Winners, Losers, and Microsoft:

How Technology Markets Choose Products

Stan J. Liebowitz

Stephen E. Margolis

To be published by the Independent Institute, May 1999

Forward vii

Part One: Introductory Concepts I-1

I. Chapter 1: Networked World I-1

A. Does Wheat Separate from Chaff? I-3

B. Where's the Beef? I-5

C. Size matters: The Economics of Increasing Returns I-6

D. Two's Company; Three's a Network I-8

E. Conventional vs. Serial Monopoly I-10

F. The Typewriter Keyboard I-11

G. Application to Antitrust I-15

H. The Plan of this Book I-18

II. The Fable of The Keys II-20

A. Introduction II-20

B. Some Economics Of Standards II-22

C. The Case For The Superiority Of The Dvorak Keyboard II-26

D. The Myth of Dvorak II-28

1. Gaps In The Evidence For Dvorak II-29

2. Evidence From The Ergonomics Literature II-38

3. Typewriter Competition II-41

4. Typing Competitions II-43

E. Conclusions II-45

Section 2: The World of Theory II-49

III. Chapter 3: Theories of Path Dependence III-51

A. The Character of An Economic Model III-52

B. Defining "Path Dependence" III-53

1. First-Degree Path Dependence III-56

2. Second-Degree Path Dependence III-57

3. Third-Degree Path Dependence III-57

4. Assessing The Differences III-58

C. Models of Lock-In III-60

D. The Meaning of Equilibrium III-63

E. Equilibria in Models of Network Effects. III-65

F. The Importance of Empirical Connections III-70

IV. Chapter 4: Network Markets, Pitfalls and Fixes IV-72

A. Networks, Connections, and Ownership IV-73

B. Network Effects vs. Network Externalities IV-74

C. Pecuniary externalities IV-78

D. Tragedy of the Commons, Comedy of the Commons IV-79

1. The Fishery Problem: The Tragedy IV-81

2. Positive Network Effects: The Comedy IV-84

E. Decreasing Costs: Is Today's Future Different than Past Futures? IV-88

F. Conclusions IV-93

V. Chapter 5 : Network and Standards V-94

A. Fixed and Flexible Standards V-94

B. Choosing Standards V-97

C. The nature of the model V-98

D. A model of standards choice V-99

1. The consumer V-102

2. Production V-103

3. The market V-106

E. Internalizing synchronization costs V-111

F. Extending the model V-114

1. Strong differences in tastes V-117

2. When One Product Is Superior To Another V-119

3. Getting locked-in V-121

4. Getting "unlocked" V-122

G. Other tactics for getting unlocked V-125

Section 3: The Real World V-127

VI. Chapter 6: Beta, Macintosh, and other fabulous tales VI-129

A. VHS versus Beta VI-130

B. Computer operating systems: Mac versus IBM VI-139

C. Metric versus English measurement VI-142

D. Bureaucracy and the myth of MITI VI-144

E. Some other examples VI-145

VII. Chapter 7: Using Software Markets to Test These Theories VII-148

A. Software Markets and Tests of Network Theories VII-149

1. Monopoly, Natural and Serial. VII-149

2. Lock In or Inertia VII-151

3. Tipping VII-152

4. Price: The Neglected Implication VII-153

B. The Nature of Software Markets VII-154

1. The Consumer's Choice VII-156

C. Paradigm Changes VII-159

1. The Shift from DOS to Windows VII-159

2. The Shift to Office Suites VII-163

D. Our Research Methods VII-167

1. Measuring software quality VII-168

2. Measuring Market Share VII-171

3. The Data VII-173

4. The Role of Prices VII-174

VIII. Chapter 8 Major Markets--Wordprocessors and Spreadsheets. VIII-178

A. The Market for Spreadsheets VIII-178

1. The Evolution of the PC Spreadsheet Market VIII-178

2. Spreadsheet Quality VIII-180

3. Spreadsheet Prices VIII-187

4. Changes in Market Share: Analysis VIII-189

5. Why Did Lotus Fail? VIII-193

B. Word processors VIII-196

1. Word Processor Quality VIII-197

2. Word Processor Prices VIII-205

3. Analysis VIII-206

C. Macintosh Word Processors and Spreadsheets VIII-207

D. Comparing PC and Macintosh markets VIII-210

IX. Chapter Nine: Other Software Markets IX-214

A. Personal Finance Software IX-214

B. Desktop Publishing Software IX-220

1. High-End IX-220

2. Mid-range PC Products IX-228

C. Browsers IX-232

D. Online Services IX-240

E. Conclusions IX-244

X. Chapter 10: The Moral X-248

XI. Appendix: Networks, Antitrust Economics, and the Case Against Microsoft. XI-260

A. Microsoft's Dispute with the Justice Department XI-262

B. Antitrust Doctrines and Network Technologies XI-265

1. Monopoly leverage, tie-ins, and bundling XI-265

2. Predatory Bundling XI-270

C. The Rate of Innovation XI-274

3. Putative Dangers XI-274

4. A Real Danger to Innovation XI-278

D. Who Should Get to Assign Desktop Icons? The Irrelevance of the 'Browser Wars' XI-281