They say under Connected Markets that, " The Chicago school held that if markets are linked, a firm with a monopoly in one cannot boost profits by monopolising [sic] another. [Why not. They are loosing me]
I think the quote you are giving me has it wrong, or maybe you have the quote wrong -- I don't know which because I cannot find the Economist article you are referring to on line.
The theory is that a monopolist in one market cannot use a tying arrangement to monopolize a second market because consumers will look at the combined price of both tied and tying products when deciding whose product to buy in the competitive market. The monopolist would be better off (make more money) to just sell the monopoly product and not do the tying arrangement.
This is no longer accepted. If Microsoft monopolises [sic] browsers, [Is this a premis? They don't. Netscape does.] economists now argue, it could prevent competetors such as Netscape from using browsers to challenge its dominant position in operating software."
Actually, it is becoming more and more accepted by the courts that tying arrangements are not rational and therefore should not be per se illegal.
In one recent case, however, the Court held that Kodak, which sells copiers in a competitive market might, under certain circumstances, be prohibited from conditioning the purchase of copiers on the purchase of copier repair service and parts. The argument is that, once you buy a copier from them, you are locked in to their monopoly in the supplies/repair services market, and, due to imperfect information in the market, the monopoly profit from the tying arrangement might exceed the losses caused by reduced sales of the overall package.
The Economist says that Network Effects sound dramatic, but can be handled by traditional regulation.
Actually, the scholarly articles I am reading at the moment seem to be rather critical of the network effects theory, questioning its theoretical and empirical viability and its value as a guide for antitrust policy making. Typical is the following quote:
"Critics . . . have identified a number of problems with the theory that impair its utility as an antitrust policy guide. For example, if a single network will surive because of economies of scale, the market is a natural monopoly, a condition long recognized as a market failure. To present such a well-understood condition in language of network externaliites as something new and unfamiliar risks confusion and policy mistakes. In such a case, one network will inevitably prevail, and antitrust is ill-suited to determine which system should win or to regulate the victor. A monopolization case, brought after a network has achieved market dominance on the ground that it is inferior to a vanquished system, would require an intractiable inquiry into the relative merits of the competing networks. Network externalities theory thus cannot tell us whether a market outcome is efficient or inefficient."
From Lopatka and Page, Posner's Program for the Antitrust Division: A Twenty Five Year Perspectve, 48 SMU L. Rev. 1713, 1740 (1995). The article goes on with a bunch of other criticisms I won't go into here. Lopatka and Page clearly are not sympathetic to the network externalities theory, as, in another article, they discuss it as it applies to the 1994-95 Microsoft Consent Decree case, arguing that the differences in position between the Reback amici and the DOJ, each of whom relied on the theory to advocate their very different proposed remedies, is an indication of the theory's weakness.
I am nowhere near ready to form an opinion on this, but I do think that, to the extent DOJ relies on network externalities (they relied on it to a great extent in the 1994-95 Consent Decree case, as did Sporkin), the lack of consensus on this theory could be a definite weakness in the DOJ's position. It is one thing for a District Judge such as Judge Sporkin or Judge Jackson to buy it. It will be another to persuade five Justices of the Supreme Court. Because it arguably is flawed, arguably does not describe the behavior of businesses in the real world, and cannot provide guidance of a proscriptive nature, it may perhaps be too risky for a court to adopt network externalities theory as the basis for antitrust liability. As Page and Lopatka said in 1995, "In all, though the theory of network externalities is an intriguing object of scholarly research and has captured the imagination of prominent economists, it has not matured sufficiently to serve as the intellectual foundation of a governmental enforcement program." Id., at 1745.
Again, I am too newly into this to form any solid opinions, but I think it's safe to say that the validity of network externalities theory is (or at least was as of 1995), to use Lawrence Lessig's terminology, a "contested discourse." |
