Case Assignment: Microsoft Economics 33

For class discussion Tuesday, June 1^st Prof. Stephen Schmidt

Read the case “Maintenance of Monopoly: U.S. v. Microsoft” in Antitrust Revolution (pages 476-501). Hand in a typed one to two page answer to the following question:

What, in one sentence, is an applications barrier to entry? Explain how this barrier to entry is created by the network effects of the market. Did the existence of this barrier support the government’s case, or Microsoft’s, and why? Do you believe there is a substantial applications barrier to entry in the OS market or not? Briefly explain why.

Be prepared to discuss that question and the following questions in class. Also prepare two questions of your own regarding the case to ask in class discussion.

1. Is the relationship between Microsoft and original equipment manufacturers (OEMs) a horizontal or vertical one? What allegedly illegal practice did Microsoft use in relationship with OEMs in regards to Netscape? In what way did the government allege that this practice was harmful to competition?

2. What is the distinction between two products which are tied, and a single integrated product? Why is an integrated product pro-competitive when a tie would not be? Do you think IE and Windows should be viewed as two tied products or as an integrated product, and why? (You are welcome to draw on your own experience with those products, since the case doesn’t describe them in much detail.)

3. What do you think is the appropriate definition of the market in which Microsoft operates? Think both about the legal guidelines for market definition and about the way markets were defined in earlier cases we have studied.

4. How did Netscape pose a threat to the value of Windows? What did Microsoft do to defend Windows against this threat? Identify one thing Microsoft did that you believe should be legal (or if you prefer, that everything they did was illegal) and one thing Microsoft did that you believe should be illegal (or, if you prefer, that everything they did was legal). What makes those actions legal and illegal in the presence of the network competition?

5. Microsoft committed to giving IE away for free, or even to pay customers for taking it in some cases. What did the government infer from this action? What did Microsoft give as its explanation for the action? Whose explanation do you find more convincing, and why?

6. Microsoft wrote contracts with OEMs which required them to place certain icons on the “desktop” of Windows, and place other icons elsewhere. What was the purpose of these contracts? Should they have been deemed legal or illegal, and why? They wrote similar contracts with ISPs. What does the evidence suggest about the effects of these contracts?

7. Should Microsoft be broken up, as the government proposed and the district court judge ordered? Why do you think so?