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69 Antitrust L.J. 87 (2001)
Network Effects and Conditions of Entry: Lessons from the Microsoft Case

handle is hein.journals/antil69 and id is 95 raw text is: NETWORK EFFECTS AND CONDITIONS OF ENTRY: LESSONS FROM THE MICROSOFT CASE GREGORY J. WERDEN* Conditions of entry into an industryI are important in many antitrust cases,2 especially monopoly cases, in which the durability of a defendant's market power is critical.3 This article discusses how network effects, a popular subject for antitrust commentators in recent years,4 can influence * Senior Economic Counsel, Antitrust Division, U.S. Department of Justice. The views expressed herein are not purported to represent those of the U.S. Department of Justice. Jeff Blattner, Tim Bresnahan, Wayne Dunham, Adam Hirsh, Doug Melamed, Cathy O'Sulli- van, and the editors provided helpful comments. I The term conditions of entry, as used herein, refers to everything relating to the costs of, or requirements for, successful entry, and to every reason why entry may succeed or fail. This term encompasses more than barriers to entry and avoids controversy over the definition of that term. See notes 44-62 and accompanying text infra; ROBERT H. BORK, THE ANTITRUST PARADOX ch. 16 (1978) (distinguishing natural and artificial barriers to entry and arguing that antitrust should be concerned only about the latter). Moreover, the barrier metaphor may paint a misleading picture. 2 Courts have rejected merger challenges on the grounds that actual or threatened entry would reverse or prevent any significant anticompetitive effects. E.g., United States v. Baker Hughes Inc., 908 F.2d 981,987-89 (D.C. Cir. 1990); United States v. Syufy Enters., 903 F.2d 659, 664-69 (9th Cir. 1990); United States v. Waste Mgmt., Inc., 743 F.2d 976, 981-84 (2d Cir. 1984). 3 Monopoly power is generally understood to be the ability (1) to price substantially above the competitive level and (2) to persist in doing so for a significant period without erosion by new entry or expansion. AD/SAT v. Associated Press, 181 F.3d 216, 227 (2d Cir. 1999) (quoting 2A PHILLIP E. AREEDA ET AL., ANTITRUST LAw T 501, at 86 (1995)). The persistence requirement finds wide support in the case law. See, e.g., W. Parcel Express v. UPS, 190 F.3d 974, 975 (9th Cir. 1999) (to satisfy the monopoly power requirement of Section 2, the plaintiff must show that there are significant barriers to entry and show that existing competitors lack the capacity to increase their output in the short run); Coastal Fuels of P.R., Inc. v. Caribbean Petroleum Corp., 79 F.3d 182, 196-97 (1st Cir. 1996) (monopoly power may be proved circumstantially by showing that the defendant has a dominant share in a well-defined relevant market and that there are significant barriers to entry in that market); Colo. Interstate Gas Co. v. Natural Gas Pipeline Co. of Am., 885 F.2d 683, 695-96 (10th Cir. 1989) (If the evidence demonstrates that a firm's ability to charge monopoly prices will necessarily be temporary, the firm will not possess the degree of market power required for the monopolization offense.) (footnote omitted). See also GregoryJ. Werden, Demand Elasticities in Antitrust Analysis, 66 ANTITRUST L.J. 363, 372-80 (1998) (analyzing cases). 4 See, e.g., Nicholas Economides & Lawrence J. White, Networks and Compatibility: Implica- tionsfor Antitrust, 38 EUR. EcoN. Rav. 651 (1994); David S. Evans & Richard Schmalensee,

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