Economics of Networks



Microsoft Anti-trust Trial
Part 2: Remedies
Interview of Nicholas Economides with John Irons of About.com: June 1, 1999

Introduction | BasicAnalysis | Remedies | AfterEffects

Assuming that either MS is found guilty on one of the charges, or that an agreement is reached in which MS agrees to some form of remedies, what should be the goals of any remedies? From the perspective of promoting economic efficiency, what should be the goal(s) of policy in such cases in general?

The remedies fall into two broad classes - first there are those that attack the business side of MS by restricting their contracts or splitting the company along various lines of business. The second broad class attacks the control over the technology by either forcing MS to release or license the source code, or disclose proprietary information (APIs). The remedies can also be divided into those that affect conduct and those that affect structure. For example, a restriction on contracts is a conduct remedy, while a breakup is a structural remedy.

Assuming that liability is established in at least one or more part(s) of the case, when defining remedies one has to consider

  1. what specifically Microsoft is convicted of doing illegally;
  2. which specific remedies would prevent Microsoft from committing the same crime or crimes again in the future;
  3. what remedies help consumers;
  4. which of these remedies creates the least interference in the legitimate business of Microsoft and the rest of the computer industry; and
  5. which remedies preserve and enhance incentives for innovation. In discussing whether or not a remedy helps consumers, one has to consider its effects on prices, on compatibility, and on variety.
In our previous discussion you mentioned that you did not expect the outcome of the case to result in any significant change in the market structure in the OS market and other software markets. Do you still feel this way?

Yes, if one looks forward to the final appeals decision. But, although my expectation is the same, there is much more uncertainty now than there was before the start of the trial on the final outcomes.

What remedies proposals have been made?

The following proposals have been made:

  1. Impose various restrictions on the contracts that Microsoft can write with sellers of complementary goods and with competitors.
  2. Force Microsoft to disclose the APIs that allow it to include Internet Explorer in the operating system.
  3. Force Microsoft to give away the Windows source code or license it to bidders in an auction.
  4. Break up Microsoft according to lines of business (operating systems and applications).
  5. Break up Microsoft in three identical parts, with each part containing an equal amount of each business (not clear how to break Bill Gates in three identical parts).
  6. Break up Microsoft along lines of business (operating systems and applications) and then break the operating systems division in three identical parts.
Which do you feel is more likely given the current state of the trial?

Unless MS does much better in its presentation in the second part of the trial, I expect that the District Court will find MS guilty of some of the accusations. I also expect that an across-the-board conviction is likely to be reversed by the DC Court of Appeals.

What are the pros and cons of each category of remedy?

The following table assesses the costs and benefits of each of the proposed remedies and my assessment of the probability that each of these remedies would be imposed and that they would be upheld on appeal. The probabilities of the various remedies actions add to 50% because I believe that Microsoft has a 50% probability of acquittal.
 
Criteria
---------
Remedies
Proportional to conviction Does it prevent MS from repeating the crime? Does it help consumers? Does it create the least interference in the rest of MS and in the industry? Probability of remedy imposed and upheld
Impose conduct restrictions on contracts Easy to tailor according to the violation Yes, if MS is convicted of anti-
competitive exclusionary contracts
Prevents vertical effects.
Does not prevent horizontal effects.
Yes 30%
Force MS to disclose APIs that allow IE to be in OS Solves all technological bundling problems Yes, if MS is convicted of illegally bundling IE with Windows Prevents vertical effects.
Does not prevent horizontal effects.
Yes 8%
Force MS to give away or license Windows source code Severe remedy that takes away the intellectual property of MS Yes, for mono-
polization.

No, for other crimes

Is likely to create incom-
patibilities and reduce consumers’ surplus. It will increase the cost of applications.
No. Severely decreases the incentive for innovation 5%
Break MS according to lines of business (operating systems and applications) Very severe remedy; dispro-
portionate to crime; its function can be accomplished by disclosure of APIs instead
Prevents vertical effects.

Does not prevent horizontal effects.

Unclear No. Very significant upheaval for MS and the industry. 5%
Break MS in 3 identical parts  Very severe remedy; dispro-
portionate to crime; 
Yes, for mono-
polization.

No, for other crimes.

Consumers lose significantly because of lack of compatibility.

Unlikely to result in significantly lower prices

No. Very significant upheaval for MS and the industry. 1%
Break MS along lines of business and then break the operating systems division in 3 identical parts Very severe remedy; dispro-
portionate to crime;
Yes, for mono-
polization and bundling.

No, for other crimes.

Consumers lose significantly because of lack of compatibility.

Unlikely to result in significantly lower prices

Very significant upheaval for MS and the industry.

May eliminate MS as a serious player 

1%

If you were put in charge of the case, which proposal would you enforce?

If I was in charge, I would impose various contract restrictions.
 

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