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
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,
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
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
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:
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
- 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 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
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
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 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 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"
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
- 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
- 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.