The Costs of Regulating Microsoft

Hahn, Robert W., "The Costs of Regulating Microsoft" . Regulation, Vol. 21, No. 3, pp. 62-68, 1998

Abstract:

All with a stake or interest in the case against Microsoft, brought by the Justice Department and several state Attorneys General, should recognize the importance of the potential costs of this action, some of them not at all obvious. Regardless of the legal niceties or even some of the theoretical economics involved, the great danger is that the proposed remedies for Microsoft's dominant position in the market for computer operating systems will be worse than the disease.

The remedies will likely create new and different problems, with the result that consumers, far from benefiting from the end of the Microsoft monopoly, would instead suffer harm. Although it is not often openly discussed, the aim of the antitrust case is a form of government regulation of the operating systems market, presumably to make it more competitive. Government regulation in a market characterized by rapid change and innovation is fraught with danger, particularly in the form of reduced incentives to innovate.

For example, when Microsoft was integrating Windows with MS-DOS during an earlier state of the Antitrust Division investigation of Microsoft, Novell, the marketer of the competing system DR-DOS, complained to the Justice Department. If Justice had forced Microsoft to carry DR-DOS in Windows, the result would have been a reduction in Microsoft's incentive to innovate because it would have been required to share the benefits with another manufacturer. Since the consumer benefits more than producers from innovation in a market like this, such an outcome would have had potentially serious adverse impacts on consumers and on society as a whole.

Another hidden cost of the antitrust case is already evident. Political rent-seeking is becoming more prominent - that is, the leading players have increased the use of hired lobbyists and political contributions in an attempt to gain political advantage in the struggle. For example, Microsoft rose from 16th in the 1992 election cycle to first in the 1996 cycle in a ranking of companies that donate money to political parties or individual politicians.

The Federal government's case against IBM, abandoned after thirteen years, is illustrative of the dangers of trying to regulate in a dynamic market like computers. Like Microsoft, IBM was accused of illegally leveraging its dominant position through various practices that erected entry barriers against competitors. By the time the whole costly exercise was over, however, IBM was no longer dominant.

Quantifying the costs and benefits of the Justice Department's proposed remedies in the Microsoft case is difficult, particularly when there is no logical endpoint to the government's intervention. But, regulatory history--especially in dynamic markets - teaches that the regulatory costs of the Microsoft case are likely to be significant.

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