May 18, 1998
Antitrust is What Losers do to Winners in the Free Marketplace
OAKLAND, CAThe antitrust suit against Microsoft brought on by the U.S. Department of Justice and 20 state attorneys general will only hurt consumers and help its politically favored rivals, according to several leading economists.
Microsofts rivalschiefly Netscapeare attempting to use the Justice Department to compensate for their own failures, they argue. These include the failure to develop server- side software and not expanding their Web site into a general purpose search engine like Yahoo! or Lycos.
Netscape will have secured an important competitive advantage if Microsoft is again forced to accede to Justice Department demands. But a victory for Netscape is not the same thing as a victory for consumers, write economists Richard McKenzie and William Shughart, in a forthcoming article for The Independent Review: A Journal of Political Economy.
Stephen Margolis, head of the economics department at North Carolina State University and an authority on competition in information technology, observes: There is a long history of firms that have lost out in the marketplace seeking a different outcome through the courts. Microsoft is the latest victim of such political entrepreneurship. Its products are standards in the PC industry because it has persistently pursued a vision of low-cost computing that meets the demands of large numbers of consumers. This is not a crime, but rather the way that the market works.
But helping Microsofts rivals through antitrust will hamper the vigorous competitionthat has brought tremendous innovation in software, he and other critics of the lawsuit say.
The claim that Microsoft is an anti-consumer monopoly is false. Although Microsoft enjoys a 90% market share in PC operating systems, it hardly qualifies as a monopolist or exploiter of monopoly power because it has not used its market position to restrict output and increase its prices and profitsthe generally accepted criterion of monopoly behavior used by economists.
Instead, Microsoft has kept the price it charges computer makers for its operating system the same for yearsapproximately $45while at the same time increasing output and adding new features. And it has given away copies of Internet Explorer, its web browser, to consumersthe same strategy that Netscape also employs.
If Microsoft someday becomes tempted to restrict output and raise prices too high, it can expect swift and intensified competition from its current competitors like IBM, Oracle, Sun, Apple, Be, DEC, Psion, 3COM, and GEMas well as established non-proprietary operating systems such as Unix and Linuxand from new competitors.
Anyone who has followed the computer industry has witnessed intense competition that has constantly challengedand often overthrownmarket leaders. To recount some of its turbulence:
- VisiCalc lost to Lotus, which lost to Excel.
- WordStar lost to WordPerfect, which lost to Word.
- Dbase lost its dominance. Ashton-Tate disappeared.
- IBM lost its dominance in PC hardware.
- Hayes lost to US Robotics in modems.
- CompuServe and Prodigy lost to America Online. (Microsoft Network badly trails AOL.)
- Borland virtually disappeared.
Many of these names we cannot remember, yet they have all stood at center stage within the last 15 years. Yet had antitrust action been taken at the behest of the losers, this competitive process of creative destruction would have been underminedmuch to the detriment of consumers, who have unquestionably benefited from this intense competition. Political favoritism, inertia and ossification would have replaced dynamic entrepreneurship, effort and innovation.
Among economists, the belief that antitrust is often the tool that sore losers use against successful competitors is gaining ground.
The conviction that antitrust serves as a bulwark of free enterprise is not based on careful studies showing that enforcement of the laws has actually promoted market conditionsthere is no such evidence in the historical record, write McKenzie and Shughart.
Shugharts 1995 book with Fred McChesney, The Causes and Consequences of Antitrust: A Public Choice Perspective, provides considerable evidence of antitrusts failure to produce benefits for consumers. Economist Dominick T. Armentano, author of Antitrust and Monopoly: Anatomy of a Policy Failure shows that antitrust restrictions on price discrimination and tying agreements have served to protect inefficient competitors and thus harm consumers.
As Independent Institute Fellow Paul Craig Roberts puts it: Economists have known for decades that antitrust is what losers do to winners.
Ultimately, consumers will be the greatest losers in the Justice Departments war against Microsoft and the marketplace. Not only will consumers have a harder time getting access to quality software, through their taxes they will be forced to ante up for this antitrust fiasco.