Economic Report President

In another part of the Internet market, the Justice Department haschallenged what it alleges are anticompetitive practices in the marketfor browsers, software that consumers use to access the Internet fromtheir computers. All computers have operating systems that controland allocate the hardware resources of the computer and allow it torun various applications programs of the user’s choosing, such as wordprocessors and browsers. The necessity for any new operating systemto be accompanied by a range of compatible applications creates a barrierto entry into the operating system market. Operating systems aresubject to network effects because more programs will be developed torun on the more widely used systems. As more programs are developedto run on a particular operating system, that system becomes yet morepopular to consumers. The result is a market for operating systemsthat has a propensity to tip to a dominant provider. Currently,Microsoft Corp.’s Windows operating system dominates the market forsystems that run on IBM-compatible personal computers.The Justice Department claims, among other charges, that Microsofthas misused its dominance in the market for personal computer operatingsystems to maintain power in that market and to attempt to gaindominance in the complementary market for browsers. Microsoft,which packages its browser with current versions of Windows, hasallegedly required computer manufacturers to agree, as a condition forreceiving licenses to install Windows on their products, not to removeMicrosoft’s browser or to allow the more prominent display of a rivalbrowser. Because consumers demand that manufacturers preload Windowsonto new personal computers, manufacturers face heavy costs ifthey do not accept Microsoft’s terms. Similarly, the Department claimsthat Microsoft has refused to display the icons of ISPs on the mainWindows screen or list them in its ISP referral service unless the ISPsagree, in turn, to withhold information about non-Microsoft browsersto their subscribers. The ISPs are also required, the Departmentalleges, to adopt proprietary standards that make their services workbetter in conjunction with Microsoft’s browser than with others.Microsoft responds that integrating its Internet browser makes itsoperating system more functional and increases the features and usesof programs written for that operating system, to the ultimate benefitof consumers. The company also claims that the contractual arrangementswith ISPs are nothing more than cross-promotional agreements,which are common within the computer industry.The case against Microsoft reflects an effort by the Justice Departmentto prevent perpetuation of monopoly by allegedly anticompetitivemeans, to protect competition in the Internet browser market and tomaintain incentives for the development of innovative software bypreventing anticompetitive actions against successful products. Thechallenge for competition policymakers in this context is to preservecompetitive opportunities without punishing successful competitors.192