The Microsoft antitrust case and its regulatory impact

Microsoft

At the core of the antitrust allegations against Microsoft was the idea that the company had used its near-monopoly position in operating systems to eliminate competition in other product categories as well. The current antitrust laws allow for firms to earn monopolies, so the domination of Windows was not at issue, but rather the exploitation of Windows to help Microsoft gain monopolies in other software categories such as word processor software and browsers (McCullagh, 2000). The judge in the case ruled that Microsoft's bundling of browser software with Windows in particular violated the current antitrust legislation.

There is little doubt that Microsoft was trying to gain monopoly power in other software by leveraging Windows. The inclusion of a free browser was something that would discourage consumers from seeking out other browsers, especially ones that they would have to pay for. There are considerable advantages to having a monopoly in an industry, compared with a duopoly. For Microsoft, a duopoly in word processors and browsers meant that the company had to spend more on marketing and product development, while charging less to customers. If the company could gain a monopoly, it would be able to charge either end consumers of the OEM manufacturers more for those products, and would have less incentive to spend on product development. The end result would be a significant increase in profits by leveraging the ability to gain monopoly rents. One concern of the justice department was that a condition of x-inefficiency would exist in software should Microsoft be able to capture a monopoly, in part because the company would have less incentive to innovate or to produce at a lower price -- the market required competition in order to induce efficient production. This would create a deadweight loss to society.

It is worth considering that none of this software constitutes a natural monopoly, so Microsoft did not attempt to use that as a defense for its actions -- we can see today in mobile there are multiple competing operating systems much less other forms of software like browsers. It is also worth noting that as time moves forward there is less of a downward sloping demand curve in software. This means that the demand for browsers is less likely to decline as price increases over time, as more people go online and the technology becomes ubiquitous. If there was a downward sloping demand curve, the monopoly firm would be prevented from increasing prices infinitely because it would lose customers doing so. The worry was that as the demand curve flattens, Microsoft would simply earn more profit from its monopoly position and thus consumers needed protection.