The Legacy of U.S. V. Microsoft: Do Advances in Economic Theory Lead to Advances in Legal Practice?

Brennan, Tim, Regulation

MUCH HAS BEEN WRITTEN ABOUT U.S. v. Microsoft, as either the last "case of the century" for the 20th century or the first for the 21st. As one might expect for a still-pursued case that has been litigated in the United States and Europe for about five years, and where Microsoft has been subject to antitrust investigation for over a decade, much of the commentary is polarized on the pros and cons of going after the software giant. Those who support the litigation express concerns that the dominant personal computer software provider will extend its power over other software markets. Those who oppose the litigation cite an absence of evidence of present harm and the benefits to consumers of allowing Microsoft to incorporate additional features into its software. Intersecting both positions is a debate regarding the ability of antitrust to keep up with high-tech industries such as computer software. How do we define markets and assess monopolization? Are systems two generations obsolete by the time a trial is over?

Litigants and other commentators have covered this ground ad infinitum, if not ad nauseum. My interest is not in what the case says about computer software markets and the applicability of antitrust in high-tech industries. Rather, it is about what the case may tell us about the changing role of antitrust in economics. The changes in that role can be marked by three eras: In the first, "pre-Chicago," era, which lasted until the 1970s, economics took a back seat to impressionistic assessments of harm in which any agreements among firms that reduced independent price and output decisions threatened ostensibly fragile competition. The subsequent "Chicago era" reflected the ascension of basic economics, relying on free entry to limit market power and the efficiencies of mergers and restraints across markets to narrow the focus of antitrust largely to collusion and major "horizontal" mergers within markets. Then, beginning in the mid-1980s or so, the "post-Chicago" era has relied on a plethora of game theory and asymmetric information models to identify circumstances in which vertical practices may be more troublesome and competition less robust than "Chicago" economics suggested.

Situation-specific, post-Chicago theories should do more than pad the curriculum vitae of economics professors. They should improve the accuracy of antitrust--fewer good practices stopped, fewer bad practices allowed. However, if practitioners and courts are unwilling or unable to determine whether any particular theory applies, post-Chicago economics may only provide theoretical cover for reviving impressionistic assessments of the past. In short, post-Chicago economics may lead to pre-Chicago antitrust.

So, does the "post Chicago" movement represent an evolution or devolution in antitrust theory? To answer that, let us look at the post-Chicago theoretical case against Microsoft and contrast it with the case that ultimately went to trial. After looking at why the theory and the trial might have differed, and why that difference matters, we note that antitrust is not the only setting facing the paradox that better economics may lead to worse policy. Ironically, the legacy of U.S. v. Microsoft may be that the activists who promote post-Chicago economics may realize that they need to force the courts to get the economics right in order to get the results they want.

Before proceeding, I must offer a caveat: In presenting various visions of the case, I make no claim as to whether the facts support or reject those or any of the other theories one might discuss. This essay is not about whether Microsoft's practices were good or bad. The lessons I want to draw come from the discordance between the vision of the case and its realization. Among the larger regrets is that we may never get a fair test of whether the vision underlying the case was accurate.

THE "BAR NAPKIN" THEORY

One of the cliches about economists is that a roomful of them will advance at least as many different opinions on an economics question as there are people in the room. The question "What might an antitrust case against Microsoft be about?" is no different. Many answers, including some that have animated prior continuing litigation against Microsoft, are of the pre-Chicago variety, e.g., leveraging a monopoly in operating systems into other related software markets. Others involve "holistic" theories with no one individually compelling story but a pattern of conduct that could lead to anticompetitive outcomes. Despite this abundance of perspectives, a core conception reflects the most serious and economically intriguing potential case against Microsoft. I imagine that it as what a few disinterested industrial organization economists--perhaps a rare and endangered species--might come up with on their bar napkins over a couple of beers.

Figure 1 sets out the story, which begins with a …

Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: The Legacy of U.S. V. Microsoft: Do Advances in Economic Theory Lead to Advances in Legal Practice?. Contributors: Brennan, Tim - Author. Magazine title: Regulation. Volume: 26. Issue: 4 Publication date: Winter 2003. Page number: 22+. © 2009 Cato Institute. COPYRIGHT 2003 Gale Group.

This material is protected by copyright and, with the exception of fair use, may not be further copied, distributed or transmitted in any form or by any means.