Competition Policy for Software Markets

Against the backdrop of the ongoing Microsoft antitrust litigation, this paper examines issues of competition policy for computer software markets. US antitrust law provides the main focus, but occasional parallels are drawn with the EU competition regime. A “dynamic compatibility regime” is proposed. This involves a recognition that various restrictions (e.g. the exclusionary rules of a joint venture, or strong intellectual property protection) work to provide the initial safeguards or incentives necessary to encourage firms to engage in winner-takes-all “standards races”. Once a standard is established, however, the argument for such restrictions becomes far less convincing. Competition policy should recognise that quality access to the technical information underlying an established standard is likely to be indispensable for effective, ongoing competition in related markets. Where this is the case, the policy goal should be to encourage interoperability (i.e. compatibility between products which are complements to the standard) by compelling access to that information. Part One begins by considering the policy goal of “maximising consumer welfare” within the context of computer software markets. There follows an analysis of the economics of network industries in general and software markets in particular. The nature of competition in software markets is examined; this leads to the conclusion that policy should encourage compatibility. The network effects analysed in Part One dictate that few firms can individually develop and advance a new standard: collective efforts are common within the computer industry. Part Two considers the antitrust treatment of collective standard-setting within network industries in general, making the relatively uncontroversial argument that a dynamic compatibility regime is appropriate. However, there is another aspect to this argument: the nature of collective standard-setting means that a number of firms will control the direction of a standard. In itself, this will go some way to ensuring that variety and competition can thrive within that standard. Part Three discusses the ongoing Microsoft case. It is submitted that the strained approach taken by the DOJ and the Circuit Court fails to convince and that “Raising Rivals’ Costs” theory represents a means of analysing the issues that better reflects the nature of competition within the software industry. “Raising Rivals’ Costs” (RRC) involves conduct that raises costs and induces rivals to restrict their output, thereby allowing the dominant firm to exercise monopoly power. Microsoft illustrates that software markets are prone to RRC through technological input foreclosure, such foreclosure being the result of restricted access to the interface information necessary to produce interoperable products or of contrived incompatibility. These “incompatibility strategies” are examined in Part Four. Part Four analyses the appropriate antitrust response to dominant firm conduct designed to render previously interoperable products incompatible with an established standard. A focus on the complementary nature of the relationship between a dominant firm and the firms with which it competes in complementary markets is favoured. The final discussion considers whether a dynamic compatibility regime can extend beyond situations where a change in policy has resulted in incompatibility, to imposing a positive obligation on dominant firms to allow access to technical information to the extent necessary for the development of interoperable products. An argument in favour of qualifying both the term and scope of copyright protection for software is constructed, and some consideration is given to the impact of compatibility on innovation incentives. (19,100 words)