By Jo Maitland in Washington
During the closing hours of Microsoft Corp’s antitrust battle with the government, Judge Thomas Penfield Jackson, who alone will decide the fate of the software giant, refered to the company as a benevolent despot, alluding to Microsoft’s dominant market position. Microsoft spent yesterday afternoon’s court session fighting the government antitrust complaint by beating the same drum that it began in January with MIT economist Richard Schmalensee’s original testimony. The company claims that it has not put up barriers to entry into the market through predatory pricing or anti-competitive action, the crux of the government’s case against Microsoft.
Microsoft attorney Michael Lacovara set about proving Microsoft’s point that if there is no barrier of entry into the market, there is no monopoly. He pulled up the testimony by governemnt witness and MIT economist, Franklin Fisher who said that there is a chicken and egg problem for potential new entrants into the platform business. Fisher said that ISVs won’t write for a platform unless it has a large number of users, but wondered how it will ever attract a large number of users if no one is writing applications that support it. This supposedly explains why no one can grow a platform and no one would ever try – a good theory but it is just wrong, said Microsoft rebuttal witness, Schmalensee.
To explain why he thought this was wrong, Schmalensee introduced a grocery store analogy which he attempted to prove showed that Microsoft had not put up barriers of entry into the market. The economist said: Just because I own a grocery store, it doesn’t mean you can’t own a grocery store…you would have the usual costs of entry, like buying the store, hiring staff etc, but this is not a barrier. He added, It only becomes a barrier when these costs for newcomers are higher. The Judge interjected: I have trouble with your grocery store analogy – it doesn’t help me. While your competitor is building his little neighborhood store, you are improving yours to become a supermarket and your competitor has fewer and fewer customers because they are looking for products in your megamarket. This means your competition is always trying to play catch-up. Schmalensee said that the size of the market or, for the sake of this analogy, the size of the town would place the constraint on how many grocery stores or supermarkets could do business. To which the judge replied, Then the analogy doesn’t fit because the world of cyber-communications is a very, very large town. The judge, on a roll at this point, said this is the whole Wal-Mart phenonmena. The issue of whether or not there is competition for Wal-Mart. And what if it means no new entrants will ever enter the market? he said.
The economist replied: It really depends on entry barriers. This may not be the working of a competitive marketplace. To which the judge retorted: You may have a benevolent despot or monoploy. No, Schmalensee answered, You don’t rely on a baker’s benevolence to get your bread. You rely on the market’s constraints. If a firm begins to think like a benevolent despot and is not protected by barriers to entry it will have a short reign.
Outside on the court steps, lead government counsel David Boies said on Microsoft being a benevolent despot, that it was the flip side of the coin to which they have been arguing. They are saying we do what’s good for the consumer, we will force them to pay more, even though they don’t realize its good for them now, in the future, when we’ve poured all this extra money into development etc etc etc, it will be. Boies said it was a mistake to read into the judge’s comments as he often plays devil’s advocate and simplifies things to unravel meaning. Refering to Microsoft barring its competition from gaining a foothold in the market, Boies said: Microsoft owns certain API’s, it has forced exclusionary contracts on companies and it has paid people not to supply similar products to its own, it controls the means of access to this market and that is an anti-competitive, monopolisitc practice that is clearly a barrier to entry.
