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

Public Policy in Private Markets

Microsoft (2nd case, 1998 -)

Le Page v. 3M (case 10 K & W)

Announcements

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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?

A. Predatory pricing in the OS market

B. Illegal tying of IE (internet explorer) and Microsoft’s OS (operating system)

C. Collusion with Apple to make IE default software

D. 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’s stated 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