Microsoft antitrust case and monopoly power in software

Microsoft Monopoly

Why was Microsoft investigated for antitrust behavior?

In the eyes of some legal analysts, Microsoft was investigated and taken to court over antitrust allegations because of the belief that it would not live up to its own word about what it intended (McKenzie and Shughart, 1998). There was little doubt about the fact that by the mid- to late-1990s Microsoft had virtual control over the operating system (Windows) that it had created to operate the vast majority of personal computers, and that it was trying to control how it packaged its favored Internet access portal (Internet Explorer, IE). Even Microsoft knew that it had a privileged position. That was why it agreed in 1995 to a consent agreement that had two basic provisions. One being that Microsoft would not require that buyers of its Windows operating system to separately purchase and install other stand-along components (which presumably meant independent versions of Internet access programs like IE). Under a second condition, however, the company could still sell "integrated" (or bundled) components that, in this case, would make Windows and IE two parts of a single package. To the Justice Department at that time, selling an integrated package was acceptable; exercising virtual access through other methods like requiring independent purchases, on the other hand, would result in a form of "imperfect competition" and allow Microsoft to be a "price maker" and market controller -- or basically a monopoly demanding antitrust enforcement.

The debate since that time has centered on whether Microsoft live up to its word. According to many experts, Microsoft did not; in fact, it went out of its way to find methods of getting around the issue to its own advantage. As McKenzie and Shughard (1998) set up the dispute at the time:

Therefore, the resolution of the issue hinges on the precise meaning of 'integrated,' that is, on how much mutual interdependence must exist before Windows and Internet Explorer are deemed to be 'integrated.' To what extent does Internet Explorer rely on the code built into Windows, and vice versa? Can Internet Explorer be 'uninstalled' without compromising the operation of Windows?

Microsoft clearly acted in a way that confirmed its message that it was not a monopoly. It went into an extraordinary competitive mode to the point where it not only took on and destroyed its major opponent (Netscape), it actually undertook strategies of giving away for free its IE package with Windows (Beatie, 2011) to circumvent the legal requirements. Their essential argument was that there were other options (such as Unix, Linux, and Macintosh) for those who wanted them, and therefore Microsoft needed to do what it was doing to protect its own place in the economy. To them, it was the nature of their business to build a product that others would have to pay to use because they have the technical ability to make a good quality protect. Taking the steps to make it difficult for consumers -- who were becoming savvy in their own ways -- to be able to undo the software independently was effectively just a good, competitive business strategy. This was hardly a situation of imperfect competition for either businesses or consumers.

But the question remained: Was Microsoft trying to gain monopolistic power?

The answer appears to be found in the end results of the legal actions. Microsoft was found guilty of monopolistic tendencies by the U.S. courts (McKenzie and Shughart, 1998), and later it would submit to stopping some of the very same practices in Europe, primarily so it would no longer have to pay multi-billion dollar fines (Wauters, 2009). And for consumers, this has resulted in markets are that able to encourage and support stand-alone software and associated technologies independent of Microsoft's products. Or put another way, the court challenges did what antitrust activities were supposed to do: change monopolistic practices.

Whether Microsoft was trying to be monopolistic in actuality or just harshly competitive is difficult to tell. They would deny that they were a pure monopoly. They were not the only business in operation selling the systems. There were other options available, and even more in the making. The prices of the goods were set by competition and whatever barriers existed occurred from the need for them to protect the product not the market. Yes, the company engaged in rent-seeking behavior, but this did not bring about a "deadweight loss to society." Just the opposite, actually: its behavior inspired innovation and opportunity for a market and a sector that was in its formative stages. There was no x-inefficiency factor but instead there were a number of efficiency factors at the time that were just beginning to be understood and Microsoft had the ability to use those factors for the benefit of the consumer in the long-run. It was even possible for them to show the positive impacts of their economies of scale by demonstrating that it was smart consumers who would benefit from their lower prices, which would bring about real profits that could be used to make the sector even better.