Economists like me see a lot of similarities among Dolly Parton, John D. Rockefeller, and Bill Gates While it sounds odd, the business aspects of the lives of the three are remarkably alike.
Single suppliers are found in a lot of markets, but they are not monopolists. One example that comes to mind is Dolly Parton. She is close to being the sole supplier of a unique set of talents. Imitators of Dolly Parton cannot pass themselves off as the real thing. Likewise, software developers may not put their names on Windows and other Microsoft programs.
Both Dolly Parton and Bill Gates are protected by copyright laws, which are meant to promote the development of intellectual property. Neither technology nor show business styles are destroyed when consumed, like an apple would be. That in turn means it is difficult to exclude free riders–both consumers and other producers.
Our founding fathers recognized this problem and included in the Constitution the goal “To promote the Progress of Science and useful arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” [Art 1, Sec 8.] Thus, copyright holders have a legal right to be sole suppliers of their respective products.
Being the sole supplier, however, does not mean the copyright holder is acting as a monopolist. Economists and some legal scholars, like judge Robert Bork in his 1978 book (before he became counsel to one of Microsoft’s competitors), point out that the misallocation of resources that stems from a monopoly results from artificially restricting output in order to push price above marginal cost. But neither Dolly Parton nor Bill Gates is doing that.
Dolly Parton writes and sings on music recordings, stars in movies, appears on television, and maintains an amusement park. It is fair to say she is expanding her business everywhere she can. The same can be said for Microsoft.
Standard Oil and Microsoft
Media coverage of Judge Thomas Penfield Jackson’s finding that Microsoft is a monopolist frequently draws a comparison with the Standard Oil case of 1911. Both companies supposedly used their dominant positions and anticompetitive practices to exploit other firms. This, in turn, justified antitrust action by the courts.
A review of the economic history of the Standard Oil case reveals an uncanny parallel with the Microsoft case, and even a possible solution. But it is not at all like the renderings of the prosecutors and pundits.
The popular myth is that Standard Oil engaged in predatory behavior by buying up competing refineries so that it could then raise prices above the competitive level. It was also alleged that Standard Oil coerced price discounts from railroads for shipping crude oil and kerosene.
As for the first charge, oil prices did not go up after Standard Oil acquired other refineries. As author Daniel Yergin points out, oil prices went down, which is typical for new products. Moreover, Professor John McGee of the University of Washington has shown in 1958 and again in 1990 that Standard Oil was not engaging in predatory behavior.
What then could be the reason for buying up refineries? One answer, according to Yergin’s book The Prize, was Rockefeller’s concern about the inferior and dangerous way some refiners made kerosene, the principal product of the day. Shoddy kerosene tended to explode rather than just burn. If this risky impression became entrenched in the minds of consumers, it would adversely affect the sales and growth prospects of the entire industry, including Standard Oil.
Thus, it was in Rockefeller’s interest to buy up the substandard refiners and upgrade them to produce a higher standard of kerosene, as well as a long list of other petroleum products that were later developed. Indeed, that is why Rockefeller called his company Standard Oil.
Microsoft is serving a similar function for the computer industry, trying to bring a higher standard of operations at a lower price in a rapidly growing market.
The second charge, that Standard Oil was able to extract discounts from railroads, is also similar to what Microsoft is alleged to be doing to software producers and hardware manufacturers. However, what is usually not mentioned about the Standard Oil case is that railroads in the 19th century were trying to form a cartel to charge above-market prices.
Cartels orchestrate across-the-board reductions in output in order to raise prices above marginal cost, thereby increasing the profits of all members of the cartel. However, there is a strong incentive for each member to quietly reduce price in order to attract more sales and more of the monopoly profits. If all the members do this, the monopoly profits are competed away. Since Standard Oil was a nationwide corporation shipping a lot of crude oil and kerosene on the railroads, it was in a good position to encourage some railroad cartel members to offer secret discounts–much as Microsoft cuts deals with specific computer vendors.
When Standard Oil was broken up by the court, it was done on a geographical basis. That was an odd choice, since it left the same number of Standard Oils in each region as existed before the breakup, hardly a way to promote competition in the oil industry. However, it was a good way to bolster the profits of the politically well-connected railroad cartel. Calling on the government to gain advantage over another firm is hauntingly similar to the Microsoft case.
The railroads did not enjoy their profits for long. The oil companies reduced their shipping by railroad and increased their own pipeline transportation. It was a decidedly lower-cost way of doing business and it accrued to the benefit of consumers. Microsoft’s operating system, I suspect, is similar to the oil company’s pipelines, in that it allows Microsoft to bring new features and applications to market faster and cheaper than relying on its competitors.
An Industry Institute
Another development in the wake of the Standard Oil decision was the emergence of the American Petroleum Institute. The initial rationale was to promulgate and enforce technical standards for the production of refined products. The API still performs that function with the active participation of the individual members of the industry.
The trade association model may also be a solution to the Microsoft case, one that involves neither wholesale dismemberment nor extensive regulation of Microsoft. A software trade association could, for example, issue consensus input and output interfaces with core programs like operating systems and networks. That way applications developers and the holders of operating system copyrights, like Microsoft, could negotiate revisions and updates. There might also be a provision for appeal to a government body in case there is a failure to reach agreement. Experience with a similar system for natural gas pipelines in Texas indicates that the direct parties diligently avoid involvement by the regulatory agency by settling disputes among themselves.
As strange as it might seem, Dolly Parton and John D. Rockefeller have a lot to teach us about protecting intellectual capital in the software business. If only the legal system will listen. With the recent appointment of Judge Richard Posner as a voluntary mediator, there is hope. Judge Posner is a prominent member of the law and economics discipline.
Jim Johnston is an economist and a policy advisor to The Heartland Institute. He can be contacted at [email protected].