Microsoft's Monopoly: Antitrust Tactics and Market Impact

Introduction

Microsoft has for decades engaged in commercial activities — both with its direct enterprise customers and its many distribution channel partners — that could be considered monopolistic. While Microsoft has long asserted that it is one of the most efficient competitors in an oligopolistically structured market for enterprise and consumer software, its strategies and tactics reveal a pattern of deliberate monopolistic behavior (Information Management, 2009). Microsoft initially used complex contracts that defied straightforward legal interpretation to prevent its Original Equipment Manufacturers (OEMs) from installing any operating system other than MS-DOS, and later Microsoft Windows (Werden, 2001). At the same time, Microsoft devised a pricing strategy that made it economically impractical for OEM customers — including Dell, Gateway, IBM, and many others — to install or even support competing operating systems.

Most recently, Microsoft was fined by the European Union (EU) for bundling its Internet browser, Internet Explorer, with the Windows XP and later Windows 7 operating systems (Meese, 1999). Microsoft has been regularly investigated for antitrust violations. This analysis assesses how the company became so adept at both committing and defending itself against accusations of antitrust violations. It also examines how Microsoft gained considerable strength as a monopolistic force in the computer software industry, and concludes with a broader assessment of the beneficial and harmful aspects of monopolies from a cross-industry perspective.

Microsoft discovered early in its OEM sales of operating systems and development components that, by using contracts that tied licenses to specific hardware units, the company could effectively control its OEM partners' product strategies (Werden, 2001). Microsoft sought to create barriers to entry for competing operating systems and development tools by concentrating on pricing, product strategy, and bundling — reshaping the demand curve for these programs faster than market dynamics alone would have done (Information Management, 2009). This approach forced a higher degree of inelasticity into the market, pressuring competitors to attempt to replicate Microsoft's economies of scale. The long-term effect was the creation of an oligopolistic market; the short-term effect was the elimination of smaller, less-capitalized competitors.

Microsoft employed similar bundling strategies with Internet Explorer and was subsequently ordered by the EU to unbundle the browser from its operating system, allowing for greater free-market dynamics and a more elastic demand curve for browser software (Gisser & Allen, 2001).

Microsoft has been widely criticized for its pricing, product strategies, and efforts to control the demand curve across large segments of the enterprise software market. The irony, however, is that Microsoft's dominance created an ideal environment for the kind of innovation that Clayton Christensen describes in The Innovator's Dilemma. Without the monopolistic pressures Microsoft exerted, customers might never have had sufficient motivation to seek out Linux and other open-source alternatives. Christensen argues that when incumbents begin protecting their market position rather than innovating, smaller and less expensive alternative products emerge quickly and begin to capture market share. Over time, these smaller competitors may come to dominate the market.

The Making of a Monopoly

This dynamic closely parallels what occurs in monopoly-dominated markets: customers seek alternatives in order to reduce costs and expand their options. A monopoly can, paradoxically, unleash a level of creativity and innovation that would not otherwise arise in a market without the artificial constraints monopolistic conditions impose (Stucke, 2012). By attempting to constrain the demand curve for software, Microsoft inadvertently created a powerful catalyst for market change. The open-source software community, in large part, owes its growth and momentum to the very monopoly Microsoft tried to construct.

Microsoft's history illustrates that monopolistic behavior carries significant costs — to competitors, to consumers, and to market efficiency — but it also demonstrates that such behavior can produce unintended competitive responses. The restrictive tactics Microsoft employed, from OEM contract tying to browser bundling, drew regulatory action from the EU and sustained antitrust scrutiny in the United States. Yet those same tactics motivated the rise of the open-source movement, validating the Christensonian view that incumbent overreach invites disruption. Understanding both dimensions is essential to evaluating the full impact of monopolistic power in technology markets.

Is Microsoft's monopoly in jeopardy? (2009). Information Management, 19(2), 8.

Gisser, M., & Allen, M. S. (2001). One monopoly is better than two: Antitrust policy and Microsoft. Review of Industrial Organization, 19(2), 211–225.

Conclusion

Werden, G. J. (2001). Microsoft's pricing of Windows and the economics of derived demand monopoly. Review of Industrial Organization, 18(3), 257.