This is a page devoted to Network Effects, Path Dependence, Lock-In, and Digital Copyright Issues.
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Material related to Economic Theories of Lock-In, Path Dependence |
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Information on my book “Winners, Losers, and Microsoft” with Steve Margolis |
Material
Related to the Microsoft Case
What would be the costs to consumers from the District Court’s remedy to
break Microsoft into two companies? To see the study performed for ACT and
introduced
Does Microsoft exercise monopoly power? A few pages taken from the book to answer the question that lies at the heart of the Microsoft trial. Microsoft in facts appears responsible for a good portion of the price decreases that have occurred in the last decade.
The Progress and Freedom Foundation and others are arguing that the costs will be low in breaking up either the entire company or just the operating system into three competing versions. In fact the costs will be high. Click Here to read my study for ACT and ASCII calculating the costs that would accrue to software producers if Windows were broken into three 'competing' flavors. It is very conservatively estimated at $30 billion over three years.
Click Here for a more recent paper discussing two papers (Lenard, and one by Levinson, Romaine, and Salop) that argue that I have overestimated these costs.
Path Dependence
Entry in The New Palgrave's Dictionary of Economics and the Law, MacMillan, 1998
Network Effect
Entry in The New Palgrave's Dictionary of Economics and the Law, MacMillan, 1998.
The Fable of the Keys
was published as the lead article in the October 1990 issue of the Journal of Law and Economics. It demonstrates the falsity of the widely held belief that the Dvorak keyboard is far superior to the Qwerty keyboard. This is important because the typewriter keyboard is frequently mentioned in this literature as the archetypical case of the economy getting stuck on the wrong standard. That many of the papers in the network externality/path dependence literature continue to use this example as support for their theories illustrates the empirical weakness of these theories.
Network Externality: An Uncommon Tragedy
This article was printed in the Journal of Economic Perspectives, Volume 8, Number 2, Spring 1994. It was part of a 3-paper symposium on network externalities. This symposium is mentioned prominently in the Reback white paper attacking Microsoft, although, not surprisingly, our article is never cited.
This article in combination with our paper "Are Network Externalities a New Source of Market Failure" has had important impacts in the network externality literature. Katz and Shapiro, in response to our work, have adopted our term "network effect" instead of the policy-pejorative term "network externality". Also, they accept our point that pecuniary externalities, which are importantly different from technological externalities, have been conflated in this literature, and need to be treated differently. Although, Katz and Shapiro have changed some of their positions to accommodate our criticisms, we would have been happier if they had been willing to acknowledge their debt to our work.
Path Dependence, Lock-In, and History
was published in the April 1995 issue of The Journal of Law, Economics and Organization. It deals with the logic of path dependence and also provides some history of the Beta-VHS format choice, which has often been given as an example of deleterious path dependence. You can read why VHS really won. We disagree with the claim that deleterious path dependence is a problem with market economies.
Click Here to download Ami Pro Document
Are Network Externalities a New Source of Market Failure?
Appeared as the lead article (a year after it was supposed to appear - the journal is a yearly journal) in Vol 17 1995, Pp. 1-22 of Research in Law and Economics. We argue that network externalities have been misunderstood and misapplied in the literature. This paper provides the detail for some of our claims in our paper that was published as part of a symposium on network externalities last summer in the Journal of Economic Perspectives. This issue also has the first direct exchange between us and two leading proponents of the theories that we criticize. This exchange should prove informative to anyone interested in this topic.
Click Here to download Ami Pro Document
Standard Choice and Market Selection
Is an early version of "Should Technology Choice be a Concern for Antitrust?" that appeared in the Harvard Journal of Law and Technology, Summer 1996, Pp. 283-318.
My book Rethinking the Networked Economy: The True Forces Driving the Digital
Marketplace, Amacom, 2002.
The link at Amazon where it is $19.57http://www.amazon.com/exec/obidos/ASIN/0814406491/qid%3D1024031827/sr%3D1-1/ref%3Dsr%5F1%5F1/102-1449769-4782559
Here are some sample chapters: http://www.utdallas.edu/~liebowit/book/chapter1.html
A few blurbs:
From the Economist:
“Where exactly did Internet economics go
wrong?
A new book by
Re-Thinking
the Network Economy explains what the
Internet did change and what it did not, so far as economics is concerned-and
it does so in a witty and accessible way. Dr. Liebowitz covers a lot of issues:
the exaggerated advantages of Internet retailing over conventional retailing;
the false claim that the Internet's lower costs would give Internet firms
bigger profits; the inadequacies of the broadcast -television model of
advertising revenues; the poorly understood questions of copyright and
digital-rights management.
It is the best book to date on the fallacies
of the e -commerce craze.”
David R. Henderson, author of The Joy of
Freedom: An Economist's Odyssey, former columnist, Red Herring: Absolutely the
best book I've read on e-commerce.
Liebowitz looks at all the claims made for how "the Internet
changes everything" and shows, persuasively, that it changes only a few
things. If you want to know how to
integrate the Internet into your business or how to judge the future success of
Internet-based firms, or if you just want a master economist's understanding of
the Internet's impact on the economy, Re-Thinking the Network Economy is the
book for you.
Daniel F. Spulber, Elinor
Hobbs Distinguished Professor, Kellogg School of Management,
Stephen E. Margolis, Chairman, NC State U Economics: “In Rethinking the Networked Economy,
Detailed Table of Contents:
A. What you will find in later chapters
Chapter 2:
Basic Economics of the Internet
A. How the Internet creates value.
B. Special Economics of the Internet, or
maybe not so special
C. How the Internet Alters the likelihood of
Winner-take-all.
Chapter 3:
Racing to be first: Faddish and Foolish
A. From Winner-take-all to First-Mover-Wins
iii. Impacts of Lock-in on First-Mover-Wins.
C. What Does the Real-World Tell Us About
Strong Lock-in?
D. The Internet and first-mover-wins.
Chapter 4:
The (Non) Ubiquity of E-tailing?
A. How Might the Internet Transform
Business? E-ordering vs. E-retailing.
i. Size and Bulk relative to Value
ii. Immediate Gratification Factor (Impulse
buying)
iv. Experience Products and Free Riding
C. What Types of Products are Most
Compatible with Full-Fledged E-tailing?
iii. Hardcopy Books, CDs, and so forth.
D. Examples of Markets likely to resist the
Internet assault.
E. The nature of Selling on the Net.
i. The evolution of the current pricing system
ii. The Concept of Price Discrimination
Chapter 5:
The value-profit paradox, the Cruelty of Competition and Internet Margins.
B. The Cruelty of Competition and Attempts
to Subvert It.
C. Implications for Internet Firms
D. Future Competition and Performance
E. Margins and Profits on the Net.
i. Understanding Profit Margins
ii. The Nature of Competition in Internet Markets
Chapter 6:
Can Advertising Revenues Support the Net?
A. The inadequacy of the television model
B. Advertising effectiveness on the
Internet.
ii. Advertising Effectiveness on the Net
C. Positive aspects of Internet advertising
D. Advertising Revenues on the Internet
Chapter 7:
Copyright and the Internet
A. The Economic Impacts of Copying
i. Direct Economic Effects of Copying
Technology
ii. Indirect Economic Effects of Copying
Technology
B. The Economic Impacts of Previously New
Technologies On Copyright Owners
ii. Videocassette Recording: The Betamax Case
C. Digitized Networked Copying: Lessons From
the Napster Case
i. The Impact of Peer-to-Peer Networks On
Revenues – The Theory
ii. The Impact of Napster on Revenues – The
Evidence
iii. Pure Peer-to-Peer Technologies: The Devil You
Don’t Know
i. DRM Will Not Harm “Fair” Use or Any Use
ii. DRM Will Not Reduce Production of New Works
E. Public Goods, DRM, and other Alternatives
Chapter 8:
Conclusions: Whither Supply and Demand?
Information about my older book with
Margolis: Winners, Losers, and Microsoft: Competition and Antitrust in High
Technology.
The book is available at some bookstores.
It is also available at the online stores
(Amazon, Barnes and Noble, and so forth). Here is an Amazon link: Amazon
You can also order it from the Independent Institute
Web site (but at list price): http://www.independent.org/tii/catalog/cat_WLMS.html.
Some Reviews:
CLIVE CROOK, THE ECONOMIST,
DECLAN MCCULLAGH, WIRED MAGAZINE,
LEE GOMES,
PAUL GIGOT "If only the Clinton Justice Department read WINNERS, LOSERS
& MICROSOFT, the American economy would be spared much pain and legal
expense.
SAM PELTZMAN, Sears Roebuck Professor of Economics and Financial Services, Graduate School of Business, University of Chicago "Economists too often adopt a clever idea without seriously examining the evidence, especially if the idea suggests a 'market failure' requiring some regulatory remediation. Winners, Losers and Microsoft is an impressive and important antidote to that tendency in the case of 'path dependence.' This is the idea that markets can get locked into an inferior technology simply because of historical accident-and, of course, that government must rescue us from the burden of that history. While most economists will acknowledge the possibility, none have examined the evidence as carefully as Liebowitz and Margolis. They show convincingly that the important supposed examples of path dependence are built on a factual house-of-cards. They also vividly show how market forces overcome inefficient path dependence. This is something most advocates of the idea have ignored. Impressive and important, everyone interested in public policy toward 'network' and high technology industries should read this great book."
ARMEN A. ALCHIAN, Professor of Economics, University of California, Los Angeles "Liebowitz and Margolis' Winners, Losers and Microsoft is instructive for all participants - the judge, defendants, plaintiffs and experts in the DOJ vs. Microsoft tragicomedy. For the rest of us, including Microsoft customers and competitors, it is not too late to learn, as well as be entertained by the Liebowitz-Margolis explanation and histories of several presumptive 'monopolies' of 'networks' and 'entrenched universal users'."
OLIVER
E. WILLIAMSON, Edgar F. Kaiser Professor of Business Administration, Walter A.
Haas School of Business, University of California, Berkeley, "Stanley Liebowitz and Stephen Margolis's excellent book, Winners, Losers and Microsoft ,
deals with the important and subtle phenomenon of path dependency. Path
dependency is important because it influences the development of many firms and
markets. The economic interpretation to be placed on path dependency, however,
is subtle. Liebowitz and Margolis counsel against the readiness with which many
economists ascribe inefficiency to path dependency. Because the reference
condition of a hypothetical ideal can never be implemented, the relevant,
comparative institutional standard for judging efficiency is always in relation
to feasible alternatives. This is a recurrent theme."
Here is some additional detail about the
book.
Analysis of Word Processor Market (from chapter 8).
Analysis of Spreadsheet Market (from chapter 8).
If you are interested primarily in the Microsoft case, go here . Some of the findings are amazing.
Other Sites of interest:
Antitrust Information by Luke Froeb
Hal Varian’s information goods page
N. Economides page on networks
Hits since 2/7/99