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ECON 3007 TOPIC 6: Competition and Innovation: The Microsoft Case

Thurs 4 Feb and 11 Feb, Ricardo Lecture Theatre, 14.00-16.00

Competition policy has traditionally focused on the impact of market power on prices and quantities at a point in time. However, innovation is a major factor determining economic growth, and in fast changing markets the degree of market power that a firm has in a market today may differ from what it will have tomorrow. In addition, the market power that a firm has, and that other firms in its industry have, is likely to affect incentives to innovate. This raises several changes for competition authorities.

In these two lectures we will consider these issues and discuss how they applied to the case brought by the US competition authorities against Microsoft.

We will start by developing a number of ideas that are useful in considering the case. We will review the traditional consideration of the welfare costs of market power in a static setting. We will then consider what happens when we add the possibility of innovation in a simple way. Policy makers then need to consider the potential trade-off between static efficiency and dynamic efficiency.

Lecture 1 slides

Lecture 2 slides

Exercises

1. In January 2009 The Nintendo Wii accounted for around 50% of sales of game consoles, much more than the other two large competitors - the XBox 360 and the Sony Playstation 3. Should the fact that Nintendo has such a dominant market position worry competition authorities?

2. In 2007 Brazil's president authorised the country to bypass the patent on an Aids drug manufactured by Merck, a US pharmaceutical giant, meaning that the drug could be sold for $0.45 each rather than $1.59. What would you expect the impact of this policy to be on consumers in the short-run and long-run?

3. Was Microsoft a dominant firm with monopoly power in the industry for (a) computer operating systems and (b) internet browers at the time under consideration in the US case against Microsoft (the early to mid 1990s)?

Essay/presentation topic

Two of the actions that were the focus of the US competition authority's case again Microsoft were :

i. the fact that Microsoft gave away Internet Explorer for free to consumers who purchased the Windows Operating System,

and,

ii. the claim that over time Microsoft altered aspects of its Operating System to integrate it with Internet Explorer, making it more favourable to Internet Explorer than to other firms' web browsers.

Were these actions competitive or anti-competitive? Discuss what impact these actions were likely to have had on consumers of different types and at different points in time.

Useful webpages

US Department of Justice page on the case

Wikipedia page summarising the case, with some useful links

Reading List

Bresnahan, Timothy F. (2002) "The Economics of the Microsoft Case" (March 2002). Stanford Law and Economics Olin Working Paper No. 232.

Davis, S. and K. Murphy (2000) "A Competitive Perspective on Internet Explorer" The American Economic Review, Vol. 90, No. 2, Papers and Proceedings of the One Hundred Twelfth Annual Meeting of the American Economic Association (May, 2000), pp. 184-187

Gilbert, R. and M. Katz (2001) "An Economist's Guide to U.S. v. Microsoft," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 25-44, Spring 2001

Fisher, F. (2000) "The IBM and Microsoft Cases: What's the Difference?" The American Economic Review, Vol. 90, No. 2, Papers and Proceedings of the One Hundred Twelfth Annual Meeting of the American Economic Association (May, 2000), pp. 180-183

Hall, C. and R. Hall (2000) "Toward a Quantification of the Effects of Microsoft's Conduct" The American Economic Review, Vol. 90, No. 2, Papers and Proceedings of the One Hundred Twelfth Annual Meeting of the American Economic Association (May, 2000), pp. 188-191

Katz, M. and Shelanski (2006) "“Schumpeterian” Competition and Antitrust Policy in High-Tech Markets"

Klein, B. (2001) "The Microsoft Case: What Can a Dominant Firm Do to Defend its Market Position?" Journal of Economic Perspectives, Vol. 15, No. 2, Spring 2001, 45-62

Schmalensee, R. (2000) "Antitrust Issues in Schumpeterian Industries" The American Economic Review, Vol. 90, No. 2, Papers and Proceedings of the One Hundred Twelfth Annual Meeting of the American Economic Association (May, 2000), pp. 192-196