By William Fellows
Microsoft Corp is not a monopoly according to MIT economics professor Richard Schmalensee, because it does not behave like one. Traditional models say a monopolist restricts output, maintains high prices and does not innovate. Moreover in a monopoly market there are barriers that prohibit the entry of competitors. Schmalensee said Microsoft exhibits none of these characteristics and in his redirect attempted to demonstrate to Judge Thomas Penfield Jackson why it does not. Conflicting arguments of key economic witnesses over whether Microsoft is a monopoly continued to dominate the 41st day of the antitrust trial in which the US government and 19 states charge Microsoft has market, or monopoly power, and maintains this power through the use of certain illegal actions.
Windows and cigarettes
Schmalensee’s use of an economic equation to demonstrate how Microsoft would have to be charging $2,000 for Windows in order to be considered a monopolist provoked the Judge to ask why it must always be assumed that a monopolist maximizes its price. He said he could imagine a situation in which a monopolist – his example was a cigarette maker – might maintain lower short term prices in pursuit of long-term gain. Schmalensee made a couple of attempts – before, and then after the recess when he’d had time to think – to incorporate the Judge’s example into his model, but appeared to side-step the issue when he said that in Microsoft’s case there is no evidence of addiction. He said Microsoft is also different to a cigarette monopolist because it operates in a dynamic market. It’s at odds with the concept of monopoly that Microsoft would only charge $50 for such a product [Windows] on PC systems that cost $2,000 or more. Moreover rather than raising prices as the government maintains, Microsoft has, Schmalensee argued, lowered the price of Windows when adjustments for improvement in quality are made. The government’s lead attorney David Boies dismissed this argument, saying that because Microsoft is not charging a monopoly price now is irrelevant, because the absence of market power can’t be determined just by looking at price, you have to look at profit too. Microsoft, Boies says, wouldn’t be able to sustain its profit or price if it was operating in a competitive market. Even the defense witness [Schmalensee] says there is no viable alternative [to Windows] today. Other behavior that Schmalensee said indicates that Microsoft is not a monopolist include its expansion of the PC market and the hundreds of millions of dollars it spends attracting ISVs to Windows. Clearly they not being prevented from entering the PC business, he argued. Schmalensee used Java to try to prove his point, observing that if Java is to realize its (cross-platform) potential it needs to attract ISVs to write in pure Java. The government’s argument, he said, is that ISVs write only to the most popular platform, in which case Sun’s effort to get ISVs to write to Java is futile. Later in court the Microsoft witness went on to forecast, using market research data, that by 2002 Netscape will have 60 million users, double the number it had in the third quarter of last year because of the rapidly rising tide of the internet. Even if Netscape’s market share continues to decline it will have a very large number of users, Schmalensee argued, 60 million should attract ISVs.
