Stephen E. Margolis

The Fable of the Keys

This paper examines the history of the QWERTY typewriter keyboard, often put forward as the archetypical case of markets choosing the wrong standard. Contrary to the claims made by Paul David and Brian Arthur, we find virtually no evidence to support a view that QWERTY is inferior to DVORAK. Instead, using records of typing experiments, studies by ergonomicists, and examining the historical record of competition among different keyboard designs back when QWERTY first became dominant, we conclude that QWERTY is about as good a design as any alternative.

Seventeen Famous Economists Weigh in on Copyright: The Role of Theory, Empirics, and Network Effects

The case of Eldred v. Ashcroft, which sought to have the Copyright Term Extension Act (CTEA, aka Sonny Bono Copyright Act) found unconstitutional, was recently argued before the Supreme Court. A remarkable group of seventeen economists including five Noble laureates, representing a wide spectrum of opinion in economics, submitted an amicus curie brief in support of Eldred. The economists condemned CTEA on the grounds that the revenues earned during the extension are so heavily discounted that they have almost no value, while the extended protection of aged works creates immediate monopoly deadweight losses and increases the costs of creating new derivative works. More important, we believe, than the particulars of this case, is the articulation of the economic issues involved in copyright extension. The articulation of those issues is not well framed in the brief. Nor is the case as one sided as the Eldred economists have claimed. First, private ownership of creative works may internalize potentially important externalities with respect to the use of existing works and the creation of derivative works. Second, the Eldred economists neglect the elasticity of the supply of creative works in their analysis, focusing instead solely on the benefits received by authors, leading to potential underestimation of additional creativity that confers benefits immediately. Third, the Eldred economists neglect certain features of copyright law, such as fair use, the distinction between idea and expression, and the parody exemption, which mitigate the costs of copyright. Finally, we present data that counters a common claim that copyright extension so far out in the future can have little effect on creativity. The small fraction of books that have the majority of commercial value when they are new appear to remain valuable for periods of time that are consistent with the expanded term of copyright under CTEA.

Causes and Consequences of Market Leadership in Application Software

This paper examines several software markets in the hopes of testing various hypotheses that have been put forward in the literature on network effects. Our primary interest focuses on the possibility of lock-in by inferior products due to network effects. We also examine whether or not these markets provide evidence for winner-take-all results and tipping. We use a case method approach, examining product quality, market shares and prices in the context of major software application markets. We find no support for the lock-in hypothesis, no support for tipping, but support for winner-take-all. It is unclear, however, whether this winner-take-all result is due to network effects or other factors such as instant scalability or economies to scale. We also find that price seems to be play an important role in generating market share only in consumer markets. As a by-product of this work we are able to examine Microsofts track-record in these markets. We conclude that Microsoft has followed a low price strategy, more so after they have achieved large market shares than while they were attempting to wrest market share from other firms.

Monopolistic Competition and Multiproduct Brand Names

The excess-capacity theorem pertaining to monopolistic competition implies a trade-off between variety and cost. This article shows that the excess-capacity theorem does not hold if firms market several products under a single brand name and if marketing efforts spill over from one product to another. The argument of the article requires that selling efforts not be prejudged to be wasteful or redundant, a position adopted and defended in Harold Demsetzs writing on monopolistic competition. Within that framework, the article constructs a counterexample to the excess-capacity theorem. Copyright 1989 by the University of Chicago.

Path dependence and lock-in

Since their first emergence in the work of Paul David thirty years ago, the dual issues of Path Dependence and Lock-In have become critically important subjects in the fields of economics, sociology, and business strategy. Theoretical and public policy debates on these issues have arisen, addressing whether markets consistently choose the best products. This collection presents each side of the debate, bringing together key publications that initiated this literature with the later works that criticize or defend many of the early claims. Both the theoretical and empirical foundations of Path Dependence and Lock-In are examined along with the role of network effects. An original introduction by the editors is included to situate each article in its wider context.

The Profits of Infringement: Richard Posner v. Learned Hand

Owners of infringed trademarks and copyrights can be awarded the defendants profits from the infringement. The statutes are silent on the definition of profits, and the federal Courts of Appeals split on how profits are computed. In the Second Circuit, a 1939 decision written by Judge Learned Hand establishes a practice of allocating a portion of the infringers overhead to the costs of infringing production. In the Seventh Circuit, the controlling case, written by Judge Richard Posner, stipulates that only costs that vary as a consequence of infringement may be considered in computing profits. While the variable-costs-only rule would appear to reflect the teaching of economics, the correct rule would credit the defendant for the incremental opportunity cost of the infringement. Because the use of fixed facilities for infringing production will generally foreclose other opportunities, a variable-cost-only rule will not reflect the true incremental costs of infringement. A rule that allocates the costs of these assets cannot precisely reflect the opportunity cost of using them, however the optimization condition that determines the firms use of these assets implies that on average, marginal factor costs will equal the value of their marginal product, which is to say their marginal opportunity cost. Consequently, an allocated-fixed-cost rule provides a reasonable proxy for the incremental costs of infringement. Thus Judge Hands rule provides a suitable implementation of Judge Posners economic principle.