The critical defect in the US settlement with Microsoft and the critical thing the EU got right goes to the issue of bundling. Brad DeLong writes:
Remember the days when there was not one single dominant browser that came preinstalled on 95% of PCs sold? Back then there was ferocious competition in the browser market, as first a number of competitors and then Netscape and Microsoft worked furiously to upgrade their browsers and add new features to them. Most of these new features turned out to be idiotic. Some turned out to be very useful. Progress in making better browsers was rapid, because browser-makers wanted to make a better product and any new idea about what a browser should be was rapidly deployed to a large enough user base to make it worthwhile for web designers to try to use the new feature.
And now? There is no progress in browsers at all. Why should anyone (besides crazed open sourcies) write a new browser? Why should Microsoft spend any money improving its browser? The point of giving Internet Explorer away for free is to protect Windows's market, after all.Yeah, I know some antitrust experts opine that bundling is good for consumers. And, yes, some of them don't even work for Microsoft. But I don't see it. Bundling of private goods is fundamentally anti-competitive and, accordingly, reduces innovation. (As an alert reader pointed out, bundling private and public goods can be beneficial because public goods tend to be underproduced. In this case, however, neither WMP nor Windows are public goods.) Prohibiting Microsoft from bundling, say, media players and search engines into the Windows operating system is critical to preserving competition and promoting innovation.
Henry Farrell elaborates:
Albert Hirschman’s Exit, Voice and Loyalty ... points out that the real costs of monopoly are much greater than the inefficient prices they maintain to extract rents. Monopolies are lazy. They have no reason to respond to their customers - where else, after all, can dissatisfied customers go? Without the threat of exit, monopolies face few incentives to improve their service.I like Hirschman's book a lot, and recommend it highly, but had forgotten he made that argument therein. I'm glad to be reminded; must pull it off the shelf and reread it soon (it's a very short and highly accessible text).
Update: I got a surprising amount of flack on this post, which I find very surprising. Barry Nalebuff quite conclusively rebutted the standard argument that bundling is efficient because it allows a monopolist to price discriminate. As Nalebuff's paper Bundling shows, bundling creates significant barriers to entry. He also showed that the gains to the monopolist from price discrimination are minor compared to those that come from impeding competition by creating barriers to entry. Which is precisely what Microsoft does!
