Article Contentsp. [25]p. 26p. 27p. 28p. 29p. 30p. 31p. 32p. 33p. 34p. 35p. 36p. 37p. 38p. 39p. 40p. 41p. 42p. 43p. 44Issue Table of ContentsThe Journal of Economic Perspectives, Vol. 15, No. 2 (Spring, 2001), pp. 1-264+i-viiiFront Matter [pp. 1 - 2]Distinguished Lecture on Economics in Government: Exchange Rate Regimes: Is the Bipolar View Correct? [pp. 3 - 24]Symposium: The Microsoft CaseAn Economist's Guide to U.S. v. Microsoft [pp. 25 - 44]The Microsoft Case: What Can a Dominant Firm Do to Defend Its Market Position? [pp. 45 - 62]Exclusivity and Tying in U.S. v. Microsoft: What We Know, and Don't Know [pp. 63 - 80]Symposium: Changes in Corporate StructureCapital Structure [pp. 81 - 102]New Evidence and Perspectives on Mergers [pp. 103 - 120]Corporate Governance and Merger Activity in the United States: Making Sense of the 1980s and 1990s [pp. 121 - 144]The Venture Capital Revolution [pp. 145 - 168]The Record and Prospects of the All-Volunteer Military in the United States [pp. 169 - 192]Tobacco at the Crossroads: The Past and Future of Smoking Regulation in the United States [pp. 193 - 212]Early Childhood Education Programs [pp. 213 - 238]FeaturesData Watch: The National Longitudinal Surveys [pp. 239 - 253]Recommendations for Further Reading [pp. 255 - 262]Notes [pp. 263 - 264]Back Matter [pp. i - viii]American Economic AssociationAn Economist's Guide to U.S. v. MicrosoftAuthor(s): Richard J. Gilbert and Michael L. KatzSource: The Journal of Economic Perspectives, Vol. 15, No. 2 (Spring, 2001), pp. 25-44Published by: American Economic AssociationStable URL: http://www.jstor.org/stable/2696590 .Accessed: 03/09/2014 23:04Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp .JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range ofcontent in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact [email protected]. .American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to TheJournal of Economic Perspectives.http://www.jstor.org This content downloaded from 129.107.136.153 on Wed, 3 Sep 2014 23:04:18 PMAll use subject to JSTOR Terms and ConditionsJournal of Economic Perspectives-Volume 15, Number 2-Spring 2001-Pages 25-44 An Economist's Guide to U.S. v. Microsoft Richard J. Gilbert and Michael L. Katz W ^ T hile most antitrust cases proceed in obscurity, the case brought against Microsoft by federal and state antitrust authorities was front-page news. Much of the drama and media hype centered on the struggle between the titan of high technology, personified in Bill Gates, and the titan of government, personified in U.S. Assistant Attorney General Joel Klein. For economists and policymakers, however, the case was about the appropriate role of competition policy in the new economy. Antitrust critics claim that the nineteenth century Sherman Act is ill-suited for the high-technology markets of the twenty-first century. Others argue that the Sherman Act provides a broad constitution for antitrust enforcement that is flexible enough to protect both the interests of consumers and the ability of firms to compete in high-technology markets. In the Microsoft case, the government (by which we mean the U.S. Department of Justice, 19 state attorneys general, and the Attorney General of the District of Columbia that brought the case) asserted that Microsoft engaged in anticompeti- tive conduct designed to maintain its operating system monopoly to the detriment of consumers. According to the government, antitrust enforcement would rein in the Microsoft monopoly and result in more competition and innovation in the software industry. In its defense, Microsoft contended that the company is a vigorous competitor that benefited consumers by supplying high quality, innovative products. According to Microsoft, antitrust action against it would dampen incen- tives for competition and slow software innovation. In this paper, we analyze the central economic issues raised by the Microsoft * Richardj Gilbert is Professor of Economics and Michael L. Katz is Professor of Economics, Edwardj and Mollie Arnold Professor of Business Administration and Director, Center for Telecommunications and Digital Convergence, all at the University of California, Berkeley, California. This content downloaded from 129.107.136.153 on Wed, 3 Sep 2014 23:04:18 PMAll use subject to JSTOR Terms and Conditions26 Journal of Economic Perspectives case: the source and strength of Microsoft's market power, the competitive effects of Microsoft's practices, the degree of consumer harm, and propose6 remedies. Early Skirmishes Microsoft's antitrust woes began in 1990 when the Federal Trade Commission (FTC) launched an investigation of the company. After three years, the FTC's legal staff-but not its economics staff-recommended that the Commission bring a case focusing on Microsoft's licensing practices with personal computer manufac- turers. The FTC investigation ended in February 1993 when the Commission deadlocked in a 2-2 vote, with one commissioner recused (Lopatka and Page, 1995, p. 324). The U.S. Department of Justice continued the investigation of Microsoft's conduct and, on July 15, 1994, brought a complaint alleging that Microsoft used exclusionary and anticompetitive contracts with personal computer manufacturers to maintain an unlawful monopoly of personal computer operating systems. Simul- taneous with the filing of the complaint, Microsoft and the Department of Justice entered into a consent decree in which Microsoft agreed to abide by certain restrictions on its licensing arrangements (United States v. Microsoft Corp., 1995-2 Trade Cas. P 71,096 [D.D.C. 1995]).' After almost a year of legal wrangling, an appellate court approved the consent decree on June 16, 1995. Disputes over the scope and interpretation of the decree soon arose. Among other conduct restrictions, the consent decree (Section IV.E) stipulated: Microsoft shall not enter into any License Agreement in which the terms of that agreement are expressly or impliedly conditioned upon: (i) the licensing of any other Covered Product, Operating System