This paper analyzes the law and economics of United States v. Microsoft, a landmark case of antitrust intervention in network industries. The United States Department of Justice and 19 States sued Microsoft alleging (i) that it monopolized the market for operating systems of personal computers and took anti-competitive actions to illegally maintain its monopoly; (ii) that it attempted to monopolize the market for Internet browsers because such browsers would create competition for operating systems; (iii) that it bundled its browser (Internet Explorer) with Windows; and that it engaged in a number of other anti-competitive exclusionary arrangements with computer manufacturers, Internet Service Providers, and content providers attempting to thwart the distribution of Netscape's browser. The District Court Judge found in most points for the plaintiffs and ordered the breakup of Microsoft into two companies, one with all the operating systems software, and one with all other products of the company. The District Court also imposed a number of severe restrictions on the business conduct of Microsoft. We analyze the economic issues related to liability. We also analyze the remedies imposed by the District Court and contrast them with other potential remedies. We analyze the economic issues related to liability. We also analyze the applicability and effectiveness of the remedies imposed by the District Court and contrast them with other potential remedies.

Key words: antitrust, Microsoft, networks, network externalities,

JEL Classification: L1, D4

^* Forthcoming in Journal of Industry, Competition and Trade: From Theory to Policy (August 2001). I thank Gwill Allen, Gary Becker, Tim Brennan, Steve Davis, David Evans, Frank Fisher, Rick Flyer, Eleanor Fox, Ron Gilson, Vic Goldberg, Eddie Lazear, Roy Radner, Rick Rule, Dick Schmalensee, and participants at presentations at Canadian Bureau of Competition, Columbia University, the Federal Reserve Bank of Philadelphia, the Hastings School of Law, the New York University School of Law, Stanford University (Economics), Stanford University (Graduate School of Business), the Stern School of Business, the University of California (Berkeley), the University of California (Los Angeles), and the University of California (Santa Barbara) for their comments and suggestions. I am not a consultant of the United States Department of Justice, Microsoft, or any of the Attorneys General of the 19 States and the District of Columbia that are suing Microsoft.

^** Stern School of Business, New York, NY 10012, tel. (212) 998-0864, fax (212) 995-4218, e-mail: neconomi@stern.nyu.edu, www: http://www.stern.nyu.edu/networks/

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