Subject: THE LIGHTHOUSE: February 27, 2001 THE LIGHTHOUSE "Enlightening Ideas for Public Policy..." VOL. 3, ISSUE 8 February 27, 2001 MICROSOFT TRIAL JUDGE BASED HIS BREAK-UP "REMEDY" ON FLAWED THEORY, NOT FACTS As the Microsoft antitrust case moved into federal appeals court Monday, the Independent Institute released an updated edition of the book that The Economist magazine calls "by a long way...the best single thing to read" on high-tech markets and network economics, WINNERS, LOSERS & MICROSOFT: Competition and Antitrust in High Technology, by Stan J. Liebowitz and Stephen E. Margolis. The new edition includes a stinging critique of the findings and break-up "remedy" proposed by Microsoft trial judge Thomas Penfield Jackson. "The government has chosen and the judge has approved a defective remedy," write economists Liebowitz and Margolis, research fellows at The Independent Institute. "Its key defect is its logical inconsistency with the claims made in the case. It's difficult to avoid concluding that the purpose of the so-called remedy is not correction, but punishment." First published in 1999, and based on peer-reviewed research going back more than a decade, WINNERS, LOSERS & MICROSOFT argues that high-tech markets face 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 effects -- the phenomenon of a product becoming more useful to a consumer, the greater the number of other users of the product -- markets do not "lock in" a market leader and 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 standard QWERTY keyboard arrangement, the VHS videotape format, and various Microsoft software programs is due not to "lock-in" but to the fact that these products are 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. "When the theory of an antitrust case is based on a defective view of markets," conclude Liebowitz and Margolis, "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." For more information, see the new press release of WINNERS, LOSERS & MICROSOFT: Competition and Antitrust in High Technology, by Stan Liebowtiz and Stephen Margolis (The Independent Institute, 2001), at http://www.independent.org/tii/lighthouse/LHLink3-8-1.html. For an updated, detailed summary of WINNERS, LOSERS & MICROSOFT, see http://www.independent.org/tii/lighthouse/LHLink3-8-2.html. To order WINNERS, LOSERS & MICROSOFT, see http://www.independent.org/tii/lighthouse/LHLink3-8-3.html. ************************************************************************** Subscribe to Freematt's Alerts: Pro-Individual Rights Issues Send a blank message to: freematt@coil.com with the words subscribe FA on the subject line. List is private and moderated (7-30 messages per month) Matthew Gaylor, 2175 Bayfield Drive, Columbus, OH 43229 (614) 313-5722 ICQ: 106212065 Archived at http://groups.yahoo.com/group/fa/ **************************************************************************