On Apr. 3, the first day of trading after news broke of the collapse of settlement talks in Microsoft's antitrust case, the software giant's stock plunged nearly 15%. The fall pushed the Nasdaq composite index 8% lower as other technology stocks also suffered losses.
All of which raises an interesting issue: If Microsoft has harmed other companies and consumers by inhibiting competition in the computer industry, as the government and rivals have charged, how has the stock market reacted as the longstanding antitrust case against Microsoft has progressed?
That's the question addressed by George Bittlingmayer and Thomas W. Hazlett of the University of California at Davis in a study in the current Journal of Financial Economics. According to its critics, Microsoft gained monopoly status in operating systems and application programs not by simply competing aggressively, as it claims, but by predatory behavior that stifled its direct competitors and the computer industry in general.
Notwithstanding Microsoft's legal setbacks, the authors note that experts and economic theorists remain highly divided on the case. The stock market, however, is a kind of impartial arbiter--reflecting the judgments of millions of investors regarding the economic consequences of both Microsoft's behavior and the government's actions. Thus, you might expect Microsoft's antitrust woes to boost the shares of its alleged victims, even as its own stock takes a hit.
To explore this idea, the authors analyzed investor reactions to 37 antitrust actions affecting Microsoft from 1991 to 1997--29 clear setbacks for the company and eight victories. In each case, they looked at how both Microsoft's stock and an index of 159 other computer-related companies moved relative to the market during a three-day period starting the day before the news hit the stands.
The results were intriguing. While reports of Microsoft antitrust setbacks sparked an average market-adjusted decline of 1.2% in the company's price, they were also accompanied by a 0.53% drop in the computer industry index--an average loss of $1.2 billion per event. And computer industry stocks rose 1.15% at the news of Microsoft's antitrust victories, as Microsoft's stock shot up 2.3%. In other words, the shares of computer industry companies--Microsoft's alleged victims--moved in tandem with its own shares.
Does this mean that investors accept Microsoft's view of its actions? Not necessarily. Rather, as the authors note, it reflects market judgments about how antitrust enforcement will affect the future profitability of the industry.
"It's a fine point," says Bittlingmayer. "Although some investors may think Microsoft engaged in anticompetitive behavior, most believe that the whole technology boom has been fostered by the absence of government regulation. And apparently they have little faith that the government can intervene in an efficient way--especially when the computer market is changing so rapidly."