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To: Charles Hughes who wrote (21697)	11/24/1998 1:52:00 AM
From: Gerald R. Lampton	Read Replies (2) \| Respond to of 24154

OK, I'll take the bait on this one. 1. It quite likely doesn't matter for the outcomes to society whether a monopoly was natural or not. Prove that statement wrong, in detail please, if you are going to keep leaning on this lame 'natural monopoly' theory. It's not lame, since, in my personal view, it is the only real hope Microsoft will have of winning this case after they lose on the factual issue of whether they have monopoly power in the PC OS market. So, the government is going to have to come up with something more than "It's so lame" if it wants to deal with this theory, at least IMHO, FWLTIW. It definitely does matter whether a monopoly is "natural" or not. It matters a great deal, especially in deciding what the policy response should be. (a) An antitrust policy that cares at all about efficiency and consumer welfare will not break up a natural monopoly, since to do so would result in a decrease in consumer welfare and efficiency. If a monopoly has been created through predatory conduct in an industry capable of efficiently supporting more than one firm, then structural remedies make sense. (b) In any monopoly maintenance case, which this case is, the government must prove that the monopolist is using predatory conduct to maintain market power and that by outlawing the predatory conduct, the antitrust court will be able to insure with at least some degree of certainty that the result will be a return to a competitive market. If the monopoly was created through predatory conduct in an industry capable of efficiently supporting more than one firm, that will not be difficult to do, since elimination of the source of the monopolist's market power, i.e., the predatory conduct, should cause the market to revert to its natural, multi-firm, competitive state. However, in this case, the government is putting on a case which will show that Microsoft's monopoly in the PC OS market is the result of network effects. That means that Microsoft's predatory conduct in the browser and Java markets are not the sole cause of Microsoft's market power in the PC OS market, but, at most, a concurrent cause. So, if the antitrust court outlaws the predatory conduct, there is no guarantee that that competitive market conditions will arise in the PC OS market because the network effects will still be operating to reinforce Microsoft's market power in that market. The government's star economist, Warren Boulton admitted as much when he said: 199. There is no guarantee, of course, that independent browsers will bring these benefits or reduce the monopoly power of Microsoft in the operating system market, even if Microsoft did not engage in exclusionary conduct. That is a matter for the market – not monopolists or engineers or economists – to decide. The important point is that the market should not be prevented by Microsoft's anticompetitive practices from making that decision. (emphasis added). The government may be able to argue that Microsoft used predatory conduct to get the network effects going in the browser market, but that market is not presently being monopolized by Microsoft. It must also be kept in mind that nonstructural remedies also have costs. By altering the monopolist's pattern of competitive conduct, they alter the price signals being sent to other producers and consumers, resulting in changes in market behavior, specifically, a slowing of the natural tendency of the market to aggregate around a single seller. Furthermore, limits on the monopolist's ability to set prices accomplishes the same distortion through a direct manipulation of the pricing mechanism. This causes both direct and indirect reductions in efficiency and consumer welfare. Many of these costs will not be immediately apparent to the antitrust court imposing the remedy, and may not become apparent for a very long time. Although I know that you, Dan and quite a few others will not be persuaded, but, to me, this is a pretty compelling argument for a per se rule of legality for at least some kinds of predatory conduct by a natural monopolist. By outlawing predatory conduct by a natural monopolist, the government is intervening in the economy to impose rules with very real costs, with no assurance whatsoever that the intended benefits will ever arise.