The Case Against the Case Against Microsoft


Barry Fagin*




The current antitrust case against Microsoft has no policy merit.  It substitutes the judgements of court experts, economists, and antitrust attorneys for the consensual transactions of consumers themselves, and ignores basic points of sound law, economics and computer science.


The rapidly evolving nature of computer science presents both consumers and producers with a standardization/innovation tradeoff.  Human time and labor can at any time be spent on newer, faster machines and more powerful software, but at the possible cost of walking away from valuable investments of time and labor on older machines and programs.  The question is not whether this tradeoff exists, but how it is to be made.


On the one hand, entrepreneurs who generate new ideas and knowledge (for example, Sun Microsystems with its Java programming language) will seek to persuade consumers to give up their existing capital for their product, claiming that the benefits now outweigh the cost.  On the other hand, companies who have a stake in existing standards (for example, Microsoft), will attempt to persuade consumers that the benefits are not worth the costs.  Either may attempt to minimize the costs of switching by supporting existing standards within the context of newer knowledge. This process provides essential information to consumers and is socially valuable.


But regardless of how the negotiations between producers and consumers are carried out, the competitive process of the market is the only way to get the correct answer.  It is the only process that is sufficiently complex enough and decentralized enough to manage the millions of different decisions that consumers must make daily, and the only process for making this decision that is compatible with the values of a free society.  To infer a priori  that a particular point in this tradeoff is best (for example, requiring an operating system to be separate from a browser) over the verdict of the marketplace is at best the arbitrary substitution of some people’s judgment for others, and at worst a perversion of the rule of law. 


In fact, a review of pricing data shows conclusively that Microsoft has not behaved monopolistically.  Below is a table of inflation-adjusted prices based on advertisements in computing magazines over the last 9 years:



1990 price

1999 price










Excel upgrade








Word upgrade








Windows upgrade





When viewed in light of the dramatic increase in functionality and power of Microsoft products over the past decade, Microsoft’s pricing behavior becomes even more benevolent.


This case is an example of how government intervention in high-technology industries does more harm than good.  Computer scientists, entrepreneurs and consumer advocates everywhere should call for its dismissal.


Overview: Better Engineers Than Lawyers


Microsoft’s fumbling of its videotape presentation in court in February confirms what many in the technical community have always suspected:  Microsoft’s engineers are better than its lawyers.   But, to be fair, they’re under a lot of pressure.  After all, for the past three years, the Department of Justice has pursued antitrust complaints against the world’s largest software company.  Because the company's founder is the world's richest man, and because the company  has achieved an unprecedented role in shaping the computer industry, the case has captured the attention of the popular media.  This case’s outcome will have a significant impact on the future of America’s computer industry.


Popular support for Microsoft is tellingly strongest in cyberspace[1], the environment most commonly frequented by computing professionals.  Popular support for the DOJ is strongest in the older, more established media. But regardless of popular feelings about Microsoft, the case has no policy merit.  It is a slap in the face of an American success story.    Successful business leaders, entrepreneurs, and computing professionals everywhere should call for the dismissal of United States v Microsoft.   It is an affront to the concept of customer choice, and victimizes those wanting to use their computer and their time in the most efficient, effective way possible.



Background: Simplicity and Standardization Are Key


In order for computer non-specialists to easily use a computer, it must perform many tasks in a simple and intuitive manner.  The more these tasks are performed behind the scenes, quietly and efficiently, the easier the machine is to use.  These tasks include processing mouse movements, managing the files on the hard disk, handling memory, starting programs when instructed and so forth.  Modern computers now handle these tasks so effectively that we never think about them.  But this ease of use enjoyed today did not happen accidentally.  It is the remarkable result of human ingenuity, applied toward the creation of a single computer program.


This program is the operating system.  The operating system is the program that the computer starts running when switched on.  During startup, the operating system performs some checks of the computer and disk drive.  It determines whether devices like a printer and scanner are connected to your computer, and presents a startup screen.  It then waits for mouse or keyboard commands from the user.


The most popular operating system is Microsoft Windows, currently released as Windows 98.  Other operating systems include the MacOS (found in all Macintosh computers), Unix (a public domain system with its roots in academic and industrial research) and IBM’s OS/2.  Differences between operating systems are the primary sources of differences between computers in the marketplace.  It is the operating system, more than anything else, that is responsible for the characteristic “look and feel” of a particular computer.


But if look and feel were all that mattered, Microsoft would still be begging for venture capital and Bill Gates would be just another college dropout.  Operating systems also provide standardization, the ability to run the same programs, like word processors or spreadsheets, on different computers.  Both producers and consumers of software highly value standardization.  Accordingly, it commands a high value in the marketplace.



How Operating Systems Provide Standardization


The operating system provides important functions beyond tasks that users can see directly.  Application programs like Quicken, Word, and Doom rely on hundreds of functions that operating systems provide: drawing pictures, printing characters on the screen, providing dialog boxes for interacting with users, and so forth.


These operating system features provide two important market functions.  First, they reduce the time it takes to write programs.  Software engineers only have to write code unique to their application, not endlessly reinvent the wheels of features common to most programs.  It’s the same advantage architects enjoy when they design a home:  They can specify what the kitchen looks like without having to design a range, microwave, and refrigerator.


Second, operating system services provide standardization.  When a computer company releases the technical details of its operating system, programmers know that if their software uses those services correctly it will run on any computer with that operating system.  This means that they need make only one version of their program for each OS, instead of one version for every computer.  This saves an enormous amount of time.  It also provides significant convenience for consumers, who get to buy software products secure in the expectation that they will run on any computer with the same operating system, instead of one and only one machine.


Standardization of software is now so much a part of our lives that we don’t think about it anymore.  Can you imagine what it would be like to have your word processing program run on one PC but not another?  Things weren’t always this way, however.  There is nothing about computing, no scientific law, that compels standardization.  Today’s computing professionals could write hundreds of operating systems tomorrow, all different from each other, all competing with each other, and all completely incompatible with each other.  Fortunately, we don’t waste our time on such an obviously unproductive task.


Standardization creates wealth by preserving and properly allocating the scarce resources needed to develop software: human time and effort.  Microsoft’s recognition of the importance of standardization, and its attempts to capitalize on the high value of standardization in the marketplace, are the single most important factors in the company’s success.  The value of standardization to consumers has important implications for the Justice Department's case.

Standardization vs. Innovation


But if standardization has some obvious advantages, it also has some temporary drawbacks.  Over time, human knowledge increases.  New discoveries and ideas reveal better ways to accomplish tasks than what we currently know.  As new knowledge percolates throughout society, old standards disappear and new methods emerge.


Economic progress follows scientific discovery.  As humanity gains new knowledge through experimentation and study of the world, we develop newer theories and techniques that displace existing ones.  A round earth replaces a flat one.  A sun-centered solar system replaces an Earth-centered one.  This doesn't mean that the older theories were “bad,” only that they were the best available given what humanity knew. 


Similarly, as consumers adopt entrepreneurs’ discoveries and new ideas, old standards and products become obsolete.  This does not make older standards and products “bad,” only less advantageous in light of newer knowledge.  Were it otherwise, we would still be driving Model Ts and using rotary phones. 


But if we abandon a standard, or replace an older product with a newer, we must reallocate resources.  We have a thorny problem: Under what circumstances should we give up a standard?  At what point does it make sense to discard the resources invested in methods of older knowledge, and acquire the new ones?  We face a standardization/innovation tradeoff, an ever-present state of adjustment to new economic realities that saturates market economies.


We're all familiar with this tradeoff from personal experience.   Consider, for example, the last time you bought a car.  Suppose that the latest copy of Car and Driver arrives in your mail with a profile on next year's version of the car you just bought.  It gets rave reviews: tests indicate it gets 10% more miles per gallon, accelerates faster and costs the same.  Should you buy it? 


Most of us wouldn't, because the resources we invest in our cars are significant, greater than the benefits we'd get from buying cars made with newer features.  Most people do not have the resources available to buy the newest car every year, even if it's technologically superior.  On the other hand, we may upgrade our computers more often, both because they represent a less significant investment of resources and because the computer industry generates new knowledge rapidly and makes it available cheaply.[2]


Standards shift and new products take hold when the benefits of moving to the new outweigh the costs of discarding the old.  Profit-making firms can attempt to influence when and where these shifts occur by maximizing the benefits of their proposed innovations (increased ease of use, greater functionality, lower cost) or by minimizing the costs of their adoption (by offering compatibility with existing standards).  Some firms even try both approaches.  Microsoft, for example, consistently adds features to Windows while providing support for applications that use DOS, its much older command-line-based operating system developed in the early days of personal computing, famous for its “c:\” prompt.  Intel’s latest chips include extremely sophisticated features for improved performance, but have always offered full compatibility with their original design of twenty years ago[3]. 


An understanding of the standardization/innovation tradeoff is essential to analyzing the economics of the computer industry.  Unfortunately, an appreciation of the tradeoff appears to be lacking in both the public statements and the legal documents on file in the Microsoft case.



The Internet, the World Wide Web and Browsers


Since the early 1960s, computer scientists have investigated various methods for connecting computers in a network.  The advantages of networking include sharing information, sharing resources and improved efficiency.  Over the past two decades, standards have evolved that permit computers to connect to one another easily and reliably.  These standards are the Internet Protocols, and include telnet, TCP/IP, ftp, and a series of protocols for delivery of electronic mail.  Computers that use these standards connect to the Internet.


In 1988, a scientist named Tim Berners-Lee first proposed a general way of organizing information that made the Internet much easier to use.  By hiding the arcane commands and protocols of the Internet from users, exchanging information on the Internet became possible for millions of people.


The portion of the Internet that now uses these standards is the World Wide Web, or WWW.  An application program that uses these standards to search the WWW for information and present it to the user is a browser.  The first browsers were text-based, like Lynx.  The first popular browser capable of displaying graphics was written by Marc Andreesen, a graduate student in computer science at the University of Illinois.  He went on to co-found Netscape Corporation (acquired by America Online last November for $4.2 billion).


Shortly after the explosion of the World Wide Web, a group of programmers at Sun Microsystems began to work on a way to write programs independent of any particular operating system, such that the same program could execute on any computer.  They developed the Java programming language.  The developers of Java negotiated arrangements with Netscape to support Java within Netscape’s browser.  This meant that any computer that could access the web and run a browser could run programs written in Java, regardless of what kind of computer it was or what operating system it had.


Microsoft, reacting to the popularity of the WWW and Netscape’s browser, recognized that the benefits of making available new Internet technologies might now outweigh the costs of discarding investment in existing standards centered on the company’s traditional desktop computing model.  Bill Gates responded by redefining Microsoft as an "Internet company," and not just a software company.  Microsoft embraced the WWW, Java and the Internet protocols as new standards, incorporating them into existing products.  They developed a browser to compete with Netscape’s called Internet Explorer, and integrated it with their Windows operating system.  Like every company faced with a new standard, Microsoft sought to maximize the benefits of adopting new technologies while minimizing the costs of doing so.  In so doing, the company sought to (a) embrace the tremendous benefits of the WWW, and (b) minimize the costs of switching from its user environment by offering full compatibility, including “look and feel,” with DOS and Windows. 


When Internet Explorer (IE) was first developed, Microsoft required all PC vendors to put the Internet Explorer icon on the desktop and take other steps that favored IE as a condition for pre-installing the Microsoft Windows operating system.  The Department of Justice believed this violated a previously obtained consent decree, and filed an antitrust complaint.  The legal minutiae of this decree hinged on whether the browser is a “separate product” from its operating system.  A lower court ruled in the DOJ’s favor, only to have that decision overturned on appeal six months later.  The DOJ consequently changed strategies, and now accuses Microsoft of using its market power to “bully” its competitors.


In any case, our interest is not in the particular “angels and pinheads” question of whether a piece of software is one product or two, or in refuting the latest legal theory that DOJ is using to bolster its case.  We are concerned with the overall merits of the DOJ complaint, and the rationality of applying century-old antitrust law to the computer industry.



The DOJ Complaint and Public Statements


The civil action of United States of America v. Microsoft Corporation was filed on May 18, 1998.  A browser-readable version  is available on the web from the Department of Justice 's web site, at  Unless otherwise stated, all citations in this section are from that document. 


The DOJ’s argument, while elaborate, runs essentially as follows:


1)   Microsoft has a monopoly in the PC operating system market.  This monopoly is protected by technological “lock-in”.

2)   The emergence of the Internet, WWW standards and Java are seen by Microsoft as a threat to that monopoly.

3)   Microsoft’s actions in response to this threat (such as its promotion of Internet Explorer through restrictive tie-ins with the Windows operating system) are illegal violations of sections 1 and 2 of the Sherman Act of 1890.  They are also anticompetitive and detrimental to consumer welfare.

4)   Preventing Microsoft from engaging in these practices will promote innovation and competition in the browser market.  This will enhance consumer welfare.


This argument is fundamentally flawed.



Monopoly and Network Effects


Microsoft has the largest share of the PC operating system market, generally estimated between 80-90%.  As noted, however, operating systems provide a tremendous consumer benefit: standardization.  A smaller market share for Microsoft and more operating systems in the marketplace, while perhaps mimicking textbook notions of “competition” more closely, would impose tremendous costs on consumers.  Where standardization is crucial, it doesn't make sense to talk about the importance of consumer welfare, while at the same time citing the dangers of a large market share.  It is precisely that large market share that enhances consumer welfare, when consumers’ welfare includes the value of their time and effort.


Additionally, the current complaint alleges that Microsoft’s “monopoly” is protected by “network effects.”  Network effects occur when a person’s benefit from using a product increases with the number of people who use it.  Network effects are in fact socially beneficial, as they play the leading role in making technology affordable for ordinary consumers.  Problems arise, so the DOJ claims, when network effects cause “lock-in” of an inferior technology, in which an otherwise weaker product can outsell a stronger one if its installed base of users is large enough.  Despite widespread popular belief, this theory has little empirical support.[4]


A declaration filed in support of the DOJ notes correctly that “application software written for a specific operating system cannot run on a different operating system without extensive and costly modifications or add-ons,” and that “Network effects have increased the desirability of Microsoft Windows [95 and 98] for consumers.  Once enough users had been attracted to Windows, that very fact made Windows even more desirable to further users.”[5]  The complaint then claims that the number of software applications that must run on an operating system constitutes a significant barrier to entry that leads to potential for the abuse of monopoly power by Microsoft, and that therefore legal action is therefore justified.


This claim is contradictory to the Justice Department's stated objectives of consumer welfare, because these very “barriers to entry” are what make Windows so attractive to consumers.  It is precisely the large number of applications programs available under Windows and the standardization Windows provides that motivate consumers to purchase the Windows operating system.  It is nonsense to recognize the benefits of standardization for consumers and then cite them as harmful “barriers to entry.” 


The Competitive Threat to Microsoft and the Historical Record


The documents on file in United States v. Microsoft contain numerous admissions that market processes are working.  Sections I.6 through I.10 of the complaint state very clearly that the combination of Web-based standards and Java, developed by Microsoft’s competitors, poses a significant threat to Microsoft’s domination of the PC operating system market.  Entrepreneurs at Netscape and Sun have generated new knowledge, with benefits that might outweigh the costs of discarding an existing standard, even a standard as popular as Windows.


If Microsoft were truly an unassailable monopoly, then it wouldn't care about its competitors.  It wouldn't need to respond to the market, it wouldn't need to innovate, it would restrict output and it would raise the prices of its products.  As the complaint itself admits, Microsoft has done just the opposite.  Instead of ignoring the threat from Netscape, Microsoft developed a competing browser, and by the government’s own admission “spent hundreds of millions of dollars to develop, test, and promote [it]."[6]  Instead of acting like a monopolist that ignored consumers’ wishes and throttled innovation, Microsoft “released three subsequent versions [of IE] (2.0, 3.0, 4.0), in each case adding features and functionality to the product."[7]   Instead of pricing like a monopolist, it gives its browser away free.


Nor does the record show evidence of monopolistic behavior in operating system licensing.  Last month, Microsoft sought to protect its Windows pricing data for PC vendors from public disclosure, citing existing confidentiality agreements[8].  Fortunately, a wealth of data on Microsoft consumer prices is already publicly available, and can be found in any good college library. 


To examine the question of Microsoft pricing behavior, the author went back through ten years of PC Magazine and sampled the price of Microsoft operating systems (DOS, Windows 3.1, Windows 95, Windows 98, and Windows NT).  The results are shown in Figure 1, with prices reported in constant 1990 dollars[9]:




Figure 1:  Microsoft OS Prices as Advertised in PC Magazine


            Up until 1995, Windows and DOS licenses declined in price even as functionality improved.  With the release of Windows 95, Microsoft offered users two choices: an original license for new users, or an upgrade path for existing Windows users.  The initial price of a Windows 95 license at $125 was about 70% more than that of a Windows 3.1 license at $74 in constant dollars.  This reflected at least in part the dramatic differences in functionality between the two products.  The cost of an upgrade to Windows 95, however,  was only $73 in constant dollars, essentially the cost of a Windows 3.1 license despite the fact that Windows 95 was a vastly more powerful product. 


If we are to give the DOJ the most charitable interpretation possible, we would observe that between 1996 and 1999, the cost of a Windows 95 single license rose 9.6% in constant dollars.  Statistically significant, perhaps, but hardly evidence of monopoly power.  On the other hand, the cost of a Windows upgrade remained essentially constant during that time.  Upgrade paths for all Windows OS products, in fact, have consistently declined in price.  This is exactly the opposite  of monopolistic pricing that we should see if “lock in” has occurred.  Once Microsoft has presumably captured users with its Windows OS, as a monopoly it should be able to restrict output and raise prices for Windows users.  In fact, the historical record shows it does nothing of the kind.


Nor is this picture confined to operating systems.  In addition to examining operating systems, the author looked at prices for Excel, Word, and the current state of the art C/C++ program development environment.  These results are shown in Figure 2:





Figure 2:  Microsoft Application Prices


Similar patterns emerge to those of Figure 1.  Prior to the release of Windows 95, costs of applications to consumers remained constant or declined.  With the release of Windows 95, an upgrade path was introduced in which consumer costs declined dramatically.  For applications, Word and Excel prices for both licenses and upgrades actually declined since 1992.  Of the three applications examined, only the price of a state of the art C/C++ development license has increased beyond inflation.  This is largely because these are lower-volume products than Word and Excel (there are far fewer C++ developers than users of word processors and spreadsheets), combined with the increasing complexity and power of modern code development environments.


Again, this pricing behavior exactly the opposite of what is required to support the DOJ’s claim of monopoly.  Once consumers are “locked in” to Windows, a monopolistic Microsoft should raise its application prices through the roof.  In fact, it has done no such thing.


These are the facts shown by the historical record:


1) Over the past ten years, the cost of a new Windows license increased at a rate slightly ahead of inflation:  from $125 in 1990 to $137 in 1999 in constant dollars.  This despite that over these ten years, Windows was significantly enhanced to support hundreds more peripheral devices, repair numerous bugs reported by users, connect to the internet, use a significantly larger help database, support more “wizards” to assist users in system configuration, and in general become a significantly more advanced and more powerful product that consumed millions of dollars of Microsoft’s research and development capital.


2) Over the past ten years, the cost to consumers of obtaining the latest Windows release has declined with respect to inflation.  For the prices obtained by the author, the cost to consumers of upgrading to the newest version of Windows has declined by 84%.  In 1990, a Windows upgrade cost $125;  in 1999 it is $68 in constant dollars.  Again, this has occurred while Microsoft has added significant functionality with each upgrade.  Microsoft’s incorporation of Internet functionality into its latest Windows releases is entirely consistent with this trend.


3) Over the past ten years, the cost of some Microsoft applications has declined in constant dollars, and for others it has increased slightly.  For the applications and prices obtained by the author, Word has increased by 7%, from $213 to $228.  Excel has declined by 40%, from $300 to $228.  A state of the art C/C++ development environment has increased by 39%, from $285 to $396. Similar to the functionality of operating systems, Microsoft application functionality has increased during this time.  In fact, one could argue that the newest versions are so different, particularly for development environments, that each release is a dramatically different product.  In each case, however, the functionality added is significantly greater than the observed price increase.


4) Upgrade costs of common applications declined significantly:  270% for Word (from $213 to $57) and 344% ($320 to $72) for Excel.


5) There is no evidence of monopoly pricing (restricted output and increased consumer cost).  The historical record shows consistently improved functionality at lower cost, exactly what classical economic theory would predict for a productive, successful company. 


These results are summarized below:



1990 price

1995 price

1999 price

% change











Excel upgrade










Word upgrade










Windows upgrade






Figure 3:  Microsoft Pricing History, 1990-1999 in constant dollars


Microsoft’s Response and the Sherman Act


Microsoft’s initial response to the threat from Netscape and Java is the key issue in the government’s case.  The government’s initial concern was Microsoft’s requiring favorable treatment of Internet Explorer as a condition for manufacturers to pre-install Windows on their machines. Microsoft also negotiated exclusive Explorer promotion arrangements with Internet service providers and Internet content providers (ISPs and ICPs).   Although Microsoft has since agreed under DOJ pressure not to pursue these types of arrangements, an analysis of them sheds a great deal of light on the role of antitrust in high tech industries.


Microsoft’s arrangements required ISPs and ICPs to provide preferential treatment to Internet Explorer if they want to appear in Windows’ Internet connection screen. Preferential treatment might include stating that IE is the preferred browser, removing links to competing browsers from their main sites, and so forth.  The DOJ alleged that these practices were anticompetitive, and were illegal violations of sections 1 and 2 of the Sherman Act.


The Sherman Antitrust Act of 1890 forbids contracts “in restraint of trade."  Enacted in response to perceived concerns about the economic power of corporations, it is the primary legal weapon in the antitrust arsenal.  Given the failure of 19th century policymakers to appreciate the extent to which antitrust served the private interests of competitors of successful businesses rather than the public interest[10] -- a failure that persists still today -- and given the extraordinary difficulties in distinguishing “restraint of trade” from ordinary competition and contractual arrangements, it is not surprising that attempts to apply the Sherman Act 100 years later to high technology lead to contradictions and problems.


In the case of computer technology and other network industries, attempts by firms to address the standardization/innovation tradeoff are necessary to promote consumer welfare -- but may still be interpreted under traditional antitrust theory as restraining trade.  For example, Microsoft’s negotiated tie-in arrangements are the predictable and socially beneficial acts of a profit-making firm seeking to persuade consumers to adapt to the new Internet standards by minimizing their transition costs.  After all, consumers may not care which browser they use, or they may not want browsers at all.


Consumers do want to use their time wisely.  It may be that the most valuable use of consumer time is a simple, easy-to-use pre-installed operating system with simple, fast Internet connection startup screens.  Or perhaps entrepreneurs will decide that Microsoft’s pre-installed vision of computing is not meeting consumer needs.  If so, they will provide value by installing less restrictive operating systems on computers and sell them on the open market.  Or it may be that producers and consumers of software will embrace Java, and get rid of Windows altogether.  We simply don’t know.


But in the absence of dynamic marketplace negotiations, there is no rational reason to prefer one specific outcome over another (for example, an operating system without a browser) as the DOJ complaint does. The DOJ’s stated goal of “improved competition in the browser market,”[11] for example, treats a particular point in the standardization/innovation tradeoff as most desirable, without any a priori evidence.  In fact, the suggestion that more favorable access to the desktop for Netscape is both desirable and requires legal intervention now appears ridiculous in light of AOL’s multi-billion dollar buyout of the company.


Due to the rapid generation of new knowledge by computer scientists and entrepreneurs, there may not be a browser market five years from now.  Perhaps consumers will prefer the WWW and their desktop integrated into a single, easy to use computing environment, and won’t like having to use a separate program to search the web.  Or perhaps future developments will make today’s PC operating systems obsolete.  We simply don’t know.  Given what we do know about computing and innovation, however, a focus on the browser market seems short-sighted.  It is doubtful, for example, if consumer welfare would have been enhanced by government intervention in the market for washboards and ditto machines.



What Microsoft “Might” Do


      One of the most disturbing aspects of the Microsoft case is DOJ’s preference for emphasizing hypothetical markets over actual ones.  The DOJ does not base its case on consumer harm caused by Microsoft, because there is none: Microsoft has consistently offered better products at lower prices.   Instead, the case documents recommend preemptive action based on Microsoft's potential to monopolize and cause harm:[12],[13]


"There is a substantial probability that these anti-competitive actions will permit …”

"Microsoft could raise the price of its operating system . . ."

"Microsoft is likely to recover its lost profits . . ."

"... the Microsoft browser may well become the bottleneck input ..."

"... are likely to enable Microsoft to monopolize ..."

"Microsoft could obtain an additional benefit if these restrictions . . ."

"At that point, Microsoft can raise the price of its OS ..."

"Microsoft will likely recoup whatever profits it has foregone ..." 

"This could potentially have significant adverse consequences ..."

"Microsoft's actions are likely  ..."


[italics added]


 Even the government’s own key economic expert,  Franklin Fisher, admitted that Microsoft has yet to cause actual harm.[14]


            It’s difficult to make a case for consumer harm.  On the one hand, even if Microsoft did everything it stands accused of, its actions still haven’t shielded it from competition.  Microsoft has been unable to gain significant market share as an Internet portal.  The Be operating system is available for PC’s at around $70,[15] and has hundreds of common applications written for it.  Dell, SGI, and HP have all committed to support Linux, another alternative OS with a supported version available for only $50.[16]  The list goes on and on.


      On the other hand, there are deeper, more troubling issues raised by this kind of argument.  It might be just as "possible," "likely" and "substantially probable" that Microsoft's actions will continue to successfully anticipate consumer preferences in the marketplace, and continue to offer better products for less money just as they have done in the past. None of us are omniscient: we just don’t know.  We do know that punishing people solely on the basis of what they might do ought to offend anyone who values reason and the rule of law. 




The policy question this paper considers is a simple one: Does antitrust as presently constituted do more harm than good to high technology sectors?  The Microsoft trial is evidence that it does.


It is wrong to assume that the millions of consumers who have bought Windows 3.1, Windows 95 and now Windows 98, bundled with Internet Explorer, were not made better off by those purchases.  The failure of elected and appointed officials to recognize and respect those judgments does more harm than good.


It is wrong to substitute the judgments of a few economists, antitrust attorneys and judges on what constitutes consumer welfare for the consensual transactions of consumers themselves.  This does more harm than good.


It is wrong to deny that a standardization/innovation tradeoff exists, or to presume to know a priori how that tradeoff should be made.  Pretending such knowledge and enforcing it through law does more harm than good.


It is wrong to ban attempts to “restrain trade” in the computing industry, since the very real and socially important objective of minimizing the costs of adopting new standards can best be achieved by one company trying to convince consumers not to trade  with another.  Such cost minimization practices can include aggressive price cutting, licensing restrictions, and massive innovation, practices that Microsoft is now on trial for.  Punishing companies who minimize the social costs of adopting standards does more harm than good.


Before he was chairman of the Federal Reserve Board, Alan Greenspan was asked for his opinion on antitrust law.  His reply: American antitrust statutes were "a jumble of economic irrationality and ignorance."[17]  Thirty years later, events have proven him right. 


The case of United States of America v. Microsoft may be front page news.  It may make interesting reading, it may be politically inevitable and it may even enjoy modest support in some circles.


But that doesn't make it right.   The government's proper role is to ensure that Microsoft (or any other company) honors its contractual agreements with customers and shareholders.  Going beyond that responsibility and interfering in the voluntary actions of consumers is bad logic, bad law and bad policy.  Supporters of freedom, reason, and entrepreneurship should urge the Department of Justice to drop this ill-considered action as an affront to rational thinking.  Markets may not be perfect, but they're better than this.

* Barry Fagin is a Senior Fellow at the Independence Institute and a professor of computer science at the Air Force Academy in Colorado Springs.  His opinions are his alone.

[1] “Antitrust Suits Expand and Libertarians Ask, Who’s the Bad Guy?”,  Wall Street Journal  front page headline, June 9th 1998.

[2] For a more formal treatment of these issues, see Farrell and Soloner:  “Installed Base and Compatibility:  Innovation, Product Preannouncements, and Predation”, American Economic Review  76: 940-55, 1986.

[3] Dulong, Carole:   "The IA-64 Architecture at Work", IEEE Computer, July 1998, pp 24-32.

[4] Liebowitz, S.J. and Margolis, S.E:  “Path Dependence, Lock-In, and History”, Journal of Law, Economics and Organization  11(1995):  205-26.

[5] Fisher, Franklin: Declaration of Prof. Franklin M. Fisher in support of plaintiff in United States v Microsoft, available online at

[6] United States v Microsoft, ¦16

7op cit, ¦62

[8] See, “Microsoft Seeks to Cloak Windows Pricing”.

[9] CPI data obtained from Bureau of Labor Statistics,

[10] In fact, a strong argument can be made that the Sherman Act had its origins in the desire to serve private interests, not public ones.  See for example DiLorenzo:  “The Origins of Antitrust:  An Interest-Group Perspective,” International Review of Law and Economics  28(1985):  247-65.

[11] United States v. Microsoft,  Memorandum of the United States in Support of Motion for Preliminary Injunction,  pg 43, available online at

[12] Sibley, David:  Declaration of Prof. David S. Sibley in support of plaintiff in United States v Microsoft, available online at

[13] Fisher, op cit

[14] Jonathan Rauch, “Microsoft Trial Dispatches,” Slate, January 13, 1999.

[15] See  We note that the BeOS development team chose to integrate their operating system very tightly with internet services, exactly the same approach that Microsoft is now on trial for.

[16] See, the web site for Red Hat Software

[17] Rand, Ayn:  Capitalism: The Unknown Ideal, The New American Library, 1967, p. 70.