[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

demand for them would increase. And restraining the operating
system company from writing applications would at least
prevent a repeat of what had happened with Netscape and the
browser market.
Some critics thought the judge, in approving the Justice
Department’s recommendations in 2000, went too far; others
thought he did not go far enough. Those in the former camp
worried that he overlooked important economies of scope—
efficiencies that arose from the close interaction between those
writing the operating system and those developing applications.
These advantages, they contended, more than offset the
disadvantages from the loss in competition. Moreover, they
believed that Microsoft’s monopoly power was temporary;
within a few years, surely competition would erode its dominant
position. Already, Linux was rapidly growing as an
alternative operating system. They argued that Microsoft
had achieved its dominant position by strong innovation,
and it was wrong to punish this success now by breaking the
company up.
But critics on the other side said that at least a significant
part of Microsoft’s success was due to its ruthless business
practices, and such behavior should not go unpunished. And
more was at stake: Microsoft represented a threat to innovation.
Few would invest in innovation if they believed that any
innovation threatening Microsoft’s competitive position would
be suppressed by Microsoft. Many Silicon Valley firms shared
this fear.
These critics worried that the Microsoft application company
still might not write programs for other operating systems,
that there might be sweetheart deals between the two
companies; they argued for other approaches to changes
Microsoft’s incentives. For instance, some suggested limiting
intellectual property protection—and requiring the disclosure
of the code—for operating systems of a firm with a
dominant position (like Microsoft) to, say, three to five years.
Doing so would automatically create a competitor to, say,
Windows XP—the freely available Windows 2000. Only if
Windows XP were markedly better than Windows 2000
would people pay anything for it. This approach would enhance
Microsoft’s incentives to innovate. Meanwhile, application
programmers would have an incentive to write programs
that worked better and better with the freely available 2000
operating system. The hope was that out of this competition,
consumers would benefit not only from lower prices but
also from innovations, possibly leading to programs that
crash less often and are tailored better to the needs of particular
groups of users, that run faster, and that perform
new tasks.
ous when goods produced by different firms are imperfect substitutes. What, for
example, is the market for beer? Those in the industry might claim that premium
beers and discount beers really constitute two different markets, as relatively few
customers cross over from one to the other. In the 1950s, DuPont had a virtual monopoly
on the market for clear wrapping paper, but it fought off charges of monopoly by
arguing that its product was one among several “wrapping materials.” It claimed
that brown paper was a good, though not perfect, substitute for clear wrapping paper,
and that DuPont did not have a particularly large share of this larger market.
Legal Criteria Today, the courts look at two criteria in defining a market and
market power. First, they consider the extent to which a change in price for one
product affects the demand for another. If an increase in the price of aluminum has
a large positive effect on the demand for steel, then steel and aluminum may be considered
to be in the same market—the market for metals. Second, if a firm can raise
its price, say by 5 percent, and lose only a relatively small fraction of its sales, then
it is “large”—that is, it has market power.
ANTITRUST POLICIES ∂ 303