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Economist Estimates that Court Ordered Microsoft Breakup Would Cost U.S. Consumers $50 Billion

(September 25, 2000) Stan Liebowitz, an economics professor, released an economic analysis of Judge Thomas Jackson's breakup order in the Microsoft antitrust case, which concluded that, if the order were implemented, software prices will rise, costing American consumers at least $50 Billion over three years, and possibly much more.

Related Documents
An Expensive Pig in a Poke: Estimating the Cost of the District Court’s Proposed Breakup of Microsoft, 9/21/00. (Link to PDF copy in the ACT web site.
A Fool's Paradise: The Windows World After a Forced Breakup of Microsoft, 2/25/00. (Link to PDF copy in ACT web site.)
Prof. Liebowitz's list of publications relating to Network Effects, Path Dependence and Lock-In, and the Microsoft Case, (Link to html page in Liebowitz's web site.)

The 36 page study is titled "An Expensive Pig in a Poke: Estimating the Cost of the District Court’s Proposed Breakup of Microsoft." It is the most recent of Prof. Liebowitz's writings pertaining to the government's antitrust case against Microsoft.

Stan Liebowitz is a Professor of Economics at the Management School of the University of Texas at Dallas. He is a member of the Chicago/Rochester school of  economic thought, which tends to support free markets, and oppose government intervention.

He conducted the study on behalf of the Association for Competitive Technology (ACT), a group which shares his views.

He wrote that "The remedy proposed by the government and adopted by the judge in the Microsoft case is likely to increase software prices to consumers, impose additional costs upon software developers, retard innovation in the operating system, reduce competition in the workstation/server marketplace, and lead to confusion and frustration among consumers who will be purchasing computers with non-standardized operating systems."

Liebowitz reasoned that if Microsoft were split into two companies (an operating system company and an applications company) as ordered by Judge Jackson, the two resulting firms would be likely to alter Microsoft's pricing strategies. He noted that Microsoft has not heretofore pursued a monopoly pricing strategy for any of its products. Rather, Microsoft has pursued a low-price strategy.


However, he continued that the resulting companies are more likely to adopt pricing strategies more consistent with typical software firms. If "the new operating system company adopts a different pricing strategy, particularly one consistent with the government’s economic theory of the case, prices would be expected to rise," wrote Liebowitz.

He provided a range of possible software price increases, and how much it would cost American consumers in total. He estimated, at the low end, an additional $50 Billion over a three year period. He estimated, at the high end, $125 Billion, if the two new companies completely turn their back on the prior pricing strategy of Microsoft. He also provided high and low estimates for the cost to all consumers in the world: $125 - $310 Billion.

Liebowitz also predicted that "Competition will be reduced in non-desktop markets, particularly the server/workstation/database market and the game console market. This will raise costs to consumers in these markets."

Finally, he predicted that if Judge Jackson's order were implemented, software developers would face higher costs, and improvements to the operating system would diminish since the financial incentive to improve Windows would be weakened.

And as is usual for Prof. Liebowitz, he took issue with much of what Judge Jackson has found and ordered in this case.

Related Stories
PFF VP Recommends Four Way Break Up of Microsoft, 2/27/00.
Economist Predicts Microsoft Breakup Would Harm Consumers and Software Developers, 2/27/00.

Prof. Liebowitz is not new to the Microsoft matter. He has written many items that have been favorable to Microsoft; he has also frequently spoken and served as a panelist on this subject. For example, he participated in panel discussion on remedies in the Microsoft case hosted by the Progress and Freedom Foundation at the National Press Club in Washington DC on February 25. At that event he presented another study in which he predicted that the cost of a Microsoft breakup to software developers would be $30 Billion.


More Excerpts from "An Expensive Pig in the Poke"
"There are several reasons to believe that the price of Windows would rise. As has been noted in a declaration by the government’s expert Carl Shapiro, and in an Amici brief by Litan, Noll, Nordhous and Scherer, there is a well-known problem that economists refer to as double marginalization. The double marginalization problem occurs when two firms, each with market power, produce complementary products. Each firm attempts to charge a markup that would maximize its profits, taking the other firm’s markup as given, and in so doing the price for the two combined goods contains a higher markup than if a single firm had set a profit maximizing markup for the two goods jointly. Thus, if one believes that both the AppCo and the OpCo will have market power, prices after the breakup would be expected to increase." [at pages 3-4.]

"A detailed analysis of Microsoft’s pricing clearly demonstrates that Microsoft’s behavior in application markets can be classified as that of a price cutter, or a firm following a low-price strategy. After the breakup, new leadership will exist in one or both companies and each will have to choose a pricing strategy. It is impossible to know in advance what pricing strategies will be adopted by these companies. Although it is possible that both the OpCo and AppCo will follow the same type of low price strategy used by Microsoft, it is likely that at least one, and perhaps both companies, will adopt a different, higher-price strategy, perhaps due in part to the double marginalization factor mentioned earlier." [at page 10.]


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