A blog about economics instruction. "Things should be made as simple as possible, but not any simpler."--Albert Einstein

Wednesday, May 11, 2005

Constructivist Learning: A Hands On Assignment--The Microsoft Antitrust Case

I've copied and pasted an assignment that I gave my Honors Micro Principles class this semester. It embodies constructivist learning principles, which are discussed in my other blog Socrates Technological University. Readers of The Royal Economics Academy can use this assignment provided attribution is given to the author.

You Be the Judge! The Microsoft Antitrust Case

Sections I. through IV. provide information that will be useful in completing the assignment. Section V. poses questions for you to answer in parts a. through d. You will be working with your group in arriving at answers. The actual assignment isn’t that long, but it may take some time to wade through the background in the Microsoft case and the provisions of antitrust law. Four links are provided in case you would like to do more research on the case.


I. The above link will take you to the U.S. Department of Justice web site to the Findings of Fact in the 1999 Microsoft case. This is a long document. You don’t need to read it in its entirety, but you might take a quick look to get the flavor. I’ve copied and pasted item 34:

34. Viewed together, three main facts indicate that Microsoft enjoys monopoly power. First, Microsoft's share of the market for Intel-compatible PC operating systems is extremely large and stable. Second, Microsoft's dominant market share is protected by a high barrier to entry. Third, and largely as a result of that barrier, Microsoft's customers lack a commercially viable alternative to Windows.

Here is item 63:

63. Finally, it is indicative of monopoly power that Microsoft felt that it had substantial discretion in setting the price of its Windows 98 upgrade product (the operating system product it sells to existing users of Windows 95). A Microsoft study from November 1997 reveals that the company could have charged $49 for an upgrade to Windows 98 — there is no reason to believe that the $49 price would have been unprofitable — but the study identifies $89 as the revenue-maximizing price. Microsoft thus opted for the higher price.

Here is the last item, item 412:

412. Most harmful of all is the message that Microsoft's actions have conveyed to every enterprise with the potential to innovate in the computer industry. Through its conduct toward Netscape, IBM, Compaq, Intel, and others, Microsoft has demonstrated that it will use its prodigious market power and immense profits to harm any firm that insists on pursuing initiatives that could intensify competition against one of Microsoft's core products. Microsoft's past success in hurting such companies and stifling innovation deters investment in technologies and businesses that exhibit the potential to threaten Microsoft. The ultimate result is that some innovations that would truly benefit consumers never occur for the sole reason that they do not coincide with Microsoft's self-interest.

II. The following link will take you to the text of several of the antitrust laws:

Since Microsoft was charged with violating sections 1 and 2, I have copied and pasted them here:

§ 1 Sherman Act, 15 U.S.C. § 1
Trusts, etc., in restraint of trade illegal; penalty
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. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court.

§ 2 Sherman Act, 15 U.S.C. § 2
Monopolizing trade a felony; penalty
Every person who shall monopolize, or attempt to monopolize, or combine or 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, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court.

The Sherman Act is not very specific, is it? How can a company tell is if it is violation? Well, I guess keep up with the case law.

III. The Final Judgment of the court, rendered in 2002, is stated in this document, which has many specific provisions:

IV. The following link contains a 2005 status report on Microsoft’s compliance with the court’s decision:
The court will be monitoring Microsoft’s efforts to comply, and its behavior through 2007, I believe.

V. As you can see, an antitrust case plays out over a significant period of time. There were two critical elements in the court’s decision that we talk about in economics, but don’t spend much time applying. One of these relates to the question, “What is the market?” The other is a related question, “What are the substitutes?” For example, is beer a substitute for coffee? If it is, then the market would be the market for beverages. If it’s not, then the beer market and the coffee market are two separate markets.

a. From your perspective as a consumer who uses computers and software, how closely do you think Microsoft fits the textbook model of a monopolist?
b. Microsoft products include Windows XP and Internet Explorer. From your perspective as a consumer, what do see as the substitutes for Microsoft products? Do you personally use any substitutes for Microsoft products?
c. Do the facts in item #63 (copied above) surprise you? Should firms be punished for charging the “revenue-maximizing price”?
d. At the time this case was in court, the talk was that Microsoft was going to broken up into two different companies: one company would create operating systems and the other company would create word processing software, web browsers, games, etc. That radical punishment was not meted out by the court. I am guessing that there are economies of scale that would be lost if Microsoft were to be broken up. Explain briefly.

Instructions: You should contribute at least two postings to a group discussion designed to arrive at answers to the questions in a. through d. Since none of us has training in the fine points of antitrust law, you are to discuss from the perspective of a student who has read the material on antitrust in the book and the material about the case contained in this document.



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6:41 PM


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