Free-market pundits in Washington have leapt to the defense of Microsoft in its shootout with the Justice Department’s antitrust lawyers. Most of them see the government effort to force a change in Microsoft’s business tactics as yet another example of Washington’s heavy hand crushing Adam Smith’s invisible hand. When Ralph Nader jumped on the bandwagon with a two-day Microsoft-bashing conference earlier this month, the free-market folks were only confirmed in their views.
And they are right to be suspicious of a government lawsuit aimed at one of America’s most successful companies. After all, Attorney General Janet Reno herself announced the latest legal move against Microsoft, and the Justice Department has hardly covered itself with glory under Reno’s reign. It is now widely seen as a shell and a shill — a shell of its former professional self, and a shill for the president. Bill Gates’s Microsoft, for its part, is a highly dynamic enterprise that has helped to change how America creates, transmits, and processes information.
But neither Reno’s failings nor Gates’s achievements nor the massive lobbying effort that Microsoft has unleashed on Congress and the media should be allowed to obscure a few simple facts about this case. Most important, the case should not cause friends of the free market to forget that antitrust laws deserve their veneration, because they keep government’s role as a regulator of industry to a bare minimum.
A disclaimer: Not being a lawyer, I have no idea whether Microsoft is in technical violation of its 1995 consent decree, as Justice now maintains. The company signed that decree rather than fight the Justice Department in court over whether its competitive tactics were unfairly based on market power. But one need not be a lawyer to conjecture that Microsoft possesses substantial market power: Its Windows software runs more than 80 percent of all the PCs in America, and that might well confer monopoly power on it.
Nothing wrong with that. Judge Learned Hand long ago ruled that “the successful competitor, having been urged to compete, must not be turned upon when he wins.” If Microsoft achieved its enviable position as the result of its own efficiency and innovative skill (a proposition that many of its competitors deny, but they would, wouldn’t they?), nothing in the antitrust laws would deprive it of the benefits of its business acumen. Having devised a better mousetrap, Microsoft should be free to wring from its invention every last point of market share and every last penny of profits that it possibly can.
So far, so good for Gates. But now Microsoft has another, and separate, product, a browser that lets you poke around the Internet. Whether that browser is better or worse than competing products, most notably Netscape’s, I do not profess to know. Presumably, if left free to do so, consumers will decide who wins and who loses the race to become the dominant browser provider. They will make their decision based on the price of the product and its features — just as they decide which car to buy and which brand of jeans best suits them. This is, Gates says, just the way he wants it. Writing in the Wall Street Journal, he agrees with customers, who he says “want the decision left to the marketplace, with competition driving improvements.”
But if the Justice Department is correct, Microsoft does not want to take the chance of losing in a one-on-one battle in the marketplace. Instead, it has hitched its browser, also available as a separate product, to its Windows operating system. As Gates himself describes it, “When a PC manufacturer like Compaq, Dell or Gateway chooses to license Windows, it agrees to ship the whole operating system, including Internet Explorer.” The manufacturer, in other words, cannot get Windows unless he agrees to ship Microsoft’s browser, dubbed Internet Explorer, along with it.
Having invented a mousetrap so good that it commands a dominant position, Microsoft now says to the manufacturers, who would be out of business without a license from Microsoft, “You must buy our cheese. Never mind that there are competitive cheeses available that may be more pleasing to the palate, buy our cheese or you can’t have our mousetrap, for which at the moment there is no effective substitute.”
When I posed this analogy to one of Microsoft’s defenders, he quickly replied, “Ah, but in the case we are talking about, the cheese is free. Are you against allowing Gates to give away a browser?” Answer: There is no free lunch. If Microsoft’s bundling tactic succeeds in driving other browser manufacturers from the field, consumers will sooner or later pay in the form of the higher prices or the debasing of a product that inevitably result from the loss of competition. Unless you believe that Bill Gates’s philanthropic proclivities include a desire to give away browsers which he has undoubtedly spent a healthy sum to develop, you must believe that customers will sooner or later pay. They will do so either as part of the price they pay for Windows and its bundled browser, or in a slower pace of innovation should the browser come to occupy a market position as overpowering as that now occupied by Microsoft’s operating system. There is no free browser.
It will take litigation or the credible threat of it to discover all the facts. But if it turns out that Microsoft does have a monopoly position in the market for operating systems, and that it is tying its browser to that monopoly product, conservatives should be appalled. Rather than automatically line up on the side of Microsoft, they should ask themselves just how capitalism is supposed to work. The answer is that it is supposed to confer rewards on those who produce the products that consumers want, at the prices they want to pay, with those preferences expressed in an open and competitive marketplace. Antitrust laws were enacted to maintain that open marketplace, or, as Gates himself puts it, “to ensure that consumers benefit from the widespread availability of goods and services at fair prices.”
Maintenance of an open-access, competitive market is especially important in the case of software products, for two reasons. First, these are markets in which we rely heavily on innovation to improve products and continue to drive down prices. If potential entrants and innovators are warned that any product they may develop will be copied (to the extent the laws allow) and then offered “free” and tied to a monopoly product, they will find something better to do with their energy, time, and money. Result: a stifling of innovation.
Second, the Justice Department contends that “unfettered competition among Internet browser products could lead to development of a computer environment in which business and consumer applications would work regardless of which operating system was installed on the PC.” If this proves to be true — and again, it is the function of litigation to separate mere assertion from fact – – the stifling of competition could help Microsoft perpetuate its market power and convert the rewards it is justly receiving for its foresight and skill into the ill-gotten gains of a firm that substitutes brawn for brains.
All of this is standard antitrust law. Tying arrangements run afoul of the law if separate products are involved (right shoes and left shoes are not separate products, copying machines and the paper they use are); if you have to buy both products to get the one you need; if the seller has sufficient market power to enforce the tie; and if the tying arrangement has more than a trivial effect on commerce.
The courts will decide the facts in Microsoft’s case, barring a settlement. And capitalism will survive either way. But in the long run, the benefits of free markets will be undermined if antitrust law erodes. What more devotees of the free market need to understand is that effective antitrust policy is crucial to the maintenance of the system they support. By forcing producers to compete for consumers’ favor, the antitrust laws maximize consumer welfare. Competition eliminates excess profits; it allocates resources to their most efficient use; it forces firms to produce goods of the highest quality at the lowest price; it stimulates innovation. Businessmen profess a love of free markets but often subvert them by weakening the force of competition, by conspiring with one another, or by engaging in practices related not to a desire for greater efficiency but to an effort to gain a monopoly position. The antitrust laws stand between them and the attainment of that goal.
Equally important, by preserving open markets, the antitrust statutes diffuse private power and preserve maximum opportunities for individual enterprise. This is crucial to the preservation of a broad constituency in favor of capitalism. For if the notion takes hold that the sheer market power of a business confers upon it the right to bar entry to competitors or squeeze them out, regardless of their efficiency or innovative prowess, then the demand for government regulation will increase.
Indeed, history shows that unregulated monopoly power is not acceptable in a democratic society. When electric, gas, transport, and telecom companies were thought to be natural monopolies, the demand for their regulation became irresistible. Government agencies sprang up to set prices, determine the appropriate level of profits, set standards of service, and review investment decisions. This is the grim alternative to maintenance of a competitive market. It is the reason those who want to limit the role of government in economic affairs should enthusiastically endorse efforts to preserve the competitive system. And that means enforcing the antitrust laws.
None of this is to say that the facts of the Microsoft case support the Justice Department: Microsoft argues that the charges are “baseless” and ” perverse,” and it may carry the day with presiding federal judge Thomas Penfield Jackson. His decision will come after both parties have had their day in court. But the outcome of this case is far less important than the general proposition involved: A monopolist should not be allowed to leverage his way to dominance in a related market. That principle will stand. Good thing.
Irwin M. Stelzer, director of regulatory studies at the American Enterprise Institute, is the author, with J. H. Shenefield, of The Antitrust Laws: A Primer (AEI).
