June 2000 Fraser Forum: The Price of Microsoft's Fall
While much of the chattering class cheers the US Department of Justice (DOJ) case against Microsoft, those who risk real money have already rendered their verdict against this antitrust action. Those rallied against Microsoft claim that the company, through monopolistic behaviour, has injured the entire computer industry. A recent examination of relevant stock market prices calls this into serious question.
In an article in the Journal of Financial Economics, economists George Bittlingmayer and Thomas Hazlett examined 7 years' worth of stock price data to uncover the damage allegedly wrought by Microsoft on its competitors. The results of this study might surprise many who have already passed judgement on this case.
First, a little background. Simply put, a stock's price is based on what it's owners believe they will receive for holding the stock, after accounting for the fact that these payments are uncertain and will be made at various points in the future.
Had Microsoft harmed the computer industry, the current and future profitability of its competitors would have been diminished, resulting in lower stock prices. Similarly, if the antitrust action was expected to remedy these harms, profitability of these companies would rise, as would their stock prices. Since stock prices are influenced by expected cash flows both now and in the future, even if the positive effects of the antitrust case weren't expected for years to come, the prices of these stocks would still go up.
If the critics claims are true, announcements favourable to the antitrust case should result in reductions in stock prices for Microsoft, while bolstering stock prices of the other firms. Conversely, news of setbacks for the DOJ case would increase Microsoft stock prices while deflating the stock prices of the allegedly harmed industry. But what actually occurred?
Bittlingmayer and Hazlett constructed an index of stock prices of 159 computer firms between 1991 and 1997. This index allowed them to analyze systematically the effects of announcements regarding antitrust actions against Microsoft on the computer industry.
Twenty-nine of these announcements were classified as "pro-enforcement," in that they proscribed stricter antitrust actions. Not surprisingly, each was associated with a 1.2 percent drop in Microsoft shares in the days surrounding the announcement. Unexpectedly, perhaps, the index of other computer industry shares (excluding Microsoft) also fell by 0.5-0.6 percent. Each drop erased US$1.2 billion from the market value of these companies per announcement, for a total US$35 billion.
Conversely, announcements which reported setbacks for the antitrust case were associated with an increase in Microsoft's share price by an average of 2.3 percent. Again contrary to perceived wisdom, the computer industry index was buoyed by this news by as much as 1.2 percent.
In addition, the authors searched for instances when the index and Microsoft's stock price moved in opposite directions. They found only 3 which coincided with antitrust announcements. In each of these cases the movement was either shortly followed by a price reversal or corresponded with other events.
Overall, the results are the opposite of the critics' predictions. When Microsoft was wounded, so was the rest of the industry. When the case for Microsoft had a turn for the better, the sun also shone on the rest of the industry. This is not unprecedented. Earlier research by Bittlingmayer indicates that in a number of industries, vigorous antitrust action against one firm lowers the amount of capital available for the entire industry.
Why, then, the case against Microsoft? The authors suggest a few interesting theories. First, it could have been undertaken by managers of competing firms in order to use the spectre of Microsoft to cover their own shortcomings. The authors also suggest that the self-interest of bureaucrats wishing tofurther their own careers could have prompted this action. Finally, the powers that be in Washington could have been disappointed about Microsoft's lack of lobbying presence in the capital and the attendant lack of political contributions. Such an action could be considered a "wake up" call for the company.
Because it is an impersonal arbiter, the stock market provides an excellent laboratory for analyzing public policy. It also requires what no newspaper column or TV program does - participants have to put their money where their mouths are. The money, and therefore the mouth, of the market suggests that the alleged harms against the computer industry for which Microsoft was taken to court should have remained mere allegations, and that the DOJ action is unlikely to produce net benefits for this vital sector of the economy.
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