Subject: Re: CNET: The coming open monopoly in software
From: Stephen J. Turnbull <stephen@xemacs.org>
Date: 26 Oct 2001 10:55:48 +0900

>>>>> "Brian" == Brian J Fox <bfox@ua.com> writes:

    Brian> That sounds like number-of-downloads (i.e., market share),
    Brian> is related to barrier to entry.

Sure.  However, a "barrier to entry" as defined by economists means
that you can price _above_ the competition without fear of entry in
the same market.

What Fisher described Microsoft as doing was pricing _below_ the
competition in one market in order to increase uncertainty (this is
Deep FUD here) for potential rivals in a complementary market, thus
creating a barrier to entry in the _complementary_ market.[1]

What was being discussed so far is the naive idea that market share in
a market automatically confers pricing power in the same market.  That
was what the government attempted to show in US vs. IBM, and what
Fisher systematically dissected, in the process making a fool of the
poor expert witness for the prosecution.  Ie, after getting market
share in the browser market, Microsoft then can raise price.  This
simply isn't true in general.  Eg, they could today probably charge
for IE for a few months, but then they'd be in the position of having
to claw back rapidly eroding market share.

Although it is not explicit in the book, Fisher was very well aware of
the difference.  I suspect that part of his reticence is he didn't
understand it as well then as we do today, and part was he was being a
good witness.  And part was that IBM simply did not, after several
consent decrees, have the same flexibility to create these linkages
that Microsoft does today.  So he was telling the truth by not telling
the whole truth.  ;-)

The bottom line is that to make arguments about barriers to entry
_other_ than legal ones, you need to carefully consider various
"network" externalities, both within and across markets.


Footnotes: 
[1]  Actually, what's probably true is that Microsoft prices below
Netscape to dominate the browser market, which leaves the
dual-exploder Windows interface with no competition.  This allows
Microsoft to use Windows as a springboard for the apps, and now
embedded and distributed value-added systems.  Machiavelli would be
impressed.  Don't take this too seriously as _the_ explanation, but
these effects are surely part of Microsoft's strategy.

-- 
Institute of Policy and Planning Sciences     http://turnbull.sk.tsukuba.ac.jp
University of Tsukuba                    Tennodai 1-1-1 Tsukuba 305-8573 JAPAN
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