Market failure is a slippery economic term, covering instances where markets are inefficient or missing altogether, i.e. the consumer pays over the odds or cannot obtain a desirable good. Bärwolff argues convincingly that a combination of intellectual property rights and contractual licensing strategies have enabled Microsoft to exert a hold on the personal computer and server market that has led to welfare losses through the appropriation of monopolistic rents, licensing and enforcement costs, and the obstruction of superior technologies.
Bärwolff offers a detailed and sustained analysis of the economic literature on markets in information goods, and software in particular. It is one of the major achievements of the paper that it succeeds in condensing critically the main economic arguments on transaction costs, information costs and network externalities in a language accessible to lawyers and policy makers. The paper is equally good on explaining the technological and institutional peculiarities of the open source movement which has resisted economic analysis: marginal costs of open source products are close to zero (under Richard Stallman’s General Public License (GPL) digital copying is encouraged, not piracy), and open source developers appear in some ways immune to the profit motive, cooperating in strange non-contractual relationships. The paper also reports three exploratory empirical studies about expert and consumer perception, and product availability of the open source operating system Linux.
Bärwolff reminds us that property rights are the result of social choices, not naturally given. He concludes that there is no evidence that a more competitive market structure facilitated for example by a legal requirement to open application programming interfaces (API) would inhibit software innovation or reduce investments.
Martin Kretschmer
