Nova workboard

a blog from young economists at Nova SBE

Bundling – The Microsoft example

In the second half of the 90s, Microsoft released its browser Internet Explorer, incorporating it into its operating system and providing it for free. Considering this actions anti-competitive, Netscape (its competitor) decided to lodge a complaint to Justice. Thus, the Justice Department has started an investigation which led to a lawsuit against Microsoft accusing it of unfair competition. This situation was based in a bundling strategy which is generally adopted by companies to join products or services  in order to sell them as a single combined unit. The issue was whether Microsoft was authorized to join the IE with Windows.

Microsoft stated that the merger between Microsoft Windows and Internet Explorer was a result of innovation and competition and both were the same product available for the consumers for free. However the Department of Justice disagreed with this definition.

According to what happened with Microsoft, we can assumed that was a situation of mixed bundling, that is, Microsoft sold a free pack with its operating system and Internet Explorer, however it is possible to buy both separately but at a higher price. In his defense, the company claimed that the IE couldn’t be sold separately because it was part of the system and without it the performance would be compromised. For Microsoft it’s feasible to provide a mix bundling and so give the possibility to the consumer has the IE once he has the computer. This situation is more productive for the consumer, because without the IE consumers can’t have access of internet and doesn’t have the possibility to surfing in the net. Even they don’t want this specific browser, it’s necessary to access it in order to download another one.

This practice is often adopted to guarantee an improvement of loyalty of costumer and greater knowledge about the product. Additionally, this strategy provides an opportunity to obtain costs savings. A company can reduce its costs of production, transaction and exchanging information, enabling efficiency of scale. Due to economies of scales, it’s easier to predict the customer preference for package than products that are sold separately.

Nevertheless, this case it’s a little bit different of what we are used to see because Microsoft provides the IE for free. Microsoft considered that their profits were not dependent of the exclusion of competition, but dependent on the goals to make the laptops more attractive and thus, increase the sales of their operating system. 

There are many opinions that emerged throughout this case, many of them divergently. In fact, while Microsoft thought it was advantage to consumers to provide IE for free, most people believed that it would benefit them just in the short term. Forcing Netscape to provide its browser for free it’s such an example. However, the consumers could suffer a competition reduction not only at browsers level but also at an operating systems and so it could result into an increase of prices or a reduction of investment in Research and Development in the long-term. After that, the consumers were in disadvantage because the probability of emergence of new competitors reduced. Concerning short-term gains for the consumer, they could be limited since the provision of IE for free allowed to keep the price of Windows at a higher level than would be expected. 

 

Rita Cordeiro #672

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Author: studentnovasbe

Master student in Nova Sbe

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