THOROUGHLY MODERN MONOPOLY

Are the barons of high-technology in­dustries a threat to free markets? Some of the world’s antitrust authorities fear that they are. In both America and Europe they look warily at new ventures by giant telecoms firms. In Europe, there are worries that a handful of companies could eventually dominate digital televi­sion, once it starts to develop. And Ameri­ca’s Department of Justice frets most about the best-known computer baron of them all: Bill Gates.

Simple statistics can make the case against Microsoft, the computer-software firm of which Mr Gates is the chairman. Over 80% of the world’s personal comput­ers contain Microsoft’s MS-DOS  or Win­dows operating systems; and Microsoft is by far the biggest supplier of desktop soft­ware applications.

But these facts mean little. Trustbusters’ fears should be based not merely on the idea that Big is Bad, but on the eco­nomics of the industry in question. More­over, as in any other business where they are worried that consumers might be fleeced, regulators should step in only if they can do better than market forces at keeping powerful companies in check. In nearly all industries (the notable excep­tions include utilities, such as gas and wa­ter supply), they cannot.

So why might antitrust authorities be especially nervous about high-technology markets? Economic theory suggests sev­eral good reasons:

Networks. One possible cause of mar­ket failure is that many information-age industries serve their customers via differ­ent kinds of networks. These links may be physical - eg, telecommunications sys­tems or computer networks - or they may be more loosely defined, consisting of the users of, say, a particular piece of com­puter software. Networks bias industries towards monopoly, or at least oligopoly, because on the demand side they are sub­ject to economies of scale: the value placed on membership by a consumer rises with the number of other people on the network.

Systems. Computer software, television decoders and other products of the in­formation age are not used in isolation. They are bits of “systems”, in which one particular component cannot be used without another. There is little point in buying a personal computer without an operating system; and operating systems are useless without applications, such as word-processing programs, databases and spreadsheets.

This may mean that if a firm controls one part of the system, it can lever its way into others - so spreading its monopoly. Microsoft’s critics say that it could, for in­stance, use profits from the operating-sys­tem market to subsidise applications pro­grams. And by embedding programs for free in its operating system, it could re­move any incentive for customers to pay extra for rivals’ programs.

Standards. Networks and systems need common standards: without them, net­work users cannot communicate with one another, and one part of a system might not be compatible with the next. But while standards make industries run more efficiently, they may also have draw­backs of their own.

One is that if a firm creates an industry standard, it can wield enormous market power. Since individual consumers and other firms need to invest time and money in acquiring skills specific to the industry standard (eg, learning how to use Microsoft Windows), they get “locked in”. As switching systems means learning new skills, would-be entrants face a con­siderable entry barrier.

Another potential drawback, say some economists, is that big companies can use their market power to ensure that their way of doing things becomes the standard - and, in consequence, make themselves more powerful still. There is no guarantee that the standard they im­pose will be the most efficient.

Innovation. Computing, telecoms and the media have all seen rapid technologi­cal change. A stream of new ideas and products has sustained vigorous compe­tition in most areas of these industries, driving costs and prices down. Thus, even if the product market were monopolised, trustbusters could afford to be sanguine if producers of new ideas were still able to make their way to market, or at least to force dominant companies to keep inno­vating and cutting prices themselves. But if such innovations also became monop­olised, antitrust authorities would be right to worry.

Even if any of these worries are justified, there may still not be a good case for anti­trust authorities to wade in. The existence of economies of scale in networks, for ex­ample, does not mean that monopoly is inevitable: several networks can coexist. If costs are cut in the process, and if the threat of new competition is maintained, consumers will enjoy lower prices.

Jumpy antitrust authorities may try to pre-empt anti-competitive behaviour by framing rules of entry into infant markets. That is more likely to work in mature monopolistic industries, such as utilities, where technological change is slow and trends fairly predictable. The speed of change in high-tech industries has consis­tently wrong-footed trustbusters. For the time being at least, it may be more sensi­ble to trust the market.

VOCABULARY