Policy
Debate: Is Microsoft A Monopoly?
Issues and Background
The current popularity of
Windows does not mean that its market position is unassailable. The potential
financial reward for building the "next Windows" is so great that
there will never be a shortage of new technologies seeking to challenge it.
Powerful competitors such as IBM, Sun Microsystems and Oracle are spending
hundreds of millions of dollars annually to develop new software aimed
squarely at replacing Windows. That is one reason why we price Windows so
low. If we increased prices, failed to innovate, or stopped incorporating the
features consumers want (such as support for the Internet), we would rapidly
lose market share.
~Bill Gates, The
Economist, 6/13/98
Everyone who uses a computer
or depends on computers has an interest in seeing Microsoft's anticompetitive
and anticonsumer practices curtailed by the antitrust authorities.
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. 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.
~Ralph Nader and James Love, ComputerWorld,
11/9/98
Microsoft operating systems account for approximately 90-95%
of microcomputer computer operating systems. Microsoft's Windows operating
system has become the de facto standard for home and business computer
applications. It is fairly clear that Microsoft is the dominant firm in the
market for computer operating systems. The question in the current Microsoft
antitrust case is whether or not the computer firm has used its market
dominance to restrain trade in violation of federal antitrust statutes.
The specific actions with which Microsoft has been charged include:
- monopolizing the
computer operating system market,
- integrating the
Internet Explorer web browser into the operating system in an attempt to
eliminate competition from Netscape, and
- using its market
power to form anticompetitive agreements with producers of related
goods.
Under current interpretations of U.S. antitrust law, Microsoft can be
found guilty of monopolization in the computer operating systems market only
if it used its market dominance to charge a price that exceeds the
competitive price. Determining the "competitive price," however, is
not an easy task in this market since such a price is not directly observed.
Imputing this price from production costs is problematic since many of the
costs of research, development, and support in a company such as Microsoft
are difficult to accurately assign to individual software products. Those who
believe that Microsoft is guilty of monopolization argue that Microsoft has
received up to $10 billion in monopoly profits. Microsoft supporters argue
that Microsoft has kept prices low because of the threat of potential
competition.
The government alleges that Microsoft's decision to integrate Internet
Explorer into the operating system was designed to eliminate the competitive
threat posed by Netscape and Sun Microsystem's Java programming language.
Microsoft argues that this action is a natural extension of the Windows
environment and that it should not be faulted for providing a free program to
all users. The recent purchase of Netscape by AOL is used as evidence by both
sides of the dispute. Microsoft argues that this reflects the the dynamic and
competitive nature of the software market. Critics of Microsoft argue that
this was required only because of the reduction in Netscape's market share as
a result of Microsoft's unfair trade practices.
The third part of the government's case is that Microsoft has used its
dominance in the operating system market to force other firms to agree to
policies that limit competition from products produced by firms that compete
with Microsoft.
Ultimately, the question that must be answered is whether Microsoft has
maintained its market dominance partly by the use of illegal anticompetitive
practices. In a somewhat unusual move that may have been designed to spur
negotiations, on November 5, 1999, Judge Thomas Penfield Jackson issued
findings of fact that were based on the evidence that had been presented on
the antitrust allegations. The Court's
Findings of Fact held that:
- Microsoft has a
monopoly of PC operating systems,
- Microsoft harmed
consumers through its use of its monopoly powers, and
- several of Microsoft's
contracts had anti-competitive effects.
On June 7, 2000 a decision was reached that would split
Microsoft into two firms, one that would provide operating systems and a
second that would provide software applications. The decision has been stayed
pending the completion of appeals. On June 28, 2001, the Washington DC Court
of Appeals ruled on Microsoft's appeal. It upheld the decision that Microsoft
was a monopoly, but vacated the decision to split Microsoft into two firms.
The case has been sent back to the District Court for a new decision on
remedies. Judge Thomas Penfield Jackson, the original trial judge, has been
removed from the case. Microsoft submitted an appeal to the U.S. Supreme
Court. (This appeal was rejected on October 10, 2002.)
On September 6, 2002, the U.S. Justice Department announced that it would
no longer argue that Microsoft should be broken up into separate companies. A
settlement with the Federal government was reached on November 2, 2002 that
required Microsoft to release portions of its source code to competitors to
allow other programs to effectively function under Windows. This settlement
also allowed computer makers to select which Microsoft products would be
loaded onto computers that they sell. While most U.S. states have accepted
this settlement, nine U.S. states and the District of Columbia (as of 2/2/02)
are still pursuing antitrust action against Microsoft. The settlement of the
federal case has not yet been accepted by the Federal court.
Microsoft had attempted top settle several private antitrust cases with a
settlement in which they would have provided free software to schools. This
settlement was rejected by Federal District Judge J. Frederick Motz on
January 11, 2002 on the grounds that this settlement would have enhanced
Microsoft's monopoly power by encouraging schools to replace computer systems
that used alternative operating systems.
Even if the federal antitrust case is settled, there are still several
antitrust actions pending against Microsoft. AOL and the Be Corporation have
each brought antitrust charges against Microsoft, claiming that Microsoft has
undertaken actions that harmed the producers of Netscape and BeOs. The
European Commission is also currently discussing possible antitrust action
against Microsoft.
Primary Resources and Data
- Antitrust
Division of the U.S. Department of Justice
http://www.usdoj.gov/atr/
The Antitrust Division of the U.S. Department of Justice (in cooperation
with the Federal Trade Commission) is charged with investigating
possible cases of antitrust violation, analyzing merger applications,
conducting studies on competition and antitrust policy, and prosecuting
violations of antitrust law.
- Federal Trade
Commission
http://www.ftc.gov/
The Federal Trade Commission (FTC), in cooperation with the Antitrust
Division of the Department of Justice, is charged with enforcing U.S.
antitrust laws. This web site contains information on recent antitrust
cases, press releases, speeches, and other information relating to U.S.
antitrust policy. While at this site, be sure to examine the mission
statement of the Bureau
of Competition, the FTC's antitrust division.
- Antitrust Case
Browser
http://www.antitrustcases.com/
Anthony Becker of Saint Olaf College provides this site that contains
summaries of U.S. antitrust cases, U.S. Supreme Court antitrust
decisions, and links to a variety of U.S. and international antitrust
related web sites. In addition, this site contains the complete text of
the Sherman
Antitrust Act, and slightly edited and abridged versions of the Clayton
Antitrust Act and the Federal
Trade Commission Act.
- U.S. Antitrust
Law
http://www.law.cornell.edu/uscode/15/ch1.html
This page, provided by the Cornell University Law School, contains the
complete text of current U.S. antitrust law.
- Antitrust
Policy
http://www.antitrust.org/
This site, created by Luke Froeb, at Vanderbilt University, provides a
wealth of information on U.S. antitrust policy. Economic analysis, case
studies, and news items are provided that deal with mergers, price
fixing, vertical restraints, and other antitrust issues. Links to online
articles concerning the Microsoft case are contained on this site.
- November 5,
1999 Court's Findings of Fact
http://www.usdoj.gov/atr/cases/f3800/msjudgex.htm
The November 5, 1999 Court's Findings of Fact indicate that Microsoft is
a monopoly that has used its monopoly power to harm consumers. This
document contains the complete text of these findings.
- June 7, 2000
Final Judgment
http://usvms.gpo.gov/
This final judgment contains the order to split Microsoft into two
separate companies: one providing the operating system and the other
providing application software.
- United States
Court of Appeals for the District of Columbia Circuit, "U.S. v.
Microsoft"
http://ecfp.cadc.uscourts.gov/MS-Docs/1720/0.pdf
This is the text of the Washington DC Court of Appeals ruling that
upheld the finding of fact but vacated the remedy in the Microsoft case.
(To view this document, the Adobe acrobat viewer plugin is required. You
may download this viewer by clicking here.)
- Revised
Proposed Final Judgment
http://www.usdoj.gov/atr/cases/f9400/9495.htm
This document contains the 11/6/01 revised proposed final judgment in
the federal antitrust case against Microsoft.
- Comments on the
United States v. Microsoft Settlement Provided to the Court on February
14, 2002
http://www.usdoj.gov/atr/cases/ms-major.htm
This website contains the text of the 47 "major" responses to
the proposed settlement in the Microsoft antitrust case. Only 5 of these
argued for the proposed settlement.
- The Seattle
Times' Microsoft Trial page
http://www.seattletimes.com/microsoft/
The Seattle Times maintains an archive of newspaper articles
relating to the Microsoft antitrust case at this site. This site
provides extensive coverage of recent developments in the trial.
- Time,
"Target: Microsoft"
http://www.time.com/time/reports/microsoft/
This site contains links to articles and statistics concerning the
Microsoft case that have been compiled by Time magazine.
- Yahoo!
Microsoft Case links
http://headlines.yahoo.com/Full_Coverage/Tech/Microsoft/
Yahoo! provides links to online coverage of the Microsoft antitrust
case. This page is updated several times a day and is perhaps the most
comprehensive source of current news about the case. Links to online
articles and audio and video resources are available at this site.
- NewsLinx
Microsoft Case page
http://www.newslinx.com/newstopics/reno_vs_gates.html
NewsLinx provides another set of links to online news articles dealing
with the Microsoft antitrust case. Links to news articles are sorted by
publication date. (Only articles through February 2001 are listed on
this page.)
- FindLaw's
Microsoft Antitrust Case page
http://www.findlaw.com/01topics/01antitrust/microsoft.html
This page, provided by FindLaw, contains an extensive collection of
links to online information dealing with the Microsoft antitrust case.
- Michelle Clark
Neely, "Does Big Business Need Taming?"
http://www.stls.frb.org/publications/re/1998/c/re1998c4.html
Michelle Clark Neely examines the evolution of the economic theory that
underlies antitrust policy in this July 1998 article which appeared in Regional
Economist, a publication of the Federal Reserve Bank of St. Louis.
- Linux Online
http://www.linux.org/
Linux is the most widely used unix alternative to Windows in the
personal computer market. While the Linux operating system is still
free, several commercial vendors have begun to provide Linux
installation CDs and support services. The availability of this support
has lead to an increase in the popularity of the Linux operating system.
It still remains, however, a small share of the operating system market.
- FreeBSD
http://www.freebsd.org/
FreeBSD is another free unix PC operating system that was an outgrowth
of the BSD unix package that was one of the first major operating
systems for unix mainframe computers, minicomputers, and workstations.
FreeBSD currently appears to be somewhat less popular than the Linux
version of unix.
- BeOS
http://www.be.com/index.html
BeOS is another, relatively recent, operating system that operates on
Intel and PowerPC hardware platforms. The Be corporation, however, has
recently been dissolved. The rights to the operating system have been
sold to a subsidiary of Palm. A separate antitrust case has been brought
against Microsoft by the Be corporation.
- Freebyte,
"Free and other operating systems"
http://www.freebyte.com/operatingsystems/
This page contains an extensive list to information about alternative
operating systems.
Different Perspectives in the Debate
- Department of
Justice Antitrust Division's Microsoft Antitrust Case Filings
http://www.usdoj.gov/atr/cases/ms_index.htm
This page contains online copies of the Antitrust Division's filings in
the Microsoft case. This is the most comprehensive source of detailed
information on the Justice Department's antitrust case against Microsoft.
- Microsoft -
PressPass
http://www.microsoft.com/presspass/legal/default.asp
PressPass is Microsoft's web page devoted to presenting its side of the
antitrust case. This site contains a variety of online articles stating
Microsoft's positions and links to speeches, testimony, and online
articles that support Microsoft's position.
- Chris E. Hall
and Robert E. Hall, "National Policy on Microsoft: A Neutral Perspective"
http://www.netecon.com/neutral.pdf
In this January 3, 1999 online paper, Chris E. Hall and Robert E. Hall
provide a careful examination of the government's case against
Microsoft. They note several weaknesses in the arguments of both the
government and Microsoft. It is suggested that while Microsoft dominates
the market for operating systems, it has not been a major force in the
internet or in content markets. It is also noted that it is difficult to
claim that Microsoft has harmed consumers by exerting monopoly power in
the internet browser market since it gives its browser away at no cost
to consumers. (The Adobe acrobat viewer plugin is required to view this
document. You may download this viewer by clicking here.)
- Consumer
Project on Technology's Microsoft Antitrust Page
http://www.cptech.org/ms/
The Consumer Project on Technology, an organization begun by Ralph
Nader, provides a series of links to online materials related to the
antitrust case. Most of these materials provide arguments suggesting
that Microsoft has violated U.S. antitrust laws.
- Ralph Nader and
James Love, "June 15, 1998 letter to Assistant Attorney General
Joel Klein"
http://plug.skylab.org/199807/msg00731.html
In this June 15, 1998 letter, Ralph Nader and James Love provide a
series of arguments suggesting that Microsoft has taken a variety of
actions that have reduced competition in computer software markets. They
note that it is impossible to buy a nationally branded PC-compatible
personal computer without also buying the Windows operating system.
Nader and Love argue that this substantially raises the cost to
consumers who prefer the use of an alternative computer operating
system. They suggest that the Justice Department should take into
account the importance of encouraging the free software movement in
pursuing its case against Microsoft.
- Ralph Nader and
James Love, "Why Microsoft Must be Stopped"
http://www.computerworld.com/cwi/story/0,1199,NAV47_STO34273,00.html
In this 11/9/98 ComputerWorld article, Ralph Nader and James Love
argue that Microsoft has used a variety of illegal tactics to restrict
competition in the market for browsers, server products, programming
languages, word processing software, spreadsheet software, and many
other types of software products.
- Ralph Nader and
James Love, "Judging Microsoft: It's a blow to real monopoly"
http://2kj.com/tuesday/microwrong.html
In this article, Ralph Nader and James Love discuss the finding of facts
in the Microsoft antitrust case. They argue that Microsoft actively
worked to limit competition in the browser market. Nader and Love view
the decision as a positive development in reducing the monopoly power of
Microsoft.
- Nathan Newman,
"From Microsoft Word to Microsoft World: How Microsoft is Building
a Global Monopoly"
http://www.netaction.org/msoft/world/
Nathan Newman, the Project Director of NetAction, argues that Microsoft
is trying to attain dominance in a wide variety of software markets.
This article details Microsoft's recent acquisitions in a variety of
software product markets and describes a series of actions that
Microsoft has taken to deter competition from other software products
and operating systems. NetAction argues that the government should:
...step back in to vigorously
defend open standards and open competition, while carefully guarding against
even the smallest abuses by Microsoft since even minor abuse by such a
dominant player magnifies its advantages due to the network effects of the
new economy.
- Richard B.
McKenzie and William F. Shugart II, "Is Microsoft a
Monopolist?"
http://www.independent.org/tii/content/pubs/review/tir32_mck_shug_article.html
Richard B. McKenzie and William F. Shugart II build a case in support of
Microsoft in this Fall 1998 Independent Review article. They
argue that Microsoft has reduced its profits by giving away Internet
Explorer. A monopolist would be expected to charge a monopoly price for
such a product. McKenzie and Shugart argue that Microsoft realized
network externalities only as a result of its long track record of
successful innovation. They suggest that there are no "commercially
reasonable alternatives" to Windows because Microsoft has acted in
a competitive manner, rather than as a monopolist. According to their
argument, Microsoft would have been faced with many active competitors
if it had attempted to restrict output in order to receive monopoly
profits. McKenzie and Shugart note that Microsoft charges computer
vendors approximately $45 for a Windows license and CD. They argue that
"[f]orty-five dollars for an operating system that incorporates
millions of lines of code and is fairly powerful and easy to use does
not seem like the price a monopolist would choose."
- Virginia
Postrel, "Creative Insecurity"
http://www.reason.com/9801/ed.vp.html
Virginia Postrel discusses the reasons for Microsoft's success in this
online Reason article. She notes that Microsoft's success was
partly the result of Apple's attempts to behave like a monopolist. She
argues that Microsoft, on the other hand, has always behaved in a more
competitive manner by charging low prices.
- Bill Gates,
"U.S. v. Microsoft: We're Defending Our Right to Innovate"
http://www.microsoft.com/presspass/doj/5-20wsjoped.asp
In this May 20, 1998, Wall Street Journal Op-Ed, Bill Gates argues that
the Windows operating system evolved in response to consumer demands. He
notes that car companies have often added new products as standard
equipment that were initially separate products. Gates suggests that the
integration of the Internet Explorer browser is an analogous response to
evolving technology and consumer demand. He argues that the government
should not be able to limit a firm's ability to improve its product to
better satisfy consumer demand.
- Franklin M.
Fisher, "May 12, 1998 Declaration in the Case of U.S. v
Microsoft"
http://www.usdoj.gov/atr/cases/f1700/1766.htm
In this statement, Franklin M. Fisher argues that Microsoft has engaged
in policies designed to limit competition in the market for internet
browser software.
- Robert A. Levy,
"Microsoft and the Browser Wars: Fit To Be Tied"
http://www.cato.org/pubs/pas/pa-296.html
In this February 19, 1998 Cato Policy Analysis article, Robert A.
Levy examines the Justice Department's arguments against Microsoft's
bundling of Internet Explorer with the Windows 95/98 operating systems.
He argues that government interference with market incentives is
inappropriate in the dynamic and competitive software market. Levy
suggests that the bundling of Internet Explorer with the Windows
operating system is no more harmful to competition than "the
packaging of tires with automobiles, cream with coffee, laces with
shoes, even left gloves with right gloves." He suggests that the
problem lies with antiquated antitrust laws, not with Microsoft's
actions.
- Stan Liebowitz
and Stephen E. Margolis, "Dismal Science Fictions: Network Effects,
Microsoft, and Antitrust Speculation"
http://www.cato.org/pubs/pas/pa324b.pdf
In this October 27, 1998 Cato Policy Analysis article, Stan
Liebowitz and Stephen E. Margolis note that it is often argued that
Microsoft's large market share is the result of an historical accident.
This argument suggests that an inferior product (Microsoft DOS and later
Microsoft Windows) became the "standard" as a result of
Microsoft's role as the provider of the initial operating system for IBM
compatible computers. Liebowitz and Margolis provide several theoretical
and empirical reasons to dispute this "lock-in" argument. They
also argue that Microsoft's success is the result of successful
innovation, rather than anticompetitive practices. (To view this document,
the Adobe acrobat viewer plugin is required. You may download this
viewer by clicking here.)
- Stan Liebowitz
and Stephen E. Margolis, "Path Dependence and Economic Evolution"
http://www.milken-inst.org/mod01/mod01-07.html
Stan Liebowitz and Stephen E. Margolis provide a more informal critique
of the "path dependence" argument in this Fall 1997 Jobs
and Capital article. The path dependence argument suggests that
inferior products often become standards as a result of historical
accidents. A variety of evidence is used to suggest that the better
product is ultimately the winner in a market economy. They note, for
example, that there is no credible evidence to suggest the widely held
belief that the DVORAK keyboard is preferable to the QWERTY keyboard.
Liebowitz and Margolis also argue that Windows has been successful
because it is a better operating system than other available
alternatives.
- Stan Liebowitz,
"A Defective Product: Consumer Groups' Study of Microsoft In Need
of Recall"
http://www.cei.org/gencon/004,01559.cfm
In this February 9, 1999 Competitive Enterprise Institute article, Stan
Liebowitz argues that several consumer groups have provided flawed
evidence against Microsoft. Liebowitz argues that consumers have
benefited from Microsoft's software products and pricing decisions.
- Nicholas
Economides, "Analysis and News of US v. MS"
http://raven.stern.nyu.edu/networks/ms/top.html
On this site, Nicholas Economides provides an analysis of the antitrust
case against Microsoft, a collection of online articles and analysis
related to the case, and links to other sources of information. Those
who are not familiar with the concepts of network economics may wish to
examine his dictionary
of terms in network economics. In a paper on "Competition
and Vertical Integration in the Computing Industry," Economides
argues that government regulation of the rapidly changing computer
industry is a dangerous practice.
- Stan Liebowitz,
"Bill Gate's Secret? Build Better Products"
http://wwwpub.utdallas.edu/~liebowit/oped.html
In this October 1998 Wall Street Journal op-ed, Stan Liebowitz
argues that Microsoft's market dominance is due to its successful
innovation and high quality products. Evidence from a survey of product
reviews is used to support this claim.
- Stan Liebowitz,
"Should Microsoft be Broken up? No. Breaking up Microsoft is
disruptive"
http://independent.org/tii/news/000128Liebowitz.html
In this January 28, 2000 op-ed piece in the Dallas Morning News,
Stan Liebowitz argues against a break up of Microsoft. He argues that
Microsoft's presence in software markets has resulted in lower costs to
consumers. Liebowitz suggests that breaking up Microsoft will lessen
competition since it is currently one of the few firms that is large
enough to compete with AOL/Time Warner and AT&T in the emerging
market for broadband content.
- Boycott
Microsoft, "Microsoft Hall of Innovation"
http://www.vcnet.com/bms/departments/innovation.shtml
This web site contains a list of "innovations" that are
alleged to have been developed by Microsoft and, where possible,
provides evidence of the earlier use of these concepts by other software
companies. It is suggested that Microsoft has not provided many
significant innovations.
- Robert Litan,
Roger Noll, William Nordhaus, and F.M. Scherer, "U.S. v Microsoft -
amicus curiae brief of April 27, 2000"
http://www.econ.yale.edu/~nordhaus/homepage/final%20microsoft%20brief%20with%20appendix.htm
In this amicus curiae brief, Litan, Noll, Nordhaus, and Scherer
recommends that Microsoft be divided up into three competing firms that
would sell the Windows operating systems and a fourth firm that would
sell applications software. It is argued that this remedy would
eliminate the monopoly power that has been the source of the problems in
this market. They note that Microsoft has displayed conduct that
suggests that less severe remedies would not be effective.
- April 27, 2000
Declaration of Paul Romer
http://www.usdoj.gov/atr/cases/f4600/4643.pdf
This document contains Paul Romer's evaluation of the government's
proposed plan to split Microsoft into separate operating system and
software application companies. He suggests that this plan will
encourage innovation and economic growth.
- Salon,
"Microsoft wins -- or does it?"
http://www.salon.com/tech/feature/2001/06/28/appeals_reaction/
This Salon article examines the decision of the Wsashington DC
Court of Appeals in this June 28, 2001 online article. Reactions to this
decision from several economists and other analysts are also included in
this article.
- Robert Reich, "Electrosoft: A Fable for
Today"
http://www.prospect.org/webfeatures/2001/07/reich-r-07-02.html
Robert Reich argues for an end to the Microsoft monopoly in this July 2,
2001 American Prospect article. He suggests that the best
solution would be to make the Microsoft operating system freely
available. Reich indicates that Microsoft's control of the operating
system market gives it the ability to set standards that can be used to
eliminate competition in other software markets. He argues that the
setting of standards is best done by either the government or by the
industry as a whole, not by a single firm.
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