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Antitrust Protectionism
Best evidence that the merger between Microsoft and Yahoo will increase competition?
Publicly, Google came out against the deal, contending in a statement that the pairing, proposed by Microsoft on Friday in the form of a hostile offer, would pose threats to competition that need to be examined by policy makers around the world.
Here's an Open Letter on Antitrust Protectionism (pdf) that I drafted nearly ten years ago during the Microsoft trial. It's still relevant today.
Posted by Alex Tabarrok on February 4, 2008 at 03:48 PM in Economics | Permalink
Comments
How much longer before most people realize that anit-trust laws are the most counter productive laws on the books? Anti-trust laws effectively criminalize doing business, trying to increase your market share, and thus bring the whole range of business activity under the government's yoke, so they can extract contributions and cater to rival businesses. For anyone to still believe the idea that these rules have anything to do with consumer protection takes a massive amount of trust in the benevolence of government.
Posted by: scott clark at Feb 4, 2008 6:19:26 PM
With Yahoo's stock price near what microsoft offered, investors believe the deal will go through.
Posted by: thehova at Feb 4, 2008 6:53:16 PM
Is this obvious? It seems to me that many IT markets have been winner-takes-all. If that's true, we may face a choice between a market with niches dominated by Google and Microsoft and a market where Microsoft dominated most of the major niches. In that case, the merger could be bad for Google and worse for competition.
Tom
Posted by: Tom G. at Feb 4, 2008 7:42:31 PM
tom, it is important to keep a distinction between competition, the degree of effort expended by a firm in an effort to increase marketshare by serving customers, and the competition, all the firms a company competes against. Even if Microsoft dominated all major niches, this would not convince me of a monopoly. Even potential competition can be as effective as actual competition in keeping firms innovating and producing. And even if Microsoft dominated all major niches, there will still be niches that it does not dominate, niches that haven't even been carved out yet, that a new firm could develop, exploit, and grow into a major firm and then rival Microsoft. Which is kinda what Google did. This degree of competition in the industry is only brought down by increased government intervention and regulation. Needing to have compliance departments and government relations departments then becomes another barrier to entry stifling potential competition.
It is important not to get hung up on the number of firms in the industry when determining monopoly status. It should be more about productive outputs, innovations, pricing, and firm behavior, it should be about outcomes.
Posted by: scott clark at Feb 4, 2008 8:24:37 PM
It's odd that you link to that Antitrust Protectionism PDF that mentions the MSFT/Netscape case given that, in retrospect, it's crystal clear that Microsoft's bundling of Internet Explorer was an anti-competitive move that basically killed innovation in the browser market for a good 6 to 7 years.
Just look at how badly IE stagnated as soon as it became clear that MSFT had "won" the browser war - active development on the product basically ceased. It's still far behind its competitors today (coasting on bundling and a massive installed user base), but at least it's being actively developed. If Firefox and Safari hadn't come into existence, it's likely that IE would still be stuck at version 6 (at least in terms of features, if not in name).
As for MSFT/YHOO - it's clearly a move of desperation on MSFT's part (their online services strategy is entering its 10th year of failure now, so merging is basically a "Hail Mary" play to try to make something happen). But GOOG's response tells us nothing one way or the other about anything, because it's always GOOG's dominant strategy to object. If GOOG thinks the merger will increase competition, then clearly it's optimal to object. But even if GOOG doesn't think the merger will increase competition, they should still object just to tie up YHOO and MSFT in additional red tape while the courts sort it out.
Posted by: mike at Feb 4, 2008 8:39:13 PM
Google is just returning the "favor": nothing more, nothing less. Yahoo is a has-been search engine and its mail features are second rate: Google knows this.
Posted by: meter at Feb 4, 2008 8:44:52 PM
Upon further consideration, Alex, are you being sarcastic, or are you just being incredibly dense? Perhaps an example will explain the extreme fallacy in your logic:
Best evidence that granting the entire search engine market to me will increase competition:
Publicly, Google, Yahoo, and Microsoft came out against a deal that would legally grant 100% of the search engine market to a single unnamed private individual living in the San Francisco Bay Area, contending in a statement this legislation, proposed by that individual on Friday, would pose threats to competition that need to be examined by policy makers around the world.
Now, the YHOO/MSFT merger may or may not increase competition (I tend to guess not, since MSFT's online division is extremely incompetent, and any attempt to merge it with YHOO's totally different technology will be a multiyear headache, so they'll probably just both die even faster). But the argument you give tells us absolutely nothing - you might as well just have said "I think the merger will increase competition because the sky is blue!"
Posted by: mike again at Feb 4, 2008 8:46:54 PM
The post and earlier letter really don't give any suggestions that would help someone actually decide whether an anti-trust action would be justified or not in such cases, so some quantifications would be useful. Right now the level of argument is at about the level of the WSJ editorial page, but I know Alex can do better than this.
Posted by: jonm at Feb 4, 2008 9:24:56 PM
The sad thing is that you really have to have some pretty good computer science chops to understand the tragedy of the MS monopoly.
It takes some architecture skills to understand how their infrastructure limits the shape of innovations.
MS can say they innovate (and they do, within their framework), but most people don't see their framework.
(For the comp sci folks in the audience, this might be a blast from the past ... Rob Pike on why systems software research does is irrelevant. (PDF))
Posted by: odograph at Feb 4, 2008 10:18:38 PM
Out of curiosity, what would a consumer based antitrust movement look like? I doubt that there were street protests each time Standard Oil crushed and absorbed a competitor. Indeed customers were happy to be paying less for oil while the crushing was going on (only to have the price go up once the competitors were out of the way.)
If you are against _all_ antitrust proceedings in principle, I can respect that. Instead you seem to be singling out the modern batch on the basis that it is just sour grapes from competitors, though I would guess that is the historical norm (and intent of the framers.)
I'd also like to point out that Microsoft's position of strength is almost entirely based on the government granted monopoly of Copyright (with some patents and now DMCA nastiness.) so it is disingenuous to shout "laissez fair" too loudly.
There is no technical reason why the various instant messaging systems (AIM, ICQ, MSN Messenger, Yahoo! Messenger, Gmail chat, etc.) can't interoperate except that the lawyers will be unleashed on anyone who dares to interoperate uninvited. If MS pledged that they would allow interoperation between MSN+Yahoo Messenger and other systems, Google would feel a lot better about blessing the merger. They sure as heck aren't worried about competing on 'search'.
Posted by: Ed C at Feb 4, 2008 10:20:24 PM
Ed C,
All the data I've seen shows that during the existence of Standard Oil, output rose steadily and price continued to fall, firms and refiners that couldn't remain profitable in that environment were bought out and those assets were then back to being productively employed. At the same time, Standard Oil was spending money on research and development to make new products and find new uses for oil. If their competitive advantage came from being able to negotiate with rail roads, that still doesn't change the fact that this was the organization that was able to get the most value out of a barrel of oil. Same with Alcoa in the 50's, they continued to increase output year after year, and the price of Aluminum continued to drop. And its true that there were no other aluminum producers that could match alcoa, and Alcoa wasn't worried about other aluminum producers, but they were worried about plastics, so Alcoa continued to get more efficient and more productive. They got broken up too.
There is no doubt that MSFT knows how to work the patent and copyright system, and there is no doubt that real reforms are needed in the digital age, but just because one government law package is screwy doesn't mean that another screwy government law package can unscrewy it.
Posted by: scott clark at Feb 4, 2008 11:09:19 PM
Maybe Google thinks that if it doesn't oppose the deal, regulators would thereby conclude that the deal will reduce competition.
But what if the regulators think this is what Google thinks?
Posted by: Tyrone Slothrop at Feb 4, 2008 11:12:32 PM
I agree with Scott.
"It is important not to get hung up on the number of firms in the industry when determining monopoly status. It should be more about productive outputs, innovations, pricing, and firm behavior, it should be about outcomes."
Is the consumer suffering? That's the question to ask before any government intervention takes place. I like the point that several niches exist where Microsoft fails to perform. With the exception of its XBox Live and Windows Live (which both pale in comparison), what online success can Microsoft offer in comparison to Google. Google no doubt knows this and could have brought about this accusation just to slow down the process. Microsoft in the past did have monopolistic control over several niches of the industry and in a lot instances still does, but not all are controlled by the beast.
My biggest worries however are mentioned in the article:
“The potential concern would be that Microsoft, if it acquires Yahoo, could do on the Internet what it did in the personal computer world — make technical standards more Microsoft-centric and steer consumers to its products,” said Stephen D. Houck, a lawyer representing the states involved in the consent decree against Microsoft.
Perhaps this isn't the case...
Let's not forget to give credit to the consumer. Firefox was created as a response to Internet Explorer's inadequicies and consumers used the product. Mac seems to be gaining more and more of a foothold. And how can we forget all the attacks against Microsoft that scared so many people into considering Linux as an operating system?
Posted by: Jarrod C at Feb 4, 2008 11:15:41 PM
scott clark,
Nobody disagrees that Stanard Oil reduced costs and increased efficiency, but they were broken up, in part, because they were perceived to have raised prices in areas where they had safely run the competition out of business. I have no position on whether either Standard Oil or the government were in the right. I was merely trying to learn whether Alex is against antitrust laws in general or only when a case is backed by competitors which is how the link colored things. My post was not pro- (or anti-) antitrust law...I just have no sympathy for MS in this case.
Posted by: Ed C at Feb 4, 2008 11:41:01 PM
As a computer science guy, I like a lot of what Microsoft does. They've done well with both XBoxes (although the 360's red light problem was an issue, it was no worse than the PS2's disk read problem). The Windows 2000 and XP operating systems were very stable and great for the average user when compared to the alternatives (which were pretty terrible). Vista didn't launch well at all, which cost Microsoft market share. I still don't use Vista; I have no reason to.
Lets face it, OS/2 was terrible for your average user. Linux is still terrible for your average user (I don't want my mom using a case-sensitive file system). Competing operating systems for the desktop market would, in my opinion, also be terrible. Sure they can try to conform to the same specs and have compatible software, but we all know how well many supposedly compatible products work together. Maybe today, with more people doing test-driven development and the overall higher quality of software, we could see some things work. But 10 years ago, I'm not so sure. Your average user doesn't want to mess with the issues associated with running different sorts of software on different distributions of an OS.
The fact that there may not be much innovation in OSes and file systems is great and all, but the market doesn't serve the innovator necessarily. The market serves the customer, and your average customer wants a stable operating system with a wide range of available software. He doesn't give a damn about microkernels or journaled file systems; he just wants things to work. Maybe certain innovations help, but I doubt they are as preferred as a mature, stable platform. Gamers, to some extent, like innovation because of their high-performance requirements, but much of that innovation is channeled into consoles which are not bound by the less flexible specifications of PCs.
I'm not trying to defend Microsoft's use of patents or copyrights; I don't know enough about their actions to do that. I don't think Microsoft does a very good job on a lot of things, and their reputation will probably come back to bite them when other OS alternatives become viable. I am trying to defend their near-monopoly in desktop operating systems because I believe that is what serves the consumer best. Don't listen to us computer science guys when we think we know what the market should look like; only the consumer knows that.
At some point I think you just have to trust that the market process has produced a desirable outcome. You shouldn't have to built a swimming pool to prove that a bowling ball sinks, and every business with a lot of market share shouldn't have to prove that things could theoretically be better if it were smaller.
Posted by: Grant at Feb 5, 2008 12:57:26 AM
Grant makes an extremely important point in answer to Mike, above. Mike is entirely correct that IE bundling killed Netscape, resulting many years of browser stagnation. But it doesn't follow that consumers were harmed. Indeed the prima facie explanation of those events is that consumers prefered getting a simple, static, standardized browser for free over a having a choice of feature-rich, evolving, and incompatible browsers that they had to pay for. What the geeks want isn't always (in fact, usually isn't) what the mass of computer users want!
Microsoft's compulsory OEM licensing and discriminatory pricing strategies did harm consumers and were a legitimate target of anti-trust action. But bundling their browser with their OS at no additional charge was an entirely legitimate, competitive tactic that certainly harmed Netscape but certainly benefited consumers.
Posted by: David Wright at Feb 5, 2008 7:10:52 AM
Isn't Grant's argument that the market would favor the first commercial operating system to gain critical mass?
That's exactly what happened.
Network Effects are very strong in computer science, and especially operating systems. And if you really understand the guts of OSes, you can imagine all of the OSes you never saw "built out" or polished for the customer because ... the niche was filled.
To name just one, Distributed Operating Systems promised a system where backup was automatic, and power grew as each new computer was added to your office (or home). Everyone got the cumulative power of the installation, without the rigid distinction of "pc" and "file server" etc.
A few examples were built, and they worked well, but they faded when they couldn't leap from the university.
History is full of "lock in" of course. You may have heard that the screw-in compact fluorescents we buy share the same thread design as an ancient kerosene can. The shape limits their innovation. How did they get that shape? They inherited it from the incandescent bulb. And when a guy in Edison's lab was making the first incandescent he found it easier to cut up a kerosene can he had there, and re-use the cap and spout, than make a set of threads from scratch.
As an engineer I'd like a little more of a "period of flux" for good ideas to percolate before lock-in and infrastructure is decided.
I think in OSes we decided WAY too soon.
Posted by: odograph at Feb 5, 2008 7:53:35 AM
Microsoft's bundling of Internet Explorer was an anti-competitive move that basically killed innovation in the browser market for a good 6 to 7 years.
No. Firefox is a direct descendant of Netscape and Mozilla -- Netscape never went away (though the name changed). And the Opera browser has been under continuous development since 1994. There was never a time when bundling Internet Explorer killed off the competition. And Internet Explorer is still bundled, as is Safari as is Opera on many non-computer devices. In fact, bundling is standard procedure -- all internet capable computers, phones, and other devices come with browsers.
Trying to sell such an internet-capable operating system or device without a browser would be as absurd as trying to sell an automobile without a steering wheel in order to protect the manufacturers of 3rd-party wheels.
Posted by: Slocum at Feb 5, 2008 8:02:14 AM
"Trying to sell such an internet-capable operating system or device without a browser would be as absurd as trying to sell an automobile without a steering wheel in order to protect the manufacturers of 3rd-party wheels."
We computer scientists sometimes make the pedantic point that an "operating system" does not in fact include any applications. It is the system that allows applications to operate.
Now I get your point totally that a computer system sold today is expected to do certain things.
And it is convenient for someone to bundle all that stuff on one CD. It might have been the computer maker (Dell or HP or Apple) or it might have been a software vendor.
Today Apple does it all, and HP/Dell negotiate a bit with MS about what they can put on their PCs. (A point of the anti-trust case was that some PC manufacturers wanted to bundle Netscape and MS used OS-monopoly to fight it.)
So sure ... expect your computer to do a bunch when you open the box ... but be aware that the consumer idea of an "operating system" is actually a large bundle of operating system, drivers, applications, etc., etc.
Posted by: odograph at Feb 5, 2008 8:12:13 AM
BTW, I hope plain folk are aware that when MS said Explorer was not separable from Windows they lied, totally.
And then they went back and violated every rule of good computer programming to make it true. It was like bolting the refrigerator to the floor of the kitchen and then saying that the architecture required it.
They were better off (legally) with a bad program that they could claim was inseparable.
Posted by: odograph at Feb 5, 2008 8:16:47 AM
We computer scientists sometimes make the pedantic point that an "operating system" does not in fact include any applications. It is the system that allows applications to operate.
Pfft -- even in computer science there's no absolute, objective line between what's part of the operating system and what's an application. In your view is the windowing system part of the operating system? Is the file browser? How about the command-line shell? If not, should all of those be unbundled as well?
In any case, that's all irrelevant to the question of what an operating system is as a *product*, and that's what matters for this discussion.
BTW, I hope plain folk are aware that when MS said Explorer was not separable from Windows they lied, totally.
They didn't. The reliance on the Internet Explorer HTML rendering engine for the help system or as a component with public APIs that could be embedded in third party applications, for example, was perfectly reasonable. Now, it's possible to include that HTML rendering engine in the package but leave out browser shell that contains the HTML renderer. It's possible, but dumb. And even if you do that, you've included most of the browser -- you've just left out the relatively trivial container for it.
Posted by: Slocum at Feb 5, 2008 9:51:57 AM
Friedman says monopolies can't exist without government collusion. People eventually find ways around them.
Posted by: jorod at Feb 5, 2008 10:05:36 AM
A funny thing about search engines is: you could write a better one today, show it to the world tomorrow, and have the whole freaking world using it the day after that.
There's not a more unstable thing to monopolize on the planet.
Cheers,
Posted by: Michael Giesbrecht at Feb 5, 2008 10:27:28 AM
jorod...
Ah ha - so Friedman said it so its true? Interesting little religion you got there.
Posted by: reason at Feb 5, 2008 10:36:53 AM
So Michael Giesbrecht -- why haven't you done it?
Posted by: reason at Feb 5, 2008 10:38:20 AM
