Stan J. Liebowitz and Stephen E. Margolis. Winners, Losers and Microsoft: Competition and Antitrust in High Technology (revised edition). Oakland: The Independent Institute, 2001. xviii + 325 pp. $19.95 (paperback), ISBN: 0-945999-84-4.

Reviewed for EH.NET by Bill Goffe, Department of Economics, SUNY-Oswego.

It is probably best to state my biases at the start. In spite of my heavy computer use, at most I am a sometime user of Microsoft products. For four or five years I have used Linux as my main operating system, and my use of Windows is limited to Quicken and PowerPoint. In the mid-1990s, I was attracted to the stability of Linux compared to Windows 3.1 and Windows 95. I also need a multi-user operating system, and I also like Linux's great flexibility (for instance, I modify the desktop user interface). Finally, I have little need for Microsoft Office, either individually or collaboratively.

As one who follows computers, I have found some of Microsoft's practices bothersome. The last time I installed Windows on a "dual boot" machine (the user chooses which operating system to run when booting), it wiped out the possibility of booting any other operating system with no warning. More recently, it appears that the MP3 encoder (which lets users copy music files to customized CDs) in Windows XP (their latest consumer operating system due this October), will not provide the highest quality encoding, and it may not be included at all. Some claim that they are promoting their own audio format. More recently still, a front-page story in the Wall Street Journal ("New Digital Camera Deals Kodak a Lesson in Microsoft's Ways," 7/2/01) dealt with Kodak's view that Microsoft "double-crossed" them in the development of photo software for Windows XP. That same day, Yahoo! reported that in its license agreement for wireless tools, Microsoft has banned the use of open source software tools, which are a competitor. In short, as a computer user, I do not have the best impression of Microsoft.

Ironically, however, I must admit that I have not examined these issues as an economist. With this in mind, let me describe the book. It has four sections: I. The Paradigm, II. The Theory, III. The Real World, and it concludes with two Appendices on the Microsoft antitrust trial.

Section I has two chapters; the first is an excellent introductory chapter to the book. It briefly describes how some argue that high-tech markets do not produce desirable outcomes due to lock-in, network effects, and increasing returns. Two quotes lay out much of the book's argument: "The winners in the high-tech world have not won by chance, but rather by the choices of consumers in an open market. A responsible examination of the historical record provides evidence that entrepreneurship and consumer sovereignty works as well in high-tech markets as they do in more traditional ones -- which is to say, very well indeed" (p. 4). "These monopolies, we would argue, are efficient outcomes in network industries, where the network effect, or scale economy, is strong. ... Such industries are serial monopolies; one monopoly after another. ... These high stakes, and the rivalry that they create, is apparently sufficient discipline to hold monopoly prices in check and to keep the rate of innovation very rapid" (p. 15). Chapter 2 is a slightly modified version of the authors' earlier work arguing that the QWERTY keyboard is not an example of a market failure due to lock-in, contrary to Paul David's argument. Liebowitz and Margolis make a very convincing case that the alternative Dvorak keyboard actually has few if any advantages. Since the supposed superiority of the Dvorak keyboard has almost become an urban legend, this chapter's ideas probably cannot be repeated too frequently.

Section II contains three chapters on the theories used to describe market failures in high-tech industries. In Chapter 3 the authors' describe and critique the theories of path dependence and lock-in. Chapters 4 and 5 describe network externalities (particularly important in many high-tech markets) and standards. I suspect that some of this material would be difficult for those who have not had at least principles of economics. I was a bit disappointed that they did not discuss the Internet standards process, which seems to work a bit differently than the process described here. These standards are absolutely essential to running the Internet and they cover everything from e-mail to delivering web pages to network plumbing. Still, they do a good job of describing these theories.

Section III tests these theories with data mostly from the PC software market. Chapter 6 takes a detour and looks primarily at why the VHS video recording format prevailed over Sony's Beta format. Many readers who assumed that VHS won in spite of Beta's superior quality will likely be surprised, as was I. This chapter is as valuable as the authors' description of the QWERTY-Dvorak keyboard contest. Chapters 7, 8 and 9 thoroughly analyze the market for PC productivity software. In an important omission, Liebowitz and Margolis only briefly analyze the market for operating systems. Their analysis would have been interesting here given not only the recent appeals court decision finding that Microsoft has a monopoly in this market, but also simply based on Microsoft's market share. Along with descriptions of the software productivity markets, they add market share data and quality measures (taken from magazine software reviews). In general, they find that superior products prevail and that their data show no evidence of lock-in and no tipping (consumers suddenly rushing to one product when it becomes popular due to network effects or increasing returns). They also find that Microsoft's products do not prevail when their products are not superior. In addition, prices fall more in markets in which Microsoft participates. I have several quibbles with their methodology. First, I recall a criticism that some software reviews were not so much based on quality but on the features list (the more, the better). Also, some have complained that as computer magazines depend upon advertising revenue, they are loath to criticize vendors. As one major computer magazine failed a few years ago (Byte), this is not an idle concern. Still, I am not sure what alternative exists. While much is made of falling prices, these markets grew dramatically over these years, and falling prices in products dominated by fixed costs are to be expected. The final chapter in this section summarizes the findings. However, it is too broad as it extends the authors' findings to markets in general.

The final section consists of two appendices that apply their findings to the Microsoft antitrust trail, and then analyze the district court's ruling (note that the appeals court ruling on it came out last month). In general, they find Microsoft blameless. Page 247 states, in reference to antitrust policy and Microsoft, that the "pattern of attacking success is being repeated today." As much of the case involves bundling, they might have expanded this into a separate chapter to make the title appropriate. Also, their view that bundling is unlikely to cause harm seems to represent one side of this seemingly unsettled issue; a more evenhanded treatment may be "Exclusivity and Tying in U.S. v. Microsoft: What We Know, and Don't Know," Michael D. Whinston, Journal of Economic Perspectives, Spring 2001. In fact, that same issue has two other articles on the Microsoft case that readers interested in this issue may find useful. As those articles demonstrate, the Microsoft antitrust case is more nuanced than Liebowitz and Margolis describe. Nonetheless, many parts of this book are informative and interesting. Put another way, I was not convinced on all points, but I found the book a valuable contribution.

Bill Goffe is an associate professor of economics at SUNY-Oswego. He edits "Resources for Economists on the Internet" . His most recent work is "The Internet and the AEA," available at .