Microsoft Monopoly

Here's an interesting article about Microsoft, its monopoly power, as well as some attempts by some US courts to weaken Microsoft's monopoly power. Enjoy.

My comments are in purple.
My highlights are in orange.
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Issues and Background

The current popularity of Windows does not mean that its market position is unassailable. The potential financial reward for building the "next Windows" is so great that there will never be a shortage of new technologies seeking to challenge it. Powerful competitors such as IBM, Sun Microsystems and Oracle are spending hundreds of millions of dollars annually to develop new software aimed squarely at replacing Windows. That is one reason why we price Windows so low. If we increased prices, failed to innovate, or stopped incorporating the features consumers want (such as support for the Internet), we would rapidly lose market share. ~Bill Gates, The Economist, 6/13/98

//According to Bill Gates' point of view, Microsoft is not having a monopoly because it still faces stiff competition from IBM, Sun Microsystems and Oracle, who are trying to dethrone microsoft from its dominant position. It is pressured to lower prices and constantly innovate. This is unlike a true monopoly is which the firm can decide on its price or output without caring about compeition from others.

//If Microsoft becomes complete monopoly, allocative ineffieciency might set in because Microsoft will price a higher price so that MC=MR and this will result in a deadweight loss as well as loss in consumer surplus.

Picture from http://en.wikipedia.org/wiki/Image:Monopoly-surpluses.svg

Everyone who uses a computer or depends on computers has an interest in seeing Microsoft's anticompetitive and anticonsumer practices curtailed by the antitrust authorities. Microsoft's claim that it is defending its right to innovate is a cruel joke in an industry that sees its best innovators attacked by the company's anticompetitive actions. Microsoft's agenda isn't innovation, it's imitation, as well as the imposition of suffocating control over user choices and an ever-widening monopoly.~Ralph Nader and James Love, ComputerWorld, 11/9/98

//Large firms/Near monopolies have the market power to engage in anticompetive practices such as predatory pricing. The primary motivation for this, as suggested by the last sentence, would probably be to increase its monopoly power.

Microsoft operating systems account for approximately 90-95% of microcomputer computer operating systems. Microsoft's Windows operating system has become the de facto standard for home and business computer applications. It is fairly clear that Microsoft is the dominant firm in the market for computer operating systems. The question in the current Microsoft antitrust case is whether or not the computer firm has used its market dominance to restrain trade in violation of federal antitrust statutes.

//Statistics prove that Microsoft is not a monopoly. It does not have 100% of the market.

//antitrust adjective chiefly United States (of legislation) preventing or controlling monopolies.

//Anticompetitive practices are opposed by many goverments as it is unfair.

The specific actions with which Microsoft has been charged include:

• monopolizing the computer operating system market
• integrating the Internet Explorer web browser into the operating system in an attempt to eliminate competition from Netscape, and
• using its market power to form anticompetitive agreements with producers of related goods

//Guess everyone saw that in the "microsoft monopoly" video.

//Eliminating competition is one more step to complete world(market) domination(monoply)!

Under current interpretations of U.S. antitrust law, Microsoft can be found guilty of monopolization in the computer operating systems market only if it used its market dominance to charge a price that exceeds the competitive price. Determining the "competitive price," however, is not an easy task in this market since such a price is not directly observed. Imputing this price from production costs is problematic since many of the costs of research, development, and support in a company such as Microsoft are difficult to accurately assign to individual software products. Those who believe that Microsoft is guilty of monopolization argue that Microsoft has received up to $10 billion in monopoly profits. Microsoft supporters argue that Microsoft has kept prices low because of the threat of potential competition.

//Alleged claims that firms engage in predatory pricing is no simple task as Microsoft argues that they lower price to increase competitiveness. Also, calculating prices is complicated as there are many factors to input.

The government alleges that Microsoft's decision to integrate Internet Explorer into the operating system was designed to eliminate the competitive threat posed by Netscape and Sun Microsystem's Java programming language. Microsoft argues that this action is a natural extension of the Windows environment and that it should not be faulted for providing a free program to all users. The recent purchase of Netscape by AOL is used as evidence by both sides of the dispute. Microsoft argues that this reflects the the dynamic and competitive nature of the software market. Critics of Microsoft argue that this was required only because of the reduction in Netscape's market share as a result of Microsoft's unfair trade practices.

The third part of the government's case is that Microsoft has used its dominance in the operating system market to force other firms to agree to policies that limit competition from products produced by firms that compete with Microsoft.

//Another case of anticompetitive practices

Ultimately, the question that must be answered is whether Microsoft has maintained its market dominance partly by the use of illegal anticompetitive practices. In a somewhat unusual move that may have been designed to spur negotiations, on November 5, 1999, Judge Thomas Penfield Jackson issued findings of fact that were based on the evidence that had been presented on the antitrust allegations. The Court's Findings of Fact held that:

• Microsoft has a monopoly of PC operating systems
• Microsoft harmed consumers through its use of its monopoly powers
• several of Microsoft's contracts had anti-competitive effects

//The common criticism about monopoly is that it limits the choices that consumers have and stifles innovation and improvement as firms become complacent. This is especially true in markets with high start-up costs and MES. Also, prices may increase as the monopoly firms raises its price such that MC=MR and consumer surplus is lost.

On June 7, 2000 a decision was reached that would split Microsoft into two firms, one that would provide operating systems and a second that would provide software applications. The decision has been stayed pending the completion of appeals. On June 28, 2001, the Washington DC Court of Appeals ruled on Microsoft's appeal. It upheld the decision that Microsoft was a monopoly, but vacated the decision to split Microsoft into two firms. The case has been sent back to the District Court for a new decision on remedies. Judge Thomas Penfield Jackson, the original trial judge, has been removed from the case. Microsoft submitted an appeal to the U.S. Supreme Court. (This appeal was rejected on October 10, 2001.)

//This is a case of monopoly regulation in which the government tries to limit the power of a monopoly. The government might see monopoly as undesirable as software companies need constant innovation and improvement, but a monpoly could make Microsoft complacent and not do R&D anymore.

On September 6, 2001, the U.S. Justice Department announced that it would no longer argue that Microsoft should be broken up into separate companies. A settlement with the Federal government was reached on November 2, 2001 that required Microsoft to release portions of its source code to competitors to allow other programs to effectively function under Windows. A substantial amount of this source code was released in AUgust 2002. This settlement also allows computer makers to select which Microsoft products would be loaded onto computers that they sell. While most U.S. states have accepted this settlement, 16 U.S. states and the District of Columbia (as of 4/10/03) are still pursuing antitrust action against Microsoft.

//Interesting method to limit monopoly.

Microsoft had attempted to settle several private antitrust cases with a settlement in which they would have provided free software to schools. This settlement was rejected by Federal District Judge J. Frederick Motz on January 11, 2002 on the grounds that this settlement would have enhanced Microsoft's monopoly power by encouraging schools to replace computer systems that used alternative operating systems. A variation of this agreement, however, that provides for direct compensation of owners of Microsoft products was used to attain a settlement of a class action suit against Microsoft in California on January 10, 2003. Some of the unclaimed funds from this settlement would be used to fund computer purchases by the poorest school districts in the state.

Even with the settlement of the federal antitrust case, there are still several aprivate ntitrust actions pending against Microsoft. AOL and the Be Corporation have each brought antitrust charges against Microsoft, claiming that Microsoft has undertaken actions that harmed the producers of Netscape and BeOs. The European Commission is also currently discussing possible antitrust action against Microsoft.

Acknowledgements: http://www.swcollege.com/bef/policy_debates/microsoft.html