Re: Theory Behind USA v. Microsoft

[Bill Stewart <bill.stewart@pobox.com>]

>>John Cassidy writes in the January 12 New Yorker mag
>>of the controversial economic theory which undergirds DoJ's
>>antitrust action against Microsoft.
>>He cites a seminal 1984 paper by Brian Arthur, "Competing
>>Technologies and Lock-in by Historical Small Events: The
>>Dynamics of Choice Under Increasing Returns."
...
>>After years of disparagement the theory seems to have
>>caught on, at least at Justice and with others who oppose the
>>theory of free market determination of winners and losers.
>>Arthur argues that market dominance by inferior products
>>is possible, and cites MS-DOS as an example.

Two other examples - 
- Rockefeller's takeover of the oil industry in the late 1800s
- the Anti-Trust laws that were intended to stop Rockefeller :-)

Apparently a large part of Rockefeller's success was recognizing the
critical resource in the industry and using control of it for
economic advantage.  The resource was railroad oil tank cars,
which were immensely more economical for shipping oil than the
competing technologies - transportation costs were substantial.
Rockefeller cornered the market for them, using them to ship oil
cheaper than other shippers, allowing his refineries to outbid
competitors for crude oil from suppliers, cornering enough of that
market to have a dominant position with the railroads,
which didn't have an economic motivation to buy their own tank cars,
and the tank car makers didn't have an incentive to make them on spec,
especially with Rockefeller twisting their arms.

The total amount of actual capital was pretty small - about 
5000-6000 cars at $1000 each, back when that was still real money,
but it was enough to leverage the industry.  There were other factors
involved - his control over the tank cars let him get away with
ripping off his oil suppliers and the railroads on measurements of
the quantities they were shipping, much corporate shuffling
to hide the real ownership of the resources and evade regulators,
kickbacks to avoid common carrier railroad tariffs,
and heavy use of information technology (5000 cars only needed a
couple of clerks with ledgers, but there were lots of people 
telegraphing shipping data back to them so it was near-real-time.)

If the industry had been well-understood, rather than breaking up
a billion-dollar business, the anti-trust folks could have subsidized 
(directly or through tax breaks) competing production of tank cars.
They did try to control ownership of tank cars, so Rockefeller spun off
the tank car company, but retained effective control for decades.
Their choices have set us up for a century of bad law....

				Thanks! 
					Bill
Bill Stewart, bill.stewart@pobox.com
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