When it comes to bouts between government antitrust authorities and
the heavyweights of high technology, few people have a better
ringside seat than University of California at Berkeley business
professor Carl Shapiro.
Shapiro sits right at the center of action in this year's two most
celebrated antitrust cases. He is advising Intel Corp. in its defense
against the Federal Trade Commission and helped lead the Justice
Department's investigation of Microsoft from 1995 to 1996.
More important, Shapiro, 43, is one of a handful of academics who
have reshaped the theory and practice of antitrust enforcement in the
technology arena.
Shapiro is respected enough on both sides of the fence that even
as he represents Intel against the FTC, he is scheduled to testify in
court today for the FTC against the proposed mergers of four
pharmaceuticals distributors.
``He's an enormously creative guy,'' said Gary Reback, a Palo Alto
attorney who represents high-tech companies. ``He has become in
antitrust circles one of the top testimonial economists. He has an A+
mind.''
Attorneys who have opposed Shapiro's positions offer the truest
testament to his reputation. Microsoft attorney Rick Rule, who headed
the Justice Department's antitrust division from 1986 to 1989, said
``even though I disagree with him on (the Microsoft case), he's
certainly one of the 10 economists that I as a lawyer'' would hire as
an expert witness.
Those who have worked with Shapiro say they are as impressed by
his charm and unassuming personality as his brilliant intellect. Two
of his passions are Ultimate Frisbee and ``Star Trek.'' ``My wife
always says you'd never guess Carl went to MIT,'' said Shapiro's
colleague at UC Berkeley, Michael Katz.
Shapiro is a leading exponent of the ``post-Chicago'' school of
antitrust theory, which rejects the influential view of some scholars
at the University of Chicago that market forces alone can protect
consumer interests without antitrust remedies.
But Shapiro is equally critical of what he calls ``mushy
populism,'' the view that ``business is suspect'' and ``big is bad.''
Shapiro, a math whiz in college, switched to economics in graduate
school at MIT to apply his skills to the real world -- following in
the footsteps of his father, who taught money and banking at Notre
Dame and the University of Illinois.
Shapiro joined the faculty at Princeton University, where he met
Katz, who had been a classmate of Bill Gates at Harvard. Intrigued by
the glamour of the software industry, Katz and Shapiro began studying
how firms in that sector wield monopoly power through the creation of
standards.
In a landmark 1985 article, Katz and Shapiro coined the term
``network effects'' to explain the rise of firms like Microsoft. The
term came from network industries like telecommunications, where the
value of telephone service depends on how many other people are on
the same network.
The theory strongly influenced antitrust analysis in technology
markets. In its latest suit against Microsoft, the Justice Department
said the company's market power was ``magnified and reinforced by
`network effects.' . . . The more users a particularly operating system
has, the more applications software developers will write for that
operating systems; and that, in turn, will make the operating system
more attractive to more users. . . . These network effects give
Microsoft a tremendous advantage.''
Katz and Shapiro's analysis wasn't lost on Microsoft, either. As
Bill Gates told the Harvard Business School in 1994, ``We look for
opportunities with network (effects) -- where there are advantages to
the vast majority of consumers to share a common standard.''
Katz and Shapiro pointed out that standards bring tremendous
rewards to consumers -- as well as to the monopolists who profit from
the standards. But other scholars warned about the power of network
effects to ``lock in'' inferior technology and retard innovation -- a
charge repeatedly thrown at Microsoft.
Shapiro takes a middle road: He sees merit in many Microsoft
products but faults the company for trying to protect its hold on the
operating system market through exclusive contracts with Internet
service providers and computer makers.
Shapiro's critique of Microsoft stands in sharp contrast to his
defense of Intel, which has even an greater share of its own market
for microprocessors.
Shapiro's reasoning: Intel faces stiff competition from AMD and
National Semiconductor, resulting in rapidly falling prices for
consumers.
Shapiro notes that Intel's withholding of chip secrets from
companies such as Intergraph and Digital Equipment, although
condemned by the FTC, was aimed at protecting Intel's intellectual
property, not restricting competition. No one can find consumers who
have been harmed, he says.
Shapiro, who charges Intel $490 an hour for advice, insists that
he doesn't switch positions just to please a paying client.
``I turn down about half the calls I get because I'm too busy,''
Shapiro said. ``This gives me the luxury of picking cases on two
criteria: Is the position they are likely to want something I believe
in, and is it interesting?''
Antitrust economist and Forbes magazine columnist Peter Huber
said, ``He has an immaculate reputation. He's up there in the top
tier, for both intelligence and his reputation for working only on
things he believes in.''
Indeed, it's hard to find anyone who doesn't like or admire
Shapiro. But his toughest intellectual critics score points in noting
that his theoretical work offers little policy guidance as to when
antitrust authorities should step in to curb high-tech monopolies.
Katz and Shapiro acknowledged as much in a 1994 article, when they
conceded, ``We are far from having a general theory of when
government intervention is preferable to the unregulated market
outcome.''
