South-Western College Publishing - Economics  

Policy Debate: Is Microsoft A Monopoly?

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
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

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.

The specific actions with which Microsoft has been charged include:

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

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.

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.

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, and
  • several of Microsoft's contracts had anti-competitive effects.
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 was 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, was removed from the case. Microsoft submitted an appeal to the U.S. Supreme Court. (This appeal was rejected on October 10, 2001.)

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.

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 were still several private antitrust actions pending against Microsoft. AOL and the Be Corporation each brought antitrust charges against Microsoft, claiming that Microsoft has undertaken actions that harmed the producers of Netscape and BeOs. Both of these cases were settled in the summer of 2003 with Microsoft making a payment of $750 million to AOL and $23.25 million to BeOs. The European Commission has been discussing possible antitrust action against Microsoft for some time.


Primary Resources and Data
  • Antitrust Division of the U.S. Department of Justice
    The Antitrust Division of the U.S. Department of Justice (in cooperation with the Federal Trade Commission) is charged with investigating possible cases of antitrust violation, analyzing merger applications, conducting studies on competition and antitrust policy, and prosecuting violations of antitrust law.

  • Federal Trade Commission
    The Federal Trade Commission (FTC), in cooperation with the Antitrust Division of the Department of Justice, is charged with enforcing U.S. antitrust laws. This web site contains information on recent antitrust cases, press releases, speeches, and other information relating to U.S. antitrust policy. While at this site, be sure to examine the mission statement of the Bureau of Competition, the FTC's antitrust division.

  • The Antitrust Case Browser
    Anthony Becker of Saint Olaf College provides this site that contains summaries of U.S. antitrust cases, U.S. Supreme Court antitrust decisions, and links to a variety of U.S. and international antitrust related web sites. In addition, this site contains the complete text of the Sherman Antitrust Act, and slightly edited and abridged versions of the Clayton Antitrust Act and the Federal Trade Commission Act.

  • U.S. Antitrust Law
    This page, provided by the Cornell University Law School, contains the complete text of current U.S. antitrust law.

  • Pritchard Law Webs: Internet Law Library, "Antitrust and Monopoly Law"
    This web site contains links to an extensive collection of web sites containing antitrust related material.

  • November 5, 1999 Court's Findings of Fact
    The November 5, 1999 Court's Findings of Fact indicate that Microsoft is a monopoly that has used its monopoly power to harm consumers. This document contains the complete text of these findings.

  • June 7, 2000 Final Judgment
    This final judgment contains the order to split Microsoft into two separate companies: one providing the operating system and the other providing application software.

  • United States Court of Appeals for the District of Columbia Circuit, "U.S. v. Microsoft"
    This is the text of the Washington DC Court of Appeals ruling that upheld the finding of fact but vacated the remedy in the Microsoft case.

  • Revised Proposed Final Judgment
    This document contains the 11/6/01 revised proposed final judgment in the federal antitrust case against Microsoft.

  • Revised Proposed Final Judgment
    This document contains the 11/12/02 revised proposed final judgment in the federal and state antitrust case against Microsoft.

  • Comments on the United States v. Microsoft Settlement Provided to the Court on February 14, 2002
    This website contains the text of the 47 "major" responses to the proposed settlement in the Microsoft antitrust case. Only 5 of these argued for the proposed settlement.

  • Microsoft, "Transcript of Microsoft News Teleconference on California Class Action Antitrust Settlement"
    This document contains a transcript of the January 10, 2003 teleconference announcing the settlement of the California class action antitrust suit against Microsoft.

  • The Seattle Times' Microsoft page
    The Seattle Times maintains an archive of newspaper articles relating to Microsoft at this site. This site provides extensive coverage of recent developments concerning Microsoft.

  • Time, "Target: Microsoft"
    This site contains links to articles and statistics concerning the Microsoft case that have been compiled by Time magazine.

  • Yahoo! Microsoft Case links
    Yahoo! provides links to online coverage of the Microsoft antitrust case. This page is updated several times a day and is perhaps the most comprehensive source of current news about the case. Links to online articles and audio and video resources are available at this site.

  • NewsLinx Microsoft Case page
    NewsLinx provides another set of links to online news articles dealing with the Microsoft antitrust case. Links to news articles are sorted by publication date. (Only articles through February 2001 are listed on this page.)

  • FindLaw Special Coverage: Microsoft Case
    This page, provided by FindLaw, contains an extensive collection of links to online information dealing with the Microsoft antitrust case.

  • PC World, "Microsoft Antitrust Case"
    This PC World website contains links to articles dealing with current and past antitrust cases involving Microsoft.

  • Michelle Clark Neely, "Does Big Business Need Taming?"
    Michelle Clark Neely examines the evolution of the economic theory that underlies antitrust policy in this July 1998 article which appeared in Regional Economist, a publication of the Federal Reserve Bank of St. Louis.

  • Linux Online
    Linux is the most widely used unix alternative to Windows in the personal computer market. While the Linux operating system is still free, several commercial vendors provide Linux installation CDs and support services. The availability of this support has lead to an increase in the popularity of the Linux operating system. It still remains, however, a small share of the operating system market.

  • FreeBSD
    FreeBSD is another free unix PC operating system that was an outgrowth of the BSD unix package that was one of the first major operating systems for unix mainframe computers, minicomputers, and workstations. FreeBSD currently appears to be somewhat less popular than the Linux version of unix.

  • BeOS
    BeOS is another, relatively recent, operating system that operates on Intel and PowerPC hardware platforms. The Be corporation, however, was dissolved in 2002. The rights to the operating system have been sold to a subsidiary of Palm. A separate antitrust case was brought against Microsoft by the Be corporation.

  • Freebyte, "Free and other operating systems"
    This page contains an extensive list to information about alternative operating systems.


Different Perspectives in the Debate

  • Department of Justice Antitrust Division's Microsoft Antitrust Case Filings
    This page contains online copies of the Antitrust Division's filings in the Microsoft case. This is the most comprehensive source of detailed information on the Justice Department's antitrust case against Microsoft.

  • Microsoft - PressPass: Legal News
    PressPass is Microsoft's web page devoted to presenting its side of legal cases in which it is involved. This site contains a variety of online articles stating Microsoft's positions and links to speeches, testimony, and online articles that support Microsoft's positions.

  • Consumer Project on Technology's Microsoft Antitrust Page
    The Consumer Project on Technology, an organization begun by Ralph Nader, provides a series of links to online materials related to the antitrust case. Most of these materials provide arguments suggesting that Microsoft has violated U.S. antitrust laws.

  • Ralph Nader and James Love, "June 15, 1998 letter to Assistant Attorney General Joel Klein"
    In this June 15, 1998 letter, Ralph Nader and James Love provide a series of arguments suggesting that Microsoft has taken a variety of actions that have reduced competition in computer software markets. They note that it is impossible to buy a nationally branded PC-compatible personal computer without also buying the Windows operating system. Nader and Love argue that this substantially raises the cost to consumers who prefer the use of an alternative computer operating system. They suggest that the Justice Department should take into account the importance of encouraging the free software movement in pursuing its case against Microsoft.

  • Ralph Nader and James Love, "Ralph Nader Tells Feds to Stop Microsoft"
    In this 11/9/98 ComputerWorld article, Ralph Nader and James Love argue that Microsoft has used a variety of illegal tactics to restrict competition in the market for browsers, server products, programming languages, word processing software, spreadsheet software, and many other types of software products.

  • Nathan Newman, "From MSWord to MSWorld: How Microsoft is Building a Global Monopoly"
    Nathan Newman, the Project Director of NetAction, argues that Microsoft is trying to attain dominance in a wide variety of software markets. This article details Microsoft's recent acquisitions in a variety of software product markets and describes a series of actions that Microsoft has taken to deter competition from other software products and operating systems. NetAction argues that the government should:

    ...step back in to vigorously defend open standards and open competition, while carefully guarding against even the smallest abuses by Microsoft since even minor abuse by such a dominant player magnifies its advantages due to the network effects of the new economy.

  • Richard B. McKenzie and William F. Shugart II, "Is Microsoft a Monopolist?"
    Richard B. McKenzie and William F. Shugart II build a case in support of Microsoft in this Fall 1998 Independent Review article. They argue that Microsoft has reduced its profits by giving away Internet Explorer. A monopolist would be expected to charge a monopoly price for such a product. McKenzie and Shugart argue that Microsoft realized network externalities only as a result of its long track record of successful innovation. They suggest that there are no "commercially reasonable alternatives" to Windows because Microsoft has acted in a competitive manner, rather than as a monopolist. According to their argument, Microsoft would have been faced with many active competitors if it had attempted to restrict output in order to receive monopoly profits. McKenzie and Shugart note that Microsoft charges computer vendors approximately $45 for a Windows license and CD. They argue that "[f]orty-five dollars for an operating system that incorporates millions of lines of code and is fairly powerful and easy to use does not seem like the price a monopolist would choose."

  • Virginia Postrel, "Creative Insecurity"
    Virginia Postrel discusses the reasons for Microsoft's success in this online Reason article. She notes that Microsoft's success was partly the result of Apple's attempts to behave like a monopolist. She argues that Microsoft, on the other hand, has always behaved in a more competitive manner by charging low prices.

  • Bill Gates, "U.S. v. Microsoft: We're Defending Our Right to Innovate"
    In this May 20, 1998, Wall Street Journal Op-Ed, Bill Gates argues that the Windows operating system evolved in response to consumer demands. He notes that car companies have often added new products as standard equipment that were initially separate products. Gates suggests that the integration of the Internet Explorer browser is an analogous response to evolving technology and consumer demand. He argues that the government should not be able to limit a firm's ability to improve its product to better satisfy consumer demand.

  • Franklin M. Fisher, "May 12, 1998 Declaration in the Case of U.S. v Microsoft"
    In this statement, Franklin M. Fisher argues that Microsoft has engaged in policies designed to limit competition in the market for internet browser software.

  • Robert A. Levy, "Microsoft and the Browser Wars: Fit To Be Tied"
    In this February 19, 1998 Cato Policy Analysis article, Robert A. Levy examines the Justice Department's arguments against Microsoft's bundling of Internet Explorer with the Windows 95/98 operating systems. He argues that government interference with market incentives is inappropriate in the dynamic and competitive software market. Levy suggests that the bundling of Internet Explorer with the Windows operating system is no more harmful to competition than "the packaging of tires with automobiles, cream with coffee, laces with shoes, even left gloves with right gloves." He suggests that the problem lies with antiquated antitrust laws, not with Microsoft's actions.

  • Stan Liebowitz and Stephen E. Margolis, "Dismal Science Fictions: Network Effects, Microsoft, and Antitrust Speculation"
    In this October 27, 1998 Cato Policy Analysis article, Stan Liebowitz and Stephen E. Margolis note that it is often argued that Microsoft's large market share is the result of an historical accident. This argument suggests that an inferior product (Microsoft DOS and later Microsoft Windows) became the "standard" as a result of Microsoft's role as the provider of the initial operating system for IBM compatible computers. Liebowitz and Margolis provide several theoretical and empirical reasons to dispute this "lock-in" argument. They also argue that Microsoft's success is the result of successful innovation, rather than anticompetitive practices. (To view this document, the Adobe Acrobat viewer plugin is required. You may download this viewer by clicking here.)

  • Stan Liebowitz, "A Defective Product: Consumer Groups' Study of Microsoft In Need of Recall",01559.cfm
    In this February 9, 1999 Competitive Enterprise Institute article, Stan Liebowitz argues that several consumer groups have provided flawed evidence against Microsoft. Liebowitz argues that consumers have benefited from Microsoft's software products and pricing decisions.

  • William F. Shughart II, "The Government's War on Mergers: The Fatal Conceit of Antitrust Policy"
    In this October 22, 1998 Cato Institute article, William F. Shugart II argues that antitrust policy does not necessarily benefit consumers. He suggests that antitrust action is often brought as a result of pressure from competitors who are concerned about the potential effects of large enterprises on product prices and not from concerns over the effect of economic concentration on consumers. He suggests that antitrust policy, while designed to protect consumers from monopoly prices, may instead help to maintain higher market prices by preventing the realization of economies of scale.

  • Nicholas Economides, "Analysis and News of US v. MS"
    On this site, Nicholas Economides provides an analysis of the antitrust case against Microsoft, a collection of online articles and analysis related to the case, and links to other sources of information. Those who are not familiar with the concepts of network economics may wish to examine his dictionary of terms in network economics. In a paper on "Competition and Vertical Integration in the Computing Industry," Economides argues that government regulation of the rapidly changing computer industry is a dangerous practice.

  • Stan Liebowitz, "Bill Gate's Secret? Build Better Products"
    In this October 1998 Wall Street Journal op-ed, Stan Liebowitz argues that Microsoft's market dominance is due to its successful innovation and high quality products. Evidence from a survey of product reviews is used to support this claim.

  • Stan Liebowitz, "Should Microsoft be Broken up? No. Breaking up Microsoft is disruptive"
    In this January 28, 2000 op-ed piece in the Dallas Morning News, Stan Liebowitz argues against a break up of Microsoft. He argues that Microsoft's presence in software markets has resulted in lower costs to consumers. Liebowitz suggests that breaking up Microsoft will lessen competition since it is currently one of the few firms that is large enough to compete with AOL/Time Warner and AT&T in the emerging market for broadband content.

  • Christian Ahlborn, David S. Evans, and A. Jorge Padilla, "The Antitrust Economics of Tying: A Farewell to per se Illegality"
    In this Spring/Summer, 2004 article appearing in The Antitrust Bulletin, Christian Ahlborn, David S. Evans, and A. Jorge Padilla argue that tying contracts offer both costs and benefits. They suggest that the Washington D.C. Court of Appeals has, in the 2001 Microsoft decision, moved to a "rule of reason" interpretation of the antitrust law prohibition on tying contracts. It is suggested that this approach is consistent with modern economic analysis.

  • Boycott Microsoft, "Microsoft Hall of Innovation"
    This web site contains a list of "innovations" that are alleged to have been developed by Microsoft and, where possible, provides evidence of the earlier use of these concepts by other software companies. It is suggested that Microsoft has not provided many significant innovations.

  • Robert Litan, Roger Noll, William Nordhaus, and F.M. Scherer, "U.S. v Microsoft - amicus curiae brief of April 27, 2000"
    In this amicus curiae brief, Litan, Noll, Nordhaus, and Scherer recommends that Microsoft be divided up into three competing firms that would sell the Windows operating systems and a fourth firm that would sell applications software. It is argued that this remedy would eliminate the monopoly power that has been the source of the problems in this market. They note that Microsoft has displayed conduct that suggests that less severe remedies would not be effective.

  • April 27, 2000 Declaration of Paul Romer
    This document contains Paul Romer's evaluation of the government's proposed plan to split Microsoft into separate operating system and software application companies. He suggests that this plan will encourage innovation and economic growth.

  • Salon, "Microsoft wins -- or does it?"
    This June 28, 2001 Salon article examines the decision of the Washington DC Court of Appeals. Reactions to this decision from several economists and other analysts are also included in this article.

  • Robert Reich, "Electrosoft: A Fable for Today"
    Robert Reich argues for an end to the Microsoft monopoly in this July 2, 2001 American Prospect article. He suggests that the best solution would be to make the Microsoft operating system freely available. Reich indicates that Microsoft's control of the operating system market gives it the ability to set standards that can be used to eliminate competition in other software markets. He argues that the setting of standards is best done by either the government or by the industry as a whole, not by a single firm.

  • Timothy J. Brennan, "Do Easy Cases Make Bad Law? Antitrust Innovations or Missed Opportunities in United States v. Microsoft"
    Timothy J. Brennan critically analyzes the economic arguments used in the case against Microsoft in this May 2002 online article. He suggests that the theory, evidence, and remedies were independent and inconsistent with each other. Brennan suggests some other approaches to the case that would have been internally consistent. (To view this document, the Adobe Acrobat viewer plugin is required. You may download this viewer by clicking here.)

  • Paul R. La Monica, "Microsoft to pay AOL $750M"
    Paul R. La Monica, in this May 30, 2003 CNN/Money article, discusses the settlement of the antitrust case brought by AOL against Microsoft.

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