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Did Microsoft Violate Antitrust Policy? The increase in competition in the telecommunications sector has been a worldwide phenomenon. It is expressed by the privatization of state-owned telephone companies, by deregulation of legal entry restrictions, and by the actual entry of newcomers in markets that have traditionally been dominated by a single firm. However, the road to competition is obstructed by old and new forms of market power, collusion, and government interference. In telecommunications, during the last few years, regulation has become an indispensable part of competition policy. Government has established certain regulatory policies ostensibly aimed at increasing competition. One of the most significant decisions facing antitrust authorities in the 1990s has been how they choose to resolve their investigations of Microsoft. One critical element of the behavior at issue is Microsoft's bundling of its browser with its operating system.
Microsoft's new operating systems have an Internet browser tightly integrated into it. Unless the Department of Justice forces Microsoft to provide the products separately (which Microsoft has claimed it cannot do), customers will not be able to buy the operating system without the browser, nor will they be able to buy the browser without the operating system. It is generally accepted that Microsoft holds an effective monopoly in the market for operating systems for personal computers. Competitors claim that by bundling the browser with its monopoly operating system, Microsoft makes it impossible for other browser firms to compete in the browser market. This not only has an exclusionary effect on competition but, it is claimed, a chilling effect on innovation. For certain customers, the software market for operating systems and browsers differs from the modeling approach we have adopted in the following respect.
For some consumers, the value of the competitor's browser is zero if the consumer does not buy the operating system, because the consumer does not already own a computer. Consumers who already have a PC can choose to buy an upgrade to the operating system or not, and would buy and use the competitor's browser (and/or the monopolist's browser, if offered separately) even without upgrading to the next version of Windows. For consumers who do not have a PC, however, neither browser has value without an operating system. A monopolist over one product can successfully leverage that monopoly power into another market so as to exclude rivals from that market by using bundled pricing. This strategy is part of an equilibrium in which the monopolist behaves rationally, both in the short run and the long run. Indeed, the exclusionary pricing is profitable in the short run, but would not be profitable in the absence of the competitor.
The bundled pricing unambiguously generates welfare losses, both in terms of social welfare and in terms of consumer surplus. The analysis is particularly relevant to the current debate over Microsoft's bundling of its browser with its operating system. It is worth the potential for requiring the sale of unbundled elements (without also precluding bundling) as an antitrust remedy and find that such a requirement, coupled with an "adding up" rule, is an effective remedy in some cases. However, additional remedies are likely to be needed in the Microsoft case to address the special demand characteristics of new buyers of computers. Opinions regarding the anticompetitive nature of Microsoft's behavior and what might be done about it vary from those who believe that Microsoft is simply an aggressive, successful, innovative competitor that should not be punished for being successful, to those who believe that nothing short of a breakup of Microsoft will remedy the anticompetitive effects of its actions. The positions have assumed something like a religious fervor, in part because of the enormous amounts of money at stake, and in large part because there is remarkably little economic theory informing the debate.
One question that naturally arises in antitrust considerations of potentially injurious behavior is whether remedies that can be easily implemented are available. It has been proved that one obvious remedy will enhance social welfare and net consumer surplus: namely, prohibiting bundled pricing. A less severe remedy might be to permit bundled pricing but require that stand-alone prices also be offered, which is known as mixed bundling. We examine here whether such a requirement would in fact be an effective remedy. Clearly, simply requiring that stand-alone prices be offered in addition to the bundled price is not sufficient to preclude anticompetitive behavior because the monopolist could set arbitrarily high stand-alone prices, which would never attract consumers from the bundled offering. It is straightforward to show that a simple adding-up rule is, however, sufficient to overcome the anticompetitive effects of the bundle under the standard bundling scenario we have modeled. However, that when the model is revised to reflect the new buyer scenario that is relevant to the Microsoft market, this remedy is no longer effective. While it may seem obvious that a monopolist can preclude competition using a bundled pricing strategy, what makes the analysis less obvious is the need to demonstrate that by doing so, a monopolist does not incur costs in excess of the profits it might realize in the newly monopolized market.
For a bundled price squeeze to be a significant antitrust concern, it is not sufficient that it be possible for a monopolist to execute the squeeze; it must also be rational for the monopolist to do so, and it must be part of an equilibrium in which the competitor also behaves rationally. Moreover, to be an antitrust concern, doing so must entail a decline in social welfare or, at least, in consumer surplus. Under plausible conditions, it is indeed possible in equilibrium for a provider who monopolizes one product (or set of products) to profitably execute a fatal price squeeze against a rival in another product by using a bundled pricing strategy. If all consumers demand a single unit of the monopolized product and have identical preferences, bundling cannot be sustained as an equilibrium leveraging strategy. However, a downward-sloping demand for the monopolized product may be sufficient to support bundling as a strategy for leveraging monopoly from one market to another. The ability to drive or preclude a rival from a market using bundled pricing exists even if the rival can offer a superior alternative to the monopolist's nonmonopolized product.
The monopolist in one market can squeeze the rival out of the second market not by making unsustainable threats or by offering below-cost pricing, but by offering a profitable bundled pricing scheme against which the rival cannot compete. Stand-alone pricing together with bundled pricing ("mixed bundling") is a viable remedy. Together with a mixed bundling, it is a remedy if it is accompanied by the requirement that the stand-alone prices sum to no more than the price of the bundle (the "adding-up" rule). It is also interesting that if customers who do not buy the monopoly product (e.g., the operating system) will have no use for the secondary product (the browser). In this case, the anticompetitive effects of bundling are even stronger than in the standard case, and mixed bundling is not a viable remedy. It is also clear that bundling competitive products with monopoly products can discourage innovation by firms other than the monopolist. References: Bakos Y, & Brynjolfsson E. ( 1998, October).
Bundling and competition on the Internet: Aggregation strategies for information goods. Paper presented at the 26th annual Telecommunications Policy Research Conference, Alexandria, VA. Dueker K. S. ( 1996, Summer). "Trademark law lost in cyberspace: Trademark protection for Internet addresses". Harvard Journal of Law and Technology, 9, 483.
McAfee R. P., McMillan J., & Whinston M. D. ( 1998). "Multiproduct monopoly, commodity bundling, and correlation of values". Quarterly Journal of Economics, 104, 371-383. Quittner J. ( 1994, July).
Billions registered: Right now, there are no rules to keep you from owning a bitchin' corporate name as your own Internet address. Wired, 2( 10)..
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