The most important lesson to be drawn from District Judge Thomas
Penfield Jackson’s decision that Microsoft is an evil monopolist is that
the anti-trust laws should be repealed. This is not to say that
Microsoft hasn’t engaged in restrictive or questionable practices,
especially regarding exclusive contracts with computer makers, or that
it hasn’t played hardball in ways many would find morally dubious.
But Judge Jackson’s decision amounts to announcing after the game has
been played that the winner transgressed rules nobody knew about in
advance. Anti-trust laws are so amorphous and vague that nobody can know
in advance whether one has violated them or not — the very opposite of
what a good law should be.
This is hardly surprising. Anti-trust laws are based on a worst-case
scenario theory of economic behavior that almost everybody who went to
college has heard expounded (though more likely in a bull session or
political science class than an economics class). If a company uses
underhanded methods like cutting prices to drive its competitors out of
business, it can then achieve monopoly status and price its goods or
services at whatever high price it prefers, thus achieving monopoly
profits and gouging consumers. Having driven all its competitors out of
business it can get away with this. This subverts the ideal of fair,
open competition, makes prices higher than they would otherwise be and
It’s an interesting theory, and it might even happen someday. In
fact, however, it has never happened and it is unlikely to happen unless
the government steps in to outlaw or suppress competition. As long as
competition is not outlawed and capital is free to flow to its highest
and best uses, a company that is able to use market dominance to
extract artificially high profits will soon attract competition from
some other bloodthirsty corporation eager to get a piece of the action.
In fact, no company has ever achieved monopoly status without
government help. Standard Oil in the 19th century had started to lose
market share before the anti-trust laws were even passed. Standard and
other greedy companies in the 19th century never relied on their “market
power” to achieve market dominance. They found it was much more
cost-effective to buy state legislators and members of Congress to hurt
their competitors or would-be competitors.
In this century Alcoa dominated the aluminum industry by offering
lower prices for a long time. When it tried to raise prices (as the
market failure model suggested it should have been able to do) it lost
market share. IBM dominated the computer industry as long as it offered
superior products and service. When it began to behave like a monopolist
and got lazy about innovation it was supplanted by upstarts like
Microsoft and Apple; the long antitrust battle with the government had
almost nothing to do with it.
AT&T, before being broken up by anti-trust actions, really was a
monopoly. But it was a monopoly explicitly and purposely created by the
The main thing Judge Jackson has created with his decision is
confusion. Nobody knows what will happen next. Will Judge Jackson, after
his stinging opinion, order a severe remedy like breaking up the
company? Will state attorney generals and the “entrepreneurial bar,” in
the words of Chicago investment strategist Robert Streed “keep after
Microsoft looking for money for a long time” as they have with tobacco
companies? Will Judge Jackson’s ruling survive the inevitable appeals
process? Is a settlement in the offing?
So Judge Jackson created massive uncertainty. The question —
especially since anti-trust law, at least in theory, is supposed to
benefit consumers — is whether the uncertainty will help consumers or
hurt them. Since anti-trust law is based on a bogus economic theory that
has no basis in real-world experience, the answer is that it will hurt
consumers. I talked to Stan Liebowitz, co-author of the recent book
“Winners, Losers and Microsoft: Competition and Antitrust in High
Technology,” published by the
Independent Institute in
Oakland. He’s Professor of Managerial
Economics at the University of Texas at Dallas and he and his co-author
Stan Margolis, who teaches economics at North Carolina State University,
have spent the last 12 years researching the high-tech big picture.
“This decision — if it ends up with a remedy consistent with Judge
Jackson’s statement, which is by no means certain — might be good for
Microsoft’s competitors, but it’s unlikely to benefit consumers,” Mr.
Liebowitz told me. “The most likely result will be to make the software
business less competitive, meaning prices will fall more slowly.”
In their book, Liebowitz and Margolis publish the results of their
empirical studies of Microsoft’s behavior in the marketplace — almost
the only work surrounding this case based on facts rather than theory.
It turns out that between 1988 and 1995, Microsoft produced a product in
10 of 15 major categories of consumer software as defined by Dataquest.
In the five software categories where Microsoft did not have a product,
prices fell by an average of 15 percent. In the 10 categories where
Microsoft did have a product, prices fell by 65 percent.
The two authors also compared Microsoft market penetration with
independent product reviews and evaluations. They found that Microsoft
became dominant only in areas where it had a superior product. Having
Windows on most personal computers didn’t help Microsoft Money take
market share from Quicken, which got the best reviews for personal
finance software. In online services, Microsoft Network has gotten
consistently poor reviews — and America Online has increased its
Was this because Microsoft was a benefactor that thought only of
consumer welfare and fair play? Of course not. It acted as a
price-reducing factor because it was a fierce competitor in marketplace
to which no government agency had restricted access. It didn’t like the
fact that upstarts in garages could outsmart it and out-compete it. In
some cases it played rough and did things that perhaps should be against
the law. But it had to operate in that kind of environment.
In other words, the market — the abstract term by which we describe
the sum total of millions of independent decisions to buy or not to buy
— has been pretty smart. Mr. Liebowitz thinks it is smarter than Judge
Jackson thinks it is.
Whether Judge Jackson, who early in the case couldn’t accomplish the
relatively simple task of removing an icon from his opening screen,
understands the high-tech market or not, however, he has demonstrated
that he has the power to disrupt it seriously. A decision Liebowitz
describes as “surprisingly unbalanced and full of logical and factual
errors” has created turmoil that is likely to continue for months or
years, doing great harm to competition and innovation.
The most important lesson to learn here, however, is not that Joel
Klein and Judge Jackson are bad guys (though there’s pretty good
evidence that they might well be) but that the anti-trust laws should be
repealed. They were written during the industrial era and based even
then on faulty economic analysis, are due for serious revision. They
have almost always been used to give one competitor an advantage over
another rather than to open markets. In the Internet era they are an
anachronism we can no longer afford.