Does microsoft have a monopoly on operating systems

We disagree. We believe the breakup we propose could be carried out quickly and with relatively minimal costs, and have seen no plausible evidence to the contrary. The second argument has to do with standardization. The idea is that we need a monopoly like Microsoft to provide a standard for operating systems and, in the absence of such a monopoly, we would have "fragmentation" and resulting incompatibility.

In Dr. Lenard's longer paper on the remedies issue he shows that this argument fails at several levels. Specifically, all of the new firms would have extremely strong incentives to maintain compatibility with the existing Windows installed base and with each other on a going forward basis.

We have not seen such a showing made, nor do we believe one is possible. The Findings of Fact and Conclusions of Law handed down by Judge Jackson address each significant argument Microsoft has made in its own defense -- and find them wanting. Microsoft has a monopoly, has engaged in anticompetitive behaviors, has harmed consumers and has violated the law.

Those who would argue otherwise have an obligation to rebut Jackson's factual and legal conclusions on their substance. We have yet to see such a rebuttal. The conspiracy theories that have been offered in place of substantive argument are unsupported by any evidence, and seem incredible on their face.

The danger that a conduct remedy in the Microsoft case could lead to increased government involvement in the software marketplace is not without merit.

A structural remedy, on the other hand, would end the Microsoft monopoly, end the threat of government regulation and obviate the need for further litigation now and for many years to come. Microsoft Corporation, Civil Action No. Attorney General Eliot Spitzer et al. Jeffrey A. Thomas M. Lenard is Vice President for Research.

Eisenach and Thomas M. Judge Jackson bases this conclusion on three factors: Viewed together, three main facts indicate that Microsoft enjoys monopoly power. Based on his Findings of Fact, Judge Jackson issued "Conclusions of Law" 3 in which he determined that: Microsoft maintained its monopoly power by anticompetitive means and attempted to monopolize the Web browser market, both in violation of section 2. On the charge of illegally maintaining its operating system monopoly, he finds that: Microsoft strove over a period of approximately four years to prevent middleware technologies from fostering the development of enough full-featured cross-platform applications to erode the applications barrier.

He also considers and specifically rejects Microsoft's contention that its activities were nothing more than the rough and tumble of the competitive process, redounding ultimately to the benefit of consumers: These actions cannot be described as competition on the merits, and they did not benefit consumers.

The Remedy Given the Court's Findings and Conclusions of Law, it is a virtual certainty that Microsoft will be subject to remedial action of some form. Conclusion The Findings of Fact and Conclusions of Law handed down by Judge Jackson address each significant argument Microsoft has made in its own defense -- and find them wanting.

PFF Classic Publications. Actually, the real price has declined by even more, because Windows has been enhanced continuously over the past six years in terms of both power and ease of use. Now, Microsoft proposes to incorporate Internet Explorer into Windows at no added cost, which is an indirect way of lowering the real price of Windows once again.

Such reductions in the real price of a product are not what would be expected in the light of textbook treatments of monopoly. They are what would be expected of a competitive firm that sees important economies for consumers, as well as for the firm itself, from gaining market share. To be sure, the price of Windows might be higher than it could be, and one might argue that it should have fallen by more than it has in recent years. But we cannot help wondering how the Justice Department or the cooperating state attorneys general can know that to be the case.

That restriction would occur because existing or potential competitors would be able to invade the operating-system market, lowering their prices below that of Windows, expanding their sales, and increasing their profits. Critics are usually eager to concede that Microsoft may not be a garden-variety monopolist.

They are quick to reason that Microsoft does not behave as most traditional monopolies behave because the market for computer software, especially operating systems, differ from those for more mundane products. Textbook monopolies are assumed to face static demands that are independent of past or prospective future consumption levels.

That is to say, future demand does not rise with greater current consumption, and vice versa. Therefore, the future demand for the product can be expected to rise with current purchases, which implies that even a monopoly firm in such an industry has a reason not applicable to traditional monopolies absent network externalities for keeping current prices low: in so doing, the monopolist can stimulate future demand and, when the increased demand materializes, elevate the profit-maximizing price.

The dominant producer can increase its dominance simply because everyone expects its dominance to grow. Accordingly, the Justice Department can argue that it must act now to avert monopoly pricing and output restrictions in the future. Although such an argument may sound appealing, it has weaknesses that must be kept in mind. The future price of the operating system might indeed be increased, but such a price hike could be expected by consumers even in a fully competitive market.

The reason has already been given in the case for preemptive antitrust action: network effects. A higher future price would not necessarily mean that the consumers were being exploited. They might pay more for the program in the future, but they then would also be getting more value because of the larger number of people using it. Microsoft would still face the threat of competition unless some pretty strong barriers obstructed the entry of new firms. The existence of network effects in the market for operating systems not only encourages low current prices.

Of course, when the future price is raised, sales would fall from that point forward because the then-reduced sales imply fewer network benefits for consumers. New entrants can reason that the gains from entry will be accumulating, with then-current sales leading to even higher future sales beyond that point.

As a consequence, network effects do not necessarily lead to a greater likelihood that a firm will take advantage of any existing monopoly power; indeed, just the opposite might as well be expected. Consumers must also be expected to anticipate, in a rough and ready way, the monopoly price the dominant producer might charge in the future. Such a perception would reduce its ability to attain the market share and, hence, to exploit the economies of scale in production that it finds most profitable.

The foregoing discussion of network effects presumes that substantial networking effects exist for a program such as Windows But the existence of substantial network effects for individuals working together is not obvious to either of the authors, and we both work extensively with our computers.

Granted, some networking externalities may exist for each of us and for our respective academic institutions. Papers can be passed around more easily among faculty members and students , and the local computer staff has to keep up to date on only a single operating system.

However, we are not convinced that the network externality argument applicable to a school or a department can be extended ad infinitum or even to the limits of the computer market. We see practically no benefits from both authors having the same operating system. Indeed, when we agreed to write this paper jointly, we did not ask one another about computer operating systems. Of course, we might have anticipated some minimal gains from both using Windows and Microsoft Word, but the anticipated benefits of collaboration were never materially influenced by the prospects that we both would use Windows and Word.

Indeed, only after writing this section of the paper did we discover that both of us use Windows. It also seems reasonable to deduce that Microsoft has a large market share only because it has not been charging anything close to the proverbial monopoly price. Similarly, if it were to indicate that it was going to act as a monopolist in the future, leading to the likelihood that its dominance of operating systems would erode, software developers would surely anticipate that development in their program writing and marketing plans.

Hoping to take advantage of network effects operating in reverse, rival producers of operating systems would have incentives to absorb at least some of the costs of switching for the software firms and consumers.

But such is not necessarily the case, if the Justice Department believes its own claims about extensive network effects.

The network has benefits to software manufacturers and consumers only to the extent that it holds together. The exclusionary agreements and contract clauses that prevent changes in the starting screen sequence can be interpreted as providing such assurance.

Software firms and consumers can thereby readily see the collective gains to be had from joining the Microsoft network. By what theory of antitrust injury must Microsoft be compelled to advertise the products of its competitors by allowing computer makers unilaterally to make alterations in the first screen the user sees when he boots up and which the end-users are themselves free to alter in any case? And if Internet service providers, such as America Online, and Internet content providers, such as the Disney Channel, want to place their logos and links on the first screen the user sees when Windows is shipped from the factory and which the users are subsequently free to add or delete to suit their own tastes , why must Microsoft be prevented from asking for something in return by insisting that those content providers not enter into similar arrangements with its competitors?

Limiting, by antitrust action, the rights to the use of the most valuable real estate in cyberspace risks making the whole sequence of investments unprofitable and, hence, chilling the efforts of future high-technology pioneers.

Consumers get no net benefit. If Microsoft is the monopolist it has been acclaimed to be, then it can compel the installation of Internet Explorer if adding the program is a net burden only by lowering the price it charges computer manufacturers for Windows. Forbidden to insist on the installation of Internet Explorer, Microsoft is free to reverse its action, jacking up the price of Windows because the manufacturers no longer have to incur the ostensible added costs of installing Internet Explorer.

Microsoft appears ready to incur those legal bills, though. None of those critics has articulated why or how consumers have been harmed in the process. One of the fundamental antitrust charges against Microsoft is not that it is a monopolist as such, but rather that it has unlawfully used its dominance of the market for computer operating systems as leverage to force computer manufacturers to install its Web browser, Internet Explorer, as a condition of loading Windows on all the units they ship.

The Clayton Act made such tie-in sales illegal on the theory that they foreclose competitive market opportunities. The sellers of rival Web browsers are placed at a disadvantage, it is alleged, because Microsoft has contractually locked a large percentage of their potential customers into its own Web-browsing software product.

If Internet Explorer is preloaded onto all of the new computers shipped with Windows on board, Microsoft will have an unfair edge as consumers decide what Web browser to use. Ever since section 3 of the Clayton Act made it unlawful for sellers to condition the sale or lease of one product on the purchase of another, the courts have taken an extremely hostile view of such contractual agreements.

Second, the sale of one these distinct products must effectively be conditioned on the purchase of the other. It is uncontested that Microsoft has an impressive share of the market for computer operating systems.

The answer is clearly no. Before the advent of mainframe computers, IBM was the dominant manufacturer of tabulating machines used to sort and compile information entered on cardboard punch cards. How the individual inputs entering into the production of those services were priced was essentially irrelevant. If IBM raised the price of one input, the cards, the per-unit cost of tabulating services had increased, and accordingly customers would have bought both fewer cards and fewer machines.

Under this theory, customers who placed relatively high values on data-tabulating services would use the tabulating machines more intensely and hence require more punch cards per week than other customers, for whom tabulating services had less value.

By selling more cards to customers in the former group, IBM would effectively charge them a higher price per unit of data-tabulating services. Customers in the latter group, who, by assumption, required fewer cards, would pay lower combined prices for these services. Thanks to its ability to align prices of data-tabulating services with consumer valuations by requiring customers to buy its punch cards as a condition of renting its tabulating machines, IBM increased its total profits over and above those earned under the alternative policy of only leasing tabulating machines and doing so at the same price for all of its customers.

Price-discriminatory demand metering is not the only reason why a firm might want to tie the sale or lease of one product to the purchase of another. Nor does that explanation fit the circumstances at issue here, where operating systems and Web browsers are used in fixed one-to-one proportions. Any attempt by Microsoft to increase the price of its Web browser over the competitive price would, if Internet Explorer and Windows are sold as a bundle, reduce the demand for its operating system.

Microsoft would then sell fewer copies of Windows. But if doing so had been a profitable strategy to begin with, Microsoft could have accomplished it without going to the trouble of developing a Web browser; it could simply have reduced the output and raised the price of its operating system.

Hence, if there is a monopoly here, the monopoly resides in Windows alone. And, as Director explained, that monopoly cannot be compounded. Software applications such as Internet Explorer can provide an additional source of profits to Microsoft only to the extent that they make the underlying operating system more useful to consumers and hence give rise to more, not fewer, sales.

The freedom-of-choice theory is reinforced by contentions that the alternatives available to consumers can be path dependent, that is, a function of the choices they made at earlier dates. Path dependency is claimed to be a particularly relevant consideration in industries characterized by network externalities, where the adoption of a common technological standard is often a prerequisite for exploiting the benefits that make connection to the network valuable. But consumers cannot coordinate their choices.

A great deal of ink has been spilled recently on two popular examples of supposed path dependency. That particular arrangement of letters was supposedly introduced in the early days of typewriting as a way of solving a mechanical problem of keys overstriking one another and becoming physically jammed.

According to legend, a rival keyboard later invented by August Dvorak is vastly superior to the QWERTY keyboard, yet QWERTY remains in common use because typists and typewriter manufacturers cannot overcome path-dependent inertia: typists do not train on the Dvorak keyboard because virtually none exist, and virtually no Dvorak keyboards are manufactured because too few typists can use that keyboard.

The implications of the story for computer operating systems seem obvious. The accepted standard was not displaced simply because the benefits of switching to the challenger were less than the costs.

Department of Justice together with the 19 States of America against Microsoft has been investigated. Allegations made by these State and legal bodies include a monopoly of Microsoft in the market for operating systems of personal computer, b bundling of Windows O. S together with an official Internet Browser - Windows Explorer, c attempts to monopolize competitions on Internet Browsers, and d its several engagements in a number of anti-competitive exclusionary arrangements Economides According to Evans , the initial legal attacks against Microsoft monopoly left the company undamaged even after the U.

Justice Department charged Microsoft with market violations of engaging in anticompetitive and exclusionary schemes to retain its monopoly status in personal computer OS and Internet browser 4. Nonetheless, Microsoft continues to decline the alleged charges against their monopolizing schemes and claims to uphold appropriate pricing for their PC OS Werden In July , Microsoft made their settling agreement against the four-year antitrust investigations enforced by U.

S Justice Department and European Commission. However, according to Grimm, Lee and Smith , negotiations offered by the company did not pass the complaints filed by misled competitors and IBM, which consequently led to the allegations of stricter antitrust enforcement policy against Microsoft Klein — together with other 20 state attorney generals filed an official legal suit Civil Action No. According to Evans , Microsoft had violated Section 1 because of their entry in exclusive contracts with different parties together with the bundling of Internet Explorer to Windows However, Microsoft immediately denied the accusations made by these legal bodies against their company Steiner and Steiner Charges against Microsoft consisting of a violation due to entry in exclusive contract, b bundling or tying, c monopoly leveraging, d attempted monopolization of web browsers, e maintenance of PC OS monopoly and f predatory pricing led to the break-up of Microsoft into two different companies under the umbrella of the general Microsoft Corporation Evans ; Grimm, Lee and Smith The principal market supporting the product lines of Microsoft Corporation comprises the multi-segmented sectors, personal users of PC Windows OS and application innovators from small to large-scale companies Eisenach and Lenard Meanwhile, major competitors of Microsoft — Linux and Mac — account to only 3.

Issues on Inhibition of Competitors. According to Steiner and Steiner , shortly after the release of Microsoft Windows Internet Explorer, Microsoft executives together with Netscape executives had their meeting aimed at persuading Netscape not to compete with Microsoft In order to eliminate the marketing potential of Netscape browser, Microsoft tied or bundled Internet Explorer with Microsoft Windows promoting the use of an official web browser instead of an installable or downloadable web browser Hahn According to Spinello , since OEM is one of the two principal channels in distributing different browsers, Microsoft allegedly performed negotiations to remove Netscape browser and promote the official Windows browser to the public users Threats on Windows access were thrown against OEM executives who refused cooperating in this deals; hence, Microsoft was sued for committing anticompetitive and monopoly campaigns against its competitors Hahn Conclusion Evidently, Microsoft had performed anti-competitive and monopolistic actions against its competitors in order to maintain its monopoly in the industry of computer and software applications.

Microsoft has violated anti-trust policies and Sherman Act sect 1 and 2 in order to retain its monopolistic powers and prevent competitors from increasing their market share in the industry of web and OS applications. Essentially, Microsoft is taking advantage of the weakness of standards in both the private and public technical education fields to mold them into subsidized Microsoft recruitment tools. Looked at comprehensively, Microsoft is using its training programs to further reinforce the network effects already tilting control of corporate computing under its dominance.

The threat of the Internet was obvious: with a twenty-year tradition of open computing standards connecting computers of all kinds, the Internet looked ready to make proprietary operating systems for individual machines an anachronism.

As the Internet broke into national consciousness in and , it appeared that millions of computers were connecting to one another with Microsoft having nothing to say in the matter. The rise of Netscape and a host of other new Internet companies seemed to promise a new era of competition including a whole new cast of companies. Having dismissed the Internet until relatively late, Microsoft has in under two years been able to assume not only a competitive position but is now threatening to control the standards of the Internet.

The most basic use of Java is for enhancements of Web pages—animated pictures, interactive queries from browsers — to go beyond viewing static information. But Java is ultimately a way for the Internet to act as one giant computer where programs can be located anywhere and be accessed instantly over the Internet from any desktop.

But Microsoft also recognized the lure of Java and it initially licensed Java from Sun for its own Web software and development tools for fear that developers might abandon them if Microsoft did not provide Java capability. It also bought out Colusa, an early developer of Java tools, and in purchased Dimension X, whose Liquid Motion graphics and multimedia authoring tools for Java were already considered top in the industry.

In July of , Microsoft announced it would not include any of what Sun called Java Foundation Classes—bits of standardized Java code to assist cross-platform compatibility—in future Microsoft products. On Oct. Having come to dominate software sales in the computing world, Microsoft is looking to use that control to move into other markets. With large areas of commercial activity moving onto the Internet, a prime Microsoft goal is to take substantial control of the standards governing financial transactions on the Internet and to use that position to leverage itself into an array of on-line commercial activities.

While working to set the software standards for financial transactions on the Internet, Microsoft is rapidly moving from being a software supplier to being a major direct player in Internet commerce unto itself by using its dominance of software and its monopoly position in operating systems to reinforce its other businesses on-line.

Microsoft had originally hoped to take a very direct route to dominating on-line commerce by cornering the market on all financial software sold to consumers. Microsoft had tried to make inroads with its own Money software, but Quicken had proven a harder challenger than any other software competitor even with Money bundled with other software for free , so buying the company had become the next best option.

However, under pressure from competitors and banks, the Justice Department intervened to pressure Microsoft to abandon the deal. The result shows some of the benefits of blocking Microsoft from dominating a market, but subsequent events demonstrate that when one avenue of control is blocked, Microsoft will simply take another route.

In some respects, however, having been blocked from merger, Microsoft has been forced to compete hard with Intuit in improving its software. Most importantly, Microsoft has been forced to work with Intuit on open transaction standards, called Open Financial Exchange OFX , acceptable to both companies along with an array of banks, including Bank of America, Chase Manhattan, Citibank, Wells Fargo along with many others. However, having been blocked in directly controlling the software and standards for financial transactions, Microsoft has rushed to dominate the tools and server software necessary for banks and other financial institutions to implement the standards.

Microsoft has supplemented its developer tools with a specific set of tools aimed at financial institutions working to build transaction-oriented Web sites. Lacking the technology inside Microsoft, the company in mid acquired eShop Inc.

Shutting down the mall, Microsoft made it clear that it was eShop technology they needed for incorporation into Merchant Server. Measuring the importance of eShop, Microsoft itself stated it saved 12 to 24 months of development time and outside analysts argued that cornering the eShop technology was going to give Microsoft a three-year jump on the competition — a lifetime in the fast-moving computer world.