The Conduct vs. Structural Remedies Controversy: an ... - Cerna

CERNA, Centre d’économie industrielle
Ecole Nationale Supérieure des Mines de Paris
60, bld St Michel - 75272 Paris cedex 06
Tél. : (33) 01 40 51 91 73
Fax : (33) 01 44 07 10 46
E-mail : leveque@cerna.ensmp.fr
http ://www.cerna.ensmp.fr/
The Conduct vs. Structural Remedies Controversy:
an Irrelevant Dichotomy of Antitrust Policy Instruments
François Lévêque
Working Paper, May 2000

The Conduct vs. Structural Remedies Controversy:an Irrelevant Dichotomy of Antitrust Policy Instruments
François Lévêque
The Microsoft trial has entered into its remedy stage. Some parties (SIIA, 1999 ; Salop, 1999 ;
Litan et alii, 2000) ask for structural remedies like vertical and horizontal divesture whereas
others claim restrictions on Microsoft behaviour by mandatory rules of conduct. For pro
plaintiffs parties structural remedies are more stringent, easier to enforce and more effective.
For supporters of Bill Gates' company such remedies are disproportionate and conduct remedies
would suffice to put an end to Microsoft anti-competitive behaviour. This conduct vs. structural
remedies controversy is based on an over-simplifying and confusing classification of antitrust
policy instruments. The reason is that it mixes two independant features of policy instruments:
whether they are based on a command-and-control or an incentives approach; whether they
concern a firm's environment, its outputs, its organisation or its property rights.
Table 1: Assumed properties of structural and conduct remedies
Remedies Enforceable Stringent Effective
Structural + + +
Conduct - - -
Table 1 sums up the current controversy about the remedies to use against Microsoft. Conduct
and structural remedies are considered as two separate families of instruments. The former
prescribes or proscribes certain behaviour. The latter modifies a firm's organisation. Structural
remedies are viewed as nipping anti-competitive behaviour in the bud because they suppress a
firm's incentives to unlawfully behave. In contrast, under conduct remedies a firm's economic
interest to break antitrust law remains in place. As a consequence, structural remedies are
largely self-executing whereas conduct remedies require permanent intervention of public
authorities. This is why structural remedies are supposed to be less costly to enforce. Moreover,
they are considered as more stringent because this characteristic which largely features
divesture is generalised to other structural remedies. Similarly, they are said to be more
effective because divesture is a means to restaure competition and this is generalised to other
structural remedies.
Such a view is over-simplifying and confusing. Structural remedies as Chinese walls to bar
information exchange between different units and mandatory accounting separation of
integrated activities to facilitate third party access to an essential facility are not especially easy
Cerna 2

The Conduct vs. Structural Remedies Controversy:an Irrelevant Dichotomy of Antitrust Policy Instruments
François Lévêque
to enforce : Information exchange is difficult to observe and accounting separation requires
permanent regulator scrutiny to check how joint costs are allocated. Even some forms of
divesture may require significant ex post involvement of administration. Functional break-up is
an example. Business lines evolves with changes in technology and demand. Public authorities'
involvement is thus necessary to ensure compliance with the maintening of business lines breakup.
On the contrary, some conduct remedies may require a low involvement of administration.
For instance, an injunction to publish a price list to remedy to discriminatory pricing is easy to
monitor. Moreover, some remedies as those concerning intellectual property rights are difficult
to range into the conduct or structural categories. In the SIIA report (1999), compulsory
licensing of Windows source code is mentioned as a conduct remedy whereas the establishment
of Windows OS family as open source software is ranged as a structural remedy ! According to
Litan et alii (2000), licensing remedies belong to the category of structural remedies. As far as
effectiveness is concerned, the insights provided by the conduct/structure dichotomy are also
confusing. Effectiveness must be assessed depending on the objective which is pursued. If
remedies'goal is impeding past unlawfull conduct to repeat (e.g., compelling Microsoft to
disbundle its operating system and Internet browser and impeding the company to leverage on
new segments of the market) conduct remedies may be effective means. If the aim is to kick
start the market back to competitive condition, only some structural remedies as divesture may
be effective. It is important to notice that even break-up is not the panacea. The functional
divesture as proposed by antitrust division is likely to reduce application barriers but does not
instaure workable competition on the OS market for the monopoly is not dismantled.
The dichotomy is confusing because it mixes two distinct features of policy instruments: the
policy approach which is used and the firm component which is targeted. The independancy of
these two features is put in evidence in table 2 with exemples of policy instruments used in
different areas (environmental policy, tort law, public utilities regulation, etc.) and exemples of
different remedies which may be used in the case of USA vs. Microsoft Coropration.
Table 2: Two independant features of policy instruments
Policy approach
Command-and-Control
Providing incentives
Target
A firm’s environment (1) Liability rules
Antitrust penalties
A firm’s outputs (e.g., price, quantity, Cost-plus tariffs, polluting emissions standards Fixed-price tariffs, environmental charges
quality)
Operating System/Internet Explorer Price Cap on Windows
A firm’s frontiers (e.g., structural
antitrust remedies)
Property Rights
Disbundling
Accounting separation
Chinese Walls between Windows and
Application businesses
Land takings
Application Programming Interfaces
Disclosure
Divestiture
Microsoft Break-up
Patents
Varian’s Proposal
(1) In market economies, public intervention is not allowed to constrain all the parameters of business environment, that is why
there is no command-and-control instruments targeted on a firm's environment.
Cerna 3

The Conduct vs. Structural Remedies Controversy:an Irrelevant Dichotomy of Antitrust Policy Instruments
François Lévêque
Whatever public policy deals with antitrust, public utilities, pollution abatement or scientific
research a key distinction of instruments is whether they are command-and-control instruments
(also called regulatory instruments) or economic instruments (also called incentives
instruments). The latter create economic incentives for firms to adopt socially desirable
behaviour. Whether firms would change their behaviour or not depends on a cost-benefit
analysis. For instance, a Pigovian tax on CO2 will result in pollution abatement whenever the
marginal abatement cost is higher than the amount of the charge per unit of emissions. Liability
rules are another classical example of economic instruments. They provide incentives to avoid
accidents. They leave firms decide to invest in accident prevention or pay damages when they
occur. Penalties, if rightly tailored, are also incentives instruments. The firm would not break
out a rule if its benefit to do it is less than the expected costs of the sanction. Penalties are
commonly used instruments in the field of antitrust policy.
Regulatory instruments corresponds with another approach of government intervention. Instead
of creating incentives, government says to a firm's how to behave; it commands and controls
their actions. In contrast to economic instruments, a firm's means to behave against social
welfare are constrained but not its incentives.
The second feature of policy instruments relates to their target. Instruments act upon different
components of business. They may concern a firm's environment, its outputs, its organisation,
its property rights and so forth.
Historically, economic theory has mainly delt with regulatory instruments targeting a firm's
output, that is price, quantity or quality of products. Classical examples are emission standards
in environmental policy, cost-plus pricing in public utilities regulation, quota in agriculture
policy ; quality standards in consumers policy, etc. It would be wrong to conclude that
instruments policy which are targeted on outputs belong to the type of Command-and-Control.
One of the main progress made by so-called new economics of regulation (Laffont and Tirole,
1996) is merely to have elaborated incentives intruments to regulate public utilities (e.g., price
cap).
Most of antitrust instruments act upon a firm's structure. Mandatory divesture before the
authorization of mergers and acquisitions are classical examples as well as (albeit less
frequent).divesture as an antitrust remedy. In public utilities regulatory reform, structural
instruments have also been used (e.g., divesture of Bristish Rail, accounting separation of the
French electricity system operator within EDF.As
well as outputs and structure targeted
instruments, remedies targeted on property rights may belong either to command-and-control or
incentives instruments. Intellectual property rules provide incentives for innovation and firms
Cerna 4

The Conduct vs. Structural Remedies Controversy:an Irrelevant Dichotomy of Antitrust Policy Instruments
François Lévêque
would decide to patent their inventions or keep them secret depending on the duration of
exclusivity they are granted. An example of intellectual property incentives to remedy to
Microsoft anti-competitive behaviour is the proposal advanced by Hal R. Varian. It consists in
requiring Microsoft to license binary versions of its operating system more than X months old
(say, 36 months) at a flat price of $ Y per license (say $10). X and Y are variables set and fine
tuned by public authorities. In contrast, the disclosure of application programing interfaces to
facilitate application sofware companies to develop complementary product to Windows does
not change Microsoft incentives. Its interest would remain not to comply with this rule in order
to give advantage to Microsoft applications product.
As a conclusion, the dichotomy structure vs conduct instruments is inappropriate to discuss
remedies that must be undertaken to end with Microsoft anti-competitive behavior.
References
Laffont J.-J. and Tirole J. (1993), A Theory of Incentives in Procurement and Regulation, MIT
Press, Cambridge.
Litan R. E., Noll R.G., Nordhaus W.D., Sherer F.M. (2000), Remedies Brief of Amici Curiae.
Salop C. S. and R.C. Romaine (1999), Preserving Monopoly : Economic Analysis, Legal
Standards, and Microsoft, George Masson Law Review, vol. 7, n° 3, pp 617-671.
SIIA (1999), Addressing the Microsoft Challenge – Restauring Competition To the Software
Industry.
Varian H. R. (1999), A framework for Negotiaition on a Microsoft Remedy,
http://wwww.sims.berkeley.edu/ hal/Papers/clobr.html
Cerna 5