Berkeley Program in Law and Economics

The remedy stage of USA vs. Microsoft Corporation has raised three main controversies: - Conduct vs. structural remedies. Certain parties (SIIA, 1999; Salop and Romaine, 1999; Lenard, 2000) asked for structural remedies, such as a break-up, whereas others (Gassée, 1999) called for restrictions on Microsoft behaviour by mandatory rules of conduct. Even among plaintiffs a disensus appeared. The states of Illinois and Ohio voiced doubt about the use of structural reliefs (Ryan and Montgomery, 2000). They proposed to test in a first step whether conduct remedies would alone be sufficient to restore competition. - Horizontal divestiture vs. full divestiture. The Department of Justice proposed that the U.S. District Court break up Microsoft horizontally by separating the operating systems business and applications business. During the remedy hearings, the District Judge, Thomas Penfield Jackson, asked the Assistant Attorney General, Joël Klein, whether an additional separation of Internet browser business would not be also appropriate. He mentioned an amici curiae brief (CCIA and SIIA, 2000) as supporting this option. In another amici curiae brief (Litan et alii, 2000) submitted to Judge Jackson, a full divestiture including the break-up of the Windows monopoly in three identical parts was recommended. - Beneficial vs. harmful effects to consumers of the operating systems/applications separation. Following the recommendations of the Antitrust Division, the District Court of Columbia ordered the horizontal separation of Microsoft. According to the Antitrust Division, such a divestiture promises to have significant benefits for competition in general and innovation in particular (US DoJ, 2000). Some columnists (Financial Times, April 29 2000) remained more skeptical pointing out that a price increase is likely to result from the replacement of one monopoly by two vertical monopolies. The paper is aimed at casting light on these controversies in using economic analysis. It is divided into 4 sections, one for each controversy, and a conclusive section. Section 1 argues that the key economic distinction to introduce amongst antitrust remedies is between economic remedies based on incentives and command-and-control remedies rather than between behavioral and structural remedies. Section 2 compares different solutions to break-up Microsoft using the maximising of the consumers’ welfare as a yardstick. It points out that the horizontal divestiture dominates the other choices only under a restrictive set of ad hoc hypotheses (e.g., the expected costs of Windows’ fragmentation is higher than the benefits provided by vertical integration). Section 3 examines to what extent the chosen remedy, that is the horizontal divestiture, is not worse than the evil it is supposed to cure. It establishes that the horizontal divestiture is welfare decreasing for consumers in several plausible circumstances (e.g., the two new entities do not compete to each other).