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![handle is hein.taxfoundation/iretcgadv0104 and id is 1 raw text is: IRET
June 2, 2000 No. 107
MICROSOFT, THE LAW, AND
ECONOMICS
In Man of La Mancha, Sancho Panza muses
on the nature of unequal contests, observing that,
Whether the stone hits the pitcher or the pitcher
hits the stone, it's going to be
baaad for the pitcher. When
the law and economics collide, Marginal cost
it is usually economics that a competiv,
gets shattered. That's literally marginal co
true in the Microsoft case, as a
the Justice Department and aer copy
Judge Jackson try to break up Z, ... it wa
the company. competitor or
to drive the pr
The charge later... [It
consumers.
The initial complaint
lodged against Microsoft was
that it injured Netscape by offering the Microsoft
Explorer web browser for free as part of the
Microsoft Windows operating system. This forced
Netscape to offer its browser for free to compete.
Until then, Netscape had dominated the browser
market and had been able to charge some computer
users for its browser.
The economics
It is a basic law of microeconomics (introduc-
tory undergraduate price theory, economics 102)
that, in a competitive market, a good sells for the
cost of producing one additional unit (its marginal
cost). Why? Because if farmers in Kansas can
produce additional bushels of wheat for $2 each,
then farmers in Nebraska can't charge $3 a bushel,
or Kansas will steal the business. A monopolist can
charge more than the marginal cost, but only
because some factor is blocking competitors from
entering the market.
Marginal cost pricing competition.
Marginal cost pricing is a sign of a competitive
market. This is true whether there are many
suppliers of a product, or a single provider
constrained in his pricing behavior by the threat that
competitors will enter the market at any hint of a
price hike. The consumer is happy either way.
How much is that browser in the window? The
marginal cost of
Pricing is a sign of
market... Since the
st of producing
of a browser is
inevitable that some
other would emerge
ice to zero sooner or
was] a boon to
making one more copy of a
browser available to one more
computer owner is virtually
zero. A browser can be part
of the software installed on the
computer at the factory, or
available on a CD-ROM
shipped with the machine, or it
can be downloaded by the
computer user from the
Internet. Either way, the
marginal cost is less than a
penny's worth of electricity.
(If you buy a browser in a
software store, you pay for the
box, shipping, and the store's and manufacturer's
overhead. What's inside the box costs about ten
cents.)
Since the marginal cost of producing another
copy of a browser is zero, and there are no barriers
to entry in the browser supply business, it was
inevitable that some competitor or other would
emerge to drive the price to zero sooner or later.
That it was Microsoft sooner rather than someone
else later was a function of the efficiency of the
software installation process on new machines, and,
being sooner, a boon to consumers.
Institute for
Research on the
Economics of
Taxation
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