NCPA - National Center for Policy Analysis

Software Isn't A "Barrier To Entry" For Microsoft Competitors

August 31, 2000

A justification for antitrust laws over the past century has been the theory that potential competitors to a firm that achieves dominance in an industry may face insurmountable "barriers to entry," specifically in the form of high capital costs.

Although such dominant firms are called monopolies, modern economists have shown that the only "true" monopolies -- those with the power to raise profits and prices without losing market share -- are created and perpetuated by government prohibitions against competition. Utilities granted exclusive government franchises and the U.S. Postal Service are egregious examples of such monopolies.

  • Most recently, for example, federal Judge Thomas Penfield Jackson based his ruling against Microsoft on the claim that the company's "monopoly" in operating systems is protected by an "applications barrier to entry" made up of 70,000 Windows-based software programs.
  • To enter the operating-system market a newcomer would need a large and varied base of compatible applications like those available to consumers who might otherwise choose Windows; but Judge Jackson wrote, "the amount it would cost an operating system vendor to create [70,000] applications is prohibitively large."

However, economist Richard B. McKenzie point out, the existence of a large number of Windows-based applications proves that Microsoft has stirred competition among software developers -- leading to better products and falling prices, and raising the value of both hardware and software to consumers.

Moreover, says McKenzie, the judge's argument is fatally flawed: most of the 70,000 Windows applications cited never existed as unique products, no longer exist or are totally outdated.

When only unique Windows applications are counted -- setting aside various versions of the same program -- the number of applications is a small fraction of the judge's count.

Moreover, survey data indicate most computer operators use only a handful of applications.

Source: Richard B. McKenzie, "Microsoft's 'Applications Barrier to Entry': the Missing 70,000 Programs," Policy Analysis No. 380, August 31, 2000, Cato Institute, 1000 Massachusetts Avenue, N.W., Washington, D.C. 20001, (202) 842-0200.

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