The Microsoft Corporation in Collision with Antitrust Law

Article excerpt

Key Words. Anti-Trust law, Microsoft, Netscape, WordPerfect, economic freedom.

1. The Political Message of the Microsoft Case

When a professor at a university began his new job, he was told that Netscape Navigator was being added to his computer. He immediately asked if Microsoft's Internet Explorer was available. When the systems administrator protested that the two programs were identical, the professor clued him in on the reasons why many economists dislike Netscape.

Netscape dominated - some would even say "monopolized" - the Internet browser market through most of the 1990s. When it became apparent that Microsoft was going to offer it some serious competition, Netscape responded by intensifying its lobbying efforts in Washington, D.C., knowing that, despite its obvious market power, Microsoft had not yet developed helpful contacts among the political class, preferring instead to focus its resources on pleasing customers.

Netscape's strategy underscores a trend that has grown with the increased scope of government in public life, namely, that faced with market competition, firms now have three options: First, they can go out of business. Second, they can fight back by trying even harder to satisfy customer needs and wants better than their rivals. And third, they can now cajole their elected representatives to intervene in the market process by contributing directly to them or to their pet causes, making it costly or even impossible for meaningful competition to develop in the market at all.

The technical term that economists use for the third option is rent dissipation. It describes what happens when capital is invested in the political class rather than in productive efforts to satisfy customers. When this happens, the wealth-creation process is hampered considerably. The successful firms are those willing and able to "pay up" for the implied assurance that politicians will not throw obstacles in the way of the firms' attempt to participate in the market.

The costs of rent dissipation are perhaps more evident to economists, and they generally have admired Microsoft for refusing to play this game. Up to 1998, Microsoft had a meager lobbying presence in Washington, relative to its competitors; indeed, the company's enormous success seemed to highlight Washington's irrelevance to the market process.

It was only when Microsoft decided to offer serious competition to Netscape that the latter decided to cash in on some of its political investments in Washington. Soon thereafter, the term "antitrust" began to be bantered around in association with Microsoft. Four years later, on November 5, 1999, Judge Thomas Penfield Jackson made it official. Microsoft was going to pay for not ponying up when it had the chance.

Just weeks before this ruling was announced, Microsoft Chairman Bill Gates announced that, through his foundation, he was funneling $1 billion to organizations that provided scholarships to black Americans. Two weeks following the ruling, the government announced it would be going into arbitration with Microsoft to determine exactly how its case should proceed, if at all. It was announced that Judge Richard Posner, a libertarian and Chicago School trained legal scholar, was to hear the arbitration, much to the surprise of Microsoft's enemies.

Could there be a connection between the two events? Is it possible that Gates is trying to communicate, through his actions, to the political class that he has finally learned about the need to be compliant, albeit somewhat late in the day?

At least since the development of income tax withholding as an emergency measure during World War II, American business, to varying but astounding degrees, has been forced to do the bidding of the state. To the degree this has been made possible, business has been nationalized. Firms learned that to be successful there were two sets of customers that had to be satisfied: the conventional ones who consumed their products, and the regulators. …