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Reuters
January 11, 1999

Economic Experts Duel At Microsoft Trial

By David Lawsky

WASHINGTON (Reuters) - Two economics experts disagreed Monday whether Microsoft Corp. holds monopoly power and used it illegally to destroy competition from Netscape Communications Corp.

The two Massachusetts Institute of Technology professors are the lead economic witnesses at the Microsoft antitrust trial -- one for Microsoft and the other for the Justice Department.

Franklin Fisher, the government's 12th and final witness, testified that Microsoft has shown the power to preserve high prices over a significant period of time without fear of having its business bid away by competitors -- his definition of monopoly.

Richard Schmalansee said in written testimony for Microsoft, made public Monday, that the firm charges ``far less than the textbook monopoly price for Windows and is constantly engaged in innovation to stay ahead of the competition.''

The Justice Department and 19 states allege that Microsoft holds a monopoly in the operating system for personal computers that it has preserved and attempted to extend through illegal actions.

Fisher said Microsoft is a monopoly: ``They are the only game in town.''

Schmalansee said the company faces ``long-run competition from its installed base, pirated copies of its operating system, existing vendors of operating systems and a long list of potential entrants.''

Schmalansee also talked about the potential of such rivals as the little-known Linux operating system. Fisher dismissed the idea that Linux and other small-time systems might steal Microsoft's market as ``a joke.''

Schmalansee said prices would be higher for Windows if Microsoft thought it could raise them. He added that Fisher had not explained why Microsoft had failed to raise its prices if it could do so.

Fisher said Microsoft's pricing policies help prove it is a monopoly that has violated the law. Typically, prices fall for older models, but Microsoft has raised the price for its Windows 95 operating system, even though it has been succeeded by Windows 98, Fisher noted.

Fisher said the price for computers has dropped while the price for Windows has risen. He added that Microsoft practices price discrimination by selling Windows to some computer companies for less than it sells the product to other, similar companies.

``If Microsoft is earning a remunerative price from the people to whom it sells at a low price, then it is earning more than a remunerative price to people by selling Windows for a higher price,'' he said. ``It's not worried they'll go elsewhere.''

Fisher, who testified in secret for several hours on his findings from Microsoft pricing data, said in public that he had found that Microsoft exercises monopoly power by ``rewarding various (computer makers) for cooperation.''

While he did not identify the firms, the Wall Street Journal said that Compaq Computer Corp.and Dell Computer Corp. paid Microsoft far less for software than other companies paid.

The paper said that Gateway 2000 Inc. and International Business Machines were forced to pay higher prices because they tended to endorse the products of rivals. Recently, however, IBM signed a better deal with Microsoft.

Microsoft's Schmalansee said the Redmond, Wash., firm had been unable to prevent rival Netscape from distributing its browser for the World Wide Web, noting there were many ways to distribute the product.

But the government's Fisher said while that was true, Microsoft had prevented Netscape from distributing through the least expensive means -- bundling with the operating system and through Internet Service Providers and was thus able to ``raise rivals' costs.''

``This is not about the destruction of Netscape,'' Fisher said. ``It's about the destruction of competition. That does not require the complete destruction of Netscape.''

Fisher was expected to complete his testimony Tuesday and Schmalansee's cross-examination by the government should begin Wednesday.

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Reuters
January 12, 1999

U.S. Government Winds Up Case Against Microsoft

By David Lawsky

WASHINGTON (Reuters) - The U.S. government wound up its antitrust case against software giant Microsoft Corp. Tuesday, arguing the company used monopoly power to destroy competition rather than charge maximum prices.

Microsoft was expected to open its defense Wednesday.

The government's final witness argued that Microsoft's price restraint has minimized harm to consumers, while the company consolidated its power by killing potential competition in the cradle.

The Justice Department and 19 states allege that Microsoft holds a monopoly in the operating system for personal computers that it has preserved and attempted to extend illegally.

Massachusetts Institute of Technology economics professor Franklin Fisher, in his fifth day of testimony, said that Microsoft chose to protect its monopoly rather than charge maximum prices.

``Microsoft is taking its profits in ways that are not reflected in the price of the operating system,'' Fisher said.

But, he said that Microsoft's prices were not as low as they would be under competition. ``It's possible to have a firm charge a price higher than if it had no monopoly power and still not charge the highest price it could,'' Fisher said.

Instead, Microsoft counts on profits from the price of complementary products, such as its Microsoft Office suite of programs, and uses its power to protect its monopoly and place restrictions on computer makers, he said. Computer makers are the primary customers for Microsoft's operating system