Antitrust Laws and Big Businesses Matt Bedel Jason Dickey Matt Nothnagel Jesse Pate Dana Scully May 12, 2005

Q P D = MSB S = MSC MR Q m Q* P m P* Comparing Monopoly and Competition …Society’s View Deadweight Loss due to Monopolization Dr. Christ – SL 151

Q Costs Long-Run Production and Economies of Scale Constant Returns to Scale Dr. Christ – SL 151 LRATC

Network and Lock-in Effects Network goods increase in value as the number of users grows Firms with large user bases can become difficult to compete with Image source:

Excerpt from a memo written by a Microsoft general manager to Bill Gates “The Windows API is so broad, so deep, and so functional that most ISVs would be crazy not to use it. And it is so deeply embedded in the source code of many Windows apps that there is a huge switching cost to using a different operating system instead... ”It is this switching cost that has given the customers the patience to stick with Windows through all our mistakes, our buggy drivers, our high TCO, our lack of a sexy vision at times, and many other difficulties [...] Customers constantly evaluate other desktop platforms, [but] it would be so much work to move over that they hope we just improve Windows rather than force them to move. “In short, without this exclusive franchise called the Windows API, we would have been dead a long time ago.”

Brief History of Antitrust Laws/Cases England - Law preventing the Crown from granting monopolies to businesses in return for cash USA - Sherman Antitrust Act prevented expansion of monopolies USA - Standard Oil broke up USA - Clayton Antitrust Act gave government more power when faced with monopolies USA - IBM USA - AT&T long distance broke up into smaller providers USA - Microsoft

Are the Current Laws Really Outdated? Robert Pitofsky of the Federal Trade Commission “The 19th century antitrust laws on the books today are adequate to address the unique competition issues presented by the high-tech industries of the 21st century”

Applicability of Antitrust Laws Industry Number of Firms Average R&D As Percent of Sales Aerospace/Defense8 6 % Biotechnology321% Chemicals10 Computer Hardware 9 8 % Computer Software 7 18 % Consumer Products 5 2 % Electronics/Electrical19 6 % Energy3 2 % Heavy Machinery 5 5 % Industrial Conglomerates 4 4 % Pharmaceuticals28 14 % Semiconductors10 22 % Telecommunications13 11 % Transportation26 5 %

Size vs. Innovation

Applicability of Antitrust Laws Industry Number of Firms Average R&D As Percent of Sales Aerospace/Defense8 6 % *Biotechnology*321% Chemicals10 Computer Hardware 9 8 % *Computer Software* 7 18 % Consumer Products 5 2 % Electronics/Electrical19 6 % Energy3 2 % Heavy Machinery 5 5 % Industrial Conglomerates 4 4 % *Pharmaceuticals*28 14 % *Semiconductors*10 22 % Telecommunications13 11 % Transportation26 5 %

Emerging vs. Established Industries

Questions?