Summary of the Case
In May 1998, the Department of Justice, 20 states’ Attorneys, and the District of Columbia sued Microsoft for anti-competitive and exclusionary tactics (Economides, 2001, p.1). They claimed that, Microsoft schemed to control the personal computer operating systems market.
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The company had sought to extend control to the Internet browsing software. To attain this monopoly status, Microsoft engaged in acts that violated the antitrust law (Economides, 2001, p.2). The cases focused on claims presented mainly by Netscape Communications Corporation.
Netscape alleged that Microsoft had excluded its Navigator Web Browser from fair competition in the market. Moreover, Netscape moaned that Microsoft used its dominance windows to hamper Netscape’s entry into the Internet explorer browser market (Klein, 1999, p. 218).
Events and Arguments
The government’s arguments were that Microsoft had engaged in a number of anticompetitive acts to remain a dominant player in the Operating System business. They were-
- Microsoft monopolized the market for the PC operating system and used anticompetitive acts to dominate and own the market illegitimately (Brinkley, & Lohr, 2001, p.21).
- That it tried to monopolize the internet browser market since it believed that these types of browsers would bring competition for various operating systems.
- That it bundled its browser (explorer function) with windows. It also entered into agreements with some companies to implement its anti-competitiveness. It entered into exclusionary arrangements with internet service providers, PC manufacturers and content products to frustrate Netscape’s browser (Brinkley, & Lohr, 2001, p.21).
Microsoft’s counter arguments were that it did not have monopoly powers since competitors’ products were already on the market. Besides, the law allowed addition new features and functions to products hence making adding internet explorer function was legal (Klein, 1999, p. 219). Microsoft claimed it was merely competing hard against its rival and not violating anticompetitive laws (Economides, 2001, p.11).
Canadian Competition Law
It addresses unfair business practices. The statute prohibits criminal offences like price fixing, price discrimination, and non-criminal practices that reduce competition. For this case, the provision on abuse of dominant position applied – the misuse of market power (Competition Bureau, 2011).
Monopolies are legal. The government regulated them more because of their powers. They could easily harm clients and competitors (Hatch, 1999, p.21). The law prohibited companies in dominant positions from engaging in anticompetitive practices that substantially decreases competition (Competition Bureau, 2011).
Less Convincing Arguments
The Government versus Microsoft case was plagued with controversies including questions of why the charges opened in the first place. The government purported that Microsoft was at as a defiant monopoly. Microsoft supporters viewed it as non-coercive monopoly.
Essentially, clients chose to use windows on their PCs amid options like Linux, UNIX, and Macintosh. Therefore, customers exercised their right of choice of windows for its convenience. It may not have been a superior OS, but it could run on Chinese clones and Toshiba laptops.
The government’s arguments are less convincing because, if Microsoft sought to exclude Netscape, then lowering prices and offering free software was ridiculous. The government claimed that, Microsoft actions proved that it had sufficient monopoly powers to bar others from entering the market, as it exercised exclusionary actions in its pricing policy.
Economists counter argue that, it would be more profitable for Microsoft to exercise monopolistic powers by increasing prices rather than raising those of its rival. Selling at lower prices or paying other firms to distribute its software was making losses (Klein, 1999, p. 218).
It is difficult to make a convincing argument that Microsoft sacrificed profits merely to exclude Netscape, which posed a potential threat in the future. After all, even if competition entered the market, it could only affect Microsoft’s future profits, an issue not relevant currently.
The main question in the case was whether Microsoft, being a monopoly in Computer OS, competed against Netscape in Server OS and how that excluded Netscape from the market.
Modern economic theory provides reasons why this critique was not convincing. The assumption that a monopoly had a permanent unchallenged position with no future entry threats was absurd. Even though some short-term barriers to entry of competitors protected Microsoft, there were numerous threats already.
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Software developers designed programs that could work on most popular platforms. Windows was simply a popular platform with a wide range of applications.
The Microsoft’s main argument was that it did do not have economic incentives to monopolize Netscape. In fact, Netscape was more of a complementary firm. Besides, it had the option of increasing prices. Degrading the interoperability of Microsoft would cause it to lose revenue since clients would not want to pay more for windows OS.
However, it was less performing with non-Microsoft servers. Rather than monopolizing the market by reducing the rival’s quality, Microsoft could have simply charged higher prices and maximize profits from server market.
The Court Ruling
Based on economic theory, the companies needed protection from competition before they could bear the cost and risks of invention. Monopolies form ideal platforms for fighting the speedily and aggressively growing targets of new technology. Recent theories purport that some industries in certain conditions, the dominating company, and technology could end in a ‘virtuous cycle’ where companies support themselves to drive the economy.
The competition law is insufficient to deal with such cases. Microsoft was asked to disclose interoperability information, yet that could have caused severe negative consequences on innovation as intellectual property. With difficulty in bringing empirical and theoretical evidence to bear, analyzing innovation, and foreclosure was inevitable in making a convincing economic case.
Modern economists hence face the challenge of developing guidelines on the form of empirical evidence to use such cases. The evidence needed would be economic incentives to foreclosure.
Brinkley, J., & Lohr, S. (2001). U.S. v. Microsoft. New York: McGraw Hill.
Competition Bureau. (2011). Abuse of Market Power. Retrieved from http://www.ic.gc.ca/eic/site/cb-bc.nsf/eng/04258.html
Economides, N. (2001). United States v. Microsoft: A Failure of Antitrust in the New Economy. UWLA Law Review, 32, 1-38.
Hatch, O. (1999). Antitrust in the Digital Age. In J. A. Eisenach &T. M. Lenard (Eds.), Competition, Innovation, and the Microsoft Monopoly: Antitrust in the Digital Marketplace. Boston: Kluwer Academic Publishers.
Klein, B. (1999). Microsoft’s Use of Zero Price Bundling to fight The ‘Browser Wars’. In J. A. Eisenach &T. M. Lenard (Eds.), Competition, Innovation, and the Microsoft Monopoly: Antitrust in the Digital Marketplace (pp. 210-222). Boston: Kluwer Academic Publishers.