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Privileged Producers

September 28, 1998

Some months ago, at a hearing before the U.S. Senate Judiciary
Committee, the head of the Netscape corporation asked the audience in the
room how many owned a personal computer and then how many of those used
Microsoft's Windows operating system. Upon a show of hands demonstrating
that almost everyone in the room who owned a computer used Windows, he
concluded that he had just proved that Microsoft had a monopoly in
personal computer operating systems. No one in the room questioned his
conclusion at the time and, to my knowledge, no television commentator or
newspaper reporter questioned it later, when the incident was telecast and
described in the press.

Everyone, it seems, took for granted the prevailing belief that the
essential feature of monopoly is that a given product or service is
provided by just one supplier. On this view of things, Microsoft, like
Alcoa and Standard Oil before it, belongs in the same category as the old
British East India Company or such more recent instances of companies with
exclusive government franchises as the local gas or electric company or the
U.S. Postal Service with respect to the delivery of first class mail.

What
all of these cases have in common, and which is considered essential to the
existence of monopoly, according to the prevailing view, is that they all
represent instances in which there is only one seller. By the same token,
what is not considered essential, according to the prevailing view of
monopoly, is whether the sellers position depends on the initiation of
physical force or, to the contrary, is achieved as the result of freedom of
competition and the choice of the market.

Microsoft, Alcoa, and Standard Oil represent cases of a sole
supplier, or at least come close to such a case. However, totally unlike
the cases of exclusive government franchises, their position in the market
is not (or was not) the result of the initiation of physical force but
rather the result of their successful free competition. That is, they
became sole suppliers by virtue of being able to produce products
profitably at prices too low for other suppliers to remain in or enter the
market, or to produce products whose performance and quality others simply
could not match.

This is confirmed even by major antagonists of these firms. With
respect to Standard Oil, the U.S. Supreme Court declared in its 1911
decision breaking up the company: "Much has been said in favor of the
objects of the Standard Oil Trust, and what it has accomplished. It may be
true that it has improved the quality and cheapened the costs of petroleum
and its products to the consumer."

With respect to Alcoa, the presidingjudge in the antitrust case against it said: "It was not inevitable that it
should always anticipate increases in the demand for ingot and be prepared
to supply them. Nothing compelled it to keep doubling and redoubling its
capacity before others entered the field. It insists that it never excluded
competitors; but we can think of no more effective exclusion than
progressively to embrace each new opportunity as it opened and to face
every newcomer with new capacity already geared into a great organization,
having the advantage of experience, trade connections and the elite of
personnel."

In this instance, the judge clearly appeared to find no significant
distinction between cases in which competitors were excluded by means of
physical force and cases in which they were "excluded" by means of superior
productive performance. Indeed, he seemed to think merely that the latter
was a more effective form of "exclusion."

Like Standard Oil and Alcoa, Microsofts eminent status in its field
is also the result of productive accomplishment. Its productive
accomplishments can be found in all of its improvements in
personal-computer operating systems from DOS 1.0 to Windows 98, and in its
growing leadership in providing applications that most successfully exploit
these improvements, such as word-processing, spreadsheet, database, and
programming-language programs.

What all this points to is that there is something very wrong in
thinking of monopoly as being constituted by any case in which there is
just one seller. The critical element is what is the foundation of that
situation? Is it the initiation of physical force by or on behalf of the
seller or is it the sellers superior performance under free competition?

In
the first case, there is something present that is clearly against the
interests of the buyers. The buyers are being forcibly deprived of
something that is better in order to allow the success of something that is
worse and could not succeed under free competition, i.e., without the aid
of the initiation of physical force. In the second case, the buyers are
clearly better off: the sole seller is the sole seller because his product
or service is better than the alternatives, and the buyers have chosen it
and him over the alternatives. Here the result is the outcome of free
competition, not of its suppression.

Furthermore, once the status of sole seller is achieved under the
freedom of competition, it can be maintained only by that seller continuing
to offer a better combination of price and quality than any potential
competitor. This is because newcomers are free to challenge him at any
time.

Once the essential importance of the presence or absence of the
initiation of physical force as the foundation of "monopoly" is recognized,
it becomes obvious that the concept of monopoly needs to be radicallyreformulated. It is profoundly wrong to have a concept that groups together
and thus treats as the same, situations that are of a fundamentally
opposite character. Whats wrong with it is the same sort of thing that
would be wrong with putting both food and poison in the same category and
then either eating both or avoiding both.

What I suggest is a definition of monopoly that excludes the
results of free-market competition and includes only the results of
forcible violations of free-market competition. The definition, I suggest
is, indeed, a modernized version of the original, seventeenth-century
definition of monopoly as an exclusive grant of government privilege. To be
specific, it is: Monopoly is a market or part of a market reserved to
the exclusive possession of one or more sellers by means of the initiation
of physical force.

On this definition, of course, Standard Oil, Alcoa, and Microsoft
are not monopolies, while the old British East India Company, the U.S. Post
Office, and the local gas and electric companies, all operating under
exclusive government franchises, are monopolies. But what is equally
significant about this definition and its highlighting of exclusiveness
based on the initiation of physical force is that it makes possible the
extension of the concept of monopoly to important instances constituting
violations of the freedom of competition other than those in which there is
just one seller of a given good or service.

For example, there are many thousands of French wheat farmers.
However, to the extent that France has a protective tariff designed to keep
out lower-priced foreign wheat and thereby to reserve the French wheat
market to the exclusive possession of French wheat farmers, French wheat
farmers are given a monopoly of the French wheat market.

Similarly, to the
extent that France or any country has, or has had, legislation designed to
protect large numbers of small merchants, such as butchers, grocers, and
haberdashers against the competition of more efficient large chains, that
too constitutes the forcible reservation of a market or segment of a market
to the exclusive possession of one set of producers and the simultaneous
forcible exclusion from that market of other producers. Such a situation is
simultaneously monopoly for the inefficient, protected producers and a
violation of the freedoms of entry and competition of the more efficient
producers who are forcibly excluded from the market.

Indeed, seen in this light, while monopoly does not necessarily
exist when there is just one seller of a given good or service, it does
exist in a case in which the production of a good or service is legally
open to everyone in a society except for just one potential producer
who otherwise would enter and compete in that industry.

That party's freedoms of entry and competition are violated. He is forcibly excludedfrom the market, which is thereby monopolized against him. For example, if
early in the present century, the U.S. government had declared that the
production of automobiles was legally open to everyone with the single
exception of Henry Ford, or the single exception of General Motors, its
action would simultaneously have constituted a violation of the freedoms of
entry and competition of these parties and the monopolization of the
automobile industry against them--with, of course, very serious negative
consequences for the future development of the automobile industry and the
standard of living of the average person.

This is the present situation of Bill Gates and Microsoft. So far
from being a monopolist, they are the targets of promonopoly interference
by the U.S. government. This is what exists when the government seeks to
reserve the internet browser market, or any part of that market, to
Netscape and others--when it says, in effect, all shall be allowed to enter
and compete in this market except Gates and Microsoft, who are to be
forcibly excluded from that market either totally or in part.

Gates and Microsoft have already been the victims of promonopoly
interference by the U.S. government, when they were prohibited from
culminating their purchase of the Intuit Corporation and its leading
software product Quicken. They had wanted to enter an important segment of
the market for computer financial software and associated computer
financial services through that purchase. But they could not. They were
forcibly excluded from that market. Their freedoms of entry and competition
were violated. The market was monopolized against them.

I believe that as a result of that act of monopolization against
Gates and Microsoft, I and many other computer users have been deprived of
such potential advances as the ability easily to integrate the generation
of invoices with inventory control, which would have been a likely outcome
of Microsofts integrating the features of Quicken with its existing
database programs, such as Access. That couldnt happen, because the
government decided to protect me from Microsoft.

Now the government wants to protect me from Microsofts web browser.
I can only say that as a buyer of computer software, I dont want this sort
of "protection." I want the right to choose to buy or not buy anything
Microsoft wants to sell me and the right to accept anything they want to
give me when I buy their Windows operating system. I see no more good
reason to reserve the internet browser market, or any part of that market,
to Netscape than I see to reserve the market for pork chops to a special
set of pork butchers. Its the same kind of promonopoly interference.

* * * * *
George Reisman is professor of economics at Pepperdine University's Graziadio School of Business and Management in Los Angeles and is the
author of Capitalism: A Treatise on Economics (Ottawa, IL.: Jameson Books,
1996) and translator of Ludwig von Mises's Epistemological Problems of Economics (New York: New York University Press, 1976).

Copyright c 1998 by George Reisman. All rights reserved. This article may
not be reproduced except by permission of the author in writing.


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