a fundamental misunderstanding of government’s decision-making role when it comes to market operations. This misunderstanding has led to an attack on one of the US’s most successful firms. It is difficult to measure consumer harms, much less harms that may only occur in the future. A common misconception about antitrust law is that its purpose is to ensure fair competition.
That’s not true; antitrust law’s purpose is to protect consumers. If fair competition maximizes their welfare, so be it; if monopoly maximizes their welfare that’s what the antitrust laws provide for. It’s not clear that Microsoft has a monopoly in the first place. Past Microsoft customers are not a captive market, as the Department of Justice portrays them. Rather, Microsoft must continue to add features and functionality to its products to get its Windows 95 consumers to become Windows 98 (and beyond) consumers. Consumers are free to change operating systems at any time.
There are such alternatives as Linux with the graphic interface, the Mac OS but the point is that even if there were none Microsoft’s ability to raise prices is strictly limited by the mere possibility of such an alternative’s emergence into the market. Predatory pricing that is, the practice of lowering prices to drive out competition, thus enabling massive price increases later? Well, maybe. There are compelling academic theories that question the possibility of predatory pricing in a free market, but economists universally agree that one component of predatory pricing must be high entry/exit costs. If the competition can enter and exit the market at very low cost, driving them out serves very little purpose, since as soon as you, the monopolist, get around to raising your prices, they’ll come right back in and compete those profits away. The purpose of this discussion of pricing strategy is to show that Microsoft, despite its size, still fears its competitors both the ones it sees now and the ones that don’t exist yet.
That is because they aren’t quite confident that they have kept up with consumers’ preferences about how an important tradeoff is to be made. Microsoft products are similar they represent a certain level of standardization and innovation. This is the source of all the nonsense being bandied about regarding network effects that is, the advantage that Microsoft allegedly enjoys because its systems interact more efficiently with one another than with other firms’ applications. It is just a side effect of Microsoft’s choosing standardization over innovation a corporate strategy they should be free to pursue. It is perfectly legitimate for consumers to express their preferences about the best way to make this tradeoff; indeed, they do so every day, with their money.
It is inappropriate, however, for the government to substitute its judgment of how the standardization-innovation tradeoff should be made for that of the market. Why? Because the market is simply better equipped to make such decisions. Basic economics tells us that prices convey information to firms more efficiently than any other information mechanism. Joel Klein and the other attorneys at the Department of Justice cannot, practically by definition, make informed choices about how to make the various tradeoffs in the software industry. For them to try to do so demonstrates not just hubris but ignorance. And that, at bottom, is the issue in the Microsoft trial.
It is not about whether Microsoft is a nice company or whether Bill Gates is a nice person. It is about whom gets to make decisions on how software is made and sold. Do firms get to make those decisions, informed by consumer preferences? Or does the government do so with its well-documented susceptibility to private interests? I think the answer is clear. BibliographyThe case against Microsoft is based not just on bad economics, but on a fundamental misunderstanding of government’s decision-making role when it comes to market operations. This misunderstanding has led to an attack on one of the US’s most successful firms.
It is difficult to measure consumer harms, much less harms that may only occur in the future. A common misconception about antitrust law is that its purpose is to ensure fair competition. That’s not true; antitrust law’s purpose is to protect consumers. If fair competition maximizes their welfare, so be it; if monopoly maximizes their welfare that’s what the antitrust laws provide for. It’s not clear that Microsoft has a monopoly in the first place. Past Microsoft customers are not a captive market, as the Department of Justice portrays them.
Rather, Microsoft must continue to add features and functionality to its products to get its Windows 95 consumers to become Windows 98 (and beyond) consumers. Consumers are free to change operating systems at any time. There are such alternatives as Linux with the graphic interface, the Mac OS but the point is that even if there were none Microsoft’s ability to raise prices is strictly limited by the mere possibility of such an alternative’s emergence into the market. Predatory pricing that is, the practice of lowering prices to drive out competition, thus enabling massive price increases later? Well, maybe.
There are compelling academic theories that question the possibility of predatory pricing in a free market, but economists universally agree that one component of predatory pricing must be high entry/exit costs. If the competition can enter and exit the market at very low cost, driving them out serves very little purpose, since as soon as you, the monopolist, get around to raising your prices, they’ll come right back in and compete those profits away. The purpose of this discussion of pricing strategy is to show that Microsoft, despite its size, still fears its competitors both the ones it sees now and the ones that don’t exist yet. That is because they aren’t quite confident that they have kept up with consumers’ preferences about how an important tradeoff is to be made. Microsoft products are similar they represent a certain level of standardization and innovation.
This is the source of all the nonsense being bandied about regarding network effects that is, the advantage that Microsoft allegedly enjoys because its systems interact more efficiently with one another than with other firms’ applications. It is just a side effect of Microsoft’s choosing standardization over innovation a corporate strategy they should be free to pursue. It is perfectly legitimate for consumers to express their preferences about the best way to make this tradeoff; indeed, they do so every day, with their money. It is inappropriate, however, for the government to substitute its judgment of how the standardization-innovation tradeoff should be made for that of the market.
Why? Because the market is simply better equipped to make such decisions. Basic economics tells us that prices convey information to firms more efficiently than any other information mechanism. Joel Klein and the other attorneys at the Department of Justice cannot, practically by definition, make informed choices about how to make the various tradeoffs in the software industry. For them to try to do so demonstrates not just hubris but ignorance. And that, at bottom, is the issue in the Microsoft trial.
It is not about whether Microsoft is a nice company or whether Bill Gates is a nice person. It is about whom gets to make decisions on how software is made and sold. Do firms get to make those decisions, informed by consumer preferences? Or does the government do so with its well-documented susceptibility to private interests? I think the answer is clear.
