1. Ian Bracy Brian Hendel David Jones
Case 20: U.S. v. Microsoft
Ian Bracy
Brian Hendel
David Jones

2. Government 1- Consumer’s are paying to much for system software
2-Microsoft’s actions reduced innovation in the software industry
3-tying of its IE browser and it’s OS, this restrained trade in violation of section 1 of the Sherman Act

3. Microsoft
1-Not a monopoly, faced significant competitive threats in a highly dynamic industry
2-Consumers benefit as a result of high-quality, innovative software

4. List of Anticompetitive Practices Microsoft was accused of
Tying of IE to the Operating System
Excluding browser competitors from OEMs and ISPs
Imposing agreements requiring OEMs not to remove IE or to substitute an alternative browser
Imposing exclusionary agreements on ISPs
Giving its browser away for free and paying others to take its browser

5. Netscape and the “cross-platform” language
A “cross-platform” language allows programmers opportunity to write a program and it will run on all OS’s this in turn will take away the applications supremacy that Microsoft has

6. Did Microsoft have Monopoly Power?

7. Government says “Yes” OEMs felt they must buy from Microsoft
If a 5-10% increase in price, customers say they will still buy from Microsoft

8. Network Effects Present
Users would like an OS that allows all applications and developers write applications for the most popular OS
Incentive for firms to use the same OS
Switching Costs
All result in ??????

9. Applications Barrier to Entry

10. Market Power
Claimed that relevant market is larger than PC Operating Systems
Ex: Handheld devices, servers
Other OSs: IBM’s OS/2, Apple
Non-OS platforms: Netscape, Java
Unknown future innovations
Alleged actions indicate a larger market
Did Microsoft have monopoly power? 10

11. Simple Monopoly Model Static, short-run pricing model
Calculated Elasticity of Demand from demand for PCs and Microsoft’s market share
Marginal cost for Windows is negligible
Came up with a “monopoly” price of $1800
Actual price was $60, so Microsoft claimed it had little market power
Did Microsoft have monopoly power? 11

12. Problems with the Model
Did not consider:
Long run behavior
Dynamics
Network effects in the OS market
Did Microsoft have monopoly power? 12

13. Court Perspective
Supports the Governments point of view on Market Definition and monopoly power issues
“appropriate to emphasize constraints on alleged Monopolist’s power with respect to BUYERS of operating systems, NOT constraints relating to producers of complimentary products”
Agreed with Applications Barrier to Entry present

14. Did Microsoft maintain its OS Monopoly by thwarting the threat posed by Netscape’s Browser?

15. Threat of Netscape
Netscape relies on Java a “Cross-Platform” language that allows programmers the opportunity to write a program and it will run on all OS’s. This “middleware” threatens Windows because now developers can write to other OS’s and they will be able to offer many applications as well.

16. Government’s Case
Evidence that Bill Gates told top level executives that there is a need to thwart the success of Netscape by bundling its browser with its OS and giving it away for free

17. Two-Level entry- Microsoft prevented companies from entering browser market unless they entered the OS market
This effectively increased the barriers to entry
If Microsoft decided to support only windows based-tech then developers have little incentive to create applications that not windows based

18. Other issues Market Allocation:meeting with Apple
Predatory Pricing: distributing browser and giving it away for free
Bundling and OEM Restrictions: said to foreclose on competition and not for achieving efficiencies
Exclusionary agreements with ISP

19. Predatory Pricing: Internet Explorer vs. Netscape Navigator
Internet was an opportunity and a threat
Increased demand for Windows
Microsoft wanted to control the communication standards
Believed that Netscape could develop into a platform that competed with Windows
Browser conflict was part of a broader competition among future OSs
Response to allegations of anticompetitive behavior 19

20. Predatory Pricing: Internet Explorer vs. Netscape Navigator
Netscape was a direct threat
Justified intense competition
Claimed it was not predatory because it was improving its own browser
Invested $100 million a year to develop IE
Integrating IE into Windows increased OS quality
IE was of equal or greater quality than Navigator
No evidence that giving away IE was not profit maximizing
Response to allegations of anticompetitive behavior 20

21. Market Allocation Winner-take-all competition
Network effects justified low or zero price for IE
Precursor to Windows 98
Meetings with other companies
Claimed it was to discuss interfaces and complementary products
No agreements
Response to allegations of anticompetitive behavior 21

22. Bundling Windows and IE
Microsoft had strict rules against OEMs altering Windows
Claimed it protected the user experience
Kept OEMs from removing IE
Produced efficiencies by merging with Windows
Very difficult or impossible to separate
Since it had no market power:
Bundling IE and the OS would not be a rational anticompetitive strategy
Response to allegations of anticompetitive behavior 22

23. ISP agreements
Success with ISPs came from superior product quality and terms
Ex: IE was easier to integrate with AOL’s software
“No harm, no foul”
Other distribution methods available for Netscape
Response to allegations of anticompetitive behavior 23

24. Court’s View Government Win’s 1-Market Allocation 2-Predatory Pricing
3-Bundling
4-Exclusionary Agreements
Microsoft Win
Government could not provide enough evidence that OEM and ISP restrictions decreased competition

25. Permanent Internet Explorer
Microsoft claimed removing IE would be detrimental to the user experience
Difference between Windows 95 and 98
Government expert
Response to allegations of anticompetitive behavior 25

26. Was Microsoft’s alleged anti-competitive behavior harmful to competition?

27. Government’s View
Microsoft succeeded in excluding Netscape from PC OEM distribution.
-Microsoft had a 94% Weighted Average share of browser shipments by ISP’s
-Netscape had a 14% Weighted Average share of browser shipments by ISP’s

28. Microsoft Defending its Actions
Microsoft claimed that its behavior was profitable regardless of changes in the competition
Distribution of IE increased OS demand; compliments
No harm to consumers
Did not eliminate the competition
AOL acquires Netscape
Microsoft’s claim that it did not restrict competition. 28

29. Microsoft Defending its Actions
Disputed Government’s evaluation of market shares
Real source of Netscape’s decline was Microsoft winning the technology battle
Government was unable to distinguish pro- and anti-competitive behavior
Microsoft’s claim that it did not restrict competition. 29

30. Court’s Perspective
Supported the Government’s view that Microsoft’s anti-competitive acts caused immediate harm
Protect Applications Barrier to Entry
Forced OEMs to ignore consumer demand for browserless version of windows(slower pc and less memory)
Hurt middleware technologies

31. Resolution of Case 3- Series of Compliance measures
Focused on conduct remedies
1-Prohibited Microsoft from foreclosing the OEM channel of distribution
2-Placed limits on Microsofts ability to discourage others from developing, promoting, or distributing non-Microsoft middleware products
3- Series of Compliance measures
whose goal is to enforce terms of the settlement agreement