Brad DeLong speaks to the costs of Microsoft’s market dominance.
I certainly think that I have been harmed by Microsoft’s bundling Internet Explorer with its Windows operating system. 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. … 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?
It’s a point that’s made eloquently in Albert Hirschman’s Exit, Voice and Loyalty. Hirschman, who has had far greater influence on political scientists and sociologists than his fellow economists (Brad is an exception) 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.
Of course, it’s far harder to model or to measure these effects than it is to measure the inefficiencies caused by monopoly pricing (and even that involves a fair amount of guesswork). Still, they’re the real reason for welcoming the EU’s forthcoming decision to restrain Microsoft’s shenanigans with media player software. If Microsoft has its way, we can expect to have similarly sloppy, bug-ridden media software, with infrequent updates and proprietary standards. This isn’t to say that Microsoft’s competitors have the consumer’s interests at heart: inside every lean, hungry entrepreneur, there’s a bloated monopolist struggling to get out. But without competition, there’s no restraint on firms’ ability to abuse consumers, and sometimes (as here) the maintenance of competition requires vigorous state intervention.