Predatory Pricing : LUSENET : MS-DOJ : One Thread

Franklin Fisher devotes a significant amount of his direct testimony to a theory of Microsoft's predatory conduct with respect to its browser distribution. A predatory act, Fisher states, is "one that does not make sense from a business standpoint, [but] only makes sense because of what it does to competition." (Trans. 1-6-99p.m., p.72). "In effect, a predatory anti- competitive act is one that involves a deliberate sacrifice of profit in order to secure or protect monopoly power." (Direct, p. 17) Fisher's definition is broader than the Supreme Court's recent discussions of predatory pricing, extending beyond "pricing" and broadening to a second market the range from which expected recoupment of predatory losses can occur. Lacovara in cross- examination and Schmalensee in his direct both challenge Fisher's definition for ignoring the Court's standard and for leaving no discernable boundary between predation and innovation.

Fisher argues that Microsoft uses its IE distribution (free, forever) strategy to create barriers to entry in the browser market and drive competitors such as Netscape out of that market to defend its OS monopoly from browser-based competition. (Direct, pp. 7-9, 108-09) He further proposes that MS is using the browser market as an example of its ability and willingness to engage in predation in other markets that threaten the OS, disincenting other firms from "innovat[ion] in areas that Microsoft may stake out as its own property." (pp. 9, 107)

Courts are wary of predatory pricing allegations because "cutting prices in order to increase business often is the very essence of competition." Matsushita at 594. Yet companies are themselves unlikely to engage in acts entailing certain short-term costs that will reap long-term gains only if they knock their competitors out of the market and keep them out even while raising prices. Fisher attempts to allay the court's fears with a description of "defensive predation," in which the browser giveaway is done not with an eye to later profit in that market, but focused on more immediate gains from the primary market, the OS. "What's going on here is there is a predatory price on a product, but the purpose of the predation is to protect Microsoft's operating system monopoly, and in some sense Microsoft has already begun to recoup that, because it recoups it in the knowledge that it is protecting the monopoly." (1-7-99 am. p. 14) As in classic predation, the effectiveness of Microsoft's actions depends on driving its competitors out of business, but the reward is not all-or-nothing, and Microsoft need not wait so long for the payoff.

Fisher must distinguish his two-market account from that of Matsushita, however. Where the Court saw no connection between low television prices in the United States and supra- competitive prices in Japan, it rejected the claim of predation in the U.S. market. Even if U.S. sales were subsidized by those in Japan, the manufacturers did not earn any more in Japan because of price cuts in the U.S., and would have to wait until their unlikely U.S. market dominance to recoup any benefit from those cuts.

The linkage of the markets makes the price cut a more rational business judgment and more clearly anti-competitive. Microsoft could commit to distributing its browser "at a negative price," paying ISPs and OEMs to give away a product on which it had spent millions in develop ing and marketing (p. 54) because every bite it took from Netscape's market share reinforced its OS dominance. Fisher shows a monopolist poaching in the secondary browser market to keep upstart platforms from its core product. In conjunction with network effects, the incremental gain meshes with our earlier discussions of the "holding pattern" strategy. Maintaining the Windows monopoly against incipient threats from Netscape or Java platforms can be both a current benefit, in interim sales, and a future gain, of customers waiting for a new MS product. By predation in the secondary but overlapping market, Microsoft fills the trough between peaks of primary- market innovation where competitors might otherwise sneak in.

While Fisher's story makes defensive predatory pricing a sounder business judgment than offensive predation in which recoupment depends on the product whose price was originally cut, it makes it that much harder to distinguish predation from vigorous competition. If MS earns "recoupment" even as it both it and Netscape give away browsers, how do we know that its business plan depends on "cutting off Netscape's air supply" rather than exploiting the market complement to IE? Fisher's arguments, Schmalensee claims, "cannot distinguish between predation and competition in the microcomputer software industry." (Schmalensee, Direct para. 323) If these business plans make too much sense, we don't need "anti-competitive effects" to explain them.

Finding that profit is realized before MS monopolizes the browser market makes the conduct more dangerous to competitors, but, paradoxically, less anti-competitive because that effect is not essential to explain the conduct. Ultimately, a great deal of Fisher's testimony, and his defensive predation theory, turns on Microsoft's subjective intent. The direct testimony is filled with excerpts from emails and depositions where Microsoft executives talk of threats to Netscape or Apple, partners are coerced into promoting IE, and competitors are shut out of the OEM and ISP markets. Fisher argues that the only way to explain this concern over the share of a free product is in benefits to the OS monopoly it preserves, while Schmalensee counts that browser share adds value to the OS and provides new opportunities in return for its costs. The predation claim turns in large part on which goal it can be proven was primary in Microsoft's sights.

-- Anonymous, February 01, 1999

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