No subject

[David Theroux]

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.

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