This is a page devoted to Network Effects, Path Dependence, Lock-In, and Digital Copyright Issues.

Material related to Economic Theories of Lock-In, Path Dependence

Information on my “Rethinking the Network Economy”

Information on my book “Winners, Losers, and Microsoft” with Steve Margolis

Material related to Microsoft Case


Material Related to the Microsoft Case

What would be the costs to consumers from the District Court’s remedy to break Microsoft into two companies? To see the study performed for ACT and introduced 9/25/2000, Click Here

Does Microsoft exercise monopoly power?  A few pages taken from the book to answer the question that lies at the heart of the Microsoft trial. Microsoft in facts appears responsible for a good portion of the price decreases that have occurred in the last decade.

The Progress and Freedom Foundation and others are arguing that the costs will be low in breaking up either the entire company or just the operating system into three competing versions. In fact the costs will be high. Click Here to read my study for ACT and ASCII calculating the costs that would accrue to software producers if Windows were broken into three 'competing' flavors. It is very conservatively estimated at $30 billion over three years.

Click Here for a more recent paper discussing two papers (Lenard, and one by Levinson, Romaine, and Salop) that argue that I have overestimated these costs.

Click Here for an examination of the Consumer Federation Study of Microsoft prices (they claim a $10 billion overcharge by Microsoft; their study, howoever, has serious errors that invalidate its results; it is both logically inconsistent (more specifically, they do not understand the economic articles they cite) and factually incorrect.

Steve Margolis and I have written numerous academic papers on the subject. They can be read online, or downloaded . Your browser should be able to print out the papers. We have also written several non-academic (policy oriented) articles on these subjects, (Oct 98 Wall Street Journal Op-ed, Upside magazine, Regulation, Reason Magazine, etc.). Click Here to read these non-academic articles, or if you are specifically interested in the application of these theories to Microsoft.

Path Dependence

Entry in The New Palgrave's Dictionary of Economics and the Law, MacMillan, 1998

Click Here to read document

Network Effect

Entry in The New Palgrave's Dictionary of Economics and the Law, MacMillan, 1998.

Click Here to read document

The Fable of the Keys

was published as the lead article in the October 1990 issue of the Journal of Law and Economics. It demonstrates the falsity of the widely held belief that the Dvorak keyboard is far superior to the Qwerty keyboard. This is important because the typewriter keyboard is frequently mentioned in this literature as the archetypical case of the economy getting stuck on the wrong standard. That many of the papers in the network externality/path dependence literature continue to use this example as support for their theories illustrates the empirical weakness of these theories.

Click Here to read document

Network Externality: An Uncommon Tragedy

This article was printed in the Journal of Economic Perspectives, Volume 8, Number 2, Spring 1994. It was part of a 3-paper symposium on network externalities. This symposium is mentioned prominently in the Reback white paper attacking Microsoft, although, not surprisingly, our article is never cited.

This article in combination with our paper "Are Network Externalities a New Source of Market Failure" has had important impacts in the network externality literature. Katz and Shapiro, in response to our work, have adopted our term "network effect" instead of the policy-pejorative term "network externality". Also, they accept our point that pecuniary externalities, which are importantly different from technological externalities, have been conflated in this literature, and need to be treated differently. Although, Katz and Shapiro have changed some of their positions to accommodate our criticisms, we would have been happier if they had been willing to acknowledge their debt to our work.

Click Here to read document

Path Dependence, Lock-In, and History

was published in the April 1995 issue of The Journal of Law, Economics and Organization. It deals with the logic of path dependence and also provides some history of the Beta-VHS format choice, which has often been given as an example of deleterious path dependence. You can read why VHS really won. We disagree with the claim that deleterious path dependence is a problem with market economies.

Click Here to read document

Click Here to download Ami Pro Document

Are Network Externalities a New Source of Market Failure?

Appeared as the lead article (a year after it was supposed to appear - the journal is a yearly journal) in Vol 17 1995, Pp. 1-22 of Research in Law and Economics. We argue that network externalities have been misunderstood and misapplied in the literature. This paper provides the detail for some of our claims in our paper that was published as part of a symposium on network externalities last summer in the Journal of Economic Perspectives. This issue also has the first direct exchange between us and two leading proponents of the theories that we criticize. This exchange should prove informative to anyone interested in this topic.

Click Here to read document

Click Here to download Ami Pro Document

Standard Choice and Market Selection

Is an early version of "Should Technology Choice be a Concern for Antitrust?" that appeared in the Harvard Journal of Law and Technology, Summer 1996, Pp. 283-318.

Click Here to read document

My book  Rethinking the Networked Economy: The True Forces Driving the Digital Marketplace, Amacom, 2002.

The link at Amazon where it is $19.57  

Here are some sample chapters:

A few blurbs:

From the Economist:

“Where exactly did Internet economics go wrong?

A new book by Stan Liebowitz, a professor of economics at the University of Texas at Dallas, and a long-time sceptic of the view that the Internet changes all the rules, gives the most thorough answer so far.

Re-Thinking the Network Economy explains what the Internet did change and what it did not, so far as economics is concerned-and it does so in a witty and accessible way. Dr. Liebowitz covers a lot of issues: the exaggerated advantages of Internet retailing over conventional retailing; the false claim that the Internet's lower costs would give Internet firms bigger profits; the inadequacies of the broadcast -television model of advertising revenues; the poorly understood questions of copyright and digital-rights management.

It is the best book to date on the fallacies of the e -commerce craze.”


David R. Henderson, author of The Joy of Freedom: An Economist's Odyssey, former columnist, Red Herring: Absolutely the best book I've read on e-commerce.  Liebowitz looks at all the claims made for how "the Internet changes everything" and shows, persuasively, that it changes only a few things.  If you want to know how to integrate the Internet into your business or how to judge the future success of Internet-based firms, or if you just want a master economist's understanding of the Internet's impact on the economy, Re-Thinking the Network Economy is the book for you.

Daniel F. Spulber, Elinor Hobbs Distinguished Professor, Kellogg School of Management, Northwestern University:  Stan Liebowitz's book brings a breath of fresh air to popular Internet debates. This lively and informative discussion exposes many of the Internet-related myths about network externalities, technology lock-in, and first-mover advantage. Managers would do well to understand his point that tried-and-true business strategies continue to apply”

Sonia Arrison, Director, Center for Technology Studies, Pacific Research Institute: "Prof. Liebowitz's analysis is sharp, reflecting an impressive combination of economic theory, history, and just the right amount of geekiness.  Whether you are a businessperson plotting your next move or an individual simply curious about why the dot com bust happened, buy this book.  The Internet will still be important.  Professor Liebowitz tells us why."

Stephen E. Margolis, Chairman, NC State U Economics: “In Rethinking the Networked Economy, Stan Liebowitz dissects the faulty business case that helped fuel the Internet hysteria. The autopsy yields important insights. Liebowitz explains why some businesses suit the Internet economy and some don’t, why some industries are winner-take-all contests but most aren’t, and why a few industries offer first-mover advantages but most don’t. The result is handbook for e-commerce that is grounded in simple but powerful economic reasoning that is fully explained within, and supported by an abundance of real world evidence.”

Detailed Table of Contents:

Chapter 1 Introduction. 1

A.       What you will find in later chapters. 3

Chapter 2: Basic Economics of the Internet 9

A.       How the Internet creates value. 9

B.       Special Economics of the Internet, or maybe not so special 13

i.    Network effects. 13

ii.   Economies of Scale. 15

iii.  Winner take all 17

C.       How the Internet Alters the likelihood of Winner-take-all. 20

Chapter 3: Racing to be first: Faddish and Foolish. 25

A.       From Winner-take-all to First-Mover-Wins. 26

B.       The Concept of Lock-In. 32

i.    Strong Lock-In. 34

ii.   Weak Lock-In. 37

iii.  Impacts of Lock-in on First-Mover-Wins. 38

C.       What Does the Real-World Tell Us About Strong Lock-in?. 40

D.       The Internet and first-mover-wins. 49

E.       Additional Evidence. 50

F.       Business Lessons. 54

Chapter 4: The (Non) Ubiquity of E-tailing?. 57

A.       How Might the Internet Transform Business? E-ordering vs. E-retailing. 59

B.       Characteristics of Products that are Likely to Determine the Extent of the Internet Transformation. 60

i.    Size and Bulk relative to Value. 61

ii.   Immediate Gratification Factor (Impulse buying) 62

iii.  Perishability. 63

iv.  Experience Products and Free Riding. 64

v.   Thin Markets. 66

vi.  The Role of Taxes. 67

C.       What Types of Products are Most Compatible with Full-Fledged E-tailing?  69

i.    Digitized Products. 69

ii.   Information. 71

iii.  Hardcopy Books, CDs, and so forth. 73

D.       Examples of Markets likely to resist the Internet assault. 75

i.    Grocery Items. 76

ii.   Automobiles. 84

iii.  Furniture. 86

iv.  Prescription Drugs. 87

E.       The nature of Selling on the Net. 88

i.    The evolution of the current pricing system.. 89

ii.   The Concept of Price Discrimination. 92

iii.  What About Auctions?. 95

Chapter 5: The value-profit paradox, the Cruelty of Competition and Internet Margins. 97

A.       The Diamond Water Paradox. 101

B.       The Cruelty of Competition and Attempts to Subvert It. 103

C.       Implications for Internet Firms. 109

D.       Future Competition and Performance. 111

E.       Margins and Profits on the Net. 113

i.    Understanding Profit Margins. 114

ii.   The Nature of Competition in Internet Markets. 118

Chapter 6: Can Advertising Revenues Support the Net?. 122

A.       The inadequacy of the television model 125

B.       Advertising effectiveness on the Internet. 128

i.    Size of Audience. 129

ii.   Advertising Effectiveness on the Net 130

iii.  Advertising budgets. 134

C.       Positive aspects of Internet advertising. 136

D.       Advertising Revenues on the Internet 138

Chapter 7: Copyright and the Internet 145

A.       The Economic Impacts of Copying. 148

i.    Direct Economic Effects of Copying Technology. 151

ii.   Indirect Economic Effects of Copying Technology. 153

B.       The Economic Impacts of Previously New Technologies On Copyright Owners  158

i.    Photocopying. 159

ii.   Videocassette Recording: The Betamax Case. 161

iii.  Audio Taping. 163

C.       Digitized Networked Copying: Lessons From the Napster Case. 164

i.    The Impact of Peer-to-Peer Networks On Revenues – The Theory. 166

a.        Indirect Appropriability. 167

b.       Exposure Effects. 170

ii.   The Impact of Napster on Revenues – The Evidence. 174

iii.  Pure Peer-to-Peer Technologies: The Devil You Don’t Know.. 183

D.       Digital Rights Management 186

i.    DRM Will Not Harm “Fair” Use or Any Use. 189

ii.   DRM Will Not Reduce Production of New Works. 192

E.       Public Goods, DRM, and other Alternatives. 196

F.       The Bottom Line. 201

Chapter 8: Conclusions: Whither Supply and Demand?. 204

A.       Lessons. 209


Information about my older book with Margolis: Winners, Losers, and Microsoft: Competition and Antitrust in High Technology.

The book is available at some bookstores.

It is also available at the online stores (Amazon, Barnes and Noble, and so forth). Here is an Amazon link: Amazon You can also order it from the Independent Institute Web site (but at list price):

Some Reviews:

CLIVE CROOK, THE ECONOMIST, September 18, 1999: “By a long way, it is the best single thing to read on this tangle of issues. The book reviews the new theory carefully and in language accessible to the general reader, and then subjects it to a detailed empirical examination… Again and again they show that good products win. The standard lock-in stories are examined and, like QWERTY before them, debunked. Betamax was not beaten by an “inferior” VHS video format. The triumph of DOS over the Macintosh operating system is equally explicable. The book gives example after example of software that came and went, at one time dominating the market but then giving way to a better newcomer: throughout, reviewers’ ratings of the products explain market-share...The case they make could hardly be stronger. At the end, very little of the fashionable critique of neoclassical economics is left standing.”

DECLAN MCCULLAGH, WIRED MAGAZINE, September 10, 1999. “This is the book that should, if justice prevails, become as influential in today's antitrust debates as Robert Bork's The Antitrust Paradox did two decades ago… well-argued and careful.. features what appears to be the first systematic look at the real-world history of the software industry… an invaluable addition to the bookshelf of anyone interested in the Microsoft trial and future high-tech antitrust cases.

LEE GOMES, WALL STREET JOURNAL, August 26, 1999. "the two economists did what no one who repeated the story seems to have ever done -- i.e., a little digging…. The professors checked out this story.. by spending a lot of time in the library. They read every software product review from the past 15 years they could find and came up with a different conclusion. Microsoft, their evidence says, wins market battles (word processors, spreadsheets, browsers) when its products are better, and loses such battles (financial software, on-line services, palm-sized computers) when they aren't…. the two authors have gone a long way toward reshaping the Microsoft debate. Henceforth, any judges, economists, pundits or journalists who discuss Microsoft or technology lock-in -- much less repeat the crusty old Qwerty tale -- without first dealing with the Liebowitz-Margolis critique should have their wrists soundly slapped."

PAUL GIGOT "If only the Clinton Justice Department read WINNERS, LOSERS & MICROSOFT, the American economy would be spared much pain and legal expense. Stan Liebowitz and Stephen Margolis really know their stuff, and they can write too."

SAM PELTZMAN, Sears Roebuck Professor of Economics and Financial Services, Graduate School of Business, University of Chicago "Economists too often adopt a clever idea without seriously examining the evidence, especially if the idea suggests a 'market failure' requiring some regulatory remediation. Winners, Losers and Microsoft is an impressive and important antidote to that tendency in the case of 'path dependence.' This is the idea that markets can get locked into an inferior technology simply because of historical accident-and, of course, that government must rescue us from the burden of that history. While most economists will acknowledge the possibility, none have examined the evidence as carefully as Liebowitz and Margolis. They show convincingly that the important supposed examples of path dependence are built on a factual house-of-cards. They also vividly show how market forces overcome inefficient path dependence. This is something most advocates of the idea have ignored. Impressive and important, everyone interested in public policy toward 'network' and high technology industries should read this great book."

ARMEN A. ALCHIAN, Professor of Economics, University of California, Los Angeles "Liebowitz and Margolis' Winners, Losers and Microsoft is instructive for all participants - the judge, defendants, plaintiffs and experts in the DOJ vs. Microsoft tragicomedy. For the rest of us, including Microsoft customers and competitors, it is not too late to learn, as well as be entertained by the Liebowitz-Margolis explanation and histories of several presumptive 'monopolies' of 'networks' and 'entrenched universal users'."

OLIVER E. WILLIAMSON, Edgar F. Kaiser Professor of Business Administration, Walter A. Haas School of Business, University of California, Berkeley, "Stanley Liebowitz and Stephen Margolis's excellent book, Winners, Losers and Microsoft , deals with the important and subtle phenomenon of path dependency. Path dependency is important because it influences the development of many firms and markets. The economic interpretation to be placed on path dependency, however, is subtle. Liebowitz and Margolis counsel against the readiness with which many economists ascribe inefficiency to path dependency. Because the reference condition of a hypothetical ideal can never be implemented, the relevant, comparative institutional standard for judging efficiency is always in relation to feasible alternatives. This is a recurrent theme."

Here is some additional detail about the book.

Table of contents.

Introductory Chapter.

Analysis of Word Processor Market (from chapter 8).

Analysis of Spreadsheet Market (from chapter 8).

 If you are interested primarily in the Microsoft case, go here . Some of the findings are amazing.





Other Sites of interest:

Antitrust Information by Luke Froeb

Hal Varian’s information goods page

N. Economides page on networks


Hits since 2/7/99