I've been privately asked to comment on a non-antitrust remedy to
the Microsoft monopoly. The following is my response.
Charles Mueller, Editor
ANTITRUST LAW & ECONOMICS REVIEW
http://webpages.metrolink.net/~cmueller
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You ask for my reaction to your Microsoft proposal which, as I
understand it, is to create some kind of consortium of software users that
would come up with the money to develop FREE software, thus undermining the
monopoly power of that firm (and others with dominant shares of particular
software "niches"). You view this as a superior alternative to any
antitrust remedies since, in your analysis, scale economies are so vast in
the software industry that it can never have more than 1 firm in each
niche--and thus can never be made price-competitive.
The idea of defeating monopoly by making an equal or superior
substitute product available at zero cost to the public is certainly an
appealing one. But can a group of users really be found that would put up
the development money and then give away the fruits of its investment? None
of the software companies would have an incentive to do so nor would, say,
the general consumer (the home user and the smaller businessman). The
Fortune 500, though, the big companies who currently have large yearly
expenditures for software? Even if it was clear that their individual cost
savings via the consortium would exceed their contributions to it, there
would still be the so-called "free-rider" problem: Each would have a
powerful incentive to "let the other guy" to bear the load of funding the
development of your free software--and then helping themselves to it at zero
cost, i.e., reaping where they had never sown.
Secondly, would your proposal be legal under the antitrust laws?
You can be sure that, if your consortium should be successfully organized
and begin to offer an effective substitute for Microsoft's Windows, for
example, at a zero price, Bill Gates' lawyers would promptly file a
multi-billion lawsuit under the antitrust laws against its members charging,
for starters, (a) conspiracy and (b) predatory (below-cost) pricing. And he
might have a winnable case: A zero price is about as "predatory" as it can
get. And if the product's quality was equal to or better than Windows--and
should be accepted as such by the consuming public--his market share would
of course start sinking like a stone, his price would collapse to near zero,
and Microsoft's STOCK price would similarly hit the skids. Bill's $40
billion fortune would be promptly wiped out--which is to say he would be
able to demonstrate to the courts that he had been "damaged" in an
unprecedented amount.
Thirdly, the traditional remedy for the scale-economy situation you
attribute to the software industry is public REGULATION of the monopolist's
prices. If, as you say, the industry is inherently monopolistic--unable to
efficiently accomodate more than 1 firm in each of its various markets
(niches)--then it is properly described as a "natural" monopoly (defined as
having a declining unit cost curve over its entire range of demand/output)
and cannot be allowed to continue extracting those monopoly prices from the
public. Transportation (railroads, trucks, airlines), utilities, and so on
are examples of industries where competition was considered inadequate to
restrain prices--and therefore a public body (commission) had to be created
to do the price-setting.
Fourth, what you describe as scale economies--the ability of
"established companies to defend their market share by reducing their prices
to practically nothing, making price competition SUICIDAL for newcomers,"
i.e., making it "impossible to compete with an established dominant player
on the basis of lower costs"--sounds like something quite different to me,
namely, a classic case of predatory (below-cost) pricing to exclude
competitors and thereafter extract monopoly prices from the consuming
public. If Microsoft's costs of Windows were properly
allocated--development, reproduction/distribution, and so on--would Gates
really be able to destroy newcomers without pricing below his own costs? My
guess is that he would not. The monopolist--in his arrogance and
complacency--almost always has far higher unit costs than his newer,
smaller, and more nimble challengers.
Finally, the traditional antitrust remedy for monopoly is
dissolution, e.g., the break-up of AT&T (which cut average prices by some
50%). Why not propose the same for Microsoft? It's really not all that
complicated. The mechanism used is called a "spin-off," i.e., a
paper-shuffling chore for the lawyers. Microsoft, with its current 90%
share of the OS market, would spin off a handful of "Baby Softs" (comparable
to the Baby Bells), say 7. Microsoft's stockholders, for each share owned,
now receive 1 share in each of the 7 new "Baby Softs." All of the
latter--which now have separate managements--are competing sellers of
Microsoft products, each with 1/7th of its 90% OS share, for example, or
about 13% of the national market.
Is 13% of the OS market sufficient to exhaust all economies of
scale? My guess is, yes. Indeed, I would expect that, with 7 competitors
in that software "niche," costs and prices would both start to fall
dramatically. Monopoly is the mother of inefficiency, as Adam Smith
reminded us. 2 competitors are always better than 1--and 20 are better than
2--better in the sense of lower prices, higher quality, and more rapid
innovation.
It's real competition the software industry needs, in my view--half
a dozen or more aggressive firms in each of its various markets
(niches)--not a collusive consortium, whether of producers or users.
Charles Mueller, Editor
ANTITRUST LAW & ECONOMICS REVIEW
http://webpages.metrolink.net/~cmueller
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