The Microsoft Case: What Can a Dominant Firm Do to Defend Its Market Position?

This paper examines the competitive actions taken by Microsoft in its "browser war" with Netscape, most importantly Microsoft's decisions to give away Explorer free of charge, integrate Explorer into its dominant Windows operating system and pay online service providers for exclusive distribution. Consumers benefited significantly from these actions, but the fundamental economic question is whether Microsoft abused its existing market power when competing in this way. A detailed analysis of Microsoft's conduct and the economics of competition for distribution suggests that severe limits placed on Microsoft's behavior would not be welfare.