Microsoft Antitrust Case and U.S. Monopoly Policy

Introduction: Microsoft and the Monopoly Debate

The question of whether Microsoft constitutes a monopoly is a genuinely controversial one. Within the company and among its shareholders, most assert that Microsoft's business practices are hardly monopolistic and that it is simply "popular." However, many outside observers are convinced that the term "monopoly" should have Microsoft in its dictionary definition. As Ralph Nader pointed out in a 1998 ComputerWorld interview, "Microsoft's claim that it is defending its right to innovate is a cruel joke in an industry that sees its best innovators attacked by the company's anticompetitive actions." He added, "Microsoft's agenda isn't innovation — it's imitation, as well as the imposition of suffocating control over user choices and an ever-widening monopoly."

When one considers the legal definition of a monopoly, Microsoft does seem to fit the description in several conspicuous ways. The main characteristic of any monopoly is exclusive control over a business activity, service, or commodity. Microsoft's 90–95% market control of computer operating systems represents that kind of exclusivity quite clearly. Even so, significant questions remain as to whether its market dominance has been actively used to restrain trade and block market entry by other software inventors, companies, and producers.

To answer these questions, one must examine the government's position on the matter. Moreover, because one key factor in determining whether a company is monopolistic is whether it causes harm to consumers — by reducing output and raising prices — one must also consider whether such harm has in fact occurred.

The DOJ Case and Court Rulings

The background of the Department of Justice case — brought in cooperation with twenty U.S. states — began in 1998 with an investigation that culminated in a preliminary ruling on November 5, 1999, finding that Microsoft did hold monopoly power. In the ensuing court battle, a 2000 decision by Judge Thomas Penfield Jackson ruled that the company's domination of the operating system market not only constituted a monopoly, but that Microsoft had used its resulting power to suppress competition and harm consumers. He further proposed a remedy that alarmed both Microsoft executives and investors: the company should be broken up into two separate entities — one for the operating system and one for software products.

To the frustration of many, and the relief of some, the remedy portion was overturned due to allegations of personal bias on the part of Judge Jackson. The core findings concerning Microsoft's monopolistic nature, however, remained largely intact. Under the subsequent Bush administration, the Department of Justice decided to pursue lesser antitrust penalties and settled the case with remedies that many in the industry characterized as "a slap on the wrist."

The DOJ charged Microsoft with several specific antitrust violations. In simple terms, these included the monopolization of the operating system market, "hard-wiring" its web browser into that monopolized operating system in an attempt to eliminate competition, and using its considerable market power to forge anti-competitive agreements with other companies producing comparable products.

Opposing Views on Microsoft's Market Power

It is important to note that some independent observers do not support the government's characterization of Microsoft as a monopoly. For example, many cite the fact that roughly 10% of the Intel-compatible computer market does not use Microsoft's operating system, that Apple successfully sells its Mac products, and that other operating systems — OS/2, for instance — do exist and are actively used. These facts, they argue, are clear evidence against a true monopoly. Furthermore, although Microsoft held its prices down (some say artificially, in order to capture exclusive and dependent market share), critics of the monopoly label point out that this is simply not stereotypical monopolistic behavior. When Microsoft did eventually raise the price of its operating system, it lost substantial market share — presumably to competing products.

Interestingly, many of Microsoft's direct competitors are themselves ambivalent about labeling the company a monopoly. Acknowledging that Microsoft holds a monopoly would, by implication, suggest that those same competitors have no meaningful market share or power — which would raise questions about their very existence. Nevertheless, the vast majority of these companies welcome DOJ action because it opens the market to greater involvement through outside oversight and regulation.

Perhaps the most telling aspect of the case is that many non-competing individuals and entities also support the claim that Microsoft is a monopoly. This broad, disinterested consensus points more strongly than any other indicator to the possibility of genuine public harm. Even foreign governments took notice: in August 2003, China's government introduced a policy requiring all government ministries to purchase only Chinese-produced software at the next upgrade cycle, explicitly intending to break Microsoft's dominance on desktop computers by removing Windows and Office from hundreds of thousands of government machines.

Conclusion

Microsoft has been found to be a monopoly in that it both controls the market share of the operating system market and harms consumers by preventing access to other products, reducing innovation and competition. Although one cannot make a compelling case that any single component in isolation constitutes a monopolistic practice — the operating system's prices, for example, have remained comparatively low — as part of a greater plan to dominate the market, the cumulative case is solid. The penalty imposed on Microsoft is hardly extreme, but it will serve as both a model to avoid and a precedent to watch in the future.

End Notes

Bill Gates, The Economist, 6/13/98

Ralph Nader and James Love, ComputerWorld, 11/9/98

McKenzie, Richard. "Microsoft: The Monopoly Mantra." http://www.gsm.uci.edu/~mckenzie/mantra.pdf

Works Cited

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Brainyencyclopedia.com. "The Monopoly Question." 2004. Retrieved September 30, 2004. http://www.brainyencyclopedia.com/encyclopedia/m/mi/microsoft.html

Economics Resource Center. "Policy Debate: Is Microsoft a Monopoly?" Retrieved September 30, 2004. http://www.swlearning.com/economics/policy_debates/microsoft.html

Liebowitz, Stan. "Microsoft Monopoly and Consumer Harm." 2001. Retrieved September 30, 2004. http://www.utdallas.edu/~liebowit/book/msmonopoly.html

McMurray, David. "Compete, Don't Delete." The Economist. 6/13/98.

McKenzie, Richard. "Microsoft: The Monopoly Mantra." 2002. Retrieved September 30, 2004. http://www.gsm.uci.edu/~mckenzie/mantra.pdf

ZDNet. "Microsoft to Reveal Windows Code." 2002. Retrieved September 30, 2004. http://news.zdnet.com/2100-3513_22-948381.html