Bob Dole vs. Microsoft (Go, Microsoft!)

 

Fortune issue: February 16, 1998

First Principles

ECONOMICS

Bob Dole vs. Microsoft (Go, Microsoft!)

By N. Gregory Mankiw

Amid the armies of experts on law, economics, and technology who have been drawn into the battle over Microsoft's future, Bob Dole is a bit like Waldo in the Sunday comics: out of place and easy to miss. But the former Senator's small role in the Microsoft case is nonetheless significant. It speaks volumes about what's wrong with the government's crusade against the software maker.

Now I have nothing against Bob Dole--but he is no computer scientist. Nor is he a specialist in the economics of industrial organization. Microsoft's rivals have recruited Dole as a foot soldier in their fight against the software giant simply for his political clout.

The struggle centers on what Microsoft should be allowed to do with its immensely popular Windows operating system. The Justice Department does not trust market forces to limit Microsoft's hegemony. The government's lawyers claim that Microsoft is illegally attempting to expand its market power by bundling Windows with its Internet browser.

Is it bad for consumers when a company bundles products together? My father bought a primitive car air conditioner and installed it himself in our 1962 Buick. Now, cars and air conditioners are routinely sold together--and consumers are better served. A three-piece suit, a ham-and-cheese sandwich, and a semester at Harvard are all made of components that could be sold separately. Not even the most zealous Justice Department lawyer would try to break up these products.

When a company (Microsoft) has a monopoly over a valuable product (Windows), it appears to have consumers over a barrel, forcing them to buy something they don't want. But why would it? A monopolist does not gain by bundling its valuable good with an undesirable one. The best way for a monopolist to profit is to provide precisely the product that consumers want and then charge the highest price it can get.

Although the consumers-over-a-barrel theory doesn't work, economic theorists have concocted more elaborate stories of how bundling may be adverse. They argue that a monopolist could deter potential competitors by bundling disparate products. For instance, if Microsoft can make applications such as the browser part of its operating system, other software firms might have less incentive to develop new and better applications. But these theories offer little guidance to those making policy. If bundling is often beneficial but sometimes not, policymakers need to be able to tell which is which before they start regulating how companies market their products. They can't.

This brings us back to Dole. When Microsoft's rivals hired him to lobby, they exposed their cynicism. They are betting the legal system will decide Microsoft's future based not only on economic principles but also on popular perception. What could be better in the court of public opinion than siccing a respected friend of business on the world's richest man?

Using antitrust laws to regulate business practices like bundling is not likely to benefit consumers. Even if the world's smartest economists did the regulating, they would often get things wrong. And given the realities of how policy is actually made inside the Beltway, things are more likely to go wrong than right.

What company will dominate the software industry in the next century? I don't know, and neither does anyone else. I hope it is the company with the best programmers. I fear it may be the company with the best lawyers.

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N. GREGORY MANKIW is a Harvard economics professor and author of Principles of Economics.