Effective Structural Relief in U.S. v. Microsoft

Robert E. Litan and William D. Nordhaus

The day after we filed an Amici Curiae brief on remedies in U.S. v. Microsoft, together with Roger Noll and Mike Scherer, the federal government and 17 state attorneys’ general (hereinafter “the government”) submitted their recommendations on relief to the Court. Because we were not privy to the details of the government’s proposal, our analysis of remedy alternatives was necessarily more general and included options that were not ultimately embraced by the government. In its proposed final judgment, the government advocates what we referred to in our brief as “functional” divestiture — the separation of Microsoft into separate operating system and application software businesses – coupled with a series of “conduct” remedies designed to be in place for no longer than three years following the divestiture to help ensure that competition in the operating systems market takes hold.

We believe that functional divestiture is the minimum acceptable form of relief in this case, but that it nonetheless also does not promise to accomplish all of the goals to which an effective relief plan should aspire. A much better case can be made, in our view, for what we have termed a “full” divestiture of Microsoft that would build on the functional split recommended by the government, and then require a further divestiture of the company’s operating systems business into three competing firms, each with the same intellectual property rights in the various Windows operating systems. We are fully cognizant that a full divestiture would be a more complicated task than that proposed by the government. For the reasons we argue in our brief to the Court, however, it not only is feasible but is the best method for ensuring competition in the operating systems (OS) market in which Microsoft has been found to have unlawfully maintained a monopoly.

The Three Central Goals of Relief

Before discussing the merits of the government’s proposal, it is useful to review the basic principles of the remedy phase of monopolization cases. Remedies in such cases generally incorporate one or more of the following elements: conduct restrictions, licensing, and restructuring. Structural relief is the most far-reaching category of remedies, but there are several reasons for the presumption favoring structural remedies in monopolization cases. If the aim is to “terminate the monopoly”, the most straightforward solution is to break it up in some fashion. This is consistent with the economic view that structural relief goes to the root of the problem, even if the problem is merely conduct that unlawfully maintains the monopoly. Such conduct would not be successful unless the underlying structure of the market in the first instance has been subject to monopoly, even if gained through lawful means. If there are significant reasons why restraining conduct or licensing remedies are not likely to be effective in undoing the terminating the monopoly – reasons which we discuss in detail in our brief – then the case for some sort of structural remedy is compelling.