An Analysis Of The Government's Economic Case In U.S. v. Microsoft

Abstract:     
U.S. v. Microsoft was mainly about the "browser war" between Microsoft and Netscape. From late 1995 to June 2000, when the court issued its final judgment, Microsoft's Web browser (IE) went from being the choice of less than 10 percent of Web users to about 70 percent, while Netscape Navigator fell from about 80 percent to under 30 percent. The government alleged that Microsoft accomplished this shift by anticompetitive actions, including tying its browser to its dominant operating system and various predatory and exclusionary acts. At times the government appeared to brand virtually of Microsoft's actions - including its large investment in improved quality and its "zero price" - as anticompetitive. According to the government, Microsoft feared that Navigator (and Sun's Java) would attract application developers, thus lowering the "applications barrier to entry" that protects Microsoft's monopoly in the "market" for operating systems for Intel-compatible PCs.

The economic analysis presented by the government was internally inconsistent, based on unsound economic theory, and conflicted with the facts. The government refused to acknowledge that the relevant antitrust market was software platforms - not operating systems narrowly defined - even though its case was mainly about Microsoft's efforts to ensure that Windows would remain the leading platform. That conceptual error forced the government to depend on a series of economic arguments whose logic hinged on software platforms not being a relevant market. In analyzing predation, the government did not acknowledge that platform competition gave Microsoft legitimate reasons to invest in the development and distribution of IE. In analyzing tying, the government refused to accept that Web-browsing capabilities logically belong in software platforms, even though all platform vendors, including IBM and Apple, also have included browsers.

In the end, the court found a relatively narrow set of actions to be anticompetitive, but nonetheless concluded that Microsoft had caused substantial harm to competition in violation of the Sherman Act. But there was no evidence in the record that the subset of actions found unlawful had a material effect on Netscape, let alone on consumers or competition. For example, it was not unlawful for Microsoft to invest $100 million per year in improving IE or to integrate it into Windows without separate charge. The tie occurred only when Microsoft refused to allow computer vendors to disable access to IE. But there was no evidence of significant demand for a browser-disabled operating system. Similarly, it was legal to get AOL to agree to use IE components in the access software distributed to all its members, but not to limit the ability of AOL and other service providers to give copies of Navigator to members who asked for it. But there was no evidence that the restrictions in practice limited AOL's distribution of Navigator or that AOL had an interest in promoting alternative browsers.

JEL Classification: L41

Accepted Paper Series