Winners, Losers and Microsoft: Competition and Antitrust in High Technology

Published by EH.NET (July 2001)

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 .