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            Monopoly Shopping

            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.)

            
In 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.