Information Goods and Policy (Antitrust)
• Winner-takes-all nature of these goods implies very
large market shares. It is efficient to have a standard.
• Competition may take a different form: competition
to be the next generation standard.
• Is there a role for these theories in antitrust? Are
consumers in danger?
• Owners of Standards need to coordinate consumers
and partners to achieve the best result. Could this
coordination appear ‘anti-competitive’?
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Recent Controversies
• AOL/Time Warner Merger in Europe
• Instant messaging controversy
• EU investigation of online music services.
• Microsoft case
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Economic Concepts
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Bundling or tying.
Locking-in monopoly.
Market Foreclosure.
Predatory Pricing
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Tie-In sales.
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Generally considered to be an ‘extension of
monopoly’ by courts. In other words, courts
believed it was an attempt to use one monopoly
to create a second.
Tie-In sales are poorly understood by courts,
imperfectly understood by most economists.
Frequently, tying good is sold very cheaply,
while tied good is very expensive. Famous
cases: IBM and computer cards, Xerox and
toner, Canning machines and tin plate.
Two monopolies are not better than one if
products are used together (in fixed proportions).
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Tie In Sale when products used
together
PP
MC=AC pairs of shoes
2PL
PP-PL
MC=AC left or right shoes
PR=PL
MR
Q1
D pairs of shoes
Q
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Market Foreclosure
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•
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Even if goods are used in fixed proportions, it
might be possible to increase profits if there is
another group of consumers that uses one of
these goods and if there are economies of scale
in production.
By ‘taking over’ second market you get a new
set of customers who didn’t buy your first good.
Somewhat farfetched set of conditions required.
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Predatory Pricing
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Current court-created definition (known as
Areeda-Turner rule) : price below average
variable cost.
Also requires that there be a serious likelihood
of driving prey out of business and of recouping
losses.
Likely to lose money for the predator, and
unlikely to remove the prey.
Can only succeed if prey is removed.
Few real world examples. Standard Oil cases are
largely fictional.
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Predatory Pricing
P
AC
S
MC
AVC
p3
p2
p1
AFC
Q
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AOL-Time Warner Merger
• AOL: largest online service, Internet service
provider. With 30 million users
• Time-Warner: largest media company with
movies, television and cable systems.
• Was it a merger of complements or
substitutes?
• What were the potential problems according
to antitrust authorities (lock-in)?
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Instant Messaging
• Network effects are very strong here.
• AOL has largest network by far
• Microsoft, Yahoo and others trying to play
catch-up.
• AOL has consciously prevented others from
making their services ‘compatible’ with
AOL’s, depriving others of network effects.
• Should government intervene? Came up
during AOL/TW merger.
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Online Music Services
• Currently, only 5 major record labels, but lots of
retailers.
• Antitrust concerns seems to be that the 5 labels will
use only a small number of Internet sites to sell
digital music and possibly collude.
• Consumers need to make sure that current retailers
don’t try to stop digital downloads that might put
them out of business.
• Online services tend to limit ‘burning’ meaning that
they are more likely to represent new revenues and
not substitutes for CD sales.
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Microsoft Case
• Background
– Microsoft ‘sells’ DOS to IBM for use on PCs. IBM allows
Microsoft to sell MSDOS to third party computer
manufacturers.
– PCs quickly eclipse Apple as leading computer platform.
– Microsoft and IBM ‘jointly’ begin work on graphical interface
(OS/2) which has very ambitious specifications and is not
based on DOS. IBM’s attempt to recapture PC market by
having special version that only runs on its PCs.
– Microsoft develops Windows as a temporary graphical
interface that runs on top of DOS. Tells IBM that it doesn’t
compete with OS/2.
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Microsoft Case
• Background:
– Windows 1.0 and 2.0 are flops, but Windows 3.0
takes off in 1990.
– PC manufacturers quickly adopt Windows on the
machines they sell. Windows is much cheaper than
OS/2.
– Microsoft and IBM have a falling out and IBM takes
over OS/2 development.
– Microsoft develops Windows NT as a more advanced
OS to compete with high end workstations such as
Sun. Since Microsoft now dominates PCs,
workstations are a new market opportunity.
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Microsoft Case Background (cont)
• Background
– Government investigates large market share of DOS. FTC tie
vote, and then Justice Department investigation.
– Government and Microsoft reach consent agreement over
Microsoft’s pricing tactics.
– 4 anonymous firms hire law firm (Gary Reback) to lobby for
government examination of Microsoft’s tactics.
– Justice begins new investigation about Microsoft’s inclusion
of MSN with each version of Windows. AOL claims it can not
compete and that Microsoft was trying to leverage its
ownership of Windows to dominate online services. AOL’s
continued growth, however, destroy the credibility of the
claim.
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Microsoft Case Background (cont)
• Background
– Justice then investigates Microsoft’s inclusion of Internet
browser (Explorer) with each copy of Windows. Claims it is a
violation of consent decree.
– Judge Jackson hears this case and orders an injunction forcing
Microsoft to sell to computer manufacturers a version of
Windows without the browser.
– Microsoft slaps judge in face by selling a version of Windows
without the browser, but which also doesn’t operate.
– On appeal, Judge Jackson’s injunction is overturned. Then
Justice bring forward, along with 19 states, a new antitrust
case based on the browser.
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Microsoft Case
• Government’s theory:
– Microsoft has a monopoly in its Windows OS. To strengthen
claim they argue that the proper market definition is Intel
based PCs.
– This monopoly is protected by network effects, referred to as
the “application barrier to entry”.
– Netscape browser, along with Java language, are a threat to
Windows since they allow programmers to write programs
that will run on any OS, removing the great appeal of
Windows, its large installed base.
– Microsoft engaged in illegal acts to protect its monopoly. It
foreclosed the market for Netscape's browser by tying Internet
Explorer to the OS.
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Microsoft Case
• Problems with Government’s theory:
– Government’s view of network effects suffers from the fact
that there is no empirical support for the lock-in claim.
Software market examination earlier showed this (Microsoft
presented similar evidence after seeing galleys of the book).
– It isn’t clear that Netscape/Java is a substitute for Windows,
and if it were it isn’t clear that its market share wasn’t big
enough.
– Showing consumer harm has become more important in
antitrust in recent decades, and government has had a hard
time demonstrating how consumers were hurt.
– The following charts illustrate Microsoft’s impacts on
consumers, at least with regard to price.
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Impact on Consumers
Fig. 1: Word Processor & Spreadsheet Prices
$250
$200
$150
$100
Average Word Processor Price
Average Spreadsheet price
$50
Source: S. Liebowitz and S. Margolis,: Winners, Losers and Microsoft:
Competition and Antitrust in High Technology, 1999, Independent Institute
$0
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
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Impact on Consumers
Figure 3: Normalized Price Changes
$140
$120
$100
$80
$60
$40
Non-Microsoft Markets
Markets Where Microsoft Competes
$20
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997 19 1998
Impact on Consumers
• What did government say about consumer harm?
– Three claimed instances:
• Wasted space on hard drive for Internet explorer for those people
wishing to use Netscape.
• Wasted time putting Netscape on computer instead of having OEM do
it.
• Lost innovation from Microsoft smothering everyone else.
– This last claim is obviously the most important, but it is
impossible to either prove or disprove. In general there is no
evidence that monopolists are less inventive than others. And
the fact that Microsoft has 120,000 developers indicates that
they do not destroy all the good ideas.
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Foreclosing Netscape
• Government claimed that Microsoft prevented Netscape
from being able to get its product into consumer’s
hands.
– Contracts with OEMs (computer manufacturers).
– Contracts with ISPs (Internet service providers such as AOL).
– Contracts with ISVs (independent software vendors such as
Quicken).
• Why did Internet Explorer gain market share?
– Government says for the reasons given above.
– Microsoft says that it gained market share because it was a
better product.
• Here is some evidence.
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Fig 9.23: Browser Wins
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Int Explorer
Netscape
Other
7
6
5
4
3
2
1
0
95-1
95-2
96-1
96-2
97-1
97-2
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Fig 9.24: Browser Shares
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Netscape
Internet Explorer
Jan-96
Jul-96
Jan-97
Jul-97
Jan-98
Jul-98
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Court’s Findings
• Microsoft was a monopoly. Upheld by Appeals Court
• District court accepted government’s case almost in its
entirety. Appeals Court threw out one charge, sent
another back with tough conditions, and accepted one
charge.
• District Court didn’t hold hearings on remedy to break
Microsoft into two. That was thrown out by the Appeals
Court with a new remedy phase required.
• Judge gave interviews during the case. The Appeals
Court was outraged and removed him from case.
• Department of Justice (and 9 states) then settled with
Microsoft but 9 other states have continued to pursue a
more stringent remedy.
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What was the first ‘Remedy’
– Two companies, one selling applications, the other
selling operating systems.
– They would not be able to trade with one another.
– The application company would have gotten all
software except operating systems [Windows,
Windows NT (2000), Windows CE]. Everything else
would go to the application company.
• This initial ‘remedy’ was thrown out by Appeals
Court.
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What was the logic, if any?
• What would it have accomplished?
• Would Microsoft Office be a substitute for
Windows? Seems unlikely.
• The restriction on interaction, in combination with the
application company getting almost all products, would
have made innovations in the operating system much more
difficult.
• Server software, voice recognition, developer tools all
belonged with the operating system company. Operating
system would have been much weaker without them. For
example, we get inefficient result if best voice recognition
was made by Microsoft.
• This shows the danger of antitrust based on poorly
articulated and understood theories.
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