Creating Competition in the Market for Operating Systems: A Structural Remedy for Microsoft

Abstract

The case against Microsoft raises fundamental questions about the role of antitrust in the digital economy. The government has presented testimony showing that Microsoft is guilty of serious antitrust violations. The district court has now issued comprehensive Findings of Fact that leave little doubt that the government has proved its case. The evidence convincingly establishes that Microsoft possesses monopoly power in the market for Personal Computer (PC) operating systems and that it has engaged in a broad campaign to protect and extend this monopoly through anticompetitive acts in violation of Section 2 of the Sherman Act.

Microsoft's behavior is not just a case of a business practice or two that strays over the line. The district court found that Microsoft engaged in a wide-ranging effort to protect its operating system monopoly, utilizing a full array of exclusionary practices, including exclusive contracts, tying, market-division proposals, and other forms of predatory conduct. Microsoft aimed its artillery at any product or firm that presented even a remote threat to its monopoly power.

Given the court's Findings, it is a virtual certainty that Microsoft will be subject to remedial action of some form. The range of anticompetitive behavior documented by the court, the importance of Microsoft to the computer industry, and the importance of the computer industry to the economy all argue for a serious remedy that will be effective in promoting competition. The remedy should not only address the illegitimate practices Microsoft employed to maintain its operating system monopoly. It should also try to create conditions where Microsoft is not able to leverage its monopoly beyond the desktop into new phases of computing. Whether the chosen remedy is effective in promoting competition in the software industry will have much to say about whether antitrust is viewed as having a constructive role to play in the digital economy.

The parties and the court have an extensive array of potential remedial options at their disposal. These options can be grouped into two general categories - conduct remedies and structural remedies, with intellectual property remedies straddling both these categories.

Conduct remedies would leave Microsoft intact and attempt to constrain its anticompetitive behavior by imposing what would likely be a very detailed set of behavioral requirements - essentially, a regulatory regime tailor-made for one firm. Microsoft's structure - and, importantly, its incentives - would remain the same. Given those incentives, the challenge for the decree court would be to develop rules that deter Microsoft's anticompetitive behavior and, at the same time, permit Microsoft to be an innovative, aggressive, value-creating competitor in the software industry.

Structural relief takes a different approach, and there are several different ways this could be done in the Microsoft case. In contrast to behavioral rules, a structural solution can change the incentive structure facing the firm, and thereby be much more effective in promoting competition, which, as Richard Posner as written, "is the proper purpose of the antitrust laws."

There is no perfect solution, and choosing among the available alternatives requires a careful weighing of their benefits and costs. Structural remedies will generally be more disruptive and impose greater initial costs than behavioral relief. However, the ongoing costs of regulatory oversight associated with detailed behavioral relief can be very large. Subjecting Microsoft's business, and even its technical decisions, to ongoing regulatory scrutiny by the court and the Department of Justice would be harmful for Microsoft and for consumers as well.

Other papers related to the Microsoft Case:

"The Flawed Fragmentation Critique of Structural Remedies in the Microsoft Case" by Robert J. Levinson, R. Craig Romaine, and Steven C. Salop.

"A Fool's Paradise: The Windows World After a Forced Breakup of Microsoft" by Stan J. Liebowitz

"Breaking Windows: Estimating Some Costs of Breaking up Microsoft Windows" by Stan J. Liebowitz

Our database includes more than 20 other papers about the Microsoft case. To find them, please use an "abstract body" search,. and enter "Microsoft" as the search term.

JEL Classification: K21, L4