Everyday Economics

Monopoly Shopping

As a consumer, would you be better off if Netscape controlled the browser market, or if Microsoft did?

Microsoft is paying me to write this column. Does that affect my objectivity? I don’t think so, but I might be wrong. Fortunately, it doesn’t matter. I’m not asking for your trust. I’m going to lay out a simple logical argument that you can check for yourself. The argument stands or falls on its own merits.

In other words, I aim to occupy the same high ground claimed by Abraham Lincoln in his sixth debate against Stephen A. Douglas:

If you have ever studied geometry, you remember that by a course of reasoning Euclid proves that all the angles in a triangle are equal to two right angles. Euclid has shown you how to work it out. Now, if you were to undertake to disprove that proposition, would you prove it to be false by calling Euclid a liar?

I am prepared to go Lincoln one better and to assert that you could not prove Euclid’s proposition to be false even by calling him a Microsoft employee.

Now, then, let’s talk about Web browsers. More specifically, let’s talk about what will happen if Microsoft extends its operating system monopoly into the browser market as the Department of Justice claims it is trying to do. Microsoft denies that intention, claiming it bundles browsers with operating systems only to take advantage of technical synergies.

Who’s right about that one? I have no idea. Well, OK, I have some ideas, but they’re probably no better informed than yours. Instead, I want to ask a related question, one that is central to this whole affair but has been almost entirely ignored in the dozens of op-ed pieces that have cropped up over the past couple of weeks. Namely: Would a Microsoft browser monopoly be good or bad for consumers?

Well–good or bad compared with what? What is the alternative to a Microsoft browser monopoly? There are several scenarios you might envision. One is an eternal competition between Microsoft and Netscape, each striving to capture market share through innovation. The upside of that scenario is that browsers would get better; the downside is that innovation uses a lot of resources that might be better employed elsewhere. It’s not clear whether the benefits of that competition would outweigh the costs, or vice-versa.

Another alternative to a Microsoft monopoly is a Netscape monopoly. Which of those would be better for consumers? Your gut response to that question is likely to depend pretty heavily on whose software has caused you the most recent frustration. For the record, my own level of frustration with both companies’ products is so high that I don’t run Windows 95 or Netscape Communicator. But let’s you and I try putting aside our individual peeves and recasting the question at a more abstract level. Assume, for the sake of argument, that there will be only one browser and that its quality will be the same regardless of whether Microsoft or Netscape supplies it. Then should you, the consumer, care who supplies it?

Under those assumptions, there’s an unambiguous answer: You should root for Microsoft. Give me a few paragraphs, and I’ll explain why.

Windows 95 costs about $90 at my local computer superstore. Why doesn’t it cost more? Because, despite its monopoly power, Microsoft remains subject to the laws of the marketplace. At a higher price, too many customers would walk away. (If you doubt a small price increase would significantly affect the sales of Windows 95, you must conclude Microsoft is undercharging out of either foolishness or generosity–neither of which is terribly consistent with the way the Justice Department and the public at large think of Microsoft.)

I n fact, every time Microsoft raises the price of Windows 95, it gets punished twice. First, it loses sales of Windows 95. Second, with each of those lost sales, it loses a potential user of Internet Explorer. For example, if Microsoft has half the browser market, then 2,000 lost Windows sales imply 1,000 fewer users of Internet Explorer. (This assumes people who don’t buy Windows won’t need a browser.)

You might ask why Microsoft is “punished” by the loss of an Internet Explorer user, given that Internet Explorer can be downloaded free. The answer, of course, is that in the long run, it won’t be free. Even when it comes packaged “free” with Windows 98, you’ll really be paying a combined price for the operating system and the browser, which will surely be higher than the price Microsoft would charge for an operating system alone.

Now think what would happen if Microsoft had a monopoly in the browser market. The second punishment would be doubled–2,000 lost Windows sales would mean 2,000 lost Internet Explorer sales, not 1,000. That’s good news for consumers. Give Microsoft a monopoly on browsers, and you’ll intensify the downward pressure on the price of its operating systems.

In fact, the same kind of pressure works to lower browser prices too. Just as a doubly monopolistic Microsoft would be reluctant to raise the price of Windows 95 for fear of losing Internet Explorer users, it would be equally reluctant to raise the price of Internet Explorer for fear of losing Windows 95 users (who might not be willing to invest in a computer at all if the price of browsers is too high). Of course prices will still rise and fall in response to other forces–but they will never rise as high under a dual monopoly as they would under two separate monopolies.

That doesn’t prove that a Microsoft monopoly beats any alternative. But it does prove a Microsoft monopoly beats a Netscape monopoly, assuming the companies provide products of comparable quality.

I promised to make an argument that would stand or fall on its own merits, and I claim to have fulfilled that promise. You can judge the argument for itself, and it doesn’t matter who else has endorsed it. But I do want to mention for the record that it has a lot of endorsements. In economics textbooks, it is commonplace to observe that vertical integration of monopolies tends to reduce consumer prices–for essentially the same reasons I’ve given in this column. That observation wasn’t always commonplace, but it has been for nearly 20 years now–ever since one Robert H. Bork forcefully called it to economists’ attention. (In my own textbook, the discussion of this issue is peppered with quotes from Bork.) In his recent public statements, he has skirted this issue entirely. Of course, Netscape pays him a lot more than Microsoft pays me.