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Your Microsoft Alternative to Antitrust

          I've been privately asked to comment on a non-antitrust remedy to
  the Microsoft monopoly.  The following is my response.
          Charles Mueller, Editor
          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
          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