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The Real Abuse

Article published by TCSDaily on April 26, 2006.

« We … will release licenses for the source code of Windows itself, » declared Brad Smith, director of Microsoft’s legal affairs, at the end of January. This was the computer giant’s response to the threat of a new €2 million per day fine levied by the European Commission for the company’s alleged failure to provide documentation allowing its competitors easier interoperability with its software. For the last year and a half Microsoft has been under a ruling that it has abused its « dominant position » in the software industry. It had to pay a record fine of €497 million and was forced to issue a version of its Windows operating system without its multi-media software.

This decision to make Microsoft pay even more makes sense only if the initial judgment was justified. However, the concept on which the charge against Microsoft rests — abuse of dominant position — is flawed. According to the EU’s competition commissioner, Neelie Kroes, a company in a dominant position, having « substantial market power », according to its own terms, can harm consumers by imposing unfairly high prices.

The MediaPlayer-less version of Windows has been on the market since last June. According to the Commission, the integration of MediaPlayer in all versions of the operating system had harmed consumers. By offering only one integrated Windows, Microsoft had benefited from its dominant position on the operating systems market by extending it to the multi-media software market, contrary to consumer interest. So the company gave consumers the possibility to buy Windows without MediaPlayer, meaning users had to complete their package with competing media consoles.

But Windows sans MediaPlayer has been a total flop. At the Champs-Elysées FNAC store in Paris, it is said that « no one buys it ». Certain computer manufacturers have even decided not to offer it. « We carried out a study with our commercial outlets in order to know if customers wanted Windows N. The conclusion: the consumer does not want it; therefore we do not offer it, » a Dell France spokesman said in once recent news report. In other words, Microsoft is being forced to manufacture products that nobody wants.

Even though that situation in and of itself should disprove the accusation that Microsoft has abused its dominant position — it turns out people actually want MediaPlayer in their Windows — the Commission persists and once again condemns. But there’s even more of a flaw in the EU’s case: the idea that « substantial market power » opens the door to abuses.

In the model of « pure and perfect competition » serving as reference for antitrust policies, everything is done to benefit the consumer in a free market situation, provided that each company has only an unimportant share of the market. It does not then have any real « market power », in that it does not have any control over the price it can ask for their product. This price is « fixed » by the market. But if a company manages to « dominate » a significant part of the market, it has the capacity to influence the price, hiking it to the detriment of consumers.

But in reality this distinction, essential to the definition of an abuse of dominant position, is flawed. In the free market, each actor has absolute control over his person and his products. Each person then has an absolute control over the prices which he tries to obtain for his products but does not have any control over the price at which the exchange finally takes place. This is because it depends on the agreement of a purchaser, assent which is necessary for a transaction to take place, by definition of the free market. To try to identify dominant position abuses according to an unspecified capacity to fix prices is absurd in this context.

Prices are mutual phenomena. Each actor takes part in their formation. No situation exists in which a firm does not have any influence over the market price. Weak as a company’s market share may be at a given time, the decision to put its products on sale contributes to the determination of the total supply of the good and thus of the market price. It follows that the presumably idyllic situation of pure and perfect competition is strictly impossible. It cannot thus be used as a reference point to diagnose anomalies such as « substantial market power ». Consequently, the raison d’être of legislation against dominant position abuse vanishes.

The only way to make sure that prices and the quality of products conform to what is required by consumers’ preferences is to allow each individual the right to take his chance on the market. Efforts to fix too high a price can be thwarted, because producers able to make money at a lower price are then free to seize the opportunities for profit offered by the would-be monopolist. In this context, important market shares for a company can come only from consumer support.

If dominant positions harmful to consumers exist, they are the result of political power, not of an unspecified market power. Antitrust legislation, far from defending the consumer, often restricts their opportunities to decide whether to support a company by purchasing its products. Microsoft is the victim of a policy destroying competition in the name of competition.

The author is an associate researcher at the Molinari Economic Institute.

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