Talk:Lecture 6
Contents
Lecture 6 Discussion
IBM and CPU Monopoly
Tolba During the course of discussion the reason for IBM protectiveness over the peripherals market was attributed to trying to maintain the CPU Monopoly. I believe there could be another explanation that also feeds back into a different topic of the lecture which is “Dual Monopoly”. Prof. Steve’s argument goes like this: “IBM was afraid that someone could master one peripheral and move on to producing other peripherals and eventually to the CPU manufacturing business”. I think the argument could be simpler; “IBM was afraid that someone mastering one peripheral could control the market of the rest of the peripherals and then the CPU/Peripheral market could become a dual monopoly”. Assuming that peripherals were then (as they are now) crucial to the usability of the bare CPU, then every IBM CPU sale is to be tightly coupled with the sale of some peripherals. The end result could be IBM losing its freedom in setting the CPU price since there are other considerations like the peripherals pricing policy. IBM could see itself losing a big chunk of the profit pie since consumers are now willing to pay less for CPUs given the outrageous price tags on peripherals.
Ted Zuvich: I wonder if this would fit the Left Shoe/Right Shoe dual monopoly model? If it did, then you would get the "race to the bottom" described in the lecture. The peripheral manufacturer would raise its price, which would cut IBM's profits. In response, IBM would have to raise its price. Repeat ad nauseum. IBM doesn't so much lose freedom to set its own price under the dual monopoly model as it just loses, period. I don't think this is what would happen (because I think another peripheral manufacturer would instantly step in), so I don't think the CPU/Peripheral scenario fits the dual monopoly model.
SMM: It's an interesting idea and yes, the left shoe/right shoe problem is exactly how I would phrase this theory. In this case, I would say that there probably wasn't any way to corner the peripherals market because the barriers to entry were small -- otherwise, all sorts of little competitors wouldn't have come in to compete with IBM. However, what actually happened in this case does not mean that the other scenario couldn't happen somewhere else.
A couple questions for Prof. Maurer or others
1. Professor Maurer mentioned (and rightfully so) that the operating system without APIs is almost worthless. In order to make the OS very useful, APIs need to be exposed for applications to utilize them. Can Prof. Maurer/anyone explain in more detail the judge’s decision that all APIs need to be exposed to non-Microsoft developers. What APIs are they talking about? Just some undocumented Windows APIs? Or are there some APIs that are for technical reasons not available to applications outside of the OS?
SMM: I assume you mean the American case. Judge Kollar-Kotelly ruled that Microsoft had to reveal the APIs that Microsoft its own middleware products depended on, but not every APIs that existed or might be used in the future. Full details at STATE OF NEW YORK, et al., Plaintiffs v. MICROSOFT CORPORATION,224 F. Supp. 2d 76 (D.DC 2002).
2. Regarding the tying IE with Windows claim. Prof. Maurer made a great point that what possible reason would Microsoft have to spend a lot of money and compete for the browser market if it’s just going to have to lose the money on this anyway. Why not let all the poor saps compete and drive the marginal cost down to zero and maintain your monopoly on the OS. That point makes so much sense, and is just so obviously right when you think about it. However, I can think of a couple of reasons why Microsoft would want to compete: how good are they? One, is simply hubris, Microsoft likes to win at everything, and although that is not a rational explanation, it is something to consider. Another is that barriers to entry are not insignificant -- it takes time and money to build a browser. Just because people aren’t making money now, doesn’t mean that it’s not an investment in the future where they could make money. And waiting until that happens may be too late to play catch up and get a piece of the market share. For example, just a couple of years ago you’d ask why you’d want to compete for Internet search, it made no money – and how much did Google bring in ads last year?
SMM: Technically, the court said that there was no proof that it was possible to monopolize the browser market, not that monopolization was impossible. So yes, such a calculation might have been possible. In the early days of the Web, it seems like everybody was writing browsers in their garage but presumably nobody would use those now. Today, a commercial browsers probably takes more time and money. I wouldn't bet that it's much of a barrier by the standards of antitrust law, but without proof in open court we really don't know.
I think the answer to the second question relates to your first question. Microsoft thinks that application development might move from the OS/desktop to the Browser so it won't matter what OS you run. So making sure Windows isn't marginalized they want to have the best browser available on Windows so that applications still run best on Windows. The feeling at Microsoft I think is the OS if frozen will be duplicated by competitors and open source in 5 years. So the only way to keep a price on Windows that people are willing to pay (over just using open source) is to keep adding more stuff to it that keeps it always ahead of competitors and open source in features - where one of the important features is reliability and security.
Comment on Cartels
Mr. Maurer had a great lecture tonight and I'd like to comment on one thing. When talking about Cartels, it was said that "courts bought the argument until 1911" that Cartels were needed. It was said in such a manner that implied that it was never needed. However, when you look at the predatory pricing of the railroads, it was clear that some collusion would be beneficial. In fact, that is why the industry (not just the populists!) called for the creation of the Interstate Commerce Commission in 1887. The government was called in to, basically, help make a cartel.
SMM: Yes, when it shades into natural monopoly that's all you can do. I will say, though, that just about every competitor thinks s/he's a victim of "cutthroat competition." Kind of like how advertisers think it's immoral to do direct comparisons on TV . . .
The Moralist and the Economist
It's interesting that in the slide deck last night, the only overtly moralistic argument I can recall was Sherman's quote about kings of countries and kings of production. Everything else was economic analysis, as expected. The politicians who decide these issues (while on camera at least) live in the moralistic world, however. Either "we have to bring the big boys down" or "the government should stay the hell out of our lives". I'm wondering how many of them have the depth to live in the more economic world even if they wanted to? Do they deeply read these policy papers that are prepared for them and act based on that advice, or do they skim the papers and look for talking points for the side they've already decided to support? Obviously every politician is different, but I'm wondering how this splits up?
At the same time - do we want our leaders only being policy wonks? Maybe I'm a biased American, but my sense is they're trying that in the EU to not so great effect. Somehow I think if Steve traveled time traveled to 1890 with his power point and showed all this dead-weight loss stuff to Senator Sherman, that wouldn't move the gentelman from Ohio all that much. But the emotional appeal of justice and the strong exploiting the weak is something that's going to get a piece of legislation through. So maybe we need moralizing legislators and cold-blooded judges to sort out the mess they cause?
SMM: Yes, I think that's often true. On the other hand, I sometimes wonder if our ancestors didn't understand the economics of monopoly better than we do. Today's cartels, when they exist, are huge and distant. Back when they were small and local it was easier to see the connections. The local bakers get together on Thursday night and you find yourself eating less on Friday morning. The people who wrote the Statute of Monopolies all those years ago were awash in guilds, and hated them, and knew exactly why they hated monopoly.
USER: S.Schimler reply to JSpaith
Politicians have to appease their constitutents, who have ideologies. For financial advice, that is why we have a Federal Reserve Board, which tries to give us non-partisan advice. I hope that that cuts through lots of the poltiical garbage. But when you look at a recommendation to deal with social security, the politicians just won't touch it. How much evidence the politicans are willing to take into consideration changes on a person to person basis.
It is interesting that you talk about going back in time to talk to Senator Sherman. You should take a look at Thomas McGraw's pultizer prize winning book, "Prophets of Regulation" (1984), where the Harvard biz school professor looks at mistakes that regulators made in the past. For example, he critizes regulators like Louis Brandeis for not understanding economics. Since a lot of the economic evidence wasn't really known at the time, I find it hard to blame them. Today's politicians, however, can take all of the blame.
posting here very late, but still...i think that Jspaith made a very valid point. Politicians are very rarely moved to propose or support new measures because they make economic sense. Those who do, of course, barely last a term although their actions are praised no end, although only in hindsight and maybe only after a century or a few decades. "Moral politicians" ( isn't that an oxymoron in some sense? ;-) ) very rarely have the political will or support to actually dictate the setting of sensible economic policy. Th only ones who do are national heroes whose every word is treated like manna from Heaven , irrespective of the relative merit. [Eg: In countries that won independence from Britain and France, the leaders of the freedom movements usually assumed power and , heroes that they were, generally had carts blanche over economic affairs at least for the firt two decades after independence. And they most certainly DID make tons of mistakes]. So ,i guess we just have to be happy with the mediocrity of policy decisions which are rarely rooted in sound economic policy the world over and be glad instead that no has the power to dictate policy , sensible or otherwise [ sooner rather than later, policy decisions from One powerful individual tend to be more in the 'otherwise' category], for entire nations.
Anti-Trust
(User: John) I get a kick out of all this economics discussion about anti-trust law and regulation. I sometimes wonder if much of history has been forgotten. The so-called "free market economy" always tends toward monopoly. Since monopoly crushes competition, after a time we either live with an ultimate business monopoly (a.k.a stagnant economic dictatorship)or we regulate the free market so it continues to operate on a competitive basis. The brilliant scholars of yesteryear, like John Keynes, preached precisely this theory. The theories of Milton Friedman and the latest conservative MBAs seem to be more popular these days. It is always easy to blame the elected representatives of the day for perceived market shortcomings. It is easier to blame player strategy after the game is over. There will never be a completely efficient free market economy. If the government is to referee the economic game, we should expect that competitive fairness of the system be a higher value than purely theoretical business efficiency.
