An Economist's Guide to U

We analyze the central economic issues raised by U.S. v Microsoft. Network effects and economies of scale in applications programs created a barrier to entry for new operating system competitors, which the combination of Netscape Navigator and the Java programming language potentially could have lowered. Microsoft took actions to eliminate this threat to its operating system monopoly, and some of Microsoft's conduct very likely harmed consumers. While we recognize the risks of the government's proposed structural remedy of splitting Microsoft in two, we are pessimistic that a limited conduct remedy would be effective in this case. 3 While most antitrust cases proceed in obscurity, the case brought against Microsoft by U.S. and State antitrust authorities was front-page news. Much of the drama and media hype centered on the struggle between the titan of high technology, personified in Bill Gates, and the titan of government, personified in U.S. Assistant Attorney General Joel Klein. For economists and policymakers, however, the case was about the appropriate role of competition policy in the new economy. Antitrust critics claim that the nineteenth century Sherman Act is ill-suited for the high-technology markets of the twenty-first century. Others argue that the Sherman Act provides a broad constitution for antitrust enforcement that is flexible enough to protect both the interests of consumers and the ability of firms to compete in high-technology markets. In the Microsoft case, the government (by which we mean the U.S. Department of Justice, 19 State attorneys general, and attorney general of the District of Columbia that brought the case) asserted that Microsoft engaged in anticompetitive conduct designed to maintain its operating system monopoly to the detriment of consumers. According to the government, antitrust enforcement would rein in the Microsoft monopoly and result in more competition and innovation in the software industry. In its defense, Microsoft contended that the company is a vigorous competitor that benefited consumers by supplying high quality and innovative products. According to Microsoft, antitrust action against it would dampen incentives for competition and slow software innovation. In this paper, we analyze the central economic issues raised by the Microsoft case: the source and strength of Microsoft's market power, the competitive effects of Microsoft's practices, the degree of consumer harm, and proposed remedies. 4 Early Skirmishes Microsoft's antitrust woes began in 1990 when the Federal Trade Commission (FTC) launched an investigation of the company. After three years, the FTC's legal staff-but not …