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

Paul Gigot

If only the Clinton Justice Department read Winners, Losers and Microsoft, the American economy would be spared much pain and legal expense. Stan Liebowitz and Stephen Margolis really know their stuff, and they can write too.
— The Wall Street Journal

Booknews

Liebowitz (economics, U. of Texas-Dallas) and Margolis (economics, North Carolina State U.) investigate whether the build-a-better-mousetrap style of competition has been replaced with path-dependence, which can lock in inferior products and lock out innovative newcomers. They argue that competitive advantage in high technology is short-lived, and that the best way to promote competition and innovation is to trust free-market entrepreneurs rather than take antitrust action. Annotation c. Book News, Inc., Portland, OR (booknews.com)

From The Critics

There are lies, damned lies and statistics, as Benjamin Disraeli once noted. Respected economists Stan Liebowitz and Stephen Margolis use plenty of statistics to examine the key tenets surrounding the Microsoft antitrust trial. Their conclusion - that the market rewards companies that make the best products, period, and that the government should butt out - is well argued.

Their research makes a compelling case that Microsoft wins because its products are better built, better marketed and better liked, but their work under the auspices of the Independent Institute, a libertarian think tank in Oakland, Calif., is tainted by the recent disclosure in the New York Times that Microsoft secretly paid for prominent newspaper ads this summer in which the institute and 240 academic experts defended Microsoft against its antitrust-case rivals. The software giant also allegedly covered the first-class travel expenses of Independent Institute President David Theroux to attend a press conference the day the ads ran. (Theroux vigorously contested both these points last week in the Los Angeles Times.)

When asked by the New York Times what he thought of the Microsoft payments, Liebowitz, a professor of economics at the University of Texas at Dallas, said that while he wasn't aware of them, "it doesn't matter to me." It's a puzzling statement coming from someone who purports to offer an objective assessment of Microsoft.

These issues cannot help but cause readers to scrutinize Winners, Losers and Microsoft for signs of bias, if not lies, among the statistics. It's not an easy task, though. Much of the book veers away from the Microsoft case and into a dense theoretical thicket of antitrust case history, some of which the authors had published nine years ago in the Journal of Law and Economics, especially their famous debunking of the QWERTY keyboard myth.

The authors argue that their voluminous research proves that consumers don't get "locked in" to inferior standards, a la the popular economic theory of "network effects." Despite QWERTY's faults, they say, it never really had a viable challenger and thus deserves to be the standard until something better comes along.

Liebowitz and Margolis also go to great lengths to show that another well-worn "lock-in" parable - the victory of the VHS home-video format over Beta - was a story in which superior picture quality was not great enough to overcome Beta's shortcomings, such as limited tape length.

The authors later move on to recent software markets, arguing that one product's superior quality, aggressive pricing and innovative development can often quickly and decisively unseat a previously entrenched leader. When Microsoft's products are better than the competition's, the authors argue, it does the unseating, as the company did with its Web browser, word processor and spreadsheet applications. When its products are second-rate, it fails to take over, as happened with financial software and online services. What's more, they show that Microsoft's entry into a market almost always lowers prices across the board.

The authors make no bones about the book's goal: "Governments can help ensure that consumers get the best products by keeping government impediments out of the way of entrepreneurs competing to establish their mousetraps in the marketplace." Having established that the theory of network effects, used by Microsoft's accusers to show how the company defends and extends its monopoly power, only rewards good products, the authors close by defending the software giant against a host of accusations: Microsoft's monopoly stifles innovation; it's out to destroy competitors; it must not be allowed to control the PC desktop, and so on.

The book's only criticism of Gates and company is saved for the defense team, whose mishandled witnesses and bungled videotaped presentations are called "staggering public relations fiascoes." If Judge Thomas Jackson rules against Microsoft and is ultimately backed by the Supreme Court, the company's lawyers will be responsible, say Liebowitz and Margolis, for letting an unworthy economic theory - network effects - rule the day, and perhaps the next century, of antitrust legislation.

It's ironic that the arguments in Winners, Losers and Microsoft, as well reasoned as they might be, are also marred by poor publicity. Bad decisions, such as the Independent Institute's acceptance of what it now admits is 8 percent of its budget last year from Microsoft, may seem to compromise its researchers' methodology. But as Microsoft's marketers surely know, perception is sometimes as potent as reality.

-Alex Lash

Lee Gomes

Two economists did what no one who repeated the story seems to have ever done -- i.e., a little digging.... The professors checked out this story.. by spending a lot of time in the library. They read every software product review from the past 15 years they could find and came up with a different conclusion. Microsoft, their evidence says, wins market battles (word processors, spreadsheets, browsers) when its products are better, and loses such battles (financial software, on-line services, palm-sized computers) when they aren't.... the two authors have gone a long way toward reshaping the Microsoft debate. Henceforth, any judges, economists, pundits or journalists who discuss Microsoft or technology lock-in—much less repeat the crusty old Qwerty tale—without first dealing with the Liebowitz-Margolis critique should have their wrists soundly slapped.
—From The Wall Street Journal.

Mark Henricks

innovative and utterly convincing... Their dismantling of commonly accepted myths about the QWERTY typewriter keyboard and the VHS-versus-Beta video struggle makes fascinating and illuminating reading... they conclude that Microsoft doesn't dominate software markets by cheating, but by creating products that work better than others.
—From American Way Magazine.