CSE Foundation Background on the Microsoft Antitrust Case

The Issue: The Department of Justice has accused Microsoft of anti-competitive behavior for allegedly using its operating system, Windows, as leverage to dominate the market for Internet browsers.

CSE Foundation’s Position: Although Microsoft has integrated a browser into its operating system, this does not mean that the company is a monopolist engaged in anti-competitive behavior. Computer prices are falling, there is no consumer harm, and any remedies imposed by the Department of Justice would lead to government regulation of one of the most dynamic sectors of the U.S. economy.

Reasons Why the Government Should Not Interfere with the Software Industry

The computer industry is fast-paced and dynamic. Hardware and software companies are constantly innovating to provide consumers with low-cost, yet highly productive, products. Requiring Microsoft, or any other software company, to jump through government hoops before it can release new products will only slow innovation and harm consumers.

Because there are no barriers to entry, Microsoft’s market share may be better viewed by the fact that the firm is an aggressive competitor—not a monopolist—that has gained its market share by providing consumers what they want at affordable prices.

In an open market, virtually any software company must be viewed as a potential competitor. Without a true barrier to entry, Microsoft is hard-pressed to exercise an monopoly power. There are numerous alternatives to the Windows operating system, including Apple’s Macintosh, IBM’s AIX, Sun’s Solaris and even the popular freeware Linux. In addition there are many Internet browsers available in the market as well, including at least a half-dozen that can be obtained free.

Microsoft’s main competitor—Netscape—is a key beneficiary of the government’s case against Microsoft. One remedy sought by the Department of Justice is to require Netscape’s icon to be placed on the Windows desktop. This, despite the fact that the company’s merger with America Online has created a company worth $14 billion with 15 million on-line subscribers. In fact, Netscape’s CEO Jim Barksdale stated that he expects to distribute more than 159 million copies of its browser. That’s more than twice the number of people currently surfing the Internet.

The government’s case is more about corporate welfare than protecting consumers. The market for computer products is intensely competitive, which has kept prices low while quality has been increasing. Facing tough competition from a competitive rival, some firms are going to the government to get what they can’t get in the marketplace.

Government regulation and the wheels of bureaucracy cannot keep pace with the rate of change in the computer industry. Federal regulators cannot second-guess a market as dynamic as the software industry. Today’s computers have far more capabilities than a similarly priced computer purchased only last year. Many of today’s products and applications were virtually unknown a year ago.

Microsoft is not driving everyone out of the market through low prices so they can raise prices later and gouge consumers. This tactic, known as predatory pricing, is not feasible and the courts have become skeptical of predatory pricing claims. Microsoft would have to sell below cost until all rivals are driven from the market before it could raise prices. But without barriers to entry it is impossible to raise prices, because higher prices would attract companies back into the market. It’s all too easy to claim your rival is undercutting the market instead of making a better mousetrap.

Path dependence and network effects are weak arguments that lack empirical support. These arguments are used to demonstrate that Microsoft can behave like a monopolist even without barriers to entry. As more and more people become part of a network of users, it becomes more costly to switch, which allegedly creates monopoly power. However, consumers have made significant shifts in the past, as in the transition from vinyl records to compact disks. These theories offer little explanatory power for consumer behavior in the real world.

Without identifiable barriers to entry, the government’s only solution is to become an arbiter of acceptable products and business practices in the software industry. Proposed remedies such as the break up of Microsoft into several companies, forced licensing of the source code to Windows, and the divestiture of Microsoft are fraught with difficulties that would harm consumers by destroying the incentive to innovate and making it difficult to bring new products to the market. While Microsoft’s competitors may see a short run gain in such policies, they offer nothing to benefit the consumer.

It is premature to talk about remedies when no consumer harm has been demonstrated. Economic regulation bears a heavy burden of justification, which has not been met.