Chapter 25: 357-359

Netscape was not happy with the outcome of their rivalry with Microsoft and filed a lawsuit. This was a much different lawsuit than the one IBM filed against Microsoft years earlier. This time, Microsoft was caught red handed. Java and Netscape were able to provide documents that showed Microsoft’s illegal activity. This was bad news for Microsoft, a company with hardly any presence in Washington and no experienced lobbyists. The result of this case: Microsoft was found guilty of violating the Sherman Antitrust Act and was forced to divide up its company. To explain how the company was to be divided, Paul Romer was brought in due to his recent theory on how “incentives in the marketplace determined the rate of technical change.” Even without Romer’s theory it was common sense that competition in the market place would stimulate innovation. In the end, Microsoft was divided into two parts, a sector that supported the operating system and a sector that pursued various applications. And while one cannot precisely measure the magnitude of this breakup, economists assumed increased innovation around the world.