Competition, Innovation and the Microsoft Monopoly: Antitrust in the Digital Marketplace: Proceedings of a conference held by The Progress & Freedom Foundation in Washigton, DC February 5, 1998

302 Pages·1999·13.58 MB·English

by  Thomas M. Lenard (auth.)

COMPETITION, INNOVATION
AND THE MICROSOFT MONOPOLY:
ANTITRUST IN THE DIGITAL MARKETPLACE
COMPETITION, INNOVA TION
AND THE MICROSOFT MONOPOLY :
ANTITRUST IN THE DIGITAL MARKETPLACE
Proceedings ofa conference held by
The Progress & Freedom Foundation in Washington, De
February 5, 1998
edited by
Jeffrey A. Eisenach and Thomas M. Lenard
The Progress & Freedom Foundation
THE PROGRESS
&FREEDOM FOUNDATION
SPRINGER SCIENCE+BUSINESS MEDIA, LLC
Library of Congress Cataloging-in-Publication Data
A C.I.P. Catalogue record for this book is available
from the Library of Congress.
Copyright © 1999 by Springer Science+Business Media New York 2001
Originally published by Kluwer Academic Publishers in 2001
Softcover reprint of the hardcover 1s t edition 2001
AII rights reserved. No part of this publication may be reproduced, stored in a retrieval
system or transmitted in any form or by any means, mechanica1, photo-copying, recording,
or otherwise; without the prior written permission of the publisher, Springer Science+
Business Media, LLC
Printed on acid-free paper.
ISBN 978-94-010-5894-0 ISBN 978-94-011-4407-0 (eBook)
DOI 10.1007/978-94-011-4407-0
Contents
Foreword vii
Jeffrey A. Eisenach
1
Introduction and Overview 1
Thomas M. Lenard
2
Antitrust in the Digital Age 19
Honorable Orrin G. Hatch
3
Antitrust in Software Markets 29
Michael L. Katz and Carl Shapiro
4
Is Heightened Antitrust Scrutiny Appropriate 83
for Software Markets?
Timothy J. Muris
5
Using Leverage to Preserve Monopoly 93
Discussion 0/K atz and Shapiro Paper
Steven C. Salop
VI Contents
6
Access and Bundling in High-Technology Markets 103
Janusz A. Ordover and Robert D. Willig
7
Comment on Ordover and Willig 129
Shane M. Greenstein
8
Microsoft And Browsers: Are the Antitrust Problems 137
ReaUyNew?
Lawrence J. White
9
New Modes of Competition:Implications for the Future 155
Structure of the Computer Industry
Timothy F. Bresnahan
10
Competition, Compatibility, and Vertical Integration 209
In the Computing Industry
Nicholas Economides
11
Microsoft's Use of Zero Price Bundling to Fight the 217
"Browser Wars"
Benjamin Klein
12
Digital Convergence? 255
Kenneth Flamm
13
Comment on Flamm 291
Robert W. Crandall
Foreword
Jeffrey A. Eisenach
The Progress & Freedom Foundation
Do the antitrust laws have a place in the digital economy, or are they
obsolete, destined to join Soviet-style central planning on the proverbial "ash
heap of history"? That is the question raised by the government's
prosecution of Microsoft, and it is the question this volume is designed to
illuminate and, to some extent, answer.
America's antitrust laws were born out of the Industrial Revolution.
Large institutions - from the railroads to the sugar trust, from Standard Oil
to U.S. Steel - first appeared on the scene in the days following the Civil
War. Policymakers and politicians debated whether "bigness" was a curse or
a blessing, an inevitable consequence of the industrial revolution or the
unhappy result of personal lust for power by the so-called "Robber Barons."
From Herbert Croly to Louis Brandeis, from Calvin Coolidge to Franklin
Roosevelt, the debate raged hot and heavy over the course of nearly a
century.
The public policies that resulted from that debate did not always serve
America well. While America's experiment with centralized planning,
mainly through Roosevelt's National Recovery Administration, was short
lived, the amalgam of "public utility" style regulation and antitrust
enforcement that has constituted our approach to market structure issues has
often erred in favor of too intrusive a role for government. Certainly,
"economic" (i.e. price-entry) regulation of airlines, railroads, trucking and
other transportation services has been discredited and, happily, has been
almost entirely dismantled. Similar regimes governing markets for
electricity and telecommunications now appear to be on their way out as
well.
Antitrust policy has also made its share of mistakes. Legal doctrines
prohibiting so called "predatory pricing" under the Robinson-Patman Act,
Vlll Competition, Innovation, and the Microsoft Monopoly
for example, have often led to firms being prosecuted for offering lower
prices to consumers, even where there were no plausible concerns about
market power or monopolization. The Clayton Act has led to the prohibition
(at times, a per se prohibition) of commercial practices such as bundling,
tying and resale price maintenance, even though it is clear that such practices
benefited both consumers and competition. And it is certain that the
"structural" doctrines that, for many years, drove merger enforcement under
the Sherman and Clayton Acts resulted in substantial losses for consumers
by preventing mergers that would have led to significant efficiency gains.
F or opponents of the antitrust laws, history is only the beginning of the
case for repeal. They argue in addition that - whatever merit the antitrust
laws may have had in the past - they have no place in a digital economy.
Rapid innovation, they suggest, makes the accumulation of market power
practically impossible. Markets change too quickly, they allege, for antitrust
actions to keep up. And antitrust remedies, they conclude, are inevitably
regulatory and hence threaten to "regulate the computer business." The
digital economy is an American success story, goes the refrain: Don't mess
with success.
A different view - and, generally, the view presented in this volume
- is that antitrust law can and does have an important and constructive role
to play in the digital economy. According to this view, antitrust should be
judged not by what it once was, but by what it has become.
Beginning in the mid-1950s, led by scholars such as Robert Bork,
Richard Posner, George Stigler and many others, the antitrust laws were
reformed. Strikingly, the reform occurred almost entirely in the courts:
Gradually, incrementally, courts came to recognize that many of the
practices the antitrust laws were being used to stifle were in fact beneficial to
consumers. Per se prohibitions on conduct were replaced with analyses
under the "rule of reason," which balances market power concerns against
potential efficiency gains. Simplistic doctrines relating to market structure
were replaced with sophisticated analyses of potential competition,
contestibility and innovation. Allegations of predatory pncmg were
recognized for what they so often are - complaints by less efficient
producers about being underpriced by their competition.
These new doctrines - broadly defined as the "Chicago School" of
antitrust analysis - are now the law of the land. As taught in law schools,
detailed in enforcement guidelines published by the Department of Justice
and the Federal Trade Commission and, most importantly, incorporated in
literally dozens of Supreme Court decisions, modem antitrust law represents
a triumph of analysis over politics, reason over sentiment, the consumer over
both big government and big business. If antitrust started out as an
indiscriminate chain saw, it has emerged, perhaps not as a scalpel, but at
least as a reasonably discriminate tool capable, more often than not, of
IX
distinguishing between competItive conduct and the exercise of market
power - between, in short, conduct that helps consumers and conduct that
hurts them.
It is a long way, it should be emphasized, from this positive (some
would say Panglossian) view to the conclusion that the antitrust laws are
always wisely enforced. While 40 years of reform have introduced sound
economic analysis into antitrust doctrine, such analysis remains an art, not a
science. Policymakers can and will make mistakes. Through sound analysis
and honest debate, it is hoped, they will make fewer mistakes.
And so this volume. The software business is new, it is complex, it is
rapidly moving. Analysis of market definition, contestibility and potential
competition, the role of innovation, network externalities, cost structures and
marketing channels presents challenges for academics, policymakers and
judges alike. Evaluating consumer harm is problematic. Distinguishing
between illegal conduct and brutal - but legitimate - competition is often
difficult.
Is antitrust analysis up to the challenge? In February 1998, The
Progress & Freedom Foundation asked some of America's leading antitrust
authorities to put their skills to the test in the case of The United States of
America v. Microsoft, arguably the most important antitrust case of the late
20lh Century - because it is, in a sense, the first case of the 21 sl Century.
Our goal, it should be noted, was not to draw conclusions about
whether Microsoft has violated the antitrust laws. That is a matter best
decided by the courts. Nor did we seek to identify specific remedies. At the
time our conference was held, such a discussion would have been premature.
Rather, we hoped to bring to bear the wisdom of 40 years of antitrust
scholarship on larger issues raised by the software business in general and
the Microsoft case in particular.
The result, simply put, is that antitrust analysis "still works." The
authors represented here agree on some things and disagree on others - but
when they disagree, they disagree within a framework of analysis that
facilitates rational debate and, ultimately, is subject to resolution through
empirical evidence. In stark contrast to the political rhetoric that has
surrounded much of the debate over the Microsoft case, the papers presented
here suggest neither that Microsoft is inherently bad (because, some would
argue, it is big), nor that it deserves a de facto exemption from the antitrust
laws (because it is successful, some would argue, and so inherently good).
Instead, they offer insights - for policymakers, courts, practitioners,
professors and students of antitrust policy everywhere - on how antitrust
analysis can be applied to the business of making and marketing computer
software.
As with any project of this size and scope, a number of people were
responsible for bringing it to a successful conclusion. I want to express my
x Competition, Innovation, and the Microsoft Monopoly
appreciation, first, to Jay Keyworth, Chairman of The Progress & Freedom
Foundation. Jay has all the right instincts about government involvement in
the computer business: Less is more. He has helped to educate all of us
about how this market really works, and, through dozens of late-night
conversations, has shaped my views on this issue in a profound and
important way. Similarly, I am grateful to my co-editor, Tom Lenard, a
Senior Fellow at PFF, whose insights and wisdom shaped not only my views
but also those of many of our authors, with whom he was the primary point
of contact.
Tom and I both want to express our special appreciation to James C.
Miller III, a member of PFF's board of directors and our former boss at the
Federal Trade Commission. More than any single public servant, Jim was
responsible for bringing sound economic analysis to antitrust enforcement,
and we only hope some part of that wisdom is reflected in our work here. In
addition, Tom and I would like to express our appreciation to several
individuals who made significant contributions to the production of this
volume: Jill Murphy of The Progress & Freedom Foundation, who managed
the conference at which the papers were initially presented; Ed Dale, who
edited the conference papers; and, Robert Frommer of The Progress &
Freedom Foundation, who both copy-edited and prepared the papers for
publication. Each of them made important contributions to the product
presented here, and to each of them we are quite grateful.
Chapter 1
Introduction and Overview
Thomas M. Lenard
The Progress & Freedom Foundation
1. INTRODUCTION
The development of the digital marketplace is one of the great economic
success stories of the twentieth century, with the potential to significantly
increase productivity and improve living standards across the economic
spectrum. It is not an overstatement to suggest that the overall health of our
economy depends, to a large extent, on our ability to maintain a vibrant and
innovative information technology sector.1
However, the emergence of one company in an overwhelmingly
dominant position raises important questions for competition in the digital
marketplace. The concern for antitrust policy is not simply that Microsoft
has a monopoly in operating systems - Windows accounts for an estimated
90 percent of the operating system market - but rather that Microsoft may
be using that monopoly to raise barriers to entry in complementary markets
and in the market for operating systems itself. If so, the impact could be to
raise prices and chill innovation in the software industry.
Two sets of specific allegations have been raised against Microsoft:
• First, it is alleged that Microsoft is leveraging its operating system
monopoly in an attempt to monopolize the market for Internet
browsers - used for accessing the Internet. Through its pricing and
other practices, including contractually and technologically tying
sales of its Windows operating system to its Internet Explorer
I See United States Department of Commerce, The Emerging Digital Economy, April 1998.