Should Government Help the Tortoise Beat the Hare?

The past year has seen Microsoft make headlines across the country, and not just for its new and innovative products. The software giant has found itself the target of an antitrust case by the Department of Justice in conjunction with a number of state attorneys general. The government claims that Microsoft is acting anti-competitively by using its operating system, Windows, as leverage to dominate the market for Internet browsers. However, the government case ignores the fact that computer prices are plummeting and innovation is booming. Consumers can now educate themselves, shop, and even plan their next vacation through their computers. In a situation where prices are falling and consumer benefits are increasing, what is Microsoft’s crime? After assessing the dynamics of the marketplace, South Carolina’s attorney general, Charlie Condon, dropped out of the case against Microsoft stating, “Innovation should be left to entrepreneurs, not to government bureaucrats or to the courts.” Indeed, it is hard to find the benefit to consumers of giving the people who brought us snail mail responsibility over the information superhighway.

The government is supposedly attacking Microsoft to protect us, the consumers. Fact is, the government’s case is more about corporate welfare than protecting consumer interests. The market for computer products is intensely competitive, which has kept consumer prices low while quality has been increasing. In real terms, the price of Microsoft Windows has fallen, and it will continue to fall if the government does not interfere with Microsoft’s plans to integrate a browser in the program’s latest version. Facing tough competition from an aggressive rival, some firms are going to the government to get what they can’t in the marketplace. Ironically, the government’s remedy would increase the cost of surfing the Internet.

Having federal regulators try to second-guess the future of the computer industry is a recipe for disaster. The computer market is perhaps the most dynamic sector of our economy. Today’s computers have far more capabilities than a comparably priced computer purchased only last year. And many of the products and applications available today were virtually unknown a year ago. Government regulation and the rusty wheels of bureaucracy cannot keep pace with the rate of change in the computer industry. Consumers are better served in a competitive market, where rival companies stand ready with their products whenever a firm – even a dominant firm – attempts to gouge consumers. After all, who is better at keeping McDonald’s prices low and quality high – federal regulators or the Burger King across the street?

Critics allege that Microsoft is engaged in predatory pricing and that once it drives its competitors out of the market it will start gouging consumers. They fail to acknowledge that predatory pricing is not a successful strategy. To make it work, the predator must sell its products at below-cost prices until some point in the future, when all rivals are driven out of business and the predator can start acting like a monopolist and raise prices. The problem is that there is no guarantee that other firms will be driven from the market. And if they are, there is always the potential for new firms to enter the market any time the monopolist tries to raise prices to recoup its losses. Economic research has failed to identify predatory pricing in the marketplace, and the courts have become skeptical of predatory pricing claims. It’s all too easy for a company to claim that an aggressive rival offering consumers innovative products at prices they can afford is undercutting the market. Instead of creating a better mousetrap, the company can then cry foul and turn to the government for protection.

There are those who would have us believe that Microsoft Windows is a monopolist because it has an 80 percent share of the market for operating systems. But it is important to distinguish aggressive competition from monopolistic behavior. There is no doubt that Microsoft is the dominant figure when it comes to operating systems, but that market share came about by providing consumers with a superior product. There are scores of other operating systems, including Apple, IBM, and Xerox. Should Microsoft stumble, or attempt to gouge consumers, each of these companies stand ready to increase their share of the market.

Microsoft was an unknown and IBM was the giant threatening to control the industry twenty years ago. Microsoft saw a different vision of the future and now looms larger in the computer industry. Its rivals are now looking to the government instead of the market as a source of revenue. Because there are no barriers to competition, Microsoft’s fortune can change at any time. The recent merger between America Online and Netscape has created a $4 billion company with 14 million online subscribers, adding a new twist to an already dynamic market. Asking the government to step into this fray to “level the playing field” is akin to forcing the Chicago Bulls to give up Michael Jordan because they win too often.