Fred Foldvary on The Microsoft Monopoly Case
|January 9, 2002||Posted by Staff under Archive, Progress Report, The Progress Report|
Fred Foldvary’s Editorial
Keep Microsoft Whole
by Fred E. Foldvary, Senior Editor
Officials of the US Department of Justice and the attorneys general of 17 States have requested that a federal judge split the Microsoft Corporation into two companies. The argument is that the split would provide greater competition in computer software.
If all other things are held equal, a monopoly can raise the price of its product above that which would prevail in a competitive market, to the disadvantage of consumers. But in the case of software, other things are not equal. Many computer programs complement one another, working together in an integrated way to create a whole greater than the single parts. This synergy would be lost if the Windows operating system is split into one company and applications into another.
Another aspect of the case is the global economy. The USA has a huge trade deficit with the rest of the world, and one major exception has been computer software. The US has been the leader in developing computer programs. Breaking up Microsoft will open the door to more foreign as well as domestic competition, and exports of American software will decline. Other countries encourage their leading industries, while US policy is to punish any firm that gets too successful.
Microsoft is not an absolute monopoly, since it is not the only producer of operating systems. Apple-Macintosh computers use a different operating systems, and there are competing systems available, though not yet widely used, for IBM-type computers. It is possible to enter the field, either with a new operating system, or with software that bypasses such systems via the Internet. At most, Microsoft has monopoly power, the power to raise prices and to stifle competition.
Microsoft is accused of exploiting such monopoly power. If the company has behaved wrongly, then the appropriate remedy is a lawsuit or prosecution of the relevant executives. Splitting the firm in two goes beyond any needed remedy for bad behavior.
Monopoly power in software is quite different from that of some natural resource such as oil, as the technology is advancing rapidly, and even a dominant firm must innovate or be left behind. Moreover, Microsoft’s biggest competitor is its own past products. The biggest competition for Windows 98 or 2000 is Windows 95, since the new version is not just sold with new computers, but also to previous users who wish to upgrade. If the new version is priced too high, then users will stick with their older versions.
It is hubris to claim, as do high-ranking officials of the US Justice Department, that breaking up Microsoft will promote innovations and greater choice. There are many variables here, and the effect is uncertain. The antitrust action could have a chilling effect on other companies, stimulate wasteful lawsuits, and raise prices with more duplication and advertising expenses.
It is questionable also why the US States should be able to bring antitrust charges along with the federal government. This seems to be an interference with interstate commerce, in violation of the US Constitution. Microsoft could be faulted with not having had a sufficiently strong defense against the whole legality and rationale for this antitrust action.
Many people envy the great wealth that has been obtained by the shareholders and especially the top executives of Microsoft. They think it’s not fair that so much wealth should be concentrated in a few hands. But the moral criterion should be how this wealth was obtained, not how much it is or who has it.
If the wealth came from land values not generated by the owners, then the appropriate remedy is the community and public collection of the rent, not interference in the enterprises using land. If excessive wealth came from protection granted by patents, then the appropriate remedy is to reform the patent system. Effective remedies eliminate the causes rather than just treat effects.
If splitting Microsoft really benefited the public and other software firms, then the response would be an increase in the prices of the shares of stock of these companies. But instead, the share prices and market averages have tumbled down. This indicates that the breakup is seen as damaging by shareholders in general. The investing public does not think the breakup will help.
This case will drag on for quite a while as Microsoft submits a response, requests extensions of time, government files a rebuttal, there are other hearings, and Microsoft appeals the case. The antitrust action against IBM continued similarly for years at great expense, and IBM was not broken up, and its dominance faded naturally as technology advanced in its unpredictable way.
This is another case of government thinking it can centrally plan and micromanage industry and fix whatever problems come up, when it does not have the knowledge to do so, and when the political incentives are there for governments as well as competitors to exploit the law and obtain privileges in the name of competition. The government actions against tobacco and guns have stirred up the appetites of the attorney generals. There’s loot to be had, and they are going after it full blast.
Any market flaws need to be compared with governmental flaws, and usually the potential for government bungling and loot-taking is far worse.
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Copyright 2000 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.