Re: [PEN-L] query: economist as hired gun

[Eugene Coyle]

My memory of Schmalensee in the Microsoft case is the moment when the judge seemed to reject Schamensee's idea of a monopolist's price for an operating system. Schmalensee thought that a monopolist could charge from $900 to $2,000 per copy for Windows instead of the $50 it was actually charging computer manufacturers.  I just found a clip that recounts that part of Schmalensee's cross-examination. Which is not to disagree with Peter Hollings memory of Schamensee's role. And all that leaves the question of what Schmalensee was paid. Gene Coyle DESKTOP PLATFORMS TOOLKIT Microsoft on Trial: Judge quizzes MS witness over testimony Tags: Applications, Apps, Internet Explorer, Netscape Will Rodger ZDNet UK Published: 22 Jan 1999 11:25 GMT       The dean of the Massachusetts Institute of Technology's business school Thursday said Microsoft would charge as much as $2,000 (£1,220) for each copy of the Windows 98 PC operating system if it were the monopoly the government alleges it to be. Richard Schmalensee made the assertion as part of his seventh day of testimony for the defence in the ongoing antitrust trial against the world's most valuable company. With no more than a marker and a pad of paper, Schmalensee sketched for Judge Thomas Penfield Jackson a series of elementary economic relationships familiar to most freshman economic students. His presentation suggested that for every percentage increase in PC prices, computer makers could expect their sales to fall by two percent. Since Microsoft charges computer makers only $50 per copy for Windows, Schmalensee drew from that a simple conclusion: The company must face real competition. Otherwise, he said, it could maximise profits by raising prices to at least $900 per copy, if not $2,000, since there would be no one to stop it from doing so. The assertion drew a question from the judge. "Why must you always assume that the monopolist maximises the price?" Jackson asked. "It seems to me you could think of reasons a monopolist would not maximise the price in quest of a larger glory at some later time." Schmalensee responded: "What you suggest, your honour, I think properly, is that most firms think about the effect of today's prices on tomorrow." Microsoft, he explained, indeed thinks about tomorrow. It thinks, he said, about tomorrow's competitors. Jackson probed further, suggesting that cigarette companies, for instance, could keep prices lower than committed smokers would pay in order to entice new generations to take up the habit. "There's got to be a relationship between today's prices and the future," Schmalensee replied. In the case of computers, he said: "I don't think there's any evidence of addiction." Schmalensee attacked testimony by previous government witnesses who claimed Microsoft's 95 percent share of PC operating system sales means other operating systems cannot attract enough software developers to compete effectively. Such "barriers to entry," government officials said, are an unmistakable sign that Microsoft wields monopoly power over its rivals. But if that were true, Schmalensee said, Microsoft would have to enjoy some unique strength that would place would-be competitors at a permanent disadvantage. There is no such barrier, he said; in the software industry, intellectual horsepower and minimal capital can produce successful products. In direct testimony submitted earlier in the trial, Schmalensee credited Microsoft's close attention to the needs of software developers with making it the most popular platform for software development. "Microsoft employs more than 2,000 people responsible for [software developer] relations," he wrote. "Annually, the company spends about $630 million supporting software development through research, events, marketing assistance ... and more." Thursday morning, he added: "I have seen no evidence that operating systems that are attractive have had difficulty attracting ISVs [software developers]. Linux has attracted not only numerous ISVs, but large ISVs." Government attorneys shrugged off Schmalensee's testimony at a noontime break, saying it defied "common sense." "I think the actual price of Windows is not especially important to this case," federal attorney David Boies said. "As Dean Schmalensee has already admitted, you can't infer the presence of absence of monopoly power from price." Instead, he said, the court needs to focus on Microsoft's after-tax profits, which remain the highest as a percentage of sales in the Fortune 500. He also criticized Schmalensee for earlier claims that the threat of potential competitors means Microsoft cannot exert undue pressure on competitors. Even Dean Schmalensee admits there are no viable alternatives today. "There could be in the future, but there are none today," he said. "I don't think anyone thinks the price of Windows should be $900 to $2,000," Boies added. "It is, without meaning any disrespect, a silly conclusion. Take me to the DoJ/Microsoft page. On Aug 30, 2007, at 12:52 PM, Peter Hollings wrote: Didn't Richard Schmalensee of MIT testify for Microsoft to the effect that the positive "network effects" of many users sharing the same software made it in the public interest not to break up the company? As I recall, this came in the penalty phase of the trial AFTER MS had already been adjudged guilty of violating the anti trust law, and despite some 30,000 citizen letters pleading that the company be broken up in service of the public interest. (There were some other egregious aspects of the affair -- including events that led reasonable people to believe that part of the deal, made shortly after 911, was to allow the DOJ a back door into Windows computers.) Don't know of any compensation that he received. Peter Hollings PS: I'm an alum; but that made me all the more pissed off when it happened. -----Original Message----- From: PEN-L list [mailto:PEN-L@SUS.CSUCHICO.EDU] On Behalf Of Jim Devine Sent: Thursday, August 30, 2007 12:00 PM To: PEN-L@SUS.CSUCHICO.EDU Subject: [PEN-L] query: economist as hired gun what's a good example of an economist -- preferably a well-known one -- receiving a big fee for doing special pleading for some big corporation or similar organization? --  Jim Devine / "In the years since the phrase became a cliché, I have received any number of compliments for my supposed ability to 'think outside the box.' Actually, it has been a struggle for me to perceive just what these 'boxes' were — why they were there, why other people regarded them as important, where their borderlines might be, how to live safely within and without them." -- Tim Page (THE NEW YORKER, August 20, 2007).