Public Policy in Private Markets

Public Policy in Private Markets Microsoft (2nd case, 1998 -) Le Page v. 3M (case 10 K & W)

Announcements • Homework 1: due today (be aware of penalties) • i>clicker grades: working on synchronization with Spark • Homework 2 due 3/1, will post soon

Announcements • Key concepts: • Nolo plea: most problematic 34% responded 1, 2 or 3 • AVC, ATC and recoupment approaches to determine predatory pricing: 10% responded 1, 2 or 3. • Cross-price elasticity: 20% responded 1, 2, or 3.

What was Microsoft charged with? • Predatory pricing in the OS market • Illegal tying of IE (internet explorer) and Microsoft’s OS (operating system) • Collusion with Apple to make IE default software • Illegal tying of Microsoft’s ‘Office’ software (Word, Excel, etc.) with IE

Market Definition • DOJ • Product: • 2: OS for Intel-based PC’s (excludes Apple) and browsers • Over 70,000 applications for MS-OS • Geographic: • Worldwide • MS • All PCs, hand-held computers, servers • No market for OS alone; platforms (www, Java)

Intent to Monopolize: Some Facts • Netscape represented a threat for MS’s OS: • More applications for an OS = more attractive OS for consumers (barrier to entry to non-MS OS) • Java is “middleware” that allows development of software that operates on any OS • Netscape operated in Java and could support other OS independent software • Other OS could have entered more easily (reducing barrier to entry)

Intent to Monopolize: Some Facts • Declining market share by Netscape (70% in 1996, <1% in early 2000’s) • MS dominance of OS market. • Evidence that there was demand for browsers other than IE (sold separately from OS) • Three accusations: • Illegal monopolization of OS • Illegal monopolization of browsers • Illegal tying of IE and OS

Intent to Monopolize • OEMs: • Could not install Windows if did not install IE (tying) • Difficulties to remove IE • Netscape had less access to OEMs • ISPs: • “Forced” to use IE, or large %: • Exclusionary Agreements (not sell, install, promote Netscape) • Free IE • Marketing $$ (negative predatory price)

Intent to Monopolize • Limited software development for non-MS OS • Exclusion of browser competitors from efficient channels (OEM/ISP): limited software development for non-MS OS • The less popular Netscape, the less likely programmers will write on Netscape • Two-level entry: no successful browser if no OS

Bill Gates • In 4/96: “Netscape’s strategy is to make Windows and the Apple Macintosh OS all but irrelevant by building the browser into a full-featured OS with information browsing. Over time Netscape will add memory management, file systems, security, scheduling, graphics and everything else in Windows that applications require. Netscape hopes that its browser will become a de facto platform for software development, ultimately replacing Windows as the mainstream set of software standards.”

Intent to Monopolize • Attempting to dissuade competition: • Meetings with Netscape to “share” the market • Apple: make IE the default browser, eliminate “QuickTime” software • Predatory pricing: • Free IE (not a feasible strategy for browsers) • Recoupment: preserving monopoly in OS

Microsoft Case • Court rulings: • U.S. Government + 18 states pursued case in District court: • Ruling: MS guilty on all counts, except foreclosure of competitors • Structural remedy: company break-up (OS and apps) • Appellate Court (Circuit): • Violated Sec 2 of Sherman Act: illegally maintaining monopoly power of OS for PCs by anticompetitive means • Exclusive agreements and monopolization of browsers not illegal • Structural remedy is “iffy” as it might not serve purpose and might also create inefficiencies

Microsoft Case • Case ends with Consent Decree between DOJ and Microsoft (11/01): Conduct remedies (no splitting up) • OEMs: • Uniform licensing for 20 largest OEMs • No retaliation • Allowed to disable middleware (browser) • Other: • Compliance committee • Settlement timeframe of 5 years (extended through 2009)

Private Cases • Prove intent to monopolize + damages • 01/02: AOL sues Microsoft for damages against Netscape ($750 million) • Estimated damages up to $12 billion (treble this?) • 03/02: Sun Microsystems sues Microsoft, for anticompetitive practices against Java ($1.6 billion) • Others: Novell ($536 mill.) state suits ($ 1 billion) • Total: $ 4-5 billion

EU • 03/04: EU fines MS for $600 million (largest fine ever) • MS must make its code available to software developers • Produce 2 versions of Windows: w/ and w/o Windows Media Player • MS appeals, but it is rejected by EU • 05: MS starts offering the 2 versions

EU • 12/05: EU imposes fines ($2.4 mill/day) for failure to disclose code • 1/06: MS offers some access • 07/06: Daily fines increase to $3.82 mill. • 2009: • > 2 billion in fines • December: case is settled – MS agrees to make “menu” of browsers available to consumers

LePage’s v. 3M • 1997-LePage’s Inc. filed a lawsuit against 3M. • Alleging that 3M had monopolized the invisible tape market. • Stating 3M used monopoly leveraging, exclusive dealing, bundled rebates, full line forcing, and other predatory practices.

Background 3M 3M- a large company with a diverse wide range of products used in industrial, commercial and consumer applications. In early 90’s accounted for over 90% of the home and office tape market in the U.S. 3M enacted several incentivizing marketing strategies including the EGF(executive growth fund), and later the PGF (partnership growth fund) 1992- Release two private label tape brands- Scotch and Highland

Background LePage’s Small manufacturer of home and office tape In early 90’s accounted for 90% of all home and office private label tape sold in U.S. Accounted for vast majority of remaining U.S. tape market other than 3M.

LePage’s v. 3M: Relevant Market LePage’sstated that market was manufacturing and sale of transparent tape for home and office use LePage’s stated that foreign competitors shouldn’t be considered in market 3M argued that the (potential) market share of foreign competitors should be considered

LePage’s v. 3M: Market Power LePage’s argued that 3M used its monopoly power to control the market and stated 3m’s large market share as the reason. 3M argued that because they sell primarily to large distributors, that their buyers had the power and threatened to change suppliers if discounts weren’t made. 3M “high market share doesn’t mean high power”

LePage’s v. 3M • Market power • Relevant market: transparent tape for home and office; domestic market (contested) • 3M’s large mkt share; barriers to entry (brand development, economies of scale) • Market structure: • No substitutes in branded market (3M>90%) • Competition in private label market (kind of, LePage>90%) • Few large buyers: retailers

LePage’s v. 3M • Intent • Private label eroding 3M’s market share • Rebate program: % discount if volume met • Tied “monopoly” product with “non-monopoly” product in detriment of LePage’s • 3M’s private label “Scotch” • Rebates: encompassed all 3M’s sales • Provided buyers stronger incentive to buy 3M’s PL at a higher price than LePage’s tape (as the rebate was substantial) • Rebates were “targeted” • LePage could not compete with this • Court rulings: controversial

Trials 1999- A U.S. District Court of the Eastern District of Pennsylvania jury found in favor of LePage’s and assessed damages in excess of $68 million 2002- A U.S. Court of Appeals for the Third District set of three judges found to reverse the decision in favor of 3M 2003- Next full set of appeal judges found in favor of LePage’s and affirmed the original decision 3M petitioned an appeal and was denied

Public Policy in Private Markets