1. Microsoft, Monopoly, and Consumer Harm

Monopolists cause harm to consumers by reducing output and raising price. The question of whether Microsoft acts like a monopolist and whether it causes harm to consumers should be crucial to the current DoJ case. What is the evidence?

Short of God whispering the true competitive and monopoly prices in our ear, economists have had an extremely difficult time determining whether any particular market is priced at a competitive level, a monopolistic level, or somewhere in between. In a world of serial monopoly, where firms compete to control the entire market, competition comes from potential new regimes, and traditional measures of monopoly power, intended to measure competition that occurs within a particular regime, are even less likely to be helpful. But that shouldn’t keep us from trying to make such a determination, particularly when charges of monopolization are being brought.

In the sections that follow we examine the price history in various software markets. Putting several disparate pieces of this pricing puzzle together makes, we believe, a persuasive case for concluding that Microsoft has not harmed consumers.

  1. Word Processor and Spreadsheet Prices

Figure 20 reprises average prices for the two largest markets, spreadsheets and word processors (in the PC, or IBM compatible, market). The most relevant feature of this chart is the very large overall fall in prices, as already noted.

This fall in prices is not constant throughout the period, however. From 1986 until 1992, prices were either constant or rising slightly in the word-processing market. From 1986 until 1990 prices were essentially constant in the spreadsheet market. Beginning in 1991 or 1992 prices fell in a very dramatic fashion. What is the proper interpretation of these price declines?

Although more detailed historical detail on these markets was provided above, it will suffice for the moment to describe the early period as the Lotus era in spreadsheets and the WordPerfect era in word-processing. Although any firm, including Microsoft, could have charged whatever price it wanted when it had a small share of the market, it is likely the case that the most effective strategy was to follow the price set by the leader in the market. This conclusion is reinforced by our finding that, except in markets catering to individuals, price differentials were rather ineffective at generating additional market share.

This chart provides information on price changes, but monopoly and competition differ in the level of prices, not in the way that they change price. However, if the market is moving from a less competitive to a more competitive market equilibrium, prices would be expected to fall during the transition. If Lotus and WordPerfect tried to use their large market shares to generate short run monopoly profits, and Microsoft didn’t, we would expect prices to fall as the markets stops taking its cues from WordPerfect and Lotus and instead started to take their cues from Microsoft. Once the new regime was in place, prices should have stabilized at their new lower level, ceteris paribus.

If Microsoft believed that Lotus and WordPerfect lost their dominant position because they failed to act competitively, it might have chosen a competitive price even after it achieved a dominant market shares. That appears to be what has happened since there is no evidence of prices rising even after market shares above 99% are achieved, as in the Macintosh spreadsheet market, and we shall see this pattern of behavior on Microsoft’s part in other markets.

By itself, this evidence might be suggestive, but would fall short of a sufficient basis on which to draw conclusions. Combined with the evidence in the next two sections, however, there is a compelling case to be told in favor of Microsoft.

  1. Microsoft’s Overall Impact on Prices
  2. One question that naturally arises in regard to pricing is how the markets examined in this study compare to markets overall. After all, it is possible that the pricing pattern in figure 1 was reproduced in many other markets and had nothing to do with Microsoft’s increased market position. We were able to perform a somewhat crude test of this claim. Dataquest provides consistent market definitions for fourteen software markets for the contiguous period 1988-1995. We calculated the average price in each category for each year as if this ‘average price’ represented changes in prices for the underlying products.

    Next, we categorized markets into three main groups: one group of markets where Microsoft has a product, one group where Microsoft has no product, and a third group where the products compete with some function of Microsoft’s operating system. All prices are normalized to their 1988 levels to simplify comparisons. The results are shown in Figure 21.

    The results are rather striking. Although it appears that software prices in general have fallen in price over this period of time, some software prices have fallen far more than others. In particular, those categories where Microsoft participates, directly or indirectly, have had far more dramatic declines than in other markets, falling by approximately 60% compared to the relatively paltry 15% fall in prices for software in markets completely devoid of Microsoft’s influence.

  3. PC – Macintosh Price Comparison

The data allow one more interesting price comparison. That is for the same product in two markets with very different market shares. We are here talking about Microsoft Word and Microsoft Excel in both the PC and the Macintosh market.

Figure 3 provides market shares for these two products in the PC and Macintosh markets. Examination reveals that Microsoft achieved very high market shares in the Macintosh market even while it was still struggling in the PC market. On average, Microsoft’s market share was about forty to sixty percentage points higher in the Macintosh market than in the PC market in the 1988-1990 period. It wasn’t until 1996 that Microsoft was able to equal in the PC market its success in the Macintosh market. These facts can be used to discredit a claim sometime heard that Microsoft only achieved success in applications because it owned the operating system, since Apple, not Microsoft, owned the Macintosh operating system and Microsoft actually competed with Apple products in these markets.

If past is prelude, then one might examine Microsoft’s behavior in a market where it has had a structural monopoly to find clues to its future behavior in markets where it appears to be well on its way to a structural monopoly. Surely, Excel’s place in the Macintosh market was assured by 1989, with a 70% market share. In the PC market, on the other hand, Excel was just getting off the ground. In 1990, when Microsoft Word for Windows was first being launched, Microsoft Word for the Macintosh had a market share of almost 60%. Again, Word’s place in the Macintosh world seemed assured, and to a structuralist it would appear monopolistic, but its place in the PC world was anything but.

Those holding a structural view of monopoly would expect Microsoft to charge a high monopoly price in the Macintosh market and a lower competitive price in the PC market.

Although there is some imprecision in the data, the price comparisons suggest the opposite of what a structuralist would expect. PC-Excel, far from being cheaper, in fact averages 13% higher prices than its Macintosh cousin during the period 1988-1992. PC Word’s price, on average, was more than eighty percent above the price for Macintosh Word prior to 1993. After that, the prices are virtually the same. To double check this result we went to price advertisements in computer magazines from PC Connection and Mac Connection, a retailer selling to both markets, and compared prices. Excel on the PC was consistently about 33% higher than for the Macintosh version. A similar result holds for Microsoft Word.

In other words, Microsoft was not acting like a textbook monopolist (raising prices) in the market where it clearly has a structural monopoly. If anything, the prices in the market where it was dominant were lower than in the markets where it was competing. After Microsoft had come to dominate the PC market, it might have been expected to raise prices, but it lowered them dramatically. We can not attribute this result to some idiosyncratic difference between PC and Macintosh markets since Microsoft equalized the prices in the two markets after gaining dominance in both. What might be going on, then?

One answer, that appears consistent with all our findings, is that Microsoft worries about competitors even when it has a very large market share. Such concern about potential entrants might explain why Microsoft has not lost any markets it has gained. The decline of Lotus might have been due to an erroneous lack of such concern.