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:
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
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 .