Microsoft, Macro-screwed : The decline of antitrust.

Judge Thomas Penfield Jackson has issued an opinion that outdoes the government in savaging Microsoft. It says, basically, that Microsoft used cunning and guile to create and maintain a monopoly with its Windows operating system, thus stifling competition and harming consumers.

Attorney general Janet Reno crows that Jackson's decision will benefit consumers. Robert Bork hailed the decision as bringing a predatory monopolist to heel. Microsoft's "untenable" legal position, Bork concludes, leaves the company no choice but to resort to a dubious lobbying and public-relations campaign: "Nothing comparable in intensity, expense, and mendacity has ever been seen with respect to antitrust litigation."

Tough words, indeed-but, to this independent observer, it just ain't so. To see why, step back from the detailed technical portions of this case to consider the broader framework of antitrust litigation. The basic prohibition of the antitrust law is against business practices that operate in restraint of trade. The paradigmatic violation of that command is an agreement among competitors to rig their prices, in consequence of which fewer goods are sold at higher prices. Consumers are made worse off, and producers are made better off. Orthodox price theory shows that the gains to the producers are systematically smaller than the losses borne by the consumers, so that on net society is better off when the monopoly is squelched and competition maintained.

The application of this laudable program is, however, fraught with hidden dangers. Enforcing the antitrust law is always costly, and the risk of wrong judgments is distressingly high. These dangers are magnified beyond reason when the claim is made that a firm such as Microsoft seeks to obtain or preserve its monopoly position by lowering prices or improving its service to consumers. The short-term advantage to consumers of low prices and better products is evident to all, so that the supposed nefarious consequences of these schemes must come from the insidious ability to gouge consumers in the long run.

In non-network industries, it is virtually impossible, historically, to identify any successful case of predation. The firm that lowers prices will experience a sudden increase in demand for its product; but selling products below cost will multiply its losses. The firm's clever competitor will stay on the sidelines while the predator hemorrhages cash, then bounce back into the marketplace the moment its drained adversary seeks to raise prices above the competitive level in order to recoup its short-term losses.

That strategy looks like financial suicide for the predator-even without the intercession of antitrust laws. An alternative account of the same behavior is obviously more reasonable: namely, that ostensible predation is in reality sensible economic competition that gives consumers lower prices.

The use of a predation theory, therefore, turns the antitrust law on its head-so that now it protects an established incumbent against competition from a new entrant.

Ironically, the established incumbent in the browser market was Netscape, not Microsoft. Microsoft had to scramble to offset Netscape's market dominance, even on computers that ran on the Microsoft system. It is hardly in the interest of consumers for Microsoft to cede this vital niche to an incumbent.

The only question is whether Microsoft adopted improper means while playing catch-up. That charge would have stuck if Microsoft had risked a public-relations disaster by configuring its operating system to repel Netscape's Navigator. Indeed, by virtue of controlling the hub position, Microsoft could have been guilty of an antitrust violation if it had impeded Netscape's ability to hook onto the Microsoft system. But that charge isn't credible, given Netscape's large initial market share-and the fact that Netscape would have needed to make only a modest adjustment to obtain access to the Microsoft system.

Microsoft chose to compete by developing better products at a lower price. In condemning this behavior, Judge Jackson's opinion lapses into inexcusable newspeak. Exhibit A is his bizarre treatment of the access- kit agreements. As Jackson describes them, these kits provided a simple and convenient way for users-including any Internet Access Provider who clicked onto Microsoft's website-to download the access kit free of charge for their own use.

Netscape, alas, did not offer its analogous package, Mission Control, until nine months later, and initially charged a staggering $1,995 for it. Not surprisingly, virtually all Internet Access Providers took the Microsoft deal, at the cost of making Microsoft their preferred (i.e., not even exclusive) Internet browser.

It's a pretty good deal. But here's how Judge Jackson describes it: "Microsoft's decision to license Internet Explorer and the [access kit] at no charge beguiled many [small service providers] that otherwise would not have done so into distributing Internet Explorer to their subscribers. By giving up an opportunity to charge for Internet Explorer, and also by developing the [access kit] at substantial cost and offering it at no charge, Microsoft thus increased" its business.

Read that passage carefully. It disproves conclusively the perverse claim that Microsoft caused antitrust injury. Judge Jackson insists that Microsoft's sophisticated software users were like infants "beguiled" into accepting its favorable terms. Does he really mean to suggest that these users should have twiddled their thumbs for nine months, until a sluggish Netscape gave them the privilege of paying $2,000 for a product that might have been less versatile than the product Microsoft was offering them free of charge? This conclusion would make sense only if the antitrust law were meant to preserve a tottering Netscape browser monopoly. But in a sane economic world, Microsoft's aggressive strategy is exactly how we want competitors to behave. Nothing would have prevented Netscape from competing with Microsoft-if only Netscape had had the goods.

Judge Jackson tries to sidestep this obvious critique by chastising Microsoft for giving up an opportunity to make money. Microsoft could have charged for Internet Explorer, and it didn't. But this was not predatory, because Microsoft was going to make immediate profits from its expanded installed base. Viewed as a whole, Microsoft did not sustain any short-term losses through this practice.

Judge Bork lashes out at Microsoft by invoking the shopworn theory of tie-ins that his own earlier work had largely discredited. The basic charge is that firms which possess a monopoly in one good (an operating system) will tie to it another (a browser) in order to improve their position. Bork's earlier work helped establish the decisive response: that any product market has at most one monopoly profit that can be extracted by raising prices on the basic product. The firm with a monopoly in cars charges the monopoly price whether or not it ties the sale of cars to the sale of tires. If, therefore, it decides to sell the car with tires, it is because the consumer prefers the bundled package to the chore of matching tires with cars.

Bork claims that the Microsoft tie-in is different, because the tie-in was used not to enhance the monopoly over operating systems, but to prevent Netscape from competing in the browser market. But again, his point makes no sense. It was Netscape that had the advantage in the browser market. Microsoft will charge nothing for its browser-whether tied-in or as a stand- alone-because of the revenues it can garner from third parties. The tie-in arrangement does not prevent Netscape from offering its browser for nothing. The theory that Netscape has been excluded would have the patina of plausibility only if consumers were being forced to pay twice to get the Netscape Navigator, but just once to get Microsoft Explorer. But they aren't. The blunt truth is that this tie-in is worthless.

The moral of this sorry tale seems clear. In the bad old days of antitrust, the government frittered its attention away from serious questions of horizontal price fixing into exotic forays into the world of predation and tie-ins. The traditional scholarship demonstrated that these diversions were always costly and often counterproductive. The Microsoft case gave the government a chance to demonstrate how its refined understanding of antitrust theory could improve technology in the computer age. But the government chose instead to trot out dubious theories whose chief effect is to preserve the monopoly of its favored client. Let us hope that its new gimmicks will be shot down by the appellate courts, the Congress, or both.