South-Western College Publishing - Economics  
Microsoft Trial: Competition Bundled Out?
Subject Anti-trust Legislation, Tying Contracts (Bundling)
Topic Market Failure, Regulation, and Public Choice
Key Words Bundling, Competition, Monopoly
News Story

Microsoft is on trial, accused of reducing competition and innovation in the software and Internet markets by virtue of its near-monopoly in operating systems. The government alleges that Microsoft unfairly bundles its Internet browser with its Windows 98 operating system, which is found in 90 percent of new personal computers. The effect, it is argued, is that users are likely to use Microsoft's browser rather than that of Netscape, and be guided into shopping and reading advertising on Microsoft's web site. Certainly, Microsoft's share of the browser market has increased from 3 to 27 percent since 1996, while Netscape's share has fallen from 80 to 41 percent. Potential new operating systems are also less likely to be successful given the near monopoly of Windows. The government also alleges that Microsoft sought to reduce competition through deals with, and threats to, competitors.

Microsoft's response is that its interwoven product is easier to use. PC makers and consumers can always place other software on the Windows screen.

The government would like to see Microsoft's browser and Windows unbundled, PC makers allowed to customize the opening screen, and the end of contracts requiring internet providers to emphasize Microsoft Explorer in return for promotion on the Windows screen.

(Updated December 1, 1998)

1. Which Act covers tying contracts?
2. In what circumstances is the bundling of products illegal under the Act?
3. What kind of market structure might result from bundling? Why?
4. Given your answer to Question 2, what outcomes might result from bundling that are not good for the public?
5. Is the bundling illegal, as the government alleges?

Source Paul Davidson, "Case will open a window to a dog-eat world", USA Today, October 16-18, 1998.

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