A Case Built on Wild Speculation, Dubious Theories

Yesterday's suit by the Justice Department against Microsoft (joined, in a needless piling on, by 20 state attorneys general) threatens to damage or even cripple a company that has brought billions of dollars of value to consumers around the world. Microsoft is a classic example of what even the Supreme Court regards as a good monopoly: a firm that has gained monopoly power not through merger or collusion, but business skill and acumen in creating a clearly superior product.

To be sure, Microsoft's leasing practices are not entirely beyond reproach. Provisions prohibiting licensees from advertising competing software -- heavily criticized by my friend Robert H. Bork -- cannot easily be defended. But these provisions are probably harmless in practice and can equally harmlessly be stopped. Mr. Bork relies entirely on the 1951 Lorain Journal case, in which the Ohio town's single newspaper was found guilty of monopolization for refusing to deal with firms that advertised on a competing radio station. That case supports the prohibition of Microsoft's advertising restrictions. But the case has little to say about the broader Justice Department claims against Microsoft.

Most troubling is the Justice Department's effort to define for Microsoft which services Windows 98 ought to include -- for example, compelling it to offer Netscape's Navigator as an alternative browser to Microsoft's own Internet Explorer or to constrain Microsoft from incorporating a WebTV site or an e-mail program. Here the Justice Department's lawsuit is based on theories of monopolization that have been discredited for decades and on wild speculation about the course of future software innovation.

The most popularly accepted theory is that Microsoft insists on incorporating its own browser program, as opposed to Netscape's, as a mechanism for extending or leveraging its 80% market power over general operating systems to additional services. If Microsoft incorporates such services, the theory runs, it forecloses opportunities for sales by smaller software manufacturers that would otherwise be its competitors.

But consider the example of General Motors, which in the 1960s was the dominant player in the domestic auto market, with a market share of 50%. Could GM increase its monopoly profits by including a car radio as standard equipment? Including the radio surely foreclosed sales by independent radio installers, but the gain to General Motors above the price it was earlier charging for the car could be no more than the additional value of the radio.

Does it make a difference that Microsoft, unlike GM, is itself the producer of Internet Explorer, so that the profits it gains are its own? Again, only insofar as Internet Explorer is of value to consumers. Put differently, if Netscape Navigator is a better browser than Microsoft Internet Explorer, requiring its inclusion in Windows 98 will reduce Microsoft's competitive advantage over rival operating systems. The Justice Department, thus, has the case exactly backwards. If Internet Explorer is superior to Navigator, the effect of a successful prosecution will be to harm consumers. If Navigator is superior, the prosecution will overrule Microsoft's mistaken decision and shore up its market power, which would otherwise decline.

The Justice Department is concerned about other programming services that Microsoft includes or might include in future versions of Windows. But does anyone believe that bureaucrats or judges can know how to define the optimally integrated product in the fast-changing computer software market?

Concern about the foreclosure of potential competitors cannot provide an answer. Should the only hotel in a small town be accused of foreclosure if it offers free soap or toiletries -- foreclosing competing grocery and drug store sales? A free ironing board -- foreclosing laundry services? Its own minibar -- foreclosing liquor and snack sales? Microsoft's definition of what Windows will include is no different.

The second ground of the Justice Department's attack is no more convincing. It rests upon pure speculation about the future of software innovation. The thought is that Microsoft's foreclosure of smaller programming competitors removes from the market entrepreneurs who, though small today given their niche markets, may at some future time generate ideas that are sufficiently innovative to challenge Windows in its entirety. This romantic hope is totally speculative. Is the next Bill Gates more likely to invent an alternative to Windows if Microsoft is forced to carry his current niche program or if Microsoft's success forces him to develop something different? The latter alternative is at least equally plausible.

The Microsoft lawsuit is reminiscent of the Justice Department's persecution of an earlier monopolist, the United Shoe Machinery Corp. As late as the 1950s, United Shoe possessed 75% to 85% of the domestic shoe-machinery market, at a time when shoemaking was dominated by American firms. In that case, too, the Justice Department attacked a set of leasing practices that it did not well understand. And with no greater
understanding, the courts struck those practices down, leading United Shoe to decline and ultimately to drop out
of the market. The results: The price of shoe machinery went up, and foreign firms began to enter the market.
Foreign companies now dominate the market both for shoe machinery and shoemaking itself. There was no clear
benefit to consumers whatsoever. Those are the stakes in the attack against Microsoft.

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About the Author

 

George L.
Priest
  • George L. Priest is the Edward J. Phelps Professor of Law and Economics and Kauffman Distinguished Research Scholar in Law, Economics, and Entrepreneurship at Yale Law School. Over the past two decades, he has focused his research on antitrust, the operation of private and public insurance, and the role of the legal system in promoting economic growth. Priest joined Yale Law School in 1981 and is co-director of the John M. Olin Center for Law, Economics and Public Policy. Earlier, he taught law at the University of Chicago; the University at Buffalo–State University of New York; and the University of California, Los Angeles. Priest is also chairman of AEI’s Council of Academic Advisers.

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