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ECONOMIC POLICY ISSUES REGARDING MICROSOFT^
The IBM and Microsoft Cases: What's the Difference?
The Microsoft case1 has attracted more attention than perhaps any antitrust case in history-- far more than the mammoth IBM case of the 1970's,2 with which it is sometimes compared. I was the chief economics witness for IBM in United States v. IBM and the chief economics witness for the United States in United States v. Microsoft.
I did not "switch sides".3 Even though both cases involved "bundling" and charges of "monopoly leveraging," the facts were different,4 and the principles of economic analysis led to different outcomes. It is useful to state two such principles:
(i) An anticompetitive act by a single firm is one that is not profit-maximizing without the monopoly rents that it creates or maintains but is profit-maximizing with those rents included.
(ii) Monopoly "leveraging" requires monopoly power to leverage.
I. The IBM Case
A. Bundling Software and Services with Hardware
Until 1968, IBM offered systems support and software with its computer systems at no separately stated charge.5 The government alleged that this bundling forced other hardware producers also to bundle, thus raising barriers to entry into the supposedly monopolized computersystems market.
This was quite untrue. There flowered a large independent software industry, making it easy for hardware manufacturers to acquire the necessary software to produce a bundle.
Further, IBM's bundling in the relatively early days of the computer industry was a response to consumer demand, providing a guarantee that computers would function and solve users' problems. That was highly desirable in a period in which computers were great, unfamiliar, frightening beasts.6 When a community of users arose that did not need the bundle, bundling diminished, starting in 1968.
Had consumers not wanted the bundle, IBM's bundling would have made entry easier, not harder. Other hardware manufacturers could have offered hardware without the bundle to customers who wished to dispense with the latter. This would have made their products more attractive relative to those of IBM. Instead, most manufacturers offered their own bundle. When IBM unbundled, Honeywell ran advertisements proclaiming "the same old bundle of joy."
B. Bundling Formerly Separate Hardware Components Together
Until the early 1970's, much of the control circuitry for disk drives was located in a...