How the Microsoft Case Could Define Antitrust Law in the
The Microsoft case was about more than just the software
giant’s misbehavior. Antitrust law was also on trial. When the Justice
Department sued Microsoft in 1998, it argued that the century-old Sherman
Antitrust Act could be applied to police high-tech monopolies. This outcome now
looks doubtful. As the digital economy evolves, it is likely to be full of
natural monopolies (i.e., those in which only one producer can survive, in
hardware, software, and communications), since consumers are motivated to
prefer products compatible with ubiquitous standards. Under such circumstances,
monopolies emerge. Companies whose products set the standards will be able to
bundle other products with their primary offering, just like Microsoft has done
with its operating system. What type of software can and cannot be bundled
continues to be a thorny issue for antitrust policy. Although the proposed
remedy did not stand on appeal, the Microsoft case had precedent value because
of the perceived importance of innovation in the information-based,
technology-driven “new economy.” This case illustrates how “trust busters” are
increasingly viewing innovation as a central issue in enforcement policy.
Regulators increasingly are seeking to determine whether proposed business
combinations either promote or impede innovation.
Because of the accelerating pace of new technology, the
government is less likely to want to be involved in imposing remedies that seek
to limit anticompetitive behaviors by requiring the government to monitor
continuously a firm’s performance to a consent decree. In fact, the government’s
frustration with the ineffectiveness of sanctions imposed on Microsoft in the
early 1990s may have been a contributing factor in their proposal to divide the
firm. Antitrust watchdogs are likely to pay more attention in the future to the
impact of proposed mergers or acquisitions on start-ups, which are viewed as
major contributors to innovation. In some instances, business combinations
among competitors may be disallowed if they are believed to be simply an effort
to slow the rate of innovation. The challenge for regulators will be to
recognize when cooperation or mergers among competitors may provide additional
incentives for innovation through a sharing of risk and resources. However,
until the effects on innovation of a firm’s actions or a proposed merger can be
more readily measured, decisions by regulators may appear to be more arbitrary
than well reasoned. The economics of innovation are at best ill-defined.
Innovation cycles are difficult to determine and may run as long as several
decades between the gestation of an idea and its actual implementation.
Consequently, if it is to foster innovation, antitrust policy will have to
attempt to anticipate technologies, markets, and competitors that do not
currently exist to determine which proposed business combinations should be
allowed and which firms with substantial market positions should be broken up.
Case Study Discussion Questions
1. Comment on whether antitrust policy can be used as an
effective means of encouraging innovation.
2. Was Microsoft a good antitrust case in which to test the
effectiveness of antitrust policy on promoting innovation? Why or why not?