|Cato Policy Analysis No. 380||August 31, 2000|
by Richard McKenzie
Richard McKenzie is a professor in the Graduate School of Management at the University of California, Irvine; author of Trust on Trial: How the Microsoft Case Is Reframing the Rules of Competition (Boston: Perseus, 2000); and an adjunct scholar of the Cato Institute.
Judge Thomas Penfield Jackson bases his ruling against Microsoft on the claim that the company’s monopoly in operating systems is protected by an "applications barrier to entry" made up of 70,000 Windows-based software programs.
Without an entry barrier, any dominant producer that seeks to restrict sales in order to raise prices above competitive levels will find its market share eroded as new entrants capture price-sensitive customers. But, according to Judge Jackson, to enter the operating-system market a newcomer would need a large and varied base of compatible applications like those available to consumers who might otherwise choose Windows. He concludes that "the amount it would cost an operating system vendor to create [70,000] applications is prohibitively large."
Judge Jackson seems unaware that the mere existence of a large number of Windows-based applications proves that Microsoft has stirred competition among software developers—leading to better products and falling prices and raising the value of both hardware and software to consumers. That said, there is a fatal flaw in the judge's argument: The overwhelming majority of the 70,000 Windows applications that make up the supposedly impregnable barrier to entry either never existed as unique products, no longer exist, or are totally out of date. When only unique Windows applications are counted—setting aside various versions of the same program—the number of applications is a small fraction of the judge's count.
Moreover, survey data indicate that the needs of active computer users are satisfied by a very small number of applications. That means the barrier to entry into the operating-system market is nowhere near as impregnable as the judge has claimed, which in turn helps explain many of Microsoft's aggressive business tactics to preserve its market position. Because the judge's most essential finding is clearly erroneous, it cannot support his conclusions of law.
|Full Text of Policy Analysis No. 380 (PDF, 21 pgs, 106 Kb)|
© 2000 The Cato Institute
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