Dow Didn’t Sue Powerful Competitors; He Outsmarted Them

Wails of agony and despair rise across America as a ferocious and merciless beast rampages across the landscape, leaving murder and mayhem in its terrible wake.

Godzilla? No, software giant Microsoft. That seems to be how the U. S. Department of Justice (DOJ) and twenty state attorneys general—including Michigan’s Frank Kelley—viewed the company when they filed a joint antitrust suit against it on May 20.

"Microsoft has demonstrated monopolistic predatory practices that are unfair to consumers," said Kelley. But has it? Antitrust lawsuits send a hostile message to businesses located, or thinking of locating, in the Great Lakes State. Early this century, a feisty Michigan entrepreneur named Herbert Dow sent the opposite message as he dealt with behemoth competitors the old fashioned way: He outsmarted them.

But first things first: Is Microsoft predatory? At issue is its practice of requiring PC manufacturers that pre-load their machines with Microsoft Windows95 to also install Internet Explorer, Microsoft’s net-surfing "browser" program. The DOJ claims that tying the sale and installation of the browser to the sale and installation of Windows95 is Microsoft’s attempt to monopolize the browser market.

The state attorneys general further charge Microsoft with attempting to "lever" Windows95’s operating system market dominance into an applications software market monopoly. Applications software, including word processors and spreadsheets, require an "operating system," like Windows95, to run.

But can a firm with a "monopoly" in one market earn additional monopoly profit in a second market by tying its products together? The answer is no according to legal scholar Robert H. Bork. In his book The Antitrust Paradox: A Policy at War with Itself, Bork maintains that tying products together to achieve market dominance is based on a "discredited" theory.

Microsoft’s alleged predatory market practices are not predatory even by the current legal standard, based on cost of production. The company’s prices are most likely above the cost of production, and adding features to its product without raising the price is not necessarily predatory.

Businesses also regularly offer cheap-to-produce products they want consumers to try at discounted prices or even for free. Netscape, Microsoft’s main competitor in the browser market, offers its software free on the Internet to anyone who wants to try it. Microsoft simply uses the same marketing strategy as its competitors.

The case against Microsoft is no different from previous suits brought against dominant firms such as United Shoe Machinery, Alcoa, and IBM. Then as now, regulators were concerned that a particular company had used particular business practices to exclude its rivals and achieve market dominance.

In such cases, some economists distinguish between "bad" and "good" monopolies. A "bad" monopoly is a firm or cartel that restricts output of a particular product in order to raise prices. Consumers are worse off because they must either pay the high price or go without; the firm or cartel is better off because it earns greater profits. A "good" monopoly is a firm that earns its large—but not exclusive—market share by lowering prices, improving quality, and expanding its output to better satisfy consumer demand. Consumers are better off because they get higher quality products at lower prices, and the firm is better off because its profits are a reward for "building a better mousetrap."

The evidence supports the "good" monopoly view of Microsoft. Its large market share is due mainly to its improvements in quality, reductions in price, and customer satisfaction: precisely the type of competitive innovation the antitrust warriors should encourage and not prosecute.

Michigan’s Herbert Dow once demonstrated an effective alternative to antitrust suits. Empire Builders: How Michigan Entrepreneurs Helped Make America Great, the book by Mackinac Center for Public Policy Senior Fellow Burton Folsom, describes how the Dow Chemical Company founder faced and singlehandedly defeated a dominant German cartel.

Angered by Dow’s decision in 1904 to sell less expensive bromine abroad in "their" market, the German cartel flooded the American market with bromine priced well below the cost of production, hoping to drive Dow out of business.

Instead, Dow quietly bought up the cheap German bromine by the truckload, repackaged it, and sold it overseas at a modest markup, but still lower than the cartel’s high price. The Germans did not expect this and as it became obvious their predatory pricing scheme would not work, they were forced to surrender to Dow and free-market competition. Dow broke the trust himself without resorting to government "trustbusters."

In the 1945 decision United States v Aluminum Company of America, et al., Judge Learned Hand warned that "[t]he successful competitor, having been urged to compete, must not be turned upon when he wins." Michigan should take a lesson from Herbert Dow and encourage competition and opportunity through the free market and not predatory lawsuits.