From: Declan McCullagh <declan@well.com>
Date: Thu, 15 Jan 1998 08:38:19 +0800
To: cypherpunks@cyberpass.net
Subject: Public choice theory and the politics of antitrust
Message-ID: <v0300780eb0e309e2c6d8@[168.161.105.216]>
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I wrote a little about public choice theory and the politics of antitrust
in my article last week:

  http://cgi.pathfinder.com/netly/opinion/0,1042,1678,00.html

Attached are excerpts from recent posts to a law and economics mailing list
I'm on. I'm unsure of the reposting policy, so I'm deleting authors' names.
Should be good reading anyway.

-Declan

===

Assume for the moment that Microsoft is doing something wrong that the
government should stop (a reach, I admit).  If that is the case, how did
the Justice Department come up with the figure of $1 million per day?  Is
that figure supposed to be compensatory, punitive, deterrent, or what?
What goal is a daily fine supposed to accomplish that some more
specifically-tailored remedy (injuntive relief, for instance) could
not?  Are there public choice explanations for what is driving this, and
if so, what are they?

===

The Government's argument, I believe, is that Microsoft violated the
consent order.  A fine under these circumstances should punish the party
that violated the order, deter it from violating the order again, and deter
others from violating other orders.

As for a public choice explanation, based upon the history of the
present Administration, I suspect that one could be found in the records of
the Federal Election Commission, i.e., I suspect that executives and
shareholders of Microsoft's enemies have made far larger political
contributions than Bill Gates and his colleagues.

===

Intel has in fact come under attack. The FTC has been investigating Intel
for several months. The charge is similar to the rap on Microsoft - trying
to dominate the inside of the computer by controlling the interface between
the processor and "helper chips." The wonder is that Intel hasn't taken
over the motherboard market - something that may also be more efficient,
just as seemless integration of the operating system and browser and other
applications is more efficient. Recall also that the FTC did in fact
investigate Intel in the early nineties, though it filed no charges in the
end. (I suspect that the FTC's institutional credibility is at stake. Since
this is the second Intel probe, they're going to have come back with at
least a symbolic consent decree.)

Still, I would grant that the attack on Microsoft is more strident.
Domestic political economy may play a role. Microsoft has vocal domestic
competitors (Oracle, Netscape and Novell, for example). It's no coincidence
that Republican Senator Hatch represents Novell's home state. Intel, in
contrast, is viewed as the company that's keeping the foreigners at bay.
Well yes, conduct and arrogance matter too. And sitting on a big pile of
cash helps. That explains why a number of state AG's jumped on the
anti-Microsoft bandwagon after the tobacco settlement.

Finally, yes, Windows is a terrible operating system and almost everyone
has an interest in seeing something better. (A confirmed Mac user, I
compare Windows to the aliens in "Men in Black:" arthropod DOS stuffed into
the skin of humanoid Mac.) Intel does have an incentive and the means to
come up with a better operating system: Windows hurts the demand for its
chips. Not surprisingly, Intel's Portland facility has 800 programmers
charged with coming up with something as cool as the operating system
developed by Next. Stay tuned.

===

[I interpret "substantial appropriable quasi-rents to be taxed away" as
"campaign cash or political contributions to be expropriated as necessary
by the government." --Declan]

There are two reasons to go after a successful company.  One possibility is
that it has substantial appropriable quasi-rents to be taxed away.  Even if
a company's equity is high, it is not readily taxable if the assets can
readily be withdrawn (e.g., Becker and Stigler's argument that Jews stayed
out of agriculture because they could too easily be expropriated).

The other reason for going after a successful company is to assist its
competition.  This may explain the attack on Microsoft ...
and probably the attack on Milken as well, if you are persuaded,
as I am, by Daniel Fischel's book on the case.

===

 There has been a lot of talk about how hard Clinton has been on
Microsoft. I wonder. Is it possible that Clinton has been
 soft on Microsoft?  Hi-Tech generally has been very pro-Clinton,
and
contributed a lot of money to him.  The fact that Justice is going
after Microsoft now is not determinative. It seems to me that
Microsoft was surprisingly arrogant in thinking it could get away
with this blatant violation of the consent decree.

 THink of the Priest-Klein selection problem as applied here. PK
implies that even if the judge is heavily pro-plaintiff, plaintiffs
will win only 50 percent of the time in his court. The reason is
that
plaintiffs will bring even totally outrageous suits, knowing the
judge might still rule in their favor. I suspect the same has
happened with Microsoft. Confident that Clinton would block any
response from Justice, they violated the consent decree. They still
hope Justice will back down. So far, they are wrong (tho--has the
fine been imposed yet, or has the judge delayed imposition?). The
most humorous part is that Rush Limbaugh, a conservative Apple user,
has been cheering for Microsoft, a notably liberal company.

===

>       Can anybody give an efficiency explanation for this? Prima
> facie, it is monopolizing conduct.  Microsoft's absurd excuses are
> that (a) Explorer is an integral part of Windows 95, and (b)
> Allowing Netscape to come up automatically would spoil the integrity
> of Windows 95.

Microsoft's behavior is indeed puzzling.  You would think that even though
Windows has such a large market share, Microsoft would wish to enhance
Window's appeal even further by making it as easy as possible for those who
prefer Netscape to access Netscape easily.

But, regardless of the wisdom of Microsoft's tactics, given what Eric
reports about the DOJ's complaint against Microsoft, why the mighty
brouhaha?  Do computer users really need federal forces to help them put
Netscape's icon on their Windows screen?

===

The DOJ wants Microsoft to be found in contempt for violating the '95
consent decree (Section IV (E)(i) of the Final Judgement) which prevents
Microsoft from requiring OEM manufacturers to license other Microsoft
products as a condition of recieving a license to install Windows '95 on
the computers they produce -- is this not what "bundling" means?

The icon business arises because three firms asked Microsoft to ammned the
license agreement to allow them to remove the IE icon from the desktop and
Microsoft refused to grant their requests.  This is mentioned in the DOJ
request for an order of contempt, but if Internet Explorer really is
considered a separate product (and the DOJ claims it is) then Microsoft
really isn't allowed to require firms to license it if they license Windows
95.  Microsoft insists that requiring the licensing of Internet Explorer,
sans icon, is still requiring the licensing of Internet Explorer, something
they aren't allowed to do under the consent decree if IE is a separate
product, but that it isn't a separate product so everything is just ducky.
They also add that if Internet Explorer, sans icon, isn't licensed Windows
won't work.  They think it's silly to claim that the consent decree
requires them to sell Internet Explorer, sans icon, as a part of Windows
but prevents them from selling Internet Explorer, with icon, as a part of
Windows.

As to the why of it all...

Microsoft believes, and the government agrees, that the browser itself is
the seed of a new sort of operating system which will become a viable
alternative to Windows 95.  Microsoft says it wants reshape Windows into
this new sort of operating system, the DOJ seems to want someone else to
come up with it.  From the DOJ's request to show cause why Microsoft should
not be found in civil contempt:

"Microsoft's aggressive and multi-faceted marketing of the Internet
Explorer browser reflects its intense competition with other, competing
Internet browsers, primarily the "Navigator" browser produced by Netscape
Communications Corporation ("Netscape").

Microsoft believes that the success of competing browsers poses a serious,
incipient threat to its operating system monopoly. Indeed, as Microsoft
fears, browsers have the potential to become both alternative "platforms"
on which various software applications and programs can run and alternative
"interfaces" that PC users can employ to obtain and work with such
applications and programs. Significantly, competing browsers operate not
only on Windows, but also on a variety of other operating systems.
Microsoft fears that over time growing use and acceptance of competing
browsers as alternative platforms and interfaces will reduce the
significance of the particular underlying operating system on which they
are running, thereby "commoditizing" the operating system."


And it's really hard for me to read this in any way other than "Microsoft
is starting to realize that a web based operating system would be a better
product than Windows 95 and is trying to create such an operating system,
but we don't want them to because they're a monopoly."

===

> And about Congressional consistency:  Let's suppose that Congress in July
> of 1890 did indeed intend the Sherman Act to help consumers.  Surely any
> institution so fickle as to go from being consumers' friend to being
> consumers' foe in a mere three months (by October 1890 when it hiked tariff
> rates) is not an institution to be trusted with the awesome power to decide
> which business practices do and do not constitute anticompetitive behavior.

I would add:

Why would anyone expect a Congress (1) in which a single majority party
leader appointed the chairmen of each legislative committee (2) that
used its committees to appoint the vast majority of federal workers (3)
operating in an environment in which the pressure group had not yet
emerged, to serve consumers? There is not only an antitrust myth, there
is a myth among economists that the legislators of the period had any
reason to make decisions based on the logic of economics. We might call
this the legislature myth. The antritrust myth and the legislature myth
seem to be stories we tell our little children in order to avoid scaring
them. Unfortunately, many professional economists treat their students
like little kids.

===

> So, you and I also agree that Congress often does stupid things. But what
> is the alternative - do you know of a better system?

Yep.  A common-law system with no antitrust statutes.

===