Case questions: 1) Should the DOJ have brought an antitrust case against Microsoft?

In my opinion, DOJ with 19 state attorneys general should have filed an antitrust action against Microsoft on May 18, 1998. In the time period of 1991-1993 and 1993-1994, the Federal Trade Commission and DOJ had been investigated Microsoft on various antitrust allegations. The results of 1994 investigation led to a consent decree in 1995. Based on my research, the key provisions of the 1995 consent decree were: a. Microsoft agreed to end per-processor (zero marginal prices) contracts with computer Original Equipment Manufactures (OEM), but it was allowed to use unrestricted quantity discounts b. Microsoft shall not enter into any License Agreement in which the terms of that agreement are expressly or impliedly conditioned upon the licensing of any other Covered Product, Operating System Software product or other product (provided, however, that this provision in and of itself shall not be construed to prohibit Microsoft from developing integrated products); or the OEM not licensing, purchasing, using or distributing any non-Microsoft product. (Final Judgment, Civil Action No. 94-1564)
In summary, the 1995 consent decree imposed both horizontal and vertical restrictions on Microsoft. The horizontal restriction prohibited Microsoft from using zero marginal cost as its reference of pricing. The vertical restriction prevented Microsoft from using product bundling strategy. However what makes the case more interesting is what the 1995 consent decree allows. It allows for quantity discount even though in my opinion zero marginal cost pricing is a special case of a quantity discount contract. The 1995 consent decree also allows Microsoft to keep expanding the functions of its integrated products such as Windows. I interpreted this as contractual bundling was not allowed, but technical bundling was. Over the years, Microsoft has integrated in the Windows many functions and features.

In 1997 the DOJ filed a complaint against Microsoft alleging that it had violated the consent decree by bundling Internet Explorer (IE) with the Windows operating systems (OS), and requiring computer manufacturers to distribute IE with Windows 95. The court of Appeal in its June 23rd, 1998 decision affirmed that Microsofts practice of bundling IE with Windows was legal under the terms of the 1995 consent decree. However in my opinion Microsofts bundling of IE with Windows and its attempt to eliminate Netscape as a competitor was much more than adding functionality to Windows. It was used to marginalize Netscape because Netscape posed a potential competitive threat to the Windows. All actions by Microsoft such as free distribution of IE, bundling it with Windows, and other attempts to win the war, were aggressive moves to protect its Windows monopoly. Therefore, I believe that DOJ should have filed an antitrust case against Microsoft.

2) Does the evidence indicate that Microsoft violated the Sherman Act? The DOJ specifically alleged four violations of the Act: 1) Microsoft engaged in unlawful exclusive dealing and other exclusionary agreements (Section 1 of the Act); 2) Microsoft engaged in unlawful tying (Section 1 of the Act); 3) Microsoft illegally maintained its monopoly of the PC OS market (Section 2 of the Act); 4) Microsoft attempted to monopolize the internet (Section 2 of the Act). I will brief introduced what the Sherman Act is and then show evidence in three categories: increased barriers to entry, predatory pricing of the OS, and exercise of monopoly power by tying IE with Windows in the browser market, to illustrate further how Microsoft violated the Sherman Act. Section2 of the Sherman Antitrust Act states: Every person who shall monopolize, or attempt to monopolize, or combine conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony. For what is relevant for the Microsoft case, the antitrust law implied that monopolization under section 2 is illegal if the offender took anti-competitive actions to acquire, preserve or enhance its monopoly. Attempting to monopolize is illegal under Section 2 of the Act if the actions taken have anti-competitive consequences such as bundling, price discrimination and exclusionary contracts. Section 1 of the Sherman Antitrust Act states: Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations, is declared to be illegal. The restraint of competition is illegal under Section 1 of the Act. The actions taken could be tying of products or other exclusive arrangements. Increased Barriers to Entry Barriers to entry are asymmetric costs that entrants incur but incumbents sunk. Software industry has very high upfront fixed costs and low marginal costs after the product was developed. The main barriers to entry created by Microsoft were the abundance of applications that run on Windows. It was estimated that Windows run more than 7,000 application, and Macintosh and the Linux OS run much fewer applications. In the industry, the number of applications

that could be run on an OS was viewed by a lot of professionals as a quality index. From the beginning, Microsoft understood the importance of an abundance of applications for its OS. To achieve this, Microsoft provided incentives to Independent Software Vendors (ISVs) to write applications for their OS. They spent considered resources to attract to ISVs to create useful applications for them, and then integrated these functionalities into their OS. Such an increase in the number of applications available in a single OS raised the barriers of entry and made almost any new entrants difficult to be profitable or even survive. The conduct itself increased the cost of entry in OS market, and created the potential anti-competitive exploitation. Predatory Pricing of the OS Microsoft priced its OS to OEM at an average price of $40 to $60, a very low price given the huge upfront fixed cost to develop the system and the resources spent to attract the ISVs. I believe that it was part of Microsofts predatory strategy. Microsoft priced low to get customers hooked, and generate network effects. The low price would help Microsoft to be accepted by the users and ISVs to get the ball rolling. As I mentioned above, the abundance of applications is the key differentiator of Microsofts OS. By pricing their OS at low level, Microsoft increased the installation of their platform. This predatory price of OS also increased the barriers of entry to make it tough for the new entrants to survive while squeezing the profits out of their existing competitors. Even though the court did not conclude that Microsofts decision to give away its IE browser for free was anti-competitive, in my opinion the pricing of OS was predatory since the OS did provide the vehicle to carry IE, the strategic application, to blow its rival Netscape, which was selling its browser at $15 to $20. Exercise of monopoly market power in the browser market by tying IE with Windows The existence of significant barriers to entry and the very high market share Microsoft in the OS market gave indications that Microsoft had monopoly power. Their actions to exclude and marginalize Netscape were sufficient to show that Microsoft possessed and exercised its monopoly power. Microsoft exercised it monopoly power by attempting to marginalize Netscape. It is an action out of fear that Netscape would become a rival platform to Windows. Once

Netscape became such a platform, applications would be written to run on Netscape Navigator. Moreover, the bigger Netscapes market share is, the more likely it is that ISVs would write applications for the Netscape platform. Since Netscape Navigator could run on many operating systems (not just Windows), therefore, from this perspective, Netscape created a threat to Windows. In this view, all actions to aggressively compete with Netscape were just attempts by Microsoft to defend its monopoly in PC operating systems. One of the clear evidence was cited from Microsofts Christian Wildfeuer writing in February 1997 that Microsoft concluded that it would be very hard to increase browser share on the merits of IE 4 alone. It will be more important to leverage the OS asset to make people use IE instead of Navigator. Microsoft also sabotaged Suns Java operating language so that Java could not become a universal language, by which application written for it could be run in any OS. A Microsoft document said that it was a strategic objective for Microsoft to kill cross-platform Java by expanding the polluted Java market Microsofts altered version of Java. A senior Microsoft executive identified Java as our major threat in an email and added that Netscapes Internet browser was Javas major distribution veichle. Even though Internet Browser market was separate from the market of OS, the technological or contractual tying of IE with Windows could raise OS prices and hurt consumers. For example, some of the consumers do not want IE even it is free of change since it burdens the OS with memory and overhead equipment and it consumes a significant amount of hard disk space. However, Microsoft did not provide the options for the customers to add or remove IE application. 3) Did Microsofts conduct benefit consumers? The answer is it depends. It depends on which market we talk about, and which segment of customers we are interested in. In the browser market, as I mentioned before it did burden some of the consumers who did not want IE even it is free of charge. This segment of consumers would like to have the option of adding or removing IE and installing their preferred Internet Browser. However some of the customers have directly benefits from the free distribution of IE as well as its bundling and tight integration with Windows. When Netscape launched its browser, initially it charged non-academic user $40-$50 to use the browser. Microsoft, by contrast, gave its internet browser free. Netscape responded to the introduction of IE4 with comparable feature and quality to Netscape by giving it away as well. And since Microsofts action encouraged competition, which in turn produces higher quality browsers, I believe this provided further benefit to the consumers. Even the District Court

judge ruled that Microsofts action of distributing IE at no charge increase the general familiarity with the Internet and reduced the cost to the public of gaining access to it, gave Netscape and incentive to improve Navigators quality, and benefited the consumers. However, on the flip side in the OS market the consumers were hurt because they could not have the option of having Windows without a browser and the browser dragged down the performance of the system. The prices of Windows were also considered high since Microsoft took the integrated functions and applications into account when it priced Windows. I can argue that the same argument for IE pricing about marginal cost is almost zero could apply to Windows as well. In the meanwhile if I looked at the historical prices for OS, I would say that the Windows is relative cheap. For example, OS/2 from IBM sold for hundreds of dollars. Linux packages, which are only add-ons to the free Linux source code, sold for a low hundred, have way fewer applications than Windows offers. I believe overall the consumers were better off given the options they had in the market place. The fear of that Microsoft would drive their competitor out of business or out of available capital would make the competitors more efficient and innovative, which would benefit consumers eventually. 4) Were Judge Jacksons remedies appropriated? Should a structural remedy be used? Remedies fall into two classes: behavioral and structural. I will discuss the behavioral part of the remedy first since it was less controversial and then moved on the structural part of the remedy. Judge Jackson decided on remedies in summary without any examination of the proposals of all sides. He was quoted shortly afterward arguing that since the plaintiffs won the liability phase, the plaintiffs should have right to determine the remedies. The behavioral remedies intended to restore viable competition in the OS and application markets. The behavioral remedies were to last for 10 years and pertained to Microsofts conduct with respect to customers and rivals. a) Microsoft must allow OEM to remove any applications from the OS b) Microsoft would have to license OS products under uniform conditions with the exception of volume discount c) Microsoft would be prohibited from interfering with any non-Microsoft middleware, discriminating against a hardware or software company for using non-Microsoft products d) Microsoft would also be required to continue to offer the previous version of its Windows OS when it introduced a new version. e) Microsoft would have to allow hardware, software, and computer makers access to technical information and developers to view the relevant necessary portions of

code including all Application Program Interfaces (APIs) and portions of the OS code. In Microsofts case, the behavior remedy focused on attacking the conducts which control over the technology by either forcing the Microsoft to release or license the source code, or to disclose their proprietary APIs. This list of conditions seemed reasonable to me, and a deal with Microsoft should be able to strike. It also provided potential ways to remedy the anti-trust behavior in OS market. For structural changes plaintiffs proposed a breakup of Microsoft into two separate companies, ops and apps, with a firewall between the two companies. Even though I do believe that Microsoft should be punished for its anti-competitive action, which helps them achieve the OS market dominance, the cost of breaking up the company still outweighed the benefits. Therefore, I dont think the proposed breakup is the either appropriate or sufficient remedy. First, the 1995 case was settled with a decree that explicitly stated that Microsoft can include in its OS any additional functionality. It is reasonable for Microsoft to believe that adding browser to Windows does not violate the consent decree even though it does not meant that adding such functionality does not violate anti-trust law. I believe now Microsoft understood more clearly to what degree the functionality could be added. Hopefully the better understanding would lead to better compliance to the new settlement. Second, the breakup will disrupt the industry. A breakup of Microsoft would eliminate Microsoft as a flexible and fierce competitor. The efficiency will be lost and customers will suffer due to this breakup. It will take time to restore the order of the industry. Especially right Sept 11th, the government should not wan to see this disorder happen. Third, the breakup was more likely to cause higher prices. Since DOJ ruled that Microsoft kept its OS prices low so that it can exercise it monopoly power in the browser market, the post breakup company would have no incentive to keep the price low. The structural remedy did not impose permanent restrictions on the post-breakup functions of the companies. These two companies could enter each others fields and a few years later it is very likely that one of the post-breakup companies will dominate both markets. Last but not least, if the breakup actually happens, it is likely to have an impact on the whole computer industry with the dark shadow of the radical government intervention. There are many firms in the computer sector with a dominant power in the market. If this DOJ appeal wins and the break occurs, antitrust law suites against other giants such as Yahoo or AOL probably wont be far behind. All in all in believe the structural remedy is not a desired way to achieve DOJs end goal. The desired end results could be achieved by less harsh method, which I will discuss further in question 6.

5) Were the terms of the settlement appropriate? In my opinion, two rules should be used to judge the appropriateness of the terms of the settlement. First is whether the settlement effectively punishes Microsoft for its illegal activities and second is whether the settlement prevents Microsoft from continuing such activities in the future. I think the settlement fails on the first of these two qualifications, although it appears to satisfy the second. But, as with Microsoft's 1995 consent decree, the text of this settlement--the so-called Final Judgment contains language that gives the company some wiggling room in the future. The important parts of the settlement concern how the settlement will curtail Microsoft's predatory conduct. First, Microsoft can't retaliate against its own partners--PC makers, in this case--if any of these companies decides to promote, use, or sell non-Microsoft software or sell PCs that dual-boot Windows and a competing OS. This agreement comes too late to save Netscape, which AOL swallowed up after Netscape was unable to compete with Microsoft's bundled Internet Explorer (IE) product. Microsoft must offer all PC makers a uniform price for Windows and not reward noncompetitive partners with better deals while punishing other companies with higher prices, as the company has in the past. However, Microsoft is free to offer volume discounts based solely on sales. This part of the agreement is fair but does nothing to compensate the companies that Microsoft's favoritism damaged in the past. During the original trial, for example, IBM stated on record that it lost millions of dollars because of Microsoft's refusal to supply a Windows 95 license in a timely manner because IBM sold Lotus products that competed with Microsoft Office. The settlement agreement lets PC makers modify Windows display icons, Start Menu entries, and other onscreen elements for products that compete with the bundled products Microsoft supplies in Windows. The caveat is that such replacements must not harm the UI's operation, which leads me to believe that in the future Microsoft will integrate product bundling even more tightly into Windows than they are today. I'll present the next condition in the exact wording of the Final Judgment; the key word is "except," because the repeated use of this word in this document buys Microsoft room to bargain in the future: "Microsoft shall not enter into any agreement relating to a Windows Operating System Product that conditions the grant of any Consideration on an ISV's refraining from developing, using, distributing, or promoting any software that competes with Microsoft Platform Software or any software that runs on any software that competes with Microsoft Platform Software, except that Microsoft may enter into agreements that place limitations on an ISV's development, use, distribution or promotion of any such software if those limitations are reasonably necessary to and of reasonable

scope and duration in relation to a bona fide contractual obligation of the ISV to use, distribute or promote any Microsoft software, or to develop software for, or in conjunction with, Microsoft." I can imagine the contractual language wrangling that will accompany any future deals of this nature. The wiggling room is obvious. Because of Microsoft's less-than-honorable approach to complying with its 1995 consent decree, the Final Judgment also includes a section about compliance, which specifies how Microsoft will be forced to stay in line going forward. For the next 5 years, a three-person Technical Committee (TC) will monitor Microsoft to ensure that the company complies with the terms of the settlement. Again, this action is acceptable for future behavior, but it does nothing to address the previous behavior that resulted in Microsoft's market dominance. And if it's not obvious by now, the major failing of this settlement is that it doesn't punish Microsoft for breaking the law but instead prevents the company from continuing the behavior that got it into trouble. The list of prohibited conduct spells out, in very general terms, exactly what the company did wrong in the past. But preventing similar crimes in the future isn't "justice." True justice addresses the people the crime hurts--in this case, Microsoft's competitors, partners, and users--and punishes those who commit the crime. This settlement lets Microsoft retain its illegally gained market power, along with most of the advantages that come along with that dominance. 6) What, if anything, should be done with Microsofts operating system monopoly and its dominance in other software application? I will adopt a hybrid method to deal with Microsofts OS monopoly and its dominance in other software applications. First, I will suggest forcing Microsoft to disclose some of the APIs that permit it to include Internet Explorer in the operating system. Microsoft has been routinely discloses APIs that integrate applications to the operating systems and allow for interoperability. However, it currently does not disclose APIs that tie together parts of the Windows OS, which includes Internet Explorer. If DOJ could incorporate the disclosure of the APIs which glue all applications together, other competitors could have the same interoperability with Windows, thus break down Microsofts monopoly power in OS market. Second, I think DOJ should consider imposing various restrictions on the contracts that Microsoft can write with sellers of complementary goods and with competitors. This remedy should to be easy to tailor depending on the violation. By combining these two, the terms should be sufficient to guarantee that Microsoft will be precluded from taking future anti-competitive actions. In the meanwhile, it would still preserve the managerial and other benefits that have made Microsoft one of the most successful and profitable companies ever.

7) Fashion designers agreed to reduce the fees they were paying runway models. This price-fixing was never intended to be malicious, they said. Does intent matter in a price-fixing case?