U.S. District Judge Thomas Penfield Jackson challenged key elements of Microsoft's defense, probing economist Richard Schmalensee's assertions that the company could neither charge higher prices for its Windows operating system nor prevent Netscape Communications from distributing its rival Internet browser.
"Why must you always assume that a monopolist maximizes the price?" Jackson asked. "You could think of reasons why a monopolist would not maximize the price in the quest of larger glory at a later time."
"Most firms think about the consequences of today's prices" on future demand, said Schmalensee, a Massachusetts Institute of Technology economist and dean who is Microsoft's lead defense witness.
Schmalensee said the monopolization case brought by the U.S. Justice Department and 19 states "has to do with Microsoft's ability to affect distribution" of Netscape's Navigator browser, "not Microsoft's ability to price operating system software."
A key allegation in the case is that Microsoft, seeing Navigator as a threat to its Windows dominance, set out to choke off Netscape's distribution of the rival Web browser.
"The ability to affect distribution is no index of monopoly power?" Jackson asked. "Isn't that the issue of what is alleged here?"
Jackson also questioned Schmalensee's thesis that the judge, in his economic analysis, can disregard allegations the software giant threatened to withhold popular products from companies like Apple Computer if it didn't favor Microsoft's Internet Explorer Web browser over Navigator.
The alleged threats, Jackson pointedly remarked, "are of consequence if there is monopoly power."
He reminded Schmalensee that a monopolist may be barred from certain hardball tactics permitted for companies that don't control a market. "You're whole thesis is premised on the absence of monopoly power," the judge said.
"The world is full of empty threats. I am concerned with what was done," Schmalensee said.
The judge's first round of questions today came after Schmalensee stood at a courtroom easel and demonstrated what he called a standard textbook formula for calculating the monopoly price of a product.
To establish Microsoft violated antitrust laws, the government must show the company has a monopoly in computer operating systems. Windows runs more than 90 percent of the world's personal computers.
Schmalensee said that, were Microsoft a monopolist, it would be charging anywhere from $500 to $2,000 for a copy of Windows 98, a product that costs computer makers about $50 to install on their PCs.
"It is absolutely at odds with common sense that a monopolist would settle for $50," said Schmalensee, dean of MIT's Sloan School of Management.
Jackson wondered aloud whether the desire to expand sales might motivate a monopolist to keep prices lower than its market power might allow it to charge. "I am thinking of a cigarette company which is a monopoly," the judge said. There is a plausible "reason why a cigarette company would price at the low end, even though it is the only source," the judge said.
"Today's prices grow tomorrow's demand," Schmalensee said.
David Boies, the government's chief trial lawyer, said Jackson raised "a common-sense issue that there are a lot of reasons why a monopolist might not charge in the short run the very highest price . . . to extend the market."
"That common-sense principle is at odds with the analysis that Dean Schmalensee has propounded," Boies told reporters.
Jackson also challenged Schmalensee's argument that Netscape was not hurt by Microsoft's requirements that computer makers give its Web browser favored placement on the Windows desktop screen, the first one that users see when they turn on their computers. The government charges these requirements were designed to make it more difficult for Netscape to distribute Navigator.
Those restrictions didn't prevent PC makers from installing Navigator as well as Internet Explorer, Schmalensee said. "It's hard to see where the bottleneck is."
"Suppose I offer to distribute your toothpaste but it will only go on the bottom shelf and I will only put it out there three days a week?" Jackson said. "The fact is that your company's toothpaste is not being distributed except on very unfavorable terms."
Schmalensee said that restriction wouldn't hurt "if supermarkets were a relatively minor channel of distribution." Besides installation on PCs, Netscape had other ways to distribute Navigator, he said.
The economist said the government was trying to cast Microsoft as if it were a company that had a monopoly on supermarket construction and refused to pave parking lots unless the stores distribute the company's brand of canned corn.
"I'm not sure it helps here," Jackson said of that example. He noted there were allegations that Microsoft refused to "extend its operating system to potential competitors, potential distributors of applications of software except upon unfavorable terms."
"It has done exactly what you were doing with your parking lots," the judge said.
Microsoft shares fell 4.3125 to 158.3125 on a day when U.S. stocks declined for the first time in a week.
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