Microsoft's antitrust investigation and monopoly power in software

MSFT Monopoly

The Microsoft antitrust case was based around three premises -- that Microsoft monopolized the market for operating systems, that it monopolized the market for browsers and that it bundled its browser and operating system in order to use its market power in operating systems to control the market for browsers. The company was also accused of having illegal agreements with channel partners to keep Netscape's browser out of the market (Economides, 2001).

I believe that Microsoft was trying to gain monopoly power in the industry. However, under the Sherman Act, firms are only forbidden from gaining monopoly power by "improper means." In the case of operating systems, Microsoft was able to succeed on the strength of its product. The browser issue is more complex, and it appears that the practice of bundling Internet Explorer discouraged consumers from buying Netscape Navigator. Although the wording of the Sherman Act is vague, this could easily be construed as "improper means."

Microsoft undoubtedly wanted monopoly power in both products, but was unable to gain monopoly in browsers because its product was roughly on par with that of the competition, something that could not be said of operating systems at the time. The reason the company wanted to gain a monopoly is because the pricing power under a monopoly is better than under conditions of competition. Indeed, the DoJ was able to force Microsoft to unbundle its browser from Windows, and today the browser market is much more free. With competition limited to a handful of browsers, however, consumers no longer have to pay for a browser at all, which is precisely the opposite of what Microsoft had wanted to accomplish. The company still has a dominant market share in operating systems and maintains its ability to earn high rents for Windows.

Monopolies are not always bad. There are some instances, such a natural monopoly, where it is simply easier and cheaper to have a monopoly. Industries such as military, police or power distribution infrastructure come to mind. There are also instances where monopolies that are not natural have been demonstrated to be superior for consumers. One example is the insurance industry, where examples in Europe have shown that the absence of marketing expenses or profit-taking have allowed government-run insurance companies to offer better coverage for less (Epple & Schafer, 1999). There are specific conditions that allow for this to happen, including information asymmetries between the companies and the consumers. Where competition should result in a downward sloping price curve in insurance, the fact that consumers have very little understanding of the product allows firms in the industry to overcharge, which combined with the cost of competing delivers inferior outcomes to consumers.

In the Microsoft case, there was little doubt that the bundling was a detriment to consumers and if Microsoft had been able to gain a monopoly in browsers it would have extracted higher rents for its browser and likely would not have made many improvements to it. A competitive environment has benefited consumers -- this is not an example of an industry where a monopoly is either natural or better for the consumer.