MICROSOFT AND THE DOJ

What products does Microsoft produce?

Operating systems

software

software development tools

hardware peripherals (mice)

Who are their customers?

1. Computer producers (manufacturers)

2. retail firms (to reach consumers)

3. corporations (business services)

So where do they fit in the down/upstream pattern?

What is the structure of the computer industry?

Hardware production (CPU, motherboard, mouse, keyboard, monitor, etc.)

software production (OS, applications)

assembly

sales

Where does MS fit?

Are any steps in computer construction natural monopolies?

Evidence?

Reason?

Is this the reason Microsoft is under investigation? No.

How long has MS been under investigation?

Over 10 years, since 1990. First FTC, then DOJ.

Why is Microsoft under investigation?

Marketing/pricing strategies

lack of separation between software/operating systems (vertical integration problem)

"Chinese wall"

conspiracy (w/IBM)

attempted merger

What further developments have there been since this case?

Netscape.

What economic concepts that we have studied in this class seem relevant?

Game theory, Dominant firm, Market power, Concentration, horizontal and vertical integration, vertical control, price discrimination, bundling.

If you were representing the US government, what points would you make to prove that MS should be subject to anti-trust?

What aspects of Anti-trust are being violated?

DOJ Document:

What factors does the DOJ take into consideration when looking at whether to allow a merger to go through?

They ask the question: will the merger increase market power (ability to raise price)?

1. Market Share (using HHI index)

Over 1800 is considered highly concentrated

Change (+100) in HHI of concern, when HHI is already over 1800.

2. Elasticity of demand

From these two they can determine market power.

Note that they distinguish between economic and accounting profit, ie they take into account opportunity costs when calculating costs.

But they also look at:

1. the impact of technological change (historical market power may or may not be a good predictor of future market power.)

2. Efficiency gains and losses

losses may occur because of reduced competition

gains may occur because of cost savings, chances to innovate

It is the firms' responsibilities to prove efficiency gains.

In case of extreme market power (near monopoly, even if efficiency gains can be claimed, merger not justified.)

3. possibility to collude or coordinate (does not have to be explicit).

Purchase of a 'maverick' firm, for instance.

Coordination may include fixing market share, prices, etc.

4. possibility for unilateral conduct.

5. How easy is entry?

In addition to merger issue, what other market practices concern DOJ?

1. predatory pricing (Sherman Act)

2. price discrimination (Clayton Act)

3. attempt to monopolize (Sherman Act)

4. attempt to lessen competition (Clayton Act)

5. tying or 'exclusive dealing' contract (Clayton)

6. Unfair methods of competition. (FTC)

If you were defending MS what would your argument be?

What solutions would you propose?