Microsoft: On Anti-Trust and Monopolies

Microsoft: On anti-trust and monopolies

(or How A Linux User Can Court Ostracism)

Introduction

In 1890, the US Congress passed the Sherman Act. Further, the Clayton Act was enacted in 1912. This was followed by the Robinson-Patman Act of 1936. These antitrust laws prohibit agreements in restraint of trade, monopolization and attempted monopolization, anticompetitive mergers and tie-in schemes, and, in some circumstances, price discrimination in the sale of commodities.

Thus, the goals of a free market controlled by individual choice and individual action were codified. Monopolies, cartels and discrimination were outlawed. Truly free markets mean more competition, more goods, more choices, lower prices and enhanced product quality. These are the result of individual initiative and Adam Smith's "invisible hand".

It is often said that the goal of every vigorous competitor is to achieve a monopoly and reap the resulting profits. While this may be true, the antitrust laws are not intended to punish successful companies simply because of their success or large companies simply because of their size. Because we want consumers to get the best for the least through the free market, only conduct that excludes competitors, stifles innovation, limits supply or raises prices is prohibited. Obviously, monopolies that are obtained by unlawful means are not allowed. But monopolies that are lawfully obtained, such as those with superior products, prices or management, are only liable if they abuse their monopoly power and exclude, stifle or limit competition. The current Microsoft case raises all of these issues.

The Case against Microsoft

Quite frankly, the fact that Microsoft has come to dominate such an important market is a bit unpalatable. Generally, that type of domination, however obtained, tends to reduce technological innovation, consumer choice and competition. However, we now come to the most crucial question, which can be summed up in two words: define monopoly.

Did (and does) Microsoft indeed hold monopoly power? A monopoly is a situation in which a single company or group owns all or nearly all of the market for a given type of product or service. By definition, monopoly is characterized by an absence of competition - which often results in high prices and inferior products. For a strict academic definition, a monopoly is a market containing a single firm. A real-world monopolist does not have or need 100% of the market. He needs enough market share to be able to distort the free market in a way that adversely affects competitors. The reason, of course, is that society is not homogeneous and so a high market share plus other technological factors creates local monopolies in one market or section of a market. So it will be interesting to see what the courts took into account while delivering the initial judgment against Microsoft, declaring it a monopoly guilty of abusing its position.

* Defining the relevant market

Microsoft Windows was said to hold over 90 percent of one particular market, namely, the market for operating systems used in Intel-compatible PCs. Other forms of operating systems - such as those used in hand-held computers, Apple Macintoshes, network computers connected to other machines, or servers for hosting Internet sites - were judged by the courts to constitute separate markets and thus to offer no competition. This is a necessary distinction, for if the relevant market had been defined as operating systems for all computing devices, Microsoft would be just another player in an actively competitive world.

* Barriers to entry

Any operating system is made stronger by the number of applications available for it - the higher the number, the more popular the system will become, and thus the more likely a system will be to preserve its strength by developing still more applications. And this in itself constitutes a barrier to competitors trying to enter the market.

* "Switching costs" and "lock-in"

Programs for one operating system will not run on another, which means that a consumer wishing to switch to a different operating system will have to purchase all-new software and perhaps even new hardware. Such "switching costs" are high, with the consequence that consumers are effectively "locked-in" to Windows.

In sum, Microsoft (in the courts' view) dominated a market the boundaries of which prevent competition from entering and consumers from leaving. This in turn means that, unfettered by competition, Microsoft did not need to succeed on its merits; it could charge a price for Windows higher than if it had to respond to competition.

The Case for Microsoft

Still, the possession of these attributes merely made Microsoft a monopoly - Microsoft would be in violation of antitrust law only if it misused that power, by engaging in an illegal form of "exclusionary conduct" to protect or extend that monopoly. This, in fact, was the burden of the accusation