1. The Case against Microsoft

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3. The case against Microsoft
Microsoft is often accused of exploiting its dominant position
How does it do this?
Is it guilty?
Are consumers worse off?
Are there remedies?
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4. The charges FTC and DoJ (US) EU Commission
1994: restrictive licensing agreements with OEMs. Settled by consent decree
1998: broke consent decree by bundling Internet Explorer with Windows
EU Commission
MS abusing dominant position, 500m Euro fine
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5. What does MS do?
Restrictive licenses – e.g. a site license for a university for Windows, the price dependent upon the number of employees, not the number of users
Restrictions on OEMs – e.g. not allowing Dell to install other software as standard (e.g. Netscape, Real Player). Users have to install these themselves
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6. What MS does (cont)
Bundling programmes with Windows – e.g. Internet Explorer, Media Player, often added free.
Undermining (‘enhancing’ say MS) industry standards – e.g. Java language
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7. Against Microsoft It is a monopolist It abuses that position
It erects barriers to entry
Used its position to enter and dominate other markets (browsers)
It keeps parts of Windows secret, aiding its own software (e.g. Office)
Applications barrier to entry. Existence of monopoly no crime under US law.
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8. In defence of Microsoft
Monopoly ensures common standards
There is a threat of entry
Price of Windows is not excessive
MS has the right to enhance Windows
MS innovates
Threat of entry: OS/2, Unix/Linux, Java
Innovation: MS usually buys up stuff, not in-house innovation (MS-DOS, Word, Excel (Multiplan), etcc.
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9. How to we analyse this? Useful bits of economics: Monopoly theory
Barriers to entry
Bundling/tie-in sales
Networks
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10. The monopoly price of Windows
Windows is bundled with a PC, so we must consider the joint product
MCPC = $500, MCW = $20, e = -1.5
Recall
RHS = 3, so monopoly price of PC is $1560
Who gets the monopoly rent?
Condition is equivalent to (p-MC)/p = -1/e
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11. Microsoft!
Microsoft is a monopolist, PC manufacture is highly competitive.
Hence MS could sell Windows for $1060 to PC manufacturers, a 50-fold mark-up over MC!
But actually, it sells Windows for around $40…
Why is Windows so cheap?
If (eg) IBM monopolised hardware, there would be a fight over the rent.
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12. Why is Windows so cheap? Threat of piracy
Allows a higher price for Office, etc.
Network effects – to encourage adoption
Threat of entry
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13. Why so cheap?
Piracy - a threat in the early days and in some parts of the world, but main market is OEM and businesses, where the problem is less.
Office price - can only extract consumer surplus once. Better to do it with Windows than Office. Low price of Windows benefits all writers of software, not just MS
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14. Economics of networks
Some goods have network effects (telephones, TVs)
The benefit you get from a good depends upon how many others also have the good
Part of the benefit of MS Word is that everyone has it, hence can exchange documents easily
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15. Network effects Race for market share Winner takes most
Profits unequally distributed, monopoly
Possible consumer benefits of common standards
Can be intense competition to become the market leader
Costs of entry high, but leader can be overturned (e.g. Sega/Nintendo by Playstation)
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16. Threat of entry Difficult, with network effects, but possible
IBM tried, with OS/2 in 1990s, but failed
Apple is not a significant competitor
Linux is biggest current threat
Browser + Java language also a threat
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17. Barriers to entry and anti-competitive behaviour
Widespread adoption of Windows creates an ‘applications barrier to entry’ to OS market
Browser + Java provided a way around this
MS ‘hijacked’ Java by adding extensions that only worked with Windows. Sneaky!
Abusive = against consumers, anti-competitive = against other firms
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18. Bundling MS bundled IE with Windows, effectively killing off Netscape
Bundling several programs together (MS Office) creates a barrier to entry
Why bundle goods together?
Bundling of IE in 97 prompted the 98 DoJ case
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19. The Economics of bundling
Willingness to pay for Word and Excel:
Strategies:
Price both at 60: revenue = 120 (1 sale of each)
PW = 30, PX = 20: revenue = 100 (2 sales)
Sell bundle for 80: revenue = 160!
Word
Excel
Total
User 1 60 20 80
User 2 30 90
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20. Why bundling works Demands are uncorrelated
Can get both users to buy both products without lowering the price of either too far
Makes entry more difficult
Next time you go to the restaurant, think about why there is both a set menu and à la carte menu…
Bundling has benefits too - who would want to buy a car without tyres?
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21. Why bundle with Windows?
Since MS can obtain all the monopoly rent via Windows alone, why does it need to bundle other products with it (e.g. IE) for free?
Perhaps to fight off the threat from alternative operating systems
MS controls the desktop
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22. Implications for policy
Structure vs conduct remedies
Break up MS
Regulate its conduct
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23. Structural remedies
OS company and applications company (Judge Jackson)
Still would not have competition
Risks losing benefits of common standards
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24. Conduct remedies Stop MS bundling products with Windows:
Web browser
Media player
Video players
What is the ‘operating system’?
Danger of over-regulating a dynamic industry
Does MS really innovate?
EU has required two versions of Windows, with and without Media Player.
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25. Summary and conclusion
MS provides some benefits, in terms of common standards
It seems to have restricted competition in a variety of ways
Remedies are not easy to impose
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