Microsoft economics 101

Judge Thomas Penfield Jackson ruled on Monday that Microsoft is a monopoly that has violated the nation's antitrust laws in its attempts to annihilate Netscape's Internet browser.

In so doing, he set the stage for the imposition of draconian remedies and has opened the floodgates to a wave of private antitrust suits intended to use the legal system to tap into Microsoft's vast wealth.

Judge Jackson will also likely go down in history as another jurist who has used antitrust laws to impose more harm on consumers than the offending companies - Microsoft included - ever contemplated.

The credibility of the Microsoft antitrust case can be judged on two claims that are patently false:

*The first, that there is absolutely "no commercially viable alternative" to Windows. Given the existence of the Mac, OS/2, and Linux (and a dozen other) operating systems, the claim hardly passes the laugh test.

Granted, Windows dominates the market for desktop operating systems. But wouldn't the available operating systems quickly become "commercially viable" if Microsoft were to act like a monopoly - that is restrict sales with the intent of substantially raising its prices? The real street price of Windows has fallen by 53 percent since 1990 (without adjusting for enhancements), not the kind of pricing behavior expected of a firm acting like a monopoly.

*The second, that the only possible justification Microsoft had for developing Internet Explorer and then to give it away was to preserve the supposed source of its monopoly power, the so-called "applications barrier to entry."

Obviously, Sun Microsystems, currently trying to erode Microsoft's market dominance by providing a handful of business applications over the Internet, doesn't believe that 70,000 Windows applications represent an impregnable entry barrier. The growing list of vendors of "Internet appliances," many of which have non-Windows operating systems, have bet their substantial investments on the judge being dead wrong.

There is indeed a clear business justification for what Microsoft has done: The company saw a serious competitive threat in Netscape and responded accordingly - competitively, and aggressively so - by upgrading its flagship product at no additional cost to meet consumer demand for Internet access.

In his findings, the judge admits that Microsoft is charging "less than the profit-maximizing monopoly price," but adds, "Microsoft could be stimulating the growth of the market for Intel-compatible PC operating systems by keeping the price of Windows low today."

Translated, this means that Microsoft would have been damned by antitrust enforcement if it had charged a monopoly price but, since it didn't, it was damned on Monday for charging a supra-competitive price: zero for Internet Explorer.

Do the Justice Department and judge truly believe that consumers today would have been better off had Microsoft played dead when confronted with a competitive challenge?

If Sun and Netscape believe they have a superior, lower-priced computer platform, is there really anything stopping them from convincing savvy corporate information officers that they should make the switch? Their marketing task would be a slam-dunk - if Microsoft were charging a monopoly price for an inferior product and were expected to continue to do so long into the future. The great irony of the case is that market rivals should want the dominant producer in their midst to act like a monopoly, that is, restrict sales to raise prices.

The rivals would then be able to expand their market shares as well as raise their prices. They should work their political contacts diligently to have the Justice Department leave the dominant producer alone.

However, in this case, Microsoft's rivals - mainly, IBM, Sun, Oracle, and Netscape/AOL - have done the exact opposite. They have mounted a major political and public relations offensive to first vilify Microsoft and then get the Justice Department to bring the case and break up Microsoft, all under the banner of making the software market more competitive.

Does anyone seriously believe market rivals would spend good money to have their market made more competitive?

Long before former Judge Robert Bork became a lobbyist and public relations pitchman for Microsoft's rivals, the good judge made an assessment of the antitrust enforcement process in his seminal work "The Antitrust Paradox" that is strangely applicable this very day: "Modern antitrust has so decayed that the policy is no longer intellectually respectable. Some of it is not respectable as law; more of it is not respectable as economics; and ... because it pretends to one objective while frequently accomplishing its opposite ... a great deal of antitrust is not even respectable as politics."

Unfortunately, the unstated message conveyed in Jackson's decision is that Judge Bork was right-on years ago.

*Richard McKenzie, author of 'Trust on Trial: How the Microsoft Case Is Reframing the Rules of Competition' (Perseus Publishing), is a professor in the graduate school of management at the University of California, Irvine. He has no relationship, financial or otherwise, with the Microsoft Corporation.

(c) Copyright 2000. The Christian Science Publishing Society