All Commentary
Tuesday, February 1, 2000

Hands Off

Microsoft Is Not a Monopoly

A Microsoft study from November 1997 reveals that the company could have charged $49 for an upgrade to Windows 98—there is no reason to believe that the $49 price would have been unprofitable—but the study identifies $89 as the revenue-maximizing price. Microsoft thus opted for the higher price.

Thus wrote U.S. District Judge Thomas Penfield Jackson in November, illustrating, in his view, Microsoft’s monopoly power. Because of its “monopoly” position, Microsoft can charge “monopoly prices.”

That view underlies the government’s entire case. The alleged monopoly enables Microsoft to force adverse terms on other companies and harm rivals by, for instance, bundling its Web browser with Windows and giving it away.

This view is rife with fallacies.

First, by what definition is Microsoft a monopoly? The government says the company has 85 to 90 percent of the market for personal-computer operating systems. That leaves a not insignificant 10 to 15 percent for competitors.

But this gives the government too much credit. Market share depends on how the market is defined. Alan Reynolds has shown that the government narrowly defines the market to further its case. The antitrust lawyers excluded everything except single-user, Intel-based, desktop personal computers. That conveniently leaves out Apple’s Macintoshes (10 percent of the market in late 1998), Sun Microsystems’ units, and all networked computers. They and a host of other computers (such as hand-held models) don’t use the Intel microprocessor. A significant number of personal computers—15 percent—are shipped without any operating system at all. When all this is taken into account, Reynolds calculates that Microsoft’s Windows was on no more than 70 percent of the PCs delivered last year. That’s a hefty share, but a monopoly?

Potential Competition

Another problem for the judge’s monopoly theory is the ever-present potential competition. The marketplace is never static (unless the government makes it that way). Entrepreneurs and venture capitalists are always looking for high returns. Potential competition can soon become actual. No firm is safe. A complacent, inefficient lone seller garnering high returns is begging for competition. As D. T. Armentano has pointed out, the most effective barrier to entry is low returns.

The idea of potential competition makes a mockery of analyses that assay competition by counting firms or computing market shares. The late Yale Brozen documented that concentration in an industry is perfectly consistent with consumer welfare—which confirms the power of potential competition.

Believers in antitrust law don’t understand this. Vice President Al Gore, for example, told a group of Microsoft employees that “competition can be stifled . . . by private action on the part of companies that want to unfairly use market dominance in one sector to stifle innovation in another sector.” The problem with that view is that Microsoft had to innovate to win market share from its Web-browser rival Netscape. Early versions of Internet Explorer left reviewers cold. The product gained ground only after a third version impressed the PC press and then Web surfers. Moreover, Microsoft keeps updating Windows. Improving Internet Explorer and integrating it into Windows was innovation. By the way, Netscape continues to improve its products. Its acquisition by America Online, the leading Internet service provider, only strengthened it. Where’s the stifling of innovation?

No doubt there are would-be innovators who chose not to take on the efficient industry leader. The same thing can be said of any industry. Efficiency is a “barrier to entry,” but it is a legitimate one. If we are doing a proper accounting, we must point out that the large base of Windows users creates economies of scale for anyone who wants to produce applications for Windows-based computers.

Consumers benefit from a standard operating system. It spares them confusion and spawns a large array of software. But that would seem to pose a dilemma: How can we have a standard without stagnation? The free market solves that problem by striking the best balance between stability and dynamism.

The belief that Microsoft has a secure place even in the operating-system market is ludicrous. Rival Linux is spreading, and several manufacturers sell computers Linux-ready. Investors have been eager to put money down on this Microsoft rival. People in the industry may say that Microsoft has a lock on its position, but they don’t act that way. The head of Sun Microsystems, Scott McNealy, complains to Congress that Microsoft “operates beyond the constraints of market discipline.” Meanwhile, he forecasts that in a few years more than half of the appliances used to get on to the Internet will be something other than computers running Windows. That forecast is not outlandish, considering the new devices coming to market. As Richard Doherty, an industry consultant, says, “Windows, which had been a shoo-in, now has competition.”

“Monopoly Price”

The view that Microsoft is a secure and abusive monopoly persists. Stanford University economist Robert Hall says a copy of Windows 98 might have cost $10 less had Microsoft not exploited its monopoly.

What is a monopoly price? It is defined by reference to “competitive price” and is meaningless if that concept can be shown to be empty. The late Murray Rothbard, in path-breaking work more than 35 years ago, blew both concepts to smithereens. Assuming that a seller sets his price at the revenue-maximizing level, above which sales would fall (because demand is elastic), Rothbard asked if that is a competitive or a monopoly price. In Man, Economy, and State he replied: “[T]here is no way of knowing. Contrary to the assumptions of the theory, there is no ‘competitive price’ which is clearly established somewhere, and which we may compare [any given price] with.”

Even if the seller restricts production to raise the price, we still cannot say that it has achieved a monopoly price. “[T]here is no criterion that will determine whether or not he is moving from a price below the alleged competitive price or moving above this price.”

Wrapping up his discussion, Rothbard wrote: “If a concept has no possible grounding in reality, then it is an empty and illusory, and not a meaningful, concept . . . . The concept of monopoly price as distinguished from competitive price is therefore untenable. We can speak only of the free-market price.”

The upshot is that Microsoft is not a monopoly in any meaningful sense. It’s a group of people with property rights who deal with consenting customers. It can’t thwart competitors except by being better in the eyes of those customers.

The government should leave it alone.

  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.