Vertical Integration and Market Power

Microsoft's vertical integration across several subfields of the software industry allows them to use their near-monopoly in the operating system market to gain competitive advantages in upstream markets, such as the market for web browsers, through marketing and pricing policies. One example of this, which gave rise to the recent Department of Justice legal action against Microsoft, is Microsoft's practice of bundling its Internet Explorer web browser with versions of Windows licensed to Original Equipment Manufacturers (OEMs).

Joel Klein, Assistant Attorney General in the Antitrust Division of the U.S. Deparment of Justice, explains how bundling of products can assume crucial importance in an market where network externalities make the quick acquisition of market share especially important in order to achieve a favorable "lock-in" on one's own technology:

If you accept that the market for browsers is likely to tip, the initial competitive concern is that, by forcing computer manufacturers to take Microsoft's browser as a condition of getting its monopoly operating system, the market could tip to a product that consumers would not have preferred in the absence of the forced tie.... Suppose that half the consumers get their browser from the Original Equipment Manufacturer (OEM) channel and half through other distribution channels (such as by down-loading from the Internet). And suppose further that, in the non-OEM channels -- where there is no opportunity for monopoly tying -- browser A is preferred over browser B by 3 to 2, while in the OEM channel, due to bundling, browser B is preferred by 4 to 1. Overall, 60% of all users would get Browser B -- 20% from the non-OEM channel and 40% from the OEM channel -- and, we can then assume if the market were to tip, it would go to B. Under these circumstances, bundling would be decisive, tipping the browser market to browser B even though, without the bundling thumb on the scale, consumers would have preferred browser A by 3 to 2.

The Department of Justice contended in their suit against Microsoft that Microsoft was bundling Internet Explorer with Windows to take market share from competitors such as Netscape's Navigator, in violation of the 1995 consent decree