small handful of bureaucrats.

Anti-trust law in practice is a very sad state of affairs. Good luck convincing people to get rid of it.

Colin K writes:

David,

The #1 selling point of Office for the Mac has traditionally been its ability to reliably edit documents created in Office for Windows.

MS started publishing more detail a few years ago, but until quite recently, the Office file formats were sufficiently proprietary that the only way to reliably use the data in them was through MS Office.

An interesting case study of this was in 2005 when Massachusetts' head of IT proposed to require that all state documents be maintained in an open/standardized document format for future-proofing. MS, needless to say, fought this tooth-and-nail.

http://en.wikipedia.org/wiki/Adoption_of_ODF_in_Massachusetts#Massachusetts

Duncan writes:

By the way, thefreelibrary (but not cato) renders "Friedman always made clear, no matter what issue he discussed" in the final paragraph as "Friedman always made dear.."

agnostic writes:

I haven't read this book, but does it provide much more in terms of the larger theoretical / empirical background than Liebowitz & Margolis' *Winners, Losers, and Microsoft*? The wealth of data they provide is about all I needed. Plus Liebowitz has a humorous writing style.

Here's a bunch of that data compiled at Liebowitz's webpage:

Microsoft info

The "non-academic articles" link in the first paragraph actually contains excerpts from the WLaM book.

"The #1 selling point of Office for the Mac has traditionally been its ability to reliably edit documents created in Office for Windows."

That wrong. Both Word and Excel won majority market shares in the Mac market looong before in the PC market. Word for PCs only surpassed Word for Macs in market share in 1996, while for the previous 8 years the Mac version had been dominating its market. It's even more dramatic for Excel -- always more dominant in the Mac market. See here, Fig. 8.18:

Market share data

Colin K writes:

Agnostic:

Thanks for the link. I think it is fair to say that MS Office has in various times and places been a good, even great product. That said, the Office wars were drawing to a close by the early 1990s. In looking at the DoJ case and its aftermath, I think it's a lot more relevant to look at where things stood in 1995 than 1990. I can think of very few cases where a software publisher has dominated such a large market, with such high margins, for so long.

FWIW, I think a huge difference between MS and Google is that the cost of switching to a better search engine is roughly zero for a user today, while the cost for someone with five years of MS Office documents to switch is potentially quite high. As much as I detest Google's fashionably ignorant progressive ideology, they strike me as dominating their market entirely by merit.

liberty writes:

"the cost for someone with five years of MS Office documents to switch is potentially quite high. "

Sorry for sounding ignorant, but why would the cost be high for a person to switch? I understand why it might be high for a company to switch, if it must contend with a lot of clients and suppliers that use MS Office, etc - but for a single person, Open Office / Star Office can read all (or the vast majority of) MS Office documents, so the switch is easy. Such a solution may prove more complicated for some businesses however. What am I missing?

lukas writes:
Open Office / Star Office can read all (or the vast majority of) MS Office documents

Oh how I wish this were true. Many of the MS Office documents that used to reach my inbox every day came out highly distorted when opened using OOo, and some were downright unreadable. OOo/SO are unable to import any but the simplest MS Office documents faithfully. Besides, MS Office is a superior product as far as resource use and usability are concerned.

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