January 26, 2005

Microsoft & Commodity Bundling

Earlier this week, I wrote about Firefox, Microsoft, and the browser wars. Yesterday I attended a lecture on Commodity Bundling and the Leverage of Market Power by Guanming Shi. Shi is tackling that old, but still relevant question of bundling and antitrust policy. According to Shi, "The conventional leverage theory argues that bundling enables the monopolist to foreclose or exclude entry into the bundled good market." This view was disputed by Chicago School theorists Richard Posner and Robert Bork, and Shi contends that Posner and Bork actually understate the case against antitrust prohibitions on bundling. This flies in the face of most economic research since Whinston's 1990 article, Tying, Foreclosure and Exclusion.

According to Shi, bundling sometimes encourages entry into new markets. With respect to Microsoft and browsers, for example, she writes:

First, Microsoft bundles IE with Windows to enter the otherwise monopolized browser market. The price for Navigator is driven down, which may make Netscape withdraw from the browser market because of the reduced profitability in the browser market. Second, this paper suggests that if potential entry occurs in both [the browser and operating system] markets, then given certain degree of product differentiation, the entrant would use bundling aggressively to enter the market. One way to stop entry is simply getting rid of the product that could be potential bundled by the entrant. So, if Microsoft would like to stop entry to the operating system market, it can do so by eliminating the existence of Navigator, which is exactly what the government alleged. Finally, it seems that, according to the analysis of this paper, the government‚s allegation that Microsoft‚s use of bundling is in violation of antitrust is not valid. As I just discussed, its use of bundling to enter the browser market is actually pro-competitive. Microsoft‚s practice of contracts that tended to exclude rivals, and various forms of predatory conduct, may be the focus of anti-trust attack, but not necessary the bundling practice. In fact, according to my analysis, banning bundling may actually help the monopolist to preserve market power.

Interesting stuff.

Posted by Gordon at January 26, 2005 11:24 PM | Internet