Microsoft Antitrust Case Microsoft is a large diversified computer software manufacturer. Microsoft produces the Windows family of operating systems

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Microsoft Antitrust Case

Microsoft is a large diversified computer software manufacturer.  Microsoft produces the Windows family of operating systems for personal computers and servers.  It also produces applications software that run on the Windows family of operating systems, most notably the very successful MS-Office Suite consisting of Word, Excel, PowerPoint, Outlook and Access.  Almost all Microsoft products are complementary to a member of the Windows family of operating systems for personal computers and servers.

During the last few years, the Federal Trade Commission and the Department of Justice of the United States have investigated Microsoft on various antitrust allegations.  The 1991-1993 and 1993-1994 investigations by the Federal Trade Commission ended with no lawsuits.  The 1994 investigation by the United States Department of Justice was terminated with a consent decree in 1995.  The provisions of the 1995 consent decree were:

  1. Microsoft agreed to end per-processor (zero marginal prices) contracts with computer manufacturers but it was allowed to use unrestricted quantity discounts.

  1. Microsoft shall not enter into any License Agreement in which the terms of that agreement are expressly or implied conditioned upon the licensing of any other covered product, operating system software product or other product (provided, however, that this provision in and of itself shall not be construed to prohibit Microsoft from developing integrated products): or the original equipment manufacturers not licensing, purchasing, using or distributing and non-Microsoft product.”

This 1995 consent decree imposes two restrictions, one horizontal, and one vertical.  The horizontal restriction stops Microsoft from using zero marginal cost pricing.  However, it allows for quantity discounts, disregarding the fact that zero marginal cost pricing is a special case of a quantity discount contract.  The vertical restriction of the decree prohibits product bundling created by contract, but allows Microsoft to keep expanding the number and type of functions of its products, including Windows.  In this decree contractual bundling was not allowed, but technological bundling was allowed.

On October 20, 1997, the Department of Justice alleged that Microsoft violated the 1995 consent decree by bundling Internet Explorer with the Windows operating systems, and requiring computer manufacturers to distribute Internet Explorer with Windows 95.  The Department of Justice petitioned the District Court to find Microsoft in civil contempt.  Judge Thomas Penfield Jackson issued a preliminary injunction barring the bundling of Internet Explorer with Windows on December 11, 1997.  This preliminary injunction was voided by the Court of Appeals (DC circuit) on May 12, 1998.  On June 23, 1998 the Court of Appeals ruled that the 1995 consent decreed did not apply to Windows 98.  The reason given for this ruling was that Windows 98 was shipped with an integrated Internet Explorer as part of the operating system and an Internet Explorer Icon on the personal computer desktop, and arguing that the courts were ill equipped to evaluate the benefits of high-tech product design.

During the week following the Court of appeals stay regarding the preliminary injunction that barred the bundling of Internet Explorer with Windows because of the alleged violation of the 1995 decree the Department of Justice filed a major antitrust suit against Microsoft.  This action was filed on May 18, 1998; the Attorneys General of 20 States and the District of Columbia joined the Department of Justice on this action.  On May 18,1998 when the Department of Justice and the Attorneys Generals of 20 States along with the District of Columbia sued Microsoft the main allegations were:

  1. Microsoft illegally monopolized the market for operating systems for personal computers under ¶2 of the Sherman Antitrust Act;
  2. Microsoft had anti-competitive contractual arrangements with various vendors of related goods, such as with computer manufacturers and Internet Service Providers, and had taken other actions to preserve and enhance its monopoly; that these contractual arrangements and other actions ere illegal under ¶2 of the Sherman Antitrust Act;
  3. Microsoft illegally attempted to monopolize the market for Internet browsers (but failed to succeed). And act that is illegal under ¶2 of the Sherman Antitrust Act.
  4. Microsoft bundled anti-competitively its Internet browser, Internet Explorer, the Microsoft Internet browser, with it Windows operating systems; that it is illegal under ¶1 of the Sherman Antitrust Act.

Microsoft had the following defense.  They argued that the law was on their side since the Court of Appeals had ruled on June 23, 1998 that they could legally add new features and functions to Windows.  Microsoft argued that it was legal to add Internet Explorers functionality to Windows, and it had done nothing wrong by integrating Internet Explorer in Windows.  Second, Microsoft argued that it was just competing against Netscape, that such competition was welfare enhancing, and that it did not commit and anti-competitive acts.  Third, Microsoft argued that it did not have monopoly power in the operating system market. Microsoft argued that competition in the software sector was intense and that a new competitor or entrant could replace its leadership position at any time.  They also argued that they were a leader in software innovation and that they have enhanced rather than hobbled the innovation process.  The last argument in Microsoft’s defense was that consumers have benefited from its action rather then having been harmed by them.  Microsoft claimed that direct consumer benefits from their low pricing on operating system the zero pricing of its Internet browser, and the enhancement and acceleration of the innovation process all benefited consumers.

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The following Antitrust Law applies to this case:

1.  Section 2 of the Antitrust Acts

“Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony.”

The U.S. antitrust law implies that monopolization under ¶ 2 of the Sherman at is illegal if the offender took anti-competitive action to acquire, preserve, or enhance its monopoly.  To prove monopolization you need to prove the ...

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