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Monday, August 26, 2013

Paul Krugman: The Decline of E-Empires

The biggest companies eventually become complacent and lose their leading role in the marketplace. Does that mean we shouldn't worry about their monopoly power?:

The Decline of E-Empires, by Paul Krugman, Commentary, NY Times: Steve Ballmer’s surprise announcement that he will be resigning as Microsoft’s C.E.O. ... has me thinking about network externalities and Ibn Khaldun. ...
First, about network externalities: Consider the state of the computer industry circa 2000... By all accounts, Apple computers were better than PCs... Yet the vast majority of desktop and laptop computers ran Windows. Why?
The answer, basically, is that everyone used Windows because everyone used Windows. ... Software was designed to run on PCs; peripheral devices were designed to work with PCs. That’s network externalities in action, and it made Microsoft a monopolist. ...
The trouble for Microsoft came with the rise of new devices whose importance it famously failed to grasp. “There’s no chance,” declared Mr. Ballmer in 2007, “that the iPhone is going to get any significant market share.”
How could Microsoft have been so blind? ... Ibn Khaldun ... was a 14th-century Islamic philosopher... Desert tribesmen, he argued, always have more courage and social cohesion than settled, civilized folk, so every once in a while they will sweep in and conquer lands whose rulers have become corrupt and complacent. They create a new dynasty — and, over time, become corrupt and complacent themselves, ready to be overrun by a new set of barbarians.
I don’t think it’s much of a stretch to apply this story to Microsoft, a company that did so well with its operating-system monopoly that it lost focus, while Apple — still wandering in the wilderness after all those years — was alert to new opportunities. And so the barbarians swept in from the desert. ...
Anyway, the funny thing is that Apple’s position in mobile devices now bears a strong resemblance to Microsoft’s former position in operating systems. ...Apple ... products ... are, by most accounts, little if any better than those of rivals, while selling at premium prices.
So why do people buy them? Network externalities: lots of other people use iWhatevers, there are more apps for iOS... Meet the new boss, same as the old boss.
Is there a policy moral here? ... Microsoft was a monopolist, it did extract a lot of monopoly rents, and it did inhibit innovation. Creative destruction means that monopolies aren’t forever, but it doesn’t mean that they’re harmless while they last. This was true for Microsoft yesterday; it may be true for Apple, or Google, or someone not yet on our radar, tomorrow.

    Posted by on Monday, August 26, 2013 at 12:19 AM in Economics, Market Failure, Regulation | Permalink  Comments (30)

          


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