Documenting U.S. v. Microsoft.

THE MICROSOFT CASE: Antitrust, High Technology, and Consumer Welfare

By William H. Page and John E. Lopatka

347 pages; University of Chicago Press, 2009

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In politics, no issue is ever settled. No matter how strong the evidence and arguments on one side, there will always be people on the other side and, if the political forces are aligned just so, they will be able to raise the issue again and, sometimes, get their way.

For that reason, books and articles that thoroughly document and evaluate both sides of an issue serve an important purpose. The Microsoft Case, originally published in 2007 and now out in paperback, is such a book. Authors William Page and John Lopatka, law professors at the University of Florida and Penn State University respectively, do a painstaking job of laying out the allegations, facts, and analysis in U.S. t,. Microsoft, the biggest antitrust case of the Clinton administration. Like all good law professors, they footnote virtually every claim: the book has 1,517 footnotes and, for that reason alone, will surely be an important source on the case for years to come.

But The Microsoft Case is far more than a source. It's also a coherent analysis by two economically literate legal scholars who are obviously doing their best to present an unbiased account. Page and Lopatka do not start tabula rasa. They are strong adherents of the "Chicago school" of antitrust law, which holds that the only legitimate purpose of antitrust is to promote economic efficiency and that, by that standard, most antitrust case law fails. Not surprisingly, therefore, their bottom line is that most of the case against Microsoft was faulty and that the few parts of Microsoft's behavior that one could justifiably object to had only a small effect. Although they never quite come out and say it, the reader is led to conclude that the country would have been better off had the case never been brought.

I should make a few disclosures before I go any further. First, I earned my Ph.D. in economics at UCLA during the 1970s, and much of what I know of antitrust economics comes from having studied under Harold Demsetz, Sam Peltzman, and Benjamin Klein, all of whom are steeped in the Chicago school tradition. Second, in the late 1990s and in 2000, as a regular columnist for Red Herring, I wrote a number of articles analyzing Microsoft's behavior and arguing that there was no good case for antitrust measures against the firm. Finally, in 2002, after I had written all those articles, Microsoft hired me to write more on the case, which I did. My association with Microsoft ended in 2003.

JUDGE JACKSON Page and Lopatka's first chapter, "Origins," takes the reader on an excursion through the development of economic and legal thinking on antitrust law and monopolization. It also lays out the basics of Microsoft's behavior and the arguments made by its attackers, chief among them Netscape. The authors introduce the idea of "network effects," an increase in value that a user derives from a good that is brought about by an increase in the number of other users of the same good.

In the second chapter, "Decisions," Page and Lopatka methodically lay out the decisions that Judge Thomas Penfield Jackson made in presiding over the case and that the Court of Appeals made in rejecting much of what Jackson found. This chapter, though dense, will be important for those who want to know the exact details of the decisions. The chapter's discussion of the judge's misconduct is especially colorful. Two months before he issued his findings of fact, Jackson gave a series of interviews to reporters from the New Yorker and the New York Times. In the interviews, he expressed negative views about the leading Microsoft officials, including Bill Gates. He said he viewed Gates as arrogant and unethical, and referred to him as "a smart-mouthed young kid ... who needs a little discipline." And Jackson compared Microsoft's behavior to that of gangland killers. Who knew? Many of us thought Microsoft was just selling a fairly good product and figuring out how to extract from consumers as much of the value of the product as it could. Silly us. It was this conduct by Jackson that led the Court of Appeals to disqualify him and hand the case to Judge Colleen Kollar-Kotelly.

The authors don't quite come out and say this, but I will: Judge Jackson seemed to see the case as a grudge match against both Bill Gates and the Court of Appeals. In the above quote about Gates being "smart-mouthed," Jackson added a line that the book's authors don't quote. According to his interviewer, the New Yorker's Ken Auletta, Jackson said: "I've often said to colleagues that Gates would be better off if he had finished Harvard." Auletta also quotes Jackson saying that part of his motive in splitting his finding of facts from his finding of the law was "to confront the Court of Appeals with an established factual record which is a fait accompli." There's nothing wrong with that, except that Jackson confessed that "part of the inspiration for doing that is that I take mild offense at their reversal of my preliminary injunction in the consent-decree case." Rule of law, anyone?

THE ECONOMICS The third through fifth chapters, titled "Markets," "Practices I: Integration," and "Practices II: The Market Division Proposal, Exclusive Contracts, and Java," contain the guts of the economic analysis. The authors integrate nicely the facts of the case with the economic analysis.

The authors' analysis is so comprehensive that a short review cannot do their book justice. Instead, I'll highlight some of the ways they hit the bull's-eye. Take, for example, the path dependence theory espoused by some critics of Microsoft. According to the theory, people can get locked into an inferior technology because network effects give the early innovator an advantage. Page and Lopatka point out, though, that there is no necessary market failure from that fact alone. Citing the work of economists Stan Liebowitz and Steven Margolis, they point out that if the cost of switching from the inferior to the superior technology is less than the incremental benefit from switching, people will switch. The authors also point out that Judge Jackson mistakenly saw network effects as something bad, but the Court of Appeals got it right, understanding that network effects add value for consumers.

A particularly persuasive part of their book is their refutation of Jackson's idea that Microsoft's bundling of its browser, Internet Explorer (IE), with its operating system, Windows, was anticompetitive. His argument was that this bundling made it difficult for Netscape to compete with its Navigator browser. Of course, the bundling made Netscape's life difficult--competition from an implicitly zero-price product with low distribution costs tends to do that. But, note the authors in seconding the Court of Appeal's reasoning, "Such an action raises Netscape's costs of distributing its browser only to the extent it reduces the consumers' costs of acquiring Microsoft's browser." In other words, this alleged anticompetitive action, however much it hurt Netscape, benefited consumers.

Jackson disputed this, the authors note, actually claiming that Microsoft hurt consumers by giving them something for free. How so? Maybe, Jackson argued, they wanted a browser other than IE, or they wanted no browser at all. Page and Lopatka point out that this "harm," if there was one, had to be dwarfed by the huge benefit to consumers from a free browser that came with the operating system. Moreover, they note, if there was a harm done with the free IE that consumers supposedly didn't want, this harm was not due to bundling per se, but to a failure to allow easy unbundling. Finally, echoing the Court of Appeals, they note that "all other commercially significant PC operating system manufacturers include a browser." This is strong evidence that consumers wanted a browser.

Prosecutors in an antitrust case against a monopolist typically argue that restricting the monopolist's conduct or, In the extreme, breaking up the monopolist will allow more competition. Page and Lopatka write, though, that the argument the government made in the Microsoft case was that the competition was "a battle between standards for the hearts and minds of developers." Therefore, the authors point out, if the government had gotten its way, the result would not have been less monopoly but, rather, a different monopolist. They note that this discussion was prominent in the oral argument before the Court of Appeals. They reproduce a hilarious 2.5-page dialogue between one of the judges and the government's appellate counsel, Jeffrey Minear, in which the judge drags Minear to a begrudging admission of that fact.

This is not to say that the Court of Appeals was always wise. In remanding the case to a different judge, the court required the government to show that Microsoft harmed competition in the market for browsers. That sounds like a plausible thing for the court to require until you learn that the same court precluded the government from proving that such a market existed. That could be raw material for a Monty Python skit.

CRITICISMS I have two criticisms of the book: one as an economist and the other as a logician. My criticism as an economist is of the authors' statement, "If Microsoft had required the consumer to pay a positive price for IE to purchase Windows, then the consumer would have had a reduced incentive to pay a second price to acquire another browser." This is false. Once the consumer, by their assumption, has paid a positive price for IE, this price becomes a sunk cost. Unless this price is so high that it would have a substantial effect on the buyer's wealth--and no one claimed that--then the already-paid price would have no effect on the decision to buy a second browser.

My logical criticism is of the authors' claim about the government's motives for bringing the Microsoft case. They quote the view of economists Milton Friedman, Thomas Sowell, Fred McChesney, and William Shughart that the case was brought because Microsoft's competitors wanted to hobble competition from Microsoft. Then they respond, "Difficult as it is for libertarians to accept, Microsoft has defenders among scholars who have no personal interest in protecting inefficient firms." But I would bet that Friedman had no difficulty whatsoever in accepting this. Friedman always made dear, no matter what issue he discussed, that most of those who disagreed with him were well-intentioned. But he also realized that special interests often play a role in the political process. One can think that the case was brought because of special interests, while also thinking that some of the supporters represented no special interests.

David R. Henderson is a research fellow with the Hoover Institution and an associate professor of economics at the Graduate School of Business and Public Policy at the Naval Postgraduate School in Monterey, Calif. He is the editor of The Concise Encyclopedia of Economics (Liberty Fund, 2008). He blogs at www.econlog.econlib.org.