Network Effects and Antitrust Law

The dramatic rise of the high-tech sector of the economy in the 1980s and 1990s created new challenges for antitrust law, in large part because many high-tech markets are networks. Some scholars argue that networks should receive greater antitrust scrutiny, while others maintain that concerns about networks are exaggerated. Those who argue for greater scrutiny believe that network economic effects give networks unique opportunities for predatory behavior. Ties, exclusive contracts, the exclusion from essential facilities, and predatory pricing are all mechanisms that may exclude competition in network markets. Network competition, however, also provides unique pro-competitive justifications for these same business practices. The challenges present in distinguishing anti-competitive from pro-competitive behavior are nowhere more evident than in United States v. Microsoft Corp. Microsoft was found guilty of predatory conduct toward its potential rivals, Netscape and Sun Microsystems, through exclusive contracts, ties, and incompatibilities. This article details the unique opportunities that networks create for both predatory and pro-competitive practices. The article then applies this analysis to the Microsoft case. The author concludes that the government did not present a coherent case of network predation. The author next develops affirmative defenses for some of Microsoft’s controversial business practices, premised on the existence of network effects in the market for operating systems. He concludes that pro-competitive motivations potentially explain many Microsoft practices.