Antitrust and Regulation
Any firm is in effect a vertically integrated organization, from production to marketing. If cost considerations justify, the same firm will be broken into different units, rather than forming one firm. Likewise, if two firms operating in different markets but nonetheless related in a vertical value chain, e.g. cable programming producer and cable system operator, they might find it cost effective to merge into one firm.
Horizontal mergers are scrutinized because it effectively eliminates competition. How about vertical mergers? Because two vertically merging firms are in different "markets" the DOJ is virtually helpless to tackle. DOJ antitrust heavily depends on "defining markets boundaries" and calculating market shares to approve or disapprove mergers. It has no framework nor will to deal with vertical markets.
But, vertical mergers are as detrimental as horizontal mergers to competition, if promoting competition is indeed still a goal. A dominant firm should not use its position in one market to influence other markets. For example, application programs need to interoperate with an operating system software, which may be dominated by one firm. Through anticompetitive behaviors, the latter firm may extend its market power into the application software market. While governments cannot prevent the firm from entering related markets, this case may fall into the category of illegal tie-ins prohibited by current antitrust laws. Often such tie-ins are practiced as bundling of vertically-related products. For example, Microsoft as a dominant firm in OS tries to dominate the Web browser market as well. If it uses its market power in OS to advance its interest in the Web browser market, it certainly appears to be a monopolization. However, enforcement efforts are often discouraged due to the need for interoperability, standardization and network externality, which compound our understanding of what constitutes anticompetitive behaviors in digital product markets.
A byproduct of allowing market forces and private initiatives in the electronic marketplace is the increasing fragmentation and incompatibility of products. The strengths of the Internet, its open and interoperable standards, are in some way liabilities for private enterprises wanting to dominate their markets. Open markets often result in fierce competition by lowering the entry cost. Rather, firms favor proprietary products and processes, which yield large (monopoly) payoffs if successful. For example, graphics and video specifications are advanced by different firms as with object standards (CORBA and Microsoft-advanced COM). New HTML tags are being added by Microsoft, which are not supported by Netscape's browsers. Java and ActiveX compete in the game of next-generation computing platforms. Interoperability is becoming something that is achieved only through market domination, not consensus, under the banner of "let the market decide."
Such non-interoperable products may challenge each other and promote competition. Also, a standard, whether achieved through consensus or monopolization, may become outdated or inferior by new and innovative products. To insist on standards and interoperability for its own sake is not a desirable goal.
Nevertheless, a more serious problem with proprietary products occurs if they are tied to existing dominant products. For example, Microsoft may introduce a new Web browser, say BrowserX, with its own versions of HTML, scripts and so on. By integrating the browser with its desktop operating system, BrowserX will become the most convenient program available to Windows users. Competing products of course can emulate the BrowserX's easy integration with Windows. However, Microsoft can ship the browser with Windows pre-installed and/or it may change the way Windows work with browsers. Competitors will be given less control over those aspects or little information and lead time to modify their products.
Some asks: So what? Isn't this free market? Why should Microsoft be restricted on what they can do with their own products? Isn't that simply smart marketing? Isn't Microsoft's success something to be applauded instead of condemned? The biggest mountain sheds the longest shade, and the pro- or con-Microsoft rhetoric penetrates into almost every aspect of computer and electronic commerce activities. What is being ignored and abandoned is the idea of guaranteeing everyone a fair and equal access to markets. "Free markets" is often being confused with "free for all." Anyone that gains market power under that condition deserves the benefit of monopoly. If unfair, anticompetitive practices were used, the market dominance itself could not be tolerated.
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