Microsoft, Antitrust and the New Economy (The Milken Institute Series on Financial Innovation and Economic Growth)

495 Pages·2002·8.76 MB·English

by  David S. Evans

MICROSOFT, ANTITRUST
AND THE NEW ECONOMY:
SELECTED ESSAYS
The Milken Institute Series On Financial Innovation
And Economic Growth
Series Editors
James R. Barth
Auburn University
Senior Fellow at the Milken Institute
Glenn Yago
Director of Capital Studies at the
Milken Institute
Other books in the series:
Barth, James R., Brumbaugh Jr., R. Dan and Yago, Glenn:
Restructuring Regulation and Financial Institutions
MICROSOFT, ANTITRUST
AND THE NEW ECONOMY:
SELECTED ESSAYS
edited by
David S. Evans
National Economic Research Associates, U.S.A.
KLUWER ACADEMIC PUBLISHERS
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Contents
About the Authors vii
Introduction 1
by David S. Evans
Section 1
U.S. v. Microsoft Corp.: The Economics 23
An Analysis of the Government’s Economic Case
in U.S. v. Microsoft Corp. 23
by David S. Evans, Albert L. Nichols, and Richard Schmalensee
Why Does Microsoft Charge So Little for Windows? 93
by Bernard Reddy, David S. Evans, and Albert L. Nichols
U.S. v. Microsoft Corp.: Remedy or Malady? 127
by Kenneth G. Elzinga, David S. Evans, and Albert L. Nichols
DOS Kapital: Has Antitrust Action Against Microsoft
Created Value in the Computer Industry? 193
by George Bittlingmayer and Thomas W. Hazlett
The Price of Unanimity:
The D.C. Circuit’s Incoherent Opinion in
U.S. v. Microsoft Corp. 221
by John E. Lopatka and William H. Page
Judicial Misconduct and the Microsoft Case 239
by Leonard Orland
Section 2
Antitrust Policy and the New Economy 253
Antitrust and the New Economy 253
by David S. Evans
The Rise and Fall of Leaders in
Personal Computer Software 265
by David S. Evans, Albert L. Nichols, and Bernard Reddy
The Failure of Structural Remedies in Sherman Act
Monopolization Cases 287
by Robert W. Crandall
Economic Perspectives on Software Design:
PC Operating Systems and Platforms 361
by Steven J. Davis, Jack MacCrisken, and Kevin M. Murphy
Preserving Competition: Economic Analysis,
Legal Standards, and Microsoft 421
by Ronald A. Cass and Keith N. Hylton
The Returns to Investments in Innovative Activities:
An Overview and an Analysis of the Software Industry 463
by Josh Lerner
About the Authors
George Bittlingmayer is the Wagnon Distinguished Professor of
Finance at the University of Kansas School of Business, whose research
interests include stock market volatility and antitrust. He is an associate edi-
tor of the Journal of Corporate Finance.
Ronald A. Cass is dean and Melville Madison Bigelow Professor of
Law at the Boston University School of Law. From 1988 to June 1990, he
served as a member of the United States International Trade Commission
and, in 1989-90, as the Commission’s vice chairman.
Robert W. Crandall is a senior fellow at the Brookings Institution who
specializes in regulatory policy. He is the co-author of Who Pays for
Universal Service? (Brookings Press).
Steven J. Davis is the William H. Abbott Professor of International
Business and Economics at the University of Chicago Graduate School of
Business. His research interests include the business cycle and the econom-
ics of software.
Kenneth G. Elzinga is a professor of economics at the University of
Virginia. He has written extensively about antitrust and industrial organiza-
tion.
David S. Evans is a senior vice president at National Economic
Research Associates in Cambridge, Massachusetts, and a consultant to
Microsoft and Visa. Among other works, he is the co-author of Paying with
Plastic: The Digital Revolution in Buying and Borrowing (MIT Press).
Thomas W. Hazlett is a resident scholar at the American Economic
Enterprise Institute specializing in regulation. He served as the chief econo-
mist for the Federal Communications Commission in 1991-92. He is co-
authorof Public Policy Towards Cable Television: The Economics of Rate
Controls (MIT Press).
Keith N. Hylton is a professor of law at the Boston University School
of Law. He specializes in the field of law and economics.
Josh Lerner is a professor of business administration at the Harvard
Business School and a faculty research fellow at the National Bureau of
viii MICROSOFT, ANTITRUST, AND THE NEW ECONOMY
Economic Research. Much of his research on technology and innovation is
collected in his book, The Venture Capital Cycle (MIT Press).
John E. Lopatka is the Alumni Professor of Law at the University of
South Carolina School of Law. He served as Assistant Director for Planning
in the Federal Trade Commission’s Bureau of Competition.
Jack MacCrisken is a technology consultant at Chicago Partners who
has served as a consultant to Microsoft. His published research includes
work on data compression.
Kevin M. Murphy is the George Pratt Shultz Professor of Economics
and Industrial Relations at the University of Chicago Graduate School
of Business and a faculty research associate at the National Bureau of
Economic Research. He is a winner of the American Economic Associa-
tion’s John Bates Clark medal for the most promising economist under
age 40.
Albert L. Nichols is a vice president at National Economic Research
Associates in Cambridge, Massachusetts, and a consultant to Microsoft.
His fields of expertise include the economics of the environment and
antitrust policy.
Leonard Orland is professor of law at the University of Connecticut
School of Law and a member of the Federal Courts Study Committee.
William H. Page, formerly a trial attorney with the Antitrust Division
of the Department of Justice, is the Marshall M. Criser Eminent Scholar
at the University of Florida’s Levin College of Law. He is currently revising
and supplementing the Kintner treatise on Federal Antitrust Law.
Bernard Reddy is a vice president at National Economic Research
Associates in Cambridge, Massachusetts, and a consultant to Microsoft.
His fields of expertise include electric power regulation and the economics
of information technology.
Richard Schmalensee is dean and professor of economics at the MIT
Sloan School of Management, and the expert economic witness for Micro-
soft in the antitrust trial. He served as a member of the President’s Council
of Economic Advisors in the first Bush administration.
Introduction
by David S. Evans
No antitrust case in recent history has attracted as much public attention
as U.S. v. Microsoft Corp. Nor has any antitrust case in memory raised as
many complex, substantive issues of law, economics, and public policy. This
volume constitutes an early effort to analyze some of the central issues and to
put the case in the context of the ongoing debate over the role of government
in managing markets – especially in technologically driven New Economy
industries.
All of these essays, it should be noted, are written by critics of the gov-
ernment’s efforts to regulate Microsoft. Indeed, many are by individuals who
were closely involved in the company’s legal defense and served as consult-
ants to Microsoft. But their work should be judged on the merits rather than
their provenance. For all represent serious scholarship by researchers com-
mitted to advancing the debate over government regulatory policies.
Part I opens with an analytic summary of the trial and its conclusions
(Evans, Nichols, Schmalensee). The second essay (Reddy, Evans, Nichols)
estimates what the profit-maximizing price of the Windows operating system
would be if it were indeed a monopoly, and offers an explanation for why
Microsoft charges so much less for a product with so dominant a share of the
apparent market. The third (Elzinga, Evans, Nichols) addresses remedy – most
notably, the logical gap between Microsoft’s legal liability as identified by the
trial judge and his proposed division of Microsoft into one company selling
operating system software and another selling applications software. The
fourth (Bittlingmayer, Hazlett) looks at the response of the stock market to the
early legal skirmishing over Windows – and looks in vain – for confirmation
that regulating Microsoft would increase efficiency. The fifth (Lopatka, Page)
assays the high price the D.C. Circuit Court of Appeals paid in terms of clar-
ity and consistency in order to generate a unanimous decision. The sixth
(Orland) dissects the appeals court’s logic in tossing out the judge without
tossing out his opinion.