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Japan's Attack on Microsoft

Mises Daily: Monday, February 14, 2000 by

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[Mr. Kusunoki, an associate of the Ludwig von Mises Institute in the U.S., is a student at the Graduate School of Law, University of Kyoto, Japan. This article appeared in the Asian Wall Street Journal, February 14, 2000.]

The U.S. Justice Department's antitrust suit against Microsoft is a hotly disputed topic the world over, with many accusing the federal government of regulatory overreach. Less well known is that the Japan Fair Trade Commission has also challenged Microsoft Japan, a wholly owned subsidiary of U.S. Microsoft, under the Japanese Antitrust Law. Though the Japanese case has been resolved without litigation, on close examination the criticisms of Microsoft are no more warranted in Japan than in the U.S.

In November, 1998, Japan's FTC called on Microsoft Japan to consider whether its practices were illegal under the Antimonopoly Law. The agency suspected that Microsoft Japan forced personal computer manufactures to accept a contract by which Microsoft Japan licensed the shipping of its spreadsheet software Excel only when the Japanese version of its word-processing software, Word, was licensed with it.

At the time Excel was the top selling spreadsheet software program in Japan, but Microsoft Word lagged behind other programs in the Japanese word-processing software market. Likewise, Microsoft Japan was accused of forcing PC manufactures to accept a similar contract for the email program Outlook, which lagged behind other email programs with schedule-managing functions.

Through these practices, the government alleges, Word and Outlook became the top software programs in their respective markets, in terms of market share. These practices were alleged to be the result of unreasonable tying arrangements, and thus illegal under Article 19 of Japan's Antimonopoly Law.

As a remedy, the Japanese FTC proposed that Microsoft Japan cease the above practices, accept PC manufacturers' applications for licenses for Excel only, and refrain from the above practices in the future. This case ended the following month because Microsoft Japan accepted this recommendation by Japan's FTC. In addition, Microsoft stated that it welcomed the agency's approach: At the very same time, Microsoft was being attacked in the U.S. through much harsher litigation.

When the Japanese FTC issues a "warning," it is an indication that the agency suspects illegal practices but is not completely sure of its case; a "recommendation," in contrast, is declaration that some practices are certainly illegal. For Microsoft, then, it was a relief that Japan's FTC issued a warning rather than recommendation. After all, Microsoft Japan was being charged with practices very similar to those for which Microsoft was taken to court in the U.S.

However, we cannot and should not think that the Japanese FTC administers its Antimonopoly Law generously. The reason the agency issued a warning rather than a recommendation was that the distributional share of the overall market held by Microsoft Japan was, in contrast with the U.S. market, very small. For example, the Internet service providers that were presumably forced to exclude browsers other than Microsoft Japan's had less than 10% of the total volume of Japanese browsers.

It is doubtful whether the U.S. Department of Justice would have challenged Microsoft if the situation had been the same as in the Japanese case. Of course, it is understandable that Microsoft said it welcomed the Japanese FTC warning, since Microsoft hoped that a lenient Japanese settlement would provide a model for the U.S.

But what about the economics of the claims themselves? Is a "tying agreement" harmful to consumers and to market competition? Prior to this case, the Japanese FTC had judged a tying arrangement to be wrong solely because it led to "coercing victims to purchase tied items." In its Microsoft case, however, the agency slightly amended its claims to say that the practice led to "establishing entry barriers and excluding competitors." Hence, the Japanese standard is now fairly close to the U.S. standard established in the 1984 antitrust case, Jefferson Parish Hospital District No.2 vs. Hyde.

It is impossible for any merchant to be perfectly satisfied with a contract's conditions. It can always claim to have been "coerced," provided we use a very loose definition of that term. So the new legal standard of "anticompetitiveness" is actually less dangerous to market freedom than the former one. At least now there is additional burden on the regulators to show that the tying arrangement has harmed someone besides the contracting merchant.

And yet, even in this case, there are reasons to question the regulators' logic. It is perfectly normal for firms to seek contract conditions that are the most advantageous for themselves. This suggests nothing more than that the firm is defending itself against pressure from competitors, which is precisely what Microsoft was doing in Japan.

If this type of decision making itself were made illegal under antimonopoly law, all strategic marketing would be illegal under antimonopoly law. To declare strategic decision making suspicious or illegal is equivalent to denying the merit of the market economy itself. It is very difficult, if not impossible, for a federal agency--whether it be in Japan or the U.S.--to distinguish the behavior of a supposed monopolist from that of market rivalry itself.

The Japanese FTC has not yet recognized the importance of this argument, and neither have Japanese courts. But as the economy becomes ever more internationally integrated, technologically innovative and strategically competitive, it becomes increasingly clear that antitrust law itself violates the basic principles of a truly competitive market economy.

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See also Mises.org on Microsoft