William_T._Bianco,_David_T._Canon]_American_Polit

560560 Chapter 15 | Economic Policy

entire market for a product and thus is not subject to competition. In this situation, the

firm with the monopoly could charge extremely high prices if the government did not

regulate it. Sometimes a “natural monopoly” occurs because getting into a specific

business is so costly that it only makes sense to have one company. For example, to have

more than one water company in a given town or city would not make sense because

it costs so much to install water pipes and other necessary infrastructure. Though

in this instance there is only one company, the government regulates the prices that

the company can charge; alternatively, the water system may be owned by the local

government.

When the competitive situation is not a natural monopoly, a large firm may act in

a monopolistic way to restrict competition—for example, by slashing prices to drive

the competition out of business. As soon as all competitors go out of business, the

monopoly is free to raise prices again. Concern about this type of behavior led to the

first two significant laws aimed at economic regulation: the Interstate Commerce Act

(1887), which created the Interstate Commerce Commission to regulate railroad rates,

and the Sherman Antitrust Act (1890), which served to break up Standard Oil in 1910,

among other monopolies.

More common than a true monopoly is the situation where a firm that controls most

but not all of a market starts acting like a monopoly. For example, in 1998 Microsoft was

sued by the Justice Department and 19 states for trying to quash its competition in the

rapidly growing area of Internet browsers. Microsoft claimed that Internet Explorer

(IE) was an integral part of its Windows operating system, whereas government

prosecutors argued that IE was a separate piece of software that was being given

away for free, putting competitors like Netscape at a huge disadvantage. The district

court judge agreed with the Justice Department and ordered that Microsoft be broken

up into a Windows-based company and another company that would sell Internet

Explorer and other programs. This ruling was overturned on appeal. In the meantime,

George W. Bush was elected to his first term as president, and his Justice Department

announced that it would not challenge the appeals court ruling. Instead, it proposed

a settlement that required Microsoft to share its application programming interfaces

with third-party companies.^54 This settlement was challenged by several states but

upheld by an appeals court in 2004. In a more recent similar case, the European Union

fined Google a record $2.7 billion for illegally steering users toward its comparative

shopping site.^55

The Microsoft and Google examples offer two lessons. First, regulation affects

our daily lives in ways that may not be obvious. The extent to which a company can

dominate the software industry is determined, in part, by the extent to which the

Government regulation affects many

aspects of our lives. Regulations

may be aimed at producing a cleaner

environment (left) or preventing

monopolies (Microsoft founder Bill

Gates testifies about possible antitrust

violations, right).

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