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Source link: http://archive.mises.org/7148/a-politically-incorrect-guide-to-antitrust-policy/

A Politically Incorrect Guide to Antitrust Policy

September 14, 2007 by

The United States has had antitrust legislation at the federal and state level for more than 100 years. (The Sherman Antitrust Act [1890] and the Federal Trade Commission Act [1914] are the basic federal statutes.) The laws make illegal “every contract, combination … or conspiracy in restraint of trade” and any attempt to “monopolize” through merger or acquisition; in addition, “unfair … and deceptive practices” are also forbidden. Given this broad regulatory mandate, antitrust law is arguably this nation’s oldest ad hoc “industrial policy.” But whether any of this regulation has ever made economic sense is entirely debatable. Despite the dismal enforcement experience, the antitrust establishment generally still supports vigorous enforcement of the antitrust laws. In antitrust, the more things change the more they seem to stay the same. FULL ARTICLE

{ 19 comments }

Paul Marks September 14, 2007 at 9:03 pm

A good article.

Sadly many “economists” still support the notion of “antitrust” regulations or “competition policy” – due to their absurd “perfect competition” misunderstanding of how the market should work.

Also, it is amusing (in a grim way) how many of those people who complain about imports also support “antitrust”, thus failing to understand how much damage antitrust regulations have done (and do) to the very manufacturing industries they seek to “protect”.

Antitrust regulations hit so many things – often way outside manufacturing. For example airlines are not allowed to make agreements about when their aircraft can fly, so they try and take off at the same times – result vast delays at airports.

But the media do not want to hear this, they would rather just call for even more government regulations in the “deregulated” airline industry (already one of the most regulated industries in the United States) although it is existing regulations (such as antitrust) that cause the problems.

Todd Whitesel September 14, 2007 at 10:25 pm

Your argument against Microsoft’s status as a monopoly is laughable to anyone familiar with the industry and how its technology works. The market for single-user IBM-compatible and Intel-compatible PCs was (and still is) very well defined and has always had huge barriers to entry. To deny this is to insult the intelligence of your readers.

One of Microsoft’s growth strategies was to wait for independent software vendors to succeed at some add-on technology, and then compete with them by bundling that technology into Windows, either by competition or acquisition. It was well known to vendors and users alike that when Microsoft moved in on somebody, it would be a difficult uphill battle for the independent technology to survive.

Netscape was in no way the only company that was driven out of business by Microsoft’s monopoly position — they were just the most prominent one who fought back.

Anthony September 14, 2007 at 10:35 pm

Thanks for this lovely article.

Brent September 15, 2007 at 12:43 pm

Todd,

Learn some economics and then comeback. Until that point, you are just polluting the blog.

Seriously – you didn’t make any sense. The MS case has been beaten to death and even the federal government didn’t believe the original case brought against MS.

Todd Whitesel September 16, 2007 at 1:56 am

Maybe you have some legalistic perspective on it that would seem equally as absurd to me. I am speaking from the trenches of the actual industry involved.

My disagreement with this article is about the claim that Microsoft didn’t really hold a monopoly position in its market. Having worked in that and related markets my entire life, I find that claim ludicrous.

If you really think that additional economics training would change my mind, be specific, or you are just insulting me for not subscribing to the same school of indoctrination as yourself.

wasach September 16, 2007 at 2:28 am

Well Todd, if you believe this web site to be nothing but indoctrination, why do you bother with it? MS simply created a product the market wanted – I know you don’t want to hear that, but it’s true.

Gérard Dréan September 16, 2007 at 3:47 am

the many cases against IBM (1968-1982) are also a good example, and are in many ways similar to the Microsoft case, including a ridiculous definition of the relevant market (as “the market for IBM-compatible computers”, that could not be anything but “dominated” by IBM). IBM won them all. The government case brought in 1975 was declared “without merit” in 1982. More at http://gdrean.club.fr/livre1996-en/l96e_ch2.htm

Anonymous Coward September 16, 2007 at 4:29 pm

One of Microsoft’s growth strategies was to wait for independent software vendors to succeed at some add-on technology, and then compete with them by bundling that technology into Windows, either by competition or acquisition. It was well known to vendors and users alike that when Microsoft moved in on somebody, it would be a difficult uphill battle for the independent technology to survive.

The particular ‘crime’ they were charged with is now done by *all* desktop environments. KDE, Gnome and OSX use a web browser type interface as part of the file manager same as winders. Well, can’t really say for certain for OSX because I’ve never used it but the other two can’t really function without it.

MS has been trying to leverage their ‘monopoly’ to control the server market for quite a while but Apache and the free OSs are doing quite well in that space.

And my personal favorite, the anti-virus companies are claiming monopoly abuse because MS is tightening up the security of their crappy OS and threatening their business model. How they can get away with selling an anti-virus/spyware product instead of just fixing the security holes is beyond me but I’m not here to Microsoft bash…

Scott D September 16, 2007 at 8:41 pm

I gave my wife an example today that I thought sums up the fallacies of the perfect competition model nicely:

Let’s say there is a firm that starts a business in a completely untapped market. This firm markets its product and soon has a hefty demand for its product. It makes nice profits for a few years, and then competitors begin to enter the market. Soon there are twelve firms all competing to sell the same or a very similar product.

A few more years go by. Four of the new firms tank in the first year. Four more are bought out by other companies (one by a company outside the industry entirely). Now we are down to five larger, competing firms. Two of them develop a leading share of the market through their superior products, service and marketing. Eventually, the two dominant business each buy out one of the lesser competitors, so we are down to three. One is a lesser player, barely hanging on, but retaining 15% of the market. The second has about 40% of the market and is doing well. The third, the dominant firm, has 45% of the market. One of the two biggest firms will likely buy out the smallest firm at some point, dropping the field to two.

Now, “perfect competition” would tell us that the market performs more efficiently after competitors entered than it did initially, when only one firm existed. This is probably true. However, it would also lead us to believe that the market was at its best when there were twelve firms battling it out, since twelve is better than two, right?

Such analysis ignores the effects of entrepreneurs, who seek to perfect the efficiency of their business and eliminate those who perform poorly. Knowledge was acquired by the firms who survived and prospered, knowledge that the firm at the beginning did not possess. Hence the danger of relying on static models for reasoning about markets.

Todd Whitesel September 18, 2007 at 7:47 pm

wasach, if Microsoft had ‘simply’ created a product the market wanted, no one would have brought an anti-trust suit against them. But there was a lot more going on.

At stake was Microsoft’s ability to arbitrarily declare that something which everyone thought of as an application was now part of the operating system and therefore immune from anti-competitive laws. This was tantamount to a government sanctioned monopoly because it effectively allowed microsoft to use anti-competitive tactics to expand into any functional domain they wanted. Many in the industry were very opposed to this.

Noting the recent European anti-trust decision against Microsoft, and the history of cases in various countries against Microsoft Office, I think people should not be so quick to exonerate Microsoft.

Responding to another comment– I don’t think mises.org is all indoctrination. But it does seem to me to be a core of great thought (Austrian economics and its perspective on history, mainly) with a disturbing amount of modern free-market-uber-alles propaganda wrapped around it.

Saying that the final decision of the market is automatically the best decision is like saying that whoever wins a genocidal war is the superior species BECAUSE they won. I’m sorry, but I thought this “might makes right” thinking was discredited a long time ago.

Anthony September 18, 2007 at 8:56 pm

“Responding to another comment– I don’t think mises.org is all indoctrination. But it does seem to me to be a core of great thought (Austrian economics and its perspective on history, mainly) with a disturbing amount of modern free-market-uber-alles propaganda wrapped around it.”

By contrast, I find the amount of statism generally pervading society to be disturbing.

“Saying that the final decision of the market is automatically the best decision is like saying that whoever wins a genocidal war is the superior species BECAUSE they won. I’m sorry, but I thought this “might makes right” thinking was discredited a long time ago.”

Discredited? Why should it be? And why the likening of competition on the market to genocidal war?

Todd Whitesel September 21, 2007 at 12:33 am

Because, operationally, there is a lot of similarity. Also the undercurrent of ends justifying the means, and all that. Free-market decisions are a lot better than central-planner decisions, but they aren’t perfect.

Just as power interests can sway a government, they can also manipulate the market — it only costs them more and is harder to hide. But it’s still an improvement.

I’d agree there is a lot of pervasive statism in society, probably stemming from a sentiment that big money interests will only listen to those more powerful than they, and who is more powerful than the state?

Also because the government doesn’t like admitting it created the loopholes that fraudulent business practices exploit. Witness the mortgage crisis right now — amazing how Wall Street demanded another hit of Debt Crack the minute things looked scary.

Anthony September 21, 2007 at 7:21 am

“Because, operationally, there is a lot of similarity.”

In what regards?

Daniel September 22, 2007 at 3:04 pm

Most of us weren’t too worried about the Whole Foods takeover of Wild Oats being an economic threat to our long-term financial well-being.
With the FTC instructed from The White House in a Republican administration to not hassle any of the
“real” corporate interests, they were evidently just looking for something to do to look busy and make tempest-in-a-teapot headlines. I would hope antitrust efforts might be more effective in oil, health care, insurance, banking, entertainment, media and advertising –but, unless we elect
Democrats, it won’t be. And with the present Supreme Court, antitrust may just be a distant memory for consumers, even with Democrats.

Anthony September 22, 2007 at 8:26 pm

Yes, I am sure the democrats will handle antitrust just wonderfully. I will personally welcome any American individuals and businesses fleeing the USA should some democrat kook rise to power.

This is not a Republican website. It does not cater to pro-corporate “Red” partisans.

Anthony September 22, 2007 at 8:26 pm

As for anti-trust becoming a distant memory… good riddance.

Jean Paul September 23, 2007 at 1:56 pm

Todd, some big problems with some of your statments.

“At stake was Microsoft’s ability to arbitrarily declare that something which everyone thought of as an application was now part of the operating system and therefore immune from anti-competitive laws.”

Your first mistake is desiring anyone to be subject to the state’s ‘anti-competitive’ or ‘pro-competitive’ laws. There is only one legitimate law that says anything about competition, and it doesn’t come from the state: it’s the non-aggression axiom, and anyone who follows it is ‘free to compete’. The only way MS broke it was by playing with the treacherous tools the state put in the sandbox: IP, regulation, and subsidy. The only party guilty of any kind of ‘anti trust’, in the MS case or in any other, is the state.

As for microsoft arbitrarily defining things however it wants, that’s their right and it’s my right and it’s your right too. This is not a crime. When the rubber meets the road and cash is voluntarily handed over, you will see who agrees with the redefinition or not. Obviously enough consumers were fine with it to make MS hugely successful.

Meanwhile, anyone who doesn’t like MS’s product is free to just not buy it. If you don’t like eating peas, then don’t eat peas. And if you starve because of your boycott – and here’s the critical point – that’s NOT the pea farmer’s fault.

“This was tantamount to a government sanctioned monopoly because it effectively allowed microsoft to use anti-competitive tactics to expand into any functional domain they wanted. Many in the industry were very opposed to this.”

Expanding into any functional domain is every actor’s right. Do you seriously see a basis for restricting this? I sketch, play music, write software, cook, renovate homes, and sometimes on a good day I even succeed in dressing myself. And who knows what other functional domains I may expand into in the future, and what synergies I may explore between them. Am I guilty of antitrust?

You say no? Why – just because I’m not selling my output?

Everyone is free to compete unless they are aggressed against. I’m not sure what anti-competitive tactics you are referring to, but unless your list includes physical theft, threats of physical harm or death, blatant breach of contract, or any other AGGRESSIVE actions, then your list had better be blank.

Many in the industry may be opposed to microsoft doing amazing things that fueled customer demand, just as many in society are opposed to anything other people do, such as wearing bad fashion, eating certain foods, participating in same-sex relationships, etc.

Of course there’s always a bunch of sour-grapes meddlers who always blame every dissatisfaction of theirs on someone else, and they think no amount of violence is too great to rebuild the world in their own image. Fact is, with an attitude like that, no one needs or wants them.

Like the stubborn pea-hater, their misfortune is theirs to own.

RdC September 28, 2007 at 4:26 am

The trouble with Microsoft is that few economists seem to understand the software-market.

I fully agree to everything Mr Armentano sais when it is about standardized markets (like screws which are produced in standardized sizes) or markets without needs of standards (like shoes which are produced in various non-standardized sizes and without need for standardization.)

The problem – and the problem many economists don’t understand – is that software works completely differently. In software, standards are very important because without them software couldn’t work neither with each other nor with hardware.

Now unlike mechanical standards, many standards in software are technically very hard to follow for the competition – if not outright illegal because of IP-laws.

Imagine a screw-maker who “owns” the interface to all screwdrivers. How could any competing firm ever sell a single screw? Since now screwdriver would fit their unstandardized screws and they are not allowed to use the interface they don’t have a chance.

The situation with Microsoft is pretty similar. Take Office for example. Office is not bought because of low price or superior quality, but because “everybody uses it” and you want to be able to exchange documents with others. Since the file format is hidden, undocumented, patented and full of bugs it is very hard to completely emulate the format by an independent software vendor (however Openoffice does a great job in doing it).

The other thing Microsoft is guilty of doing is using special discounts to make sure computer-makers don’t ship any competing product. Of course Microsoft is getting ever more greedy and hardware cheaper so Microsoft’s licenses make up an ever-increasing share of the price of a computer so the first cracks on that scheme already appeared (for example Dell already sells Linux preinstalled although they don’t advertize it and several Linux-only computer makers appeared) but Microsoft has still a very strong position on Laptops for example. Google “Microsoft tax” to know what I mean.

Everybody who knows the industry also knows how Microsoft has crippled and slowed down the whole industry. In my opinion, Microsoft is the proof that a constant source of income will turn any company into an incompetent and slow government look-alike.

Mike Schamer December 6, 2007 at 2:36 am

(Hopefully this will display with correctly formatted paragraphs…after all this time spent writing it, please, oh please…)

RdC’s comment just above mine is right on the money. This comment will probably never get read (hence I will alter the audience a bit and email it to the original article author instead), but I believe that there are some serious flaws with Armentano’s understanding of both the power of a monopoly and Microsoft’s case in particular.

An example of a predatory monopolistic practice that hinders competition:
_________________________________________________________________________
Early in the article, Armentano recognizes the fact that monopolies can draw upon their bankrolls to become “loss leaders” and kill off some competitors (who don’t have the bank accounts to back such low prices for long), then make prices skyrocket again. However, his understanding fails when he says, “Even if a dominant firm were to succeed temporarily and eliminate some of its rivals, competitors would likely return when and if prices were increased to profitable levels.” He says this as if it’s the easiest thing in the world, and the way he glosses over it makes me wonder if he *knows* this is where his logic falls apart.

Let’s scrutizine the situation. “Competitors would likely return…” How are they going to do that? Consider this scenario: A predatory monopoly dominates a market sector that inherently has little to no product differentiation (i.e. companies only compete on price). Whenever the market is clear of competitors, the monopoly exploits its position and prices its products exorbitantly. Any time an upstart company (or several) decides to join the market, the monopoly takes advantage of its massive stacks of money by temporarily lowering prices to utterly unprofitable and unmatchable levels, which quickly bankrupts the upstarts. Once a company goes out of business, it’s not likely to come back to market anytime soon, and the same will happen to the next wave of upstarts, too. There are only three ways to break this cycle without government intervention:
1.) An existing company joins the fight: Another large existing company moves into the market sector where the monopoly does business. Then, since it has enough money in the bank, the monopoly has to compete legitimately and can’t quickly drive the new company under. Still, this is such a barrier to entry that it precludes all small businesses, which is obviously harmful to the economy as a whole (consider what would happen if the majority of market sectors were run like this?).
2.) Attrition: A bunch of upstarts decide to selflessly join the fight one after another, knowing full-well they’ll be slaughtered like sacrificial lambs, but slowly, they’ll be wearing down the monopoly through attrition. Quite frankly, this would never happen – not that many companies will willingly go bankrupt just to have a role in defeating a monopoly.
3.) Consumer awareness: Consumers recognize the situation they are in and buy from the competing companies (despite higher prices) to end the monopoly. Unfortunately, this is also extremely unlikely to happen. The fact is, consumers have short-term memories, and they’re not likely to support the upstart companies over the monopoly (which has lower prices for the short time the upstarts are around). Do they therefore deserve what they get (a continued monopoly)? Perhaps…but it still has a negative long-term effect on all consumers, all businesses except for the monopoly, and the overall progress of the market and/or technology whole.

When it comes down to it, the only real way for free market forces to end this type of monopoly is if another existing large company decides to enter the same market sector. Is this really fair? Is this what free market capitalism is supposed to be? When only the “big boys” can get past the entry barriers, something’s wrong. Besides economic freedom, the major premise behind following a competitive economic model like capitalism over a cooperative economic model like socialism or communism is that competition encourages progress, whereas cooperation/lack of competition encourages stagnation and sloth. In the scenario outlined above, “free market capitalism” can naturally morph into something closer resembling an economic dictatorship. Government is not necessarily the only entity capable of restricting the freedom of others; in an indirect way, monopolies can exercise their own “freedom” to unfairly preclude competitors from gaining a foothold in a market at all. Such a scenario is a poster child for antitrust laws, since it shows that market forces can actually lead to a situation where neither advantage of capitalism holds:
- There’s no competition, and therefore there is no progress, consumers are exploited, etc.
- Only one company has the freedom to act, at the expense of all others. Sure, government isn’t preventing them from competing, but they’re being prevented all the same.

I’d honestly love to see someone prove me wrong here and explain how/why this coercive scenario is impossible. An obvious argument is, “Well, people can choose not to buy anything at all…” Perhaps this is valid, but I’m not so sure. While I’m far too tired to actually think of a good practical example, assume for the sake of argument that the monopoly is selling something that consumers don’t *need* but that they would be hard-pressed to go without. The monopoly pricing is low enough that people are willing to stomach it, but it’s still high enough to be exploitative. I’d actually be very grateful to be legitimately proven wrong here and shown that this can never happen…somehow I doubt I will be, though.

MICROSOFT IN PARTICULAR:
________________________
I don’t know much about the other cases, so I can’t offer any rebuttal; that said, I can definitely point out where Armentano’s understanding of the Microsoft case fails. To try to get this across, I’ll break this up into sections:

I.) What is an operating system, and why does it differ from ordinary standalone software applications?
As its primary offering, Microsoft sells Windows, a computer operating system. Operating systems are different from most software (and most products in general) because they’re really not all that useful to anyone by themselves. What really makes a computer useful to someone is the software applications that run on a particular operating system. In that way, the operating system is really just a platform that everything else runs on, a kind of software infrastructure that all compatible programs must be designed around.

II.) How and why Microsoft really is a monopoly (or a near monopoly)?
First, let’s differentiate the server market from the PC market, since Armentano failed to see the clear divide (and wrongly insinuated that such differentiation was a superficial ploy to make Microsoft’s market share seem higher than it is). The PC market and the server market are very distinct, clearly defined market segments that compete on somewhat different merits. In the server market, customers don’t typically need a very large selection of software applications; only a few major programs are regularly used, which means that each platform (Windows, Linux, BSD, Solaris, etc.) generally has all of the software available for it that customers need. Due to the relatively small numbers of applications, it has not been too difficult for the people in each OS camp to create all of the necessary server software and/or convince just a few independent software vendors to port their programs to specific operating systems. What this means is: In the server market, each operating system can largely compete on its own merits instead of the size of the available software library. This is the way it should be, and it results in some nice, healthy competition between several different operating systems. Windows still has the dominant market share (in many ways due to the familiarity people have with it on the PC – it’s a known entity), but unless there’s something I don’t know about, I’d say they’re winning here through honest competition. Microsoft does not have a monopoly in the server market.

However, the PC market is very different. In order for a PC to be useful to end users, people require access to a large and varied library of application software. The average family computer is used by multiple people with varying wants/needs. Typically speaking, a single paying customer requires many of the following types of software to be available: web browsers, multimedia software, office software, graphics software, games, and last but not least, any number of small novelty programs. When the average person downloads a piece of software from the Internet, he/she expects that application to just work. With Windows, people get all this, and with competing operating systems, it’s a lot more hit or miss (though it is slowwwwwly improving). Why? It’s not because Windows is inherently better. People choose Windows because it has much more software available for it (almost all software is made for Windows). Windows has more software because more software developers make software for it. More software developers make software for Windows because more people choose Windows (to the point where it’s simply unprofitable for most companies to write software for any other OS). In case you haven’t noticed, there’s a cycle here – it’s a “chicken and the egg” situation. Windows is not necessarily winning because Microsoft has the best product, nor is it winning because Microsoft’s product is cheaper. People don’t necessarily like Windows better; they’re just tied into it. It’s continuing to win simply because it’s already winning. It’s an established software infrastructure.

Before continuing, it’s worth taking a look at Microsoft’s real market share. When you accept the clear distinction between the server OS market and PC OS market, it is apparent that Microsoft’s market share in the PC sector really can and should be viewed on its own (without respect to its share in the server market). The first site the comes up in a Google search for “microsoft market share” is http://www.windowsitpro.com/Article/ArticleID/40481/40481.html, which indicates that:

“According to the report, “Worldwide Client and Server Operating Environment Market Forecast and Analysis, 2002-2007,” Windows desktop OS sales worldwide increased from 93.2 percent of the market in 2001 to 93.8 percent in 2002, accounting for more than $9.75 billion in sales. Various Mac OS versions stalled in second place, with just 2.9 percent of the market (and 2.2 percent of the revenues), although IDC noted that Apple will soon relinquish second place to Linux, which saw desktop growth in 2002 to 2.3 percent of the market. All told, 121 million client OSs shipped in 2002, IDC says; about 113 million were XP, 3.5 million were Mac OS, and 2.9 million were Linux.”

Do these figures take into account all of the Linux installations out there? Probably not, since copies of Linux distributions can be freely copied and are thus difficult to quantify. However, if the figures don’t take into account downloaded copies of Linux, they also likely don’t take into account the large number of pirated copies of Windows throughout the world. Therefore, the numbers are likely to be a wash. While I have not verified this 93.8% market share figure anywhere else, it seems like a reasonable enough estimation based on every other market share assessment I have ever seen except for Armentano’s. Whereas Armentano insinuated that the government’s assessment of Microsoft’s market share was contrived to support their conclusion, it seems to me that ironically, Armentano’s own figures are the contrived ones.

Hopefully, I’ve already made it clear that other operating systems have so much trouble competing not because of their inferior quality but because of their available software library. Obviously, it’s not nearly as easy for someone to simply switch to a competing OS (no matter its relative merits) as it is for them to switch what brand TV they buy, what brand clothing they buy, etc. Now, I’ll explain just one of the ways Microsoft leverages their monopoly status in an anticompetitive manner: An application program interface (API) is the software framework that application developers rely upon to write their software and make it compatible with an operating system. Every chance they get, Microsoft decides to eschew any kind of otherwise-industry-standard software API in favor of integrating their own proprietary API’s into Windows. They do this because they know three things:
1.) They have an effective monopoly, so anyone wanting to make much money writing software programs will have to write software for Windows…and to write software for Windows, they almost always have no choice but to use several of Microsoft’s proprietary API’s. There are exceptions, but this is a general rule of thumb.
2.) This means that in order to port a software application to another platform, a company would have to spend a lot of time and money rewriting and reworking a large part of the code. This makes it even more unprofitable to write software for other platforms, thereby perpetuating the “chicken and egg” cycle.
3.) Because their API is proprietary, nobody else knows how it works, so it’s extremely difficult for competitors to enable cross-platform compatibility through reverse-engineering (especially without running afoul of patents and copyright law). To explain how difficult it is to do, it’s somewhere in the ballpark of being a blind man trying to draw a detailed map of the United States based on some vague comments he once heard about US geography. It can be done, but it takes a long time, a lot of blind men, and constant feedback from people who can pretty much only say, “Yep, that’s right,” or “Nope, that’s all wrong.” Also, if it turns out that any one of the blind men was ever in his life able to see a US map, everything he did has to be scrapped.

To be sure, Windows does not have a 100% monopoly. There is active competition working against them, and by some accounts, it is gaining ground. During my explanation of the “compete on price” monopoly situation, I mentioned above that consumers have short-term memories and will continue to support their oppressors so long as they have the lowest price *today*, regardless of what yesterday brought or tomorrow will bring. However, in market sectors with product differentiation, I agree that a free-market monopoly is probably unable to *indefinitely* sustain coercive monopoly status. To a very limited extent, there is indeed some competition in the OS world. Mainstream users value the size of the available software library above all other considerations, so they’re locked into Windows. Nevertheless, competitors are able to appeal to other niche groups. For instance, despite the consistently small software library available for Macs, Apple is able to compete amongst a demographic of young, trendy people by creating an image of “cool” and a sense of brand identity. Linux, on the other hand, is able to compete amongst a demographic of PC hobbyists, programmers, techies, and idealists who value freedom from Microsoft (and/or all proprietary software) above the size/usefulness of the software library. What’s unique about this group is that many tend to have programming skills, and they put their skills, idealism, and free time to use by working to create some of the most important software that their preferred OS lacks, thereby improving the software library themselves. A lot of enterprise companies are doing the same, which has created a growing software library on the Linux platform. That said, despite such advances, Linux (and other OS’s) can never break into the mainstream until enough independent software vendors port specific applications that people want/need from Windows. That requires the status quo to change in the “chicken and the egg” scenario. It probably will eventually happen on its own accord through free market forces, but it has taken so long (and possibly will taken so much longer) that you have to honestly ask yourself the following questions:

Even if the free market can correct coercive monopolies by itself, how long should we have to wait for it to do so? When it takes decades or even generations for free market forces to bring back competition, is waiting really an appropriate solution? How long does the industry have to stagnate, how long do consumers have to pay exorbitant prices, and how long do entrepreneurs have to get unfairly run out of business before someone says, “Enough is enough!”?

III.) Why is the Netscape case relevant?
So, I’ve hopefully made it clear why Microsoft had (and has) a near-monopoly on the PC operating system market. As I mentioned before, mainstream PC users simply have to buy Windows (either off-the-shelf or as part of the cost of their PC). Because of the software library issue, mainstream users don’t really have any viable alternatives, and they view the price of buying Windows as just part of the price of buying a PC.

Now, according to antitrust law, it is improper for a company to leverage its monopoly status in one market sector in order to encroach on another. Obviously, the Mises Institute disagrees with this, but I will now attempt to explain why it is an important consideration: Netscape sued Microsoft for encroaching on their market territory by irrevocably tying Microsoft Internet Explorer in with Microsoft Windows. If they were suing any other company, this would be absolutely laughable – after all, it’s totally up to any company what products they wish to bundle together, right? I’ve noticed that some people comment, “But Mac, Linux, etc. all include browsers in their OS now!” They miss the point that none of these other companies have such a dominant (and coercively enforced) market share that they use to encroach upon other markets, hence they should be free to “tie in” whatever products they want. However, this case is different, because mainstream PC users *had* to buy Windows to use their PC, which means they *had* to buy Internet Explorer. Sure, they can get Netscape Navigator in addition to Internet Explorer, but why would they when they already paid good money for Internet Explorer (through no explicit choice of their own)?

I expect at this point that some might call foul and say, “Nobody paid money for Internet Explorer! Internet Explorer came for free as part of Windows!” Ah, but here’s the catch: Nothing is free in the world of commercial software. The development of Internet Explorer had to be paid for somehow, and you can be sure that Microsoft didn’t just eat the cost due to their charitable, giving nature. No, the cost of Internet Explorer was simply rolled up into the cost of Microsoft Windows, the OS that mainstream consumers have been effectively coerced into buying. Windows was more expensive *because* Microsoft included Internet Explorer, and consumers had no choice in the matter. Hence, Microsoft leveraged their (near-)monopoly status in the OS market to encroach on the browser market and stamp out any competition by default. Interestingly enough, the real problem is not the anticompetitive nature of this tactic, but the anticonsumer nature of it. Firefox proved several years later that a significantly better product truly can gain market share over a monopoly’s tie-in product. The people who really took the hit were the mainstream PC users, who were forced to pay for something they may not have wanted (Internet Explorer) in order to buy something they had little choice in buying.

When it comes down to it, I actually do tend to agree that Netscape’s case in particular was frivolous. After all, Firefox’s success (at a time when Internet Explorer was far more dominant than in the Netscape era) proves that competition always stood a viable chance, hence Microsoft clearly did not successfully extend their coercive OS monopoly to the browser market.

Still, I hope I’ve illustrated two important things through this diatribe about Microsoft:
1.) Microsoft is indeed a coercive near-monopoly. Its OS competitors (MacOS to an extent, but particularly the Unix/Linux/BSD families of operating systems) are at an unfair disadvantage due to Microsoft’s existing overly dominant market share, and mainstream consumers are forced into paying monopoly-level prices with no viable alternatives. Due to product differentiation, there is inherently some competition in niche demographics, but there is no real competition at the mainstream level, as indicated by prevailing consumer attitudes and Microsoft’s >90% market share. While free market forces can and will eventually correct this, they’re extremely slow-acting. Is it really reasonable to make consumers and entrepreneurs wait for well over a decade (perhaps several decades…who knows how much longer it will last?) for competition to finally have a fair chance?
2.) While Netscape itself had no case on anticompetitive grounds for Microsoft’s tie-in of Internet Explorer with Windows, Microsoft’s behavior was nevertheless inappropriate, anticonsumer, and indicative of a coercive monopoly.

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