It’s Time To Reexamine Antitrust Legislation

November 13, 1997 • Commentary
This article appeared in Bridge News.

Microsoft’s latest difficulties with the U.S. Department of Justice reveal the absurdity of attempting to apply 19th century antitrust law to a 21st century computer and telecommunications marketplace.

Microsoft currently licenses its Windows 95 operating system to PC makers on condition that they also take (at no charge) its Internet browser Explorer. If the operating system and browser are in fact separate products, then this arrangement is a tying agreement forbidden by a 1995 consent decree between Microsoft and the Department of Justice.

Microsoft claims, however, that its browser function has now been fully integrated into Windows 95 and that the consent decree allows it to sell “integrated” products. Unless the parties settle, a federal judge will have to decide whose interpretation of the consent decree is correct.

Legal semantics aside, a larger public policy question looms: Why should antitrust regulators have the power to decide whether computer products can be sold tied or integrated?

Since tying and integration are functionally equivalent anyway, and since an important part of the computer marketplace has already decided that integrated products make economic sense, what public purpose does antitrust oversight serve?

Section 1 of the Sherman Act (1890) and Section 3 of the Clayton Act (1914) currently prohibit tying agreements that may “restrain trade substantially.” In addition, there is a vast body of antitrust case law that prohibits firms with dominant market shares in one product (the tying good) from requiring buyers to take a second product (the tied good) as a condition of sale or lease.

Such regulation has never made much economic sense, however, and having the government micro‐​manage business agreements hardly promotes the public interest.

Consumers don’t need or want level playing fields. They simply want the best product at the lowest price.

The appropriate perspective for any analysis of tying agreements is the self‐​interest of the consumer, not the welfare of a particular manufacturer or competitor. Prospective buyers of personal computers are like other consumers. They want as much total product as they can get for the lowest cost.

From a consumer perspective, Windows 95 with an integrated Explorer is better than Windows 95 without Explorer or with Explorer only at some additional cost.

PC manufacturers are not “coerced” into taking Explorer, even though some have complained loudly about Microsoft’s tough negotiation stance. The simple fact is that most, if not all, PC users want Explorer with their Windows 95. Almost no PC manufacturer can risk selling its product without including Explorer because rival PC manufacturers would provide Explorer at no cost to consumers.

This is the basic reason that PC manufacturers accept Microsoft’s licensing condition that Explorer not be deleted. Competition in the PC market aligns the consumer’s interest with that of Microsoft.

But does the Microsoft licensing agreement itself restrain trade?

It might if it contained a clause forbidding the licensee PC maker from installing “competitive” browsers or dealing in the products of a competitor of Microsoft. Such language was common in tying cases tried decades ago, and the Justice Department won all of those handily.

But currently, Microsoft places no outside restraint whatever on PC makers with respect to installation of competitive products–including browsers.

Antitrust enthusiasts have also argued that trade could be restrained if Microsoft’s tying agreement (or product integration) sharply reduced the sales of competitive browsers. But this theory of “restraint” makes no sense. Overall trade is not restrained when some firms do more business while other firms do less.

Further, if it is assumed that Microsoft’s browser is actually superior to the competitive browser it replaces, then overall trade has been expanded, not restrained, by the tie‐​in.

Netscape Communications Corp., the nation’s largest browser manufacturer, has complained that the tying arrangement is unfair because Microsoft is using its popular operating system to leverage open the browser market. But this argument is a variation of the discredited “level playing field” theory employed to justify protectionism.

Business competition is never fair or “even,” and any attempt to make it so will create strong disincentives to gain market advantages and pass them along to consumers. Consumers don’t need or want level playing fields. They simply want the best product at the lowest price. And they certainly don’t want competition itself “restrained” by antitrust regulation.

Microsoft will undoubtedly pull out all of the stops to win the semantic battle over the consent decree. The larger battle, however, is the general freedom of firms to innovate within the context of an increasingly irrelevant antitrust paradigm.

It’s well past the time for policy‐​makers to begin a serious debate over selective antitrust repeal.