marketplace. They were reduced to compelling third parties not to distribute Netscape’s browser so as, in the words of one Microsoft marketing manager “not to lose all those side by side product comparisons.”

A very important lesson here for competition policy is that not only innovation but also competition come from unlikely sources. The best in the world – and Microsoft really is that, in many ways – at the established business can still be inferior, not only in innovation, but also in implementation, to a startup. Most of the startup’s advantages came from its head start. In innovation, the ability of a particular firm to move the economy forward is a valuable part of innovative capacity.

Another important lesson is about incentives. When challenged by an innovative technology, an incumbent can gain very valuable incentives from competition. Microsoft’s rapid turn to the Internet, and its investment of tremendous resources in Internet technologies, is an example of that. An incumbent firm can also gain the incentive to prevent the competition, which is an incentive not in society’s interest. That is a reason competition policy should pay attention.

### 3. d) Emphasis on the Outcomes and Innovation Incentives

There are two important outcomes from the browser war and the related pattern of anticompetitive acts in the late 1990s. The one that is emphasized for the Microsoft case itself is the continuation of the Windows monopoly in place, especially the continuation of high entry barriers. The other, less emphasized there but very important for policy purposes, is the impact on innovation incentives.

The success of the Netscape browser than the Microsoft one would have lowered entry barriers. It would be far easier for an entrant – such as Linux – to attempt to compete against Windows on individual end users' PCs. While we can be quite certain that, absent Microsoft's violations, entry barriers would have fallen, there is no guarantee that entry would have succeeded. What competition policy should do is support that entry going forward and see if it succeeds. Yet competition policy should not hope that it succeeds. It should form a level playing field, to the extent possible, and let competition go forward.

If Microsoft had not violated the law, or if an effective remedy had been put in place at the end of the Microsoft case, entry barriers into the operating system market would be far lower. That would benefit society by making a level playing field for operating system entrants. The level playing field would improve consumers' position in two ways. First, it would give them more of a choice in the operating system market, where there is now an incumbent protected by high entry barriers. Second, it would give much stronger innovation incentives to incumbent Microsoft. The threat of entry from Linux on the desktop would, for example, have given Microsoft far stronger incentives to provide decent security in its software. We now suffer from computer viruses (and all the other species of ills) to an elevated extent because Microsoft did not have those incentives.

A second point about innovation incentives comes in the market for complements to the existing monopoly. One of those was the browser. Microsoft now earns the economic return to the browser, for its browser is the dominant one. Yet it was others who invented and commercialized the browsers. Microsoft’s successful expropriation of the economic return to the browser, which stems from its monopoly power in the