Economics of Networks
Preliminary analysis of US v. MS
This page presents information and analysis on the latest legal battles between Microsoft and the U.S. Department of Justice ("DOJ"). These disputes are of crucial importance to the future of the internet, the personal computers industry, and high technology industries in general.
There are currently two cases of the Antitrust Division of the Department of Justice against Microsoft. The latest one was filed on May 18, 1998. The older one was filed in October 1997. The analysis below focuses on the latest case.
The allegations
In its current lawsuit against Microsoft, the US Department of Justice ("DOJ") and many States allege that Microsoft monopolized the market for PC operating systems and leveraged this monopoly power in markets for complementary goods such as the market for browsers.
There are three main types of allegations of DOJ and the States against Microsoft:
- Monopolization of the market for operating systems for PCs.
- Anti-competitive bundling of Internet Explorer (the Microsoft Internet browser) with the Windows operating systems.
- Anti-competitive contractual arrangements with various vendors of related goods.
Brief analysis
1. To successfully prove monopolization under antitrust law, it is not sufficient for the DOJ to simply show that Microsoft has a large share of the market for PC operating systems. In order to prove monopolization, the DOJ has to prove that Microsoft used its monopoly power. The standard way to prove that Microsoft used its monopoly power is to show that Microsoft sold the operating system at a high price. But, although the actual numbers have not yet been revealed in the trial, it is commonly believed that Microsoft sells its Windows operating system to computer manufacturers at about $30-40. This is far below the "monopoly price" that could easily be as high as $400. Unless the DOJ has a very smart trick up its sleeve, conventional analysis would conclude that the DOJ is unlikely to prove the monopolization allegation.
2. To prove anti-competitive consequences of bundling of Internet Explorer with Windows, the DOJ has to prove that the incorporation of the Internet Explorer in the operating system harms consumers. This may be very hard to prove, since the browser is given away for free. The DOJ would have to prove that at the time of the incorporation of the browser in the operating system, Microsoft increased prices. Again this is very hard to prove. Giving away software, or expanding the capabilities and functionality of existing software is generally helpful and not harmful to consumers.
It has been argued that Microsoft is likely to increase the price of the browser (or the bundle that includes the browser and the operating system) once Netscape has exited the market. The problem with this allegation of predation is that Microsoft has not yet done that. Microsoft, like everyone else, cannot be convicted of a crime it has not yet committed.
3. The third allegation of anticompetitive or exclusionary contracts is the only one in which the DOJ may have a significant probability of success. The potentially anti-competitive effects of such contracts have to be judged on an individual basis. The possibility of existence of anti-competitive effects depends on the specifics and the details of such contracts. Without knowledge of the specifics of the contracts (which have not been made public) it is impossible to judge if any of them were anti-competitive.
Based on publicly available information so far, it is unlikely that the DOJ and the States will prevail in the first two allegations, and it is unclear if the DOJ will prevail on the third type of allegation.
Further reading in increasing order of difficulty
- Dictionary of terms in Network Economics
- Competition in the computer industry
- Network economics
- Compatibility decisions in network markets
- Critical mass and network size
- Raising rivals' costs
- Durable goods with network externalities
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neconomi@stern.nyu.edu
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