[Market Economy Guide] The Microsoft Antitrust Case

You Cannot Judge a Monopoly by the Number of Competitors or Market Share Alone

…The key question is whether consumer benefits, such as lower prices, outweigh social losses

The “browser war” refers to competition among web browsers for market share. The first browser war took place in the late 1990s between Microsoft and Netscape. In 1998, the U.S. Department of Justice charged Microsoft with violating antitrust law. The reason was the controversy over Microsoft’s “browser tying.”

Microsoft’s Browser Tying

Browser tying refers to Microsoft’s practice at the time of integrating Internet Explorer into Windows, its core operating system, and selling them together. In fact, until Microsoft announced Internet Explorer 4.0 in October 1997, Explorer’s market share was only 18%. The dominant player in the browser market, with a 72% share, was clearly Netscape Navigator. But in market competition, no one remains the absolute dominant player forever.

Microsoft launched the opening salvo of the “browser war” with the aggressive strategy of “browser tying,” and as a result completely reversed the market-share rankings. Computer users came to use Explorer, which was installed automatically when they installed Windows, and naturally fewer users downloaded and used Netscape Navigator. As a result, Netscape suffered a crushing defeat at the hands of Microsoft and found it difficult to continue operating as an independent company. Finally, in 1998, Netscape was sold to the online service company America Online for $4.2 billion.

Sanctions by the U.S. Department of Justice

The U.S. Department of Justice then unsheathed its sword against Microsoft. This was the 1998 case in which it charged Microsoft with violating antitrust law. The argument was that Microsoft should be held responsible for driving its competitor Netscape out of the market through browser tying.

To state the conclusion first, the Justice Department’s argument was the result of the mistaken belief that the number of competitors and market share are the core concepts that define competition. In reality, competition does not arise simply because there are many competitors or because several firms divide market share among themselves.

Even when one company effectively monopolizes market share, that does not necessarily mean competition is absent. Robert Bork, who served as U.S. Solicitor General and as a judge on the U.S. Court of Appeals, defined competition not by whether competitors exist, but as a state in which efficiency is maximized. This relates to the nature of market competition. Market competition is the process of striving to be chosen by more consumers by supplying better-quality products at lower prices. Therefore, even in a monopoly-like situation without competitors, if a firm strives to lower consumer prices and improve quality, that is much the same as market competition taking place. Conversely, no matter how many competitors there are, if they collude and deprive consumers of choice, that can never be considered fair competition.

Corporate Efforts to Win Consumer Choice

In that context, Microsoft’s browser tying should be understood as a corporate effort to win consumer choice. The Chicago school in the United States understood tying in the real world not as conduct aimed at monopolizing a market, but in terms of sales efficiency. First, it reduces production and distribution costs; second, it lowers transaction costs; third, it enables better products to be made; fourth, it allows price discrimination. In all four respects, tying can provide benefits to more consumers. Therefore, tying should be understood not as an illegal corporate act for monopoly, but as a form of integration aimed at maximizing consumer satisfaction.

That is why the U.S. federal court, which sided with the Department of Justice in 1998, took a different position in 2001. In the case of software platforms, it decided to apply the “rule of reason” to tying. The rule of reason is the principle that conduct is judged unlawful only when the social losses caused by it are greater than its benefits. Accordingly, even if Microsoft tied Explorer to Windows, if it provided convenience and usefulness to consumers, then it should not be regarded as inherently unlawful.

“The Rule of Reason”

It is in the very nature of business to survive competition by constantly transforming and evolving while seeking to differentiate itself from other firms. If such efforts are judged by the arbitrary yardstick of the Fair Trade Commission, and brakes are put on legitimate business activities under the pretext of protecting competitors, market competition will shrink and consumer interests will decline.

■ Please remember

In 1998, the U.S. Department of Justice charged Microsoft with violating antitrust law. The reason was the controversy over Microsoft’s “browser tying.” Browser tying refers to Microsoft’s practice at the time of integrating Explorer into Windows, its core operating system, and selling them together. Microsoft came to dominate the market, and the Justice Department’s indictment led to a trial.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

---

Original title: [시장경제 길라잡이] 마이크로소프트 독점 소송

Author: Sung-no Choi

Date: 2020-03-09

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=9&idx=22458