Introduction |
BasicAnalysis
| Remedies |
AfterEffects
What are the after effects of this case?
If MS loses, a suit against various dominant firms in the computer industry
would be a natural consequence. It would be logical for USDOJ to sue AOL,
YAHOO, and others in the computing industry on certain clauses of exclusive
dealing in their contracts that resemble the MS contracts.
The structure of the OS software industry, as
well as many other emerging technology industries, tend to be subject to
network externalities. Do network externalities necessarily lead to natural
monopolies?
Sometimes. An OS seller may keep its price low to guarantee wide acceptance
of its OS so that independent software companies anticipate a large market
and write software for this OS. The market outcome depends on historical
market share, but most importantly, it depends on the pricing strategies
of the competitors and the availability of software compatible with each
OS. The winner is often the company that is willing to sell at a low price
for a long time to gain market share and reap the externalities. The loser
is typically the firm that sells at a high price, receives short term profits,
but loses in the long run. Being first is useful, but persistence and the
correct pricing policy are more important.
In summary, we have the paradoxical situation where the winning firm
(that has high market share) is at the same time the company that sells
at a low price. Sacrifices in price pay off in higher market share, and
market share in more valuable when the industry has network externalities,
since higher sales signify higher value. In this process, consumers benefit
from the low market price.
I have shown in theoretical models (see "
Compatibility
and Market Structure for Network Goods") that monopoly (or a
very concentrated industry) can be a natural free-entry equilibrium in
a market where there are very strong externalities. In such a market, at
a natural equilibrium, the leading firm can have three times the market
share than the second firm, the second largest firm can have three times
the market share of the third firm, and so on. Moreover, sometimes it is
better for society to have a more concentrated industry because then society
realizes the benefits of high network externalities of the leading platform.
From a welfare maximizing point of view, should
we prefer one market structure over another?
My paper "Compatibility and Market Structure for Network Goods" shows
that sometimes a more concentrated market results in higher social welfare
than a less concentrated market. A judgment has to be based on the very
specific features of a market.
It seems difficult to forecast the financial success
of a producer of a good subject to network externalities. Do network externalities
imply a "winner take all" industry?
A network consists of many complementary components. The use of a number
of components is required to produce a final service. Often the components
of the network have their own markets. A firm can be most successful if
it can monopolize the market for one crucial component while markets for
complementary components are competitive. The failure of analysts to distinguish
between promising and not promising ventures arises from a failure to adequately
define the market for the final service or from a failure to identify the
extent of market power in each of the markets for the components.