Antitrust in the Information Age

June 4, 1999 • Commentary

Despite intense competition and absent any evidence of consumer harm, the Justice Department persists in its antitrust litigation against Microsoft. Today, I propose to address three questions about that litigation. First, what theory does the government rely on to defend its interventionist role? Second, what logic, if any, justifies the remedies reportedly under consideration by the Justice Department? Third, what’s really driving the browser wars?

I turn first to the theory of network effects, which says that high‐​tech consumers, concerned about compatible software applications, might be seduced into purchasing inferior goods. Undoubtedly, there’s some truth to the theory. But in unregulated software markets, users were not inveigled by network effects despite compatibility concerns. Consumers refused to anoint WordPerfect as ruler‐​in‐​perpetuity of word processing, or Lotus as spreadsheet leader forever, merely because usage of those products was ubiquitous.

Network effects theorists argue that consumer purchases are not a reliable indicator of a “superior” product. Instead, objective measures can tell us which products are technically superior, no matter what consumers actually buy. The problem with that argument is that it leads directly to government paternalism — to the idea than an elite corps of government experts knows our interests better than we, and can regulate our affairs to satisfy those interests better than the market does. When we permit government to make such assessments, and we allow those assessments to trump the subjective choices of consumers, we abandon any pretense of a free market.

Next, let me address the various remedies that have been floated by the Department of Justice. Essentially, each remedy punishes vigorous competition by dismembering the winning competitor. First, vertical divestiture: One company keeps the Windows operating system; a second company gets applications programs; a third company takes on Internet and e‐​commerce products. Normally one doesn’t attack monopoly power by spinning off the monopoly itself into a separate company. But what is worse, vertical divestiture will require ongoing government decisions about whether a product is part of the operating system, or an application or Internet related. Just look at the browser to see how difficult it can be to compartmentalize a product within a nearly seamless operating environment. And look at the AT&T fiasco to see how easy it is for a court to get bogged down in post‐​divestiture regulation.

Second, horizontal divestiture: Each of several vertically integrated clones — Baby Bills — would receive full rights to Microsoft’s source code and other intellectual property. They could then proceed to compete freely and fiercely against one another. May the better Bill win, at least until a new leader emerges, at which time the government will undoubtedly call for another divestiture. No one seems to know which corporate Bill gets the real‐​life Bill, nor whether new operating system features have to be shared and, if so, why any company would continue to innovate, knowing that competitors will reap the benefits.

Third, compulsory licensing: Microsoft would be forced to license the Windows source code to one or more companies, each of which could develop and sell it independently, thereby creating instant competition in the operating system business. The problems should be obvious: If new technology is to be declared public property, it will not materialize. If technology is to be proprietary, then it must not be expropriated. Once expropriation becomes the remedy of choice, the goose is unlikely to continue laying golden eggs.

Meanwhile, government‐​driven balkanization of operating system protocols will wipe out Microsoft’s most important contribution to software markets: standardization. Like the Unix system, Windows will end up with a dozen or more variations — no common platform on which software developers can build. The result will be fewer applications programs, increased costs of development and higher user prices.

Finally, what’s really driving the browser wars? To find out, just read the Justice Department’s complaint. There you will find Netscape mentioned 130 times in 130 pages — government resources co‐​opted for the welfare of a competitor, not for consumers. The conclusion is all but inescapable that antitrust laws are being used as an anti‐​competitive subsidy to prop up unsuccessful firms. Instead of focusing on new and better products, software executives will find themselves consorting with former members of Congress, their staffers, antitrust officials and the best lobbying and public relations firms that money can buy.

On the other hand, perhaps this case is merely support for empire building, which has become standard procedure in Washington, D.C. President Clinton has asked for a 17 percent increase in funding for the Antitrust Division. To justify that increase, the Department of Justice must provide the American public with dramatic evidence of its effectiveness. Hence, a high‐​profile case with sensational remedies as the exit strategy, played to the media and focused not on substantive legal issues but on public ridicule of a company and its chief executive. We deserve better.

These remarks were given by Robert Levy on May 24, 1999, in the United States Capitol at the National Taxpayers Union Conference titled Antitrust in the Information Age.

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