Virginia Postrel makes some interesting points on Microsoft, Chicken Delight and Antitrust Policy, drawing on the work of Paul Joskow. Postrel argues that transactions cost analyses will often give different answers to the game-theoretic approaches that dominate modern literature on industrial organization. She is reasonably convincing in her defence of Chicken Delight, a franchise operation that required franchisees to buy all supplies from the parent company, a requirement that was found to be an illegal tie-in. She says:
“But, Professor Joskow notes, the franchisees didn’t have to sign up with Chicken Delight in the first place. There was plenty of competition. ”
But this argument, and transactions cost economics, go the other way in the case of Microsoft. Microsoft does not have anything like “plenty of competition” And, given sufficient market power, the deliberate creation of even modest transactions costs (e.g. of switching web browsers) can from the basis of big monopoly profits.
The same thing was seen in the California electricity crisis where market power came from the fact that demand was almost totally inelastic (unresponsive to prices). Hence, Enron and others could make big profits by creating and relieving, spurious congestion.