Platform Externalities and the Antitrust Case against Microsoft

• Author: Neil B. Niman
• DOI: 10.1177/0003603X0204700405
• Published date: 01 December 2002
• Date: 01 December 2002
• Subject Matter: Economic

The Antitrust Bulletin/Winter 2002

Platform externalities

and

the

antitrust case against

Microsoft

BY NEIL B. NIMAN*

I.

Introduction

641

In the ongoing debate between expert witnesses in the

Microsoft

case, each side has recently had an

opportunity

to articulate its

very different views. The essence

of

the pro-Microsoft position

of

Evan, Nichols and Schmalensee is that the court failed to recog-

nize the distinction between software as a product and software as

aplatform. Arguing that a platform is characterized by

network

externalities that work on both sides

of

the

market,

Microsoft's

actions were designed to further the success

of

the Windows plat-

form and not reduce competition for its software products.

Fisher

and Rubinfeld on the other hand, take the opposite position. They

contend that while software may be subject to network effects

and

positive feedback, this does not justify

Microsoft's

"anticompeti-

tive acts to extend that power to another market or, in particular,

its engaging in anticompetitive acts that serve to buttress and pro-

tect its power in the original market."1

*Associate Professor of Economics, University

of

New Hampshire,

Durham, NH.

Franklin M. Fisher &Daniel L. Rubinfeld, U.S. v.

Microsoft-An

Economic Analysis, 46

ANTITRUST

BULL.

1, 8 (2001). The other side is

presented in David S. Evans, Albert L. Nichols &Richard Schmalensee,

©2003 by Federal Legal Publications. Inc.

642

The antitrust bulletin

The debate therefore rests on two key points. When defining

the relevant market, is the distinction between asoftware product

and software platform significant? Second, did Microsoft engage

in anticompetitive acts? The focus of the ensuing discussion will

be to

investigate

more

closely

the

claim

that

there

exists

an

important

difference

between

a

product

and

platform

and

that

such adistinction should form the basis for the subsequent evalu-

ation of whether or not Microsoft engaged in anticompetitive acts.

The position to be advanced here is that the benefits associ-

ated

with the

existence

of

a

platform

are derived

not

from the

number

of

users (network effects), but rather from an enhanced

division

of

labor. Serving as a nonmarket coordinating mechanism

that

enhances the division of

labor

and organizes production in

very

much

the

same

way

that

the

actions

of

a

firm

assembles

resources and guides various production decisions, aplatform is

capable

of

generating positive externalities that are not a function

merely

of

the number of users.

By recognizing the important coordination function performed

by a platform, the actions undertaken by Microsoft take on a new

meaning. Rather than demonstrating an abuse of monopoly power,

Microsoft's

behavior reflects that of a rational profit maximizer

attempting

to

appropriate

social

benefits

for

individual

gain.

Microsoft's success has not come at the expense of competition,

but rather is a reflection

of

its superior position for appropriating

the social benefits attributed to the Windows platform. Thus, what

should be applied in the

Microsoft

case is not the traditional tools

of

antitrust based on concerns over monopoly power,

but

rather

the

economics

of

externalities and more specifically the

Coase

theorem.

To make such a case, we begin with a discussion of the con-

cept of a platform and how it shapes the structure of rewards and

innovation in an industry. Generating social benefits in excess of

their costs, these externalities will be defined as "family effects."

The Coase theorem will then be applied to show how these family

An Analysis

of

the Government's Economic Case in U.S. v. Microsoft, 46

ANTITRUST

BULL.

163 (2001).