NCPA - National Center for Policy Analysis

Microsoft and Chicken: Imperfect Games and Antitrust

June 20, 2002

The Microsoft antitrust case showcased recent economic scholarship on what's called imperfect game competition, which uses mathematical game theory to understand the strategies companies might pursue in markets that depart from the abstract notion of perfect competition.

In perfect competition, no buyer or seller can influence the price. But in the real world, economists are interested in more complex and realistic strategic choices that affect market outcomes.

  • In theory, a monopolist might use exclusivity clauses or other "non-standard" contract provisions -- a notion that helped give intellectual impetus to the Clinton Administration's antitrust activism.
  • As economic theory this might be sound, but, experts say, applied naively to antitrust policy it leads to poor legal rules and remedies.
  • They argue another branch of economic research --- transaction cost economics -- also need to be taken into account.
  • This is based on the idea that making and enforcing contracts isn't free, and that some exchanges might be easier and cheaper to manage if the parties were within the same organization.

Just because a contract is unusual or exclusive, doesn't mean it hampers competition. For example, consider the 1971 antitrust case involving Chicken Delight, a franchise operation that required franchisees to buy all supplies from the parent company rather than paying a percentage of store revenue. It was an elegant solution to a basic problem: in a cash business it is easy to lie about sales. A federal appeals court ruled Chicken Delight engaged in an illegal so-called tie-in arrangement.

But legal scholars note the franchisees didn't have to sign up in the first place. There was plenty of competition. And the result was bad antitrust policy.

Source: Virginia Postrel, "Microsoft, Chicken Delight and competition for an imperfect world," New York Times, June 20, 2002


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