This is a final version submitted for publication. Minor editorial changes may have subsequently been made.
Last month a US judge ordered that the Microsoft Corporation be broken up into two separate companies, an operating systems company and an applications company. The judge found that Microsoft had used its near monopoly in operating systems to disadvantage competitors and thereby stifle innovation.
The anti-trust laws, which Microsoft has breached, were first introduced in the late nineteenth century and show that public concern about the power of large corporations and its misuse has a long history. The mergers of the late nineteenth and early twentieth centuries, like those of modern day corporations, were often aimed at overcoming the uncertainty created by competition and enabling businesses to have more control over markets and therefore prices and sales.
This quest for control led to the creation of trusts and holding companies to enable former competitors to combine. These trusts expanded horizontally to reduce direct competition but also vertically so that they could control their own supply of raw materials and the marketing of their final products. They also expanded into foreign markets.
Towards the end of the nineteenth century and early in the twentieth century a wave of mergers of businesses in the US created huge corporations. Naomi Lamoreaux in her book The Great Merger Movement in American Business, 1895-1904 noted that in a few short years the US was transformed "from a nation of freely competing, individually owned enterprises into a nation dominated by a small number of giant corporations."
For example Standard Oil, one of the earliest of the giant corporations, had already formed an alliance with many of the companies in the industry through interchange of stock and other devices. In this way it controlled the supply of 90 percent of the country's kerosene. In 1882, under the leadership of John D. Rockefeller, it became the Standard Oil Trust. This enabled it to consolidate the management and administration of these companies into a centralised structure. It then set about integrating its supply of raw materials and manufactured products that were part of its inputs as well as the wholesaling and even retailing of the final product. It became a multinational corporation in its efforts to control sources of crude oil and markets in other countries.
By the end of the 1920s the giant corporation, run by professional managers, had come to dominate not only most industries but also economic life in the US. The automobile, steel, rubber, tobacco, liquor, chemical and other industries all came to be dominated by a few very large corporations. Similar trends followed in other countries.
Microsoft argues that the anti-trust laws are outdated and obsolete but the dominance of world markets by large corporations still reduces competition and suppresses innovation today. Not only are these large corporations able to influence prices paid and received but they often act in unison. Even where there is not explicit discussions about prices, a lead firm can often set the price that others would follow.
Whereas once competition was effected by selling goods for the lowest price through increased efficiency and innovation. Now competition between firms is often based on attempts to differentiate products with the help of advertising and marketing rather than on the basis of price. Brand names are also important in acquiring and maintaining loyalty from consumers in the face of small price differentials.
In the case of Microsoft, it uses its 95% share of operating systems worldwide to impose conditions on the companies it licenses its operating systems to, so that they have little choice but to use Microsoft software. For example, in 1996 Netscape was arguably the best browser on the market preferred by 87 percent of internet users. Microsoft's Internet Explorer, although free, was not competitive. When Compaq, the largest personal computer manufacturer, attempted to put Netscape on its computers rather than Internet Explorer, Microsoft threatened to withdraw Compaq's license to put Windows on its computers. Compaq decided to stick with Microsoft's browser.
The 'free market' relies on competition to ensure economic efficiency, innovation and lower prices. The 1890 Sherman Anti-Trust Act was an attempt to protect the free market by ensuring competition. Ironically, Microsoft itself benefited from anti-trust actions taken against IBM in earlier decades, which opened the computer market to more competition.
Microsoft is appealing the decision.