How does Austrian economics deal with software monopolies?

Economics Economics Questions
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1

Over the last three and a half years, after encountering the Ron Paul presidential campaign, I have been trying to learn more and more about Austrian economics. Despite public school education, once I learned what the Fed is, I recalled learning in AP US history about the Continental dollar and needed no more convincing that our current economic system can’t work. After watching numerous videos online, and reading books such as Meltdown and Economics for Real People, by Gene Callahan, there is still one area that I’m struggling with in either believing or re-orienting my thinking to know how it would work.

This last November I was in Texas for a friend’s wedding, and before I went I tried to see if I could meet Ron Paul. He was understandably busy, but his assistant said that she could arrange a phone call from him. I was quite an honor, and after thanking him for all he does and inspiring me to go into politics once life calms down (got married in Seattle in '09 the weekend of the Campaign for Liberty regional conference, and I’m becoming a dad this April), I asked him the same question I would like to pose to all of you. He talked to me for almost ten minutes before having to go, and I thanked him for his time, but afterwords I found myself hoping that I didn’t come across as arguing with the man when he’s doing me the honor of calling. I hoped that given he normally has to defend basic principles to misguided people in the media, or praise from supporters, that it was okay, and that he’d prefer supporters to be critically thinking than just agreeing. If anyone reading this knows tha man, perhaps by the end of this post you could also tell me whether or not I’ve been worried for nothing.

So, the one issue that I still have regarding completely free market economics is antitrust, specifically as it applies to the software industry, and in particular, Microsoft. Growing up in Seattle, I’m very familiar with that case. However, as I led into my question with Dr. Paul, I don’t have a problem with them because they are big. My problem is with how they got to where they are, and what they do to maintain that dominance. I knew that Dr. Paul frequently sites laws currently in place that would take care of abuses, rather than needing more regulation, so my question was mostly how would he propose to handle predatory business practices in the software industry. My premise was, unlike the example you’ve given of Dow and bromine, where there are costs associated with extracting something from the earth and manufacturing, all you essentially need for software is developers. In other words, with tangible products, there is a higher limit on how much you can lower your price without selling at a loss, which gets even worse once you are talking about giving a product away. The example I normally gave people is that under current law there’s nothing wrong with having a monopoly on refrigerators, but if you do have a monopoly on refrigerators you can’t simply give away a microwave to anyone that buys your refrigerator. However, in this example, the business carrying out these pricing practices is taking an enormous loss due to the cost of making these free microwaves, so the likelihood of it ever being a problem is low.

In my opinion, this is vastly different than what happened between Microsoft and Netscape, the major basis for the antitrust case. The first web browsers had to be purchased in stores. The battle was mainly between Netscape Navigator and Microsoft Internet Explorer, with Netscape dominating the market. Netscape was argued to be the better made product. Prior to releasing Windows 95, Microsoft met with Netscape and tried to carve up the market. Microsoft said that Netscape could sell it’s product to pre-Windows 95 users, Mac users, and Unix/Linux users, and Microsoft would sell Internet Explorer to Windows 95 users and beyond. Netscape maintained that they had just as much a right to compete as Microsoft. So, Microsoft released Internet Explorer for free. This is where I probably should have chose my words differently with Dr. Paul. I say that because they didn’t just release it for free, they bundled it with Windows. If they had continued to package it as before, in stores, with all the overhead involved in packaging, shipping, etc, but consumers would stand in the store and look at IE with a $0 price tag next to Navigator, still priced at $40 or $50, that would have been one thing. I see it as a difference because you could argue, as he did, that Netscape could have still sold for a smaller fee, or any number of things. However, by bundling IE with Windows, Microsoft eliminated all costs associated with selling it, except for the developers. Since Microsoft had a monopoly in operating systems with Windows, it could easily afford to pay for the developers. Netscape offered Navigator as a free download, but since everyone with Windows already had IE, and this is in the day of drastically more non-savvy users and slow, pay per minute, dial-up connections, not many people would take the effort to get a product that they already had. Netscape tried to partner with hardware manufacturers to make agreements allowing Netscape to be on computers by default, but failed in this area too when Microsoft threatened to take raise, or revoke licensing to manufacturers that didn’t make IE their default. Dr. Paul did say that he wants to make sure there aren’t barriers to entering a market, but I wasn’t clear if he meant only regulatory barriers, which this clearly wasn’t. I understand that constitutionally, people should be able to contract however they want, so I don’t see how the government could step in and tell Microsoft that they can’t stop selling their product to someone, but I ask, is this not a barrier of entry?

So, in the end Netscape Navigator and the company disappeared. It does live on in the open source Mozilla FireFox project, and continues to gain momentum, but the damage has been done. The odds of IE no longer being dominant browser are not good. If it all happened today, in this age of people caring around min computers in their phones, and fast download speeds, would this even be an issue, I don’t know. Despite that, however, I still find it important to ask, if antitrust (or similar laws) didn’t exist, how could you stop a company from not only unfairly putting a competitor out of business, but from possibly stifling innovation because the majority of people are locked into browsing the Internet Microsoft’s way?

As you can tell, I’m very passionate about this issue. To be completely honest, I am a Mac user, and so in junior high through college, before I started wearing Ron Paul t-shirts and being anti-Fed, I was wearing Apple t-shirts and was anti-Microsoft. I think those years prepared me for fighting for something truly important, liberty, but old beliefs often die hard. Honestly, however, I really believe that the Austrian school of economics has an answer to this problem, and would be very appreciative if someone could point me in the direction of those answers.

2

Microsoft doesn’t have a monopoly (except for the state-granted monopoly that you can’t copy it).

How can it be bad to give away something for free?

Is Microsoft using weapons (guns) to force anyone to do anything? If not, how could it be right to force them to stop doing something?

Do you realize that the software world would look completely different without intellectual property laws (which are supported through violence)?

I’m typing this in Mozilla Firefox. I also use Chrome. I never use Internet Explorer. It was very useful to have Internet Explorer though to download the other two --free-- programs.

3

Without government, there would be no monopolies. ALL monopolies are government created. Patents and copyrights are monopolies. There would be no patents or copyrights without government.

4

The argument regarding pre-bundled IE vrs an aftermarket browser such as Netscape seems like it could be analogous to an auto manufacturer including with their cars a proprietary radio (as opposed to one made by Pioneer or some other radio manufacturer). I fail to see any anti-trust implications from this setup.

5

When a manufacturer improves the quality of their product while not raising the price. The result is consumers massively benefit. This is how economies grow wealthier over time. Denouncing this behavior is anti-economical. It’s counter productive if the goal is economic prosperity. We want business’s to bundle more while offering the solution for less. Not the other way around.

6

I, too, am a Mac user (as well as a free software developer). However, I see the MS/Netscape issue in a different light.

Consider the following. Before the existence of Netscape, Microsoft’s position on TCP/IP and the web phenomenon was that it was completely unnecessary. As a result, it was extremely difficult for the average Windows user to get on the 'Net (anyone remember trying to install Trumpet Winsock on Win 3.1?). Then Mosaic / Netscape comes along (remember, Netscape was just a rewritten Mosaic), and suddenly, MS discovers the internet. Without Netscape’s market push, MS would have happily continued putting together an inferior product. Windows 95 came about because of competition from Apple. These are not the actions of a monopolist, but of a large, less flexible player responding to the market.

MS played hardball, there is no doubt (it still does). But its actions did not harm the market, that I can see. Netscape sold itself to AOL and made Marc Andreesen a very wealthy man; AOL’s slow, agonizing demise is happening not because of Microsoft, but because of its own exceedingly poor business decisions (the ill-advised merger with Time-Warner being only the latest of many). IE is still bundled with the operating system (in the U.S., at least), and yet the browser market is extraordinarily healthy, with tons of browser options for consumers. MS doesn’t have an operating system monopoly, either – Apple Corp, despite having a smaller market share in the desktop market, has a larger capitalization than Microsoft.

Where’s the harm? The only harm I see is the harm that occurred to Microsoft as a result of the anti-trust investigations by the U.S. and the EU over the browser issue. It punished MS stock, it caused their executives to take their eyes off the ball in market innovation (allowing Linux to infiltrate the server room and Apple to re-energize in the desktop market), and wrapping what used to be a highly flexible and market-oriented company into a legal straitjacket where the legal department seems to make more market decisions than the product units do.

In conclusion, MS supposed monopoly seemed to harm no one but themselves and their shareholders. It certainly didn’t harm the browser market.

7

What you saw happen between Microsoft and Netscape was just the normal process of commoditization of goods under capitalism. Netscape was driven out of the market by a larger, more productive competitor.

What is the situation today? All browsers are now free.

8

Furthermore, who cares if Netscape was better. Internet Explorer can pre-installed in Windows. Obviously, the consumers favored convenience over Netscape.

9

in other words, monopolies won’t exist (for long) without state sponsorship…because well we say they won’t!

i am personally not a proponent of anti-trust laws either, but it sounds like all the responses basically assume that the only barrier to entry is government force. that seems unlikely in most cases, but totally crazy with regards to most software products where it is argued that network effects could theoretically lead to lock-in of a particular (possibly inferior) platform.

there are reasons to doubt the lock-in story, but to just ignore the argument is to totally misunderstand the anti-trust case against microsoft.

i think a book KITT will love to read is "winners, losers, and microsoft" by liebowitz and margolis. i think they do a good job of casting doubt on the typical lock-in story and they touch precisely on your concerns with microsoft. you can buy it cheap on amazon and it is well worth the money.

http://www.amazon.com/Winners-Losers-Microsoft-Stan-Liebowitz/dp/0945999844

10

@ Student.

This is some what of a cop-out, but the issue of monopolies have come up at least a dozen times before. Searching or the Mises.org site will provide the party interested with various compilations of texts, video’s and audio all regarding monopolies.

Are you just asking us to link to those articles. Again? Or did you genuinely think there was no theory behind what people posted above?

11

While Microsoft might have temporarily killed off the competition, remember that it was only temporary - Mozilla Firefox hit hard and fast enough to make Microsoft abandon the idea that it could stick with version 6 of IE forever. The browser market is perfect proof that, absent coercion, a monopoly that rests on its laurels is soon eviscerated by more visionary competition.

12

Maybe terms need to be redefined, but one of the primary reasons that I’ve been asking this question of late is that I can’t seem to find a truly analagous situation to what occurs in the realm of software. The auto manufacturer only partially works. I say this, because Microsoft is not the car manufacturer, because they don’t make PCs, they make the operating system. The car manufacturer is similar to the OEM PC manufacturer (Dell, Sony, etc, and technically Apple at this point since Macs can run Windows). Windows is only maybe comparable to the engine, or maybe the computer system governing all the systems receiving power to the engine. Let’s reframe this to be, instead of a radio, a GPS unit. At some point, you had to buy these only from Microsoft, or someone else (Netscape). Then Microsoft says that they want to be the only people making GPS units for their new engine. Netscape looks at their sales and realize most drivers are buying their GPS unit, so they don’t agree. So, Microsoft (through some nonexistant science which ruins this analogy) starts producing a new engine with GPS built-in. What’s more, they threaten to stop producing this engine for any car manufacturer that puts Netscape’s GPS in their cars. Netscape’s in a bind because they have to be able to sell their GPS unit for at least cost or go out of business (remember, were not talking about price wars, we’re talking about having to now compete with something that’s free, and only free because the competition can sell at a loss, which is much less than this example we’re were talking about a product that has to be created from tangible material).

Netscape could start making engines with built-in GPS too, but there’s no guarantee that the other components third-party components of the car (think, software, but again, I don’t know the analogy with a car or anything else) would work. They try to convince the car manufacturer to put their GPS in the car too, so they at least eliminate distribution costs, but Microsoft threatens to stop selling their engine to the manufacturers if they do that. Now the car manufacturers are in the same bind as Netscape, they could start making their own engines, but their customers don’t want to buy a car with someone else’s engine.

As I said, that’s the best analogy I can think of. I appreciate your reply, and would be open to hearing if you had a more similar analogy, and the Austrian response. My biggest problem in trying to find answers here is finding someone to ask that is both familiar with the technical details of this case, and who supports Austrian economics. I’m not arguing this because I hate Microsoft for being big. I think that argument leads to people calling Apple the new Microsoft, which I think is false. Apple has gained dominance because people chose to buy their products. Microsoft has a dominance in web browsers because they had a dominance in Windows and leveraged it. Through consumer choice (although, in my opinion, through unethical business practices) consumers voted with their wallets that Windows should succeed. However, why did that mean that they are stuck with Microsoft way of doing other software products that it can release with Windows for free, effectively killing most other competing products?