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A professor at the Stern School of Business at New York University, Economides runs a Web site called the Economics of Networks (www.stern.nyu.edu/networks), has written extensively about the ramifications of network effects, and edits the journal Netnomics. So you would think Economides would be a big fan of the government's lawsuit against Microsoft -- and the Justice Dept.'s plan to breakup the software giant. You would be wrong. While Economides is a true believer in the theory of network effects, he's deeply apprehensive about the trustbusters' plan to sever Microsoft into two parts, an operating-systems company and an applications company. Why? Because he's convinced that the theory dictates that many network markets are natural monopolies -- and that no amount of government intervention can possibly change that. "I worry that the present proposal is not going to achieve anything," says Economides. MODEST APPROACH. The professor got a chance to air his views Friday, May 5, at a conference on "The Law and Economics of United States v. Microsoft" at New York University Law School. His thinking is worth taking seriously. While the theory of network effects can help explain how Microsoft achieved its monolopy power and, indeed, how it has broken the law, it doesn't necessarily mean the company has to be cut apart. So now that the remedy phase of the trial is upon us, it makes sense to analyze how network economics bears on the issue of what to do about Microsoft. In Economides' mind, the theory dictates that antitrust cops should take a modest approach to remedies. First, they should accept the fact that monopolies may be inevitable in network markets. Then they should adopt a path of either restricting the conduct of dominant companies or regulating them in much the same way that utilities are. Trying to impose a judicially crafted restructuring on a network business, he believes, could lead to disaster. OVERRATED? A detailed explication of Economides' views can be found in his 1998 paper "Compatibility and Market Structure for Network Goods" (www.stern.nyu.edu/networks/98-02.pdf). In it, he makes an economic argument that, in network markets, monopolies may maximize consumer well-being. The primary reason: They help encourage the proliferation of unitary technology standards. "Society has to balance the benefits of monopolies against the possibility of abuses," Economides said at the conference. "What I haven't seen is a discussion of this balance." The professor also took some heat at the conference. Harry First, chief of the New York State Attorney General's Antitrust Bureau and a former law professor at New York University, argued that the theory of network effects is a bit overrated. He pointed out that all types of networks are different, that the behavior of monopolies in each industry requires independent analysis, and that in some cases breakup might be appropriate. True enough. But in my opinion, the trustbusters still have some selling to do. Before something as radical as a breakup of Microsoft is approved, Economides' objections deserve a fuller analysis. France covers Legal Affairs for Business Week in New York. Have a question or a comment? Let him know at mike_france@ebiz.businessweek.com. |
