Economist Estimates that Court Ordered Microsoft Breakup Would Cost U.S. Consumers $50 Billion

(September 25, 2000) Stan Liebowitz, an economics professor, released an economic analysis of Judge Thomas Jackson's breakup order in the Microsoft antitrust case, which concluded that, if the order were implemented, software prices will rise, costing American consumers at least $50 Billion over three years, and possibly much more.

The 36 page study is titled "An Expensive Pig in a Poke: Estimating the Cost of the District Court’s Proposed Breakup of Microsoft." It is the most recent of Prof. Liebowitz's writings pertaining to the government's antitrust case against Microsoft.

Stan Liebowitz is a Professor of Economics at the Management School of the University of Texas at Dallas. He is a member of the Chicago/Rochester school of  economic thought, which tends to support free markets, and oppose government intervention.

He conducted the study on behalf of the Association for Competitive Technology (ACT), a group which shares his views.

He wrote that "The remedy proposed by the government and adopted by the judge in the Microsoft case is likely to increase software prices to consumers, impose additional costs upon software developers, retard innovation in the operating system, reduce competition in the workstation/server marketplace, and lead to confusion and frustration among consumers who will be purchasing computers with non-standardized operating systems."

Liebowitz reasoned that if Microsoft were split into two companies (an operating system company and an applications company) as ordered by Judge Jackson, the two resulting firms would be likely to alter Microsoft's pricing strategies. He noted that Microsoft has not heretofore pursued a monopoly pricing strategy for any of its products. Rather, Microsoft has pursued a low-price strategy.

Stanley Liebowitz

However, he continued that the resulting companies are more likely to adopt pricing strategies more consistent with typical software firms. If "the new operating system company adopts a different pricing strategy, particularly one consistent with the government’s economic theory of the case, prices would be expected to rise," wrote Liebowitz.

He provided a range of possible software price increases, and how much it would cost American consumers in total. He estimated, at the low end, an additional $50 Billion over a three year period. He estimated, at the high end, $125 Billion, if the two new companies completely turn their back on the prior pricing strategy of Microsoft. He also provided high and low estimates for the cost to all consumers in the world: $125 - $310 Billion.

Liebowitz also predicted that "Competition will be reduced in non-desktop markets, particularly the server/workstation/database market and the game console market. This will raise costs to consumers in these markets."

Finally, he predicted that if Judge Jackson's order were implemented, software developers would face higher costs, and improvements to the operating system would diminish since the financial incentive to improve Windows would be weakened.

And as is usual for Prof. Liebowitz, he took issue with much of what Judge Jackson has found and ordered in this case.

Prof. Liebowitz is not new to the Microsoft matter. He has written many items that have been favorable to Microsoft; he has also frequently spoken and served as a panelist on this subject. For example, he participated in panel discussion on remedies in the Microsoft case hosted by the Progress and Freedom Foundation at the National Press Club in Washington DC on February 25. At that event he presented another study in which he predicted that the cost of a Microsoft breakup to software developers would be $30 Billion.