TCS Daily

No Help for the Consumer

By Christopher Lingle - April 17, 2006 12:00 AM

The actions of American antitrust regulators and their counterparts in the European Union -- to make the world safe for would-be competitors of Microsoft -- are well known. But it appears that South Korean antitrust regulators have taken a cue from their buddies in the Occident. In each instance, regulatory and judicial scrutiny was initiated by competitors that complained that Microsoft violated trade rules by tying some of its software to Windows.

The Korea Fair Trade Commission accused Microsoft of abusing its market dominance and imposed a fine of 33 billion won ($31.9 million). It also ordered that if offer a version of Windows without Windows Media Player and Windows Messenger software. Another version must have links to Web pages so consumers can download other versions of similar software.

Microsoft faced a similar order from the European Union in March 2004 and a fine of €497 million ($586 million). It was also directed to share code with rivals and offer a version of Windows without Media Player software. And in the US, antitrust lawyers in the Justice Department were behind a ruling that found that Microsoft misused its market power, branding it a monopoly.

South Korea's Daum Communications Corporation, a local Internet portal provider, alleged Microsoft violated trade rules by tying its instant-messaging software to Windows. It was joined by Seattle-based RealNetworks Inc. in a complaint alleging Microsoft undermined competition "unfair" bundling of Media Player and Media Server software to Windows.

Both Daum and RealNetworks entered a $761 million legal settlement with Microsoft that ended all their antitrust disputes world-wide, including in South Korea.

While government lawyers may be rejoicing, consumers of computer software have less reason to celebrate. This is because these actions enrich weak competitors without providing a better service. And, of course, none of this necessarily improves the position of consumers.

Whatever the legal or political logic behind assaults on Microsoft, economic theory offers little support for their cases. In a literal sense, monopolies are the sole seller in a market. Such circumstances are quite rare and most have short lives, unless government intervention restricts the entry of competitors. Most economists know that monopolies often arise from government interventions in the first place, and their long-run survival depends upon government restraints on competition.

The long-run market destruction of monopolies is so certain that I offer my students an "A" grade without taking any examinations if they contradict my claim. The requirement is to identify a monopoly producer that injures the community by overpricing and "underproducing" and surviving without government restrictions on competition or receiving subsidies. I have made this offer for over 25 years without having to deliver a single A.

None of my students will ever be able to cash in on this deal because competitive conditions assure that monopolists simply cannot survive without government interference to protect them. When I was a student, the monopolistic bogies were AT&T, GM and IBM. But like all other supposed "monopolists", their market positions are weakened by the dynamics of time and market forces.

A fundamental principal of physics has it that nature "hates" a vacuum. Likewise, markets "hate" monopolies. This is because consumers and other producers react to higher prices and profits arising from restricted output. High prices induce consumers to seek substitutes or encourage other producers to provide them.

Changing tastes and preferences arising from new information about other goods also weakens a monopolist while changing technology reduces its value and impact on the community. In sum, industries undergoing rapid technological changes will dispose of monopolists quickly.

With monopolies so rare and with such poor survival rates, it is strange that so many defenders of antitrust actions do so with such self-righteous conviction. But they are motivated by political and personal impulses and have little economic substance behind their arguments.

This is partly because attacks on deep-pocketed corporations find support among voters. Generally, citizens and consumers are more in awe of private corporations than worried about the power wielded by their governments. This is surprising, since there are many more mechanisms to punish private-sector actors than to remove or punish public officials.

The motivation of antitrust regulators is also suspect. In the US, successful prosecution of the richest and most successful corporation in the world enhances the market value of lawyers with experience in the antitrust division. There is a well-known "revolving door" tendency whereby government employees move into the private sector. Those with hands-on knowledge of the inner working of the Justice Department and valuable contacts with those that remain there can charge large fees to defend corporate clients.

Similarly, the distractions and costs of legal action against Microsoft delight the software producers that are competitors and they benefit from any actions that hobble it.

This means that there is a wide gulf between intentions of public officials and the outcome of public policy. For example, government officials may not plan to inflict pain upon citizens arising from recessions or inflation. Yet, it is their ill-timed or ill-conceived policies that caused every economic downturn or price upsurge in history.

It is likely that antitrust actions do more harm than good. In a global economy, nimbleness and rapid response are increasingly necessary. Microsoft must continually re-engineer or become non-viable as a competitor. Therefore, becoming large may be its own punishment.

If Microsoft is "too large" and does not respond to competitive pressures, the market will punish it far more than antitrust regulators might. But if large size is an advantage, it would be imprudent to force Microsoft or any other industrial behemoth to downsize.

As it is, "downsizing" on the basis of corporate logic has led to many mistakes. It is more likely that such moves motivated by political logic will be prone to larger errors.

It is bad enough that crybaby competitors join with government authorities to extort money from of a successful company like Microsoft. Since these antitrust rulings allow competitors to be non-competitive, the results are unlikely to serve consumer interests.

Christopher Lingle is Senior Fellow at the Centre for Civil Society in New Delhi.


1 Comment

Microsoft's real crime?
Bill Gates and Microsoft's real crime had little, if anything, to do with "monopolistic practices." Rather, the real crime here was that they did not support any political party or politician with campaign "contributions." By going after Microsoft, the regulators put the rest of corporate America on notice that you gotta pay your dues to the politicians or face the government's wrath.

And you wonder why American corporations pay such vast sums for campaign "contributions..."

TCS Daily Archives