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McKenzie Cites Microsoft In Explaining E-World Economy

September 24, 2000
CONTACT: Bill Giduz

By Emily Drew '04, photos by Eron Earley-Thiele '04

"Even negative prices can be profit maximizing in the new electronic business world," said Richard McKenzie, speaking to Davidson College's Omicron Delta Epsilon economics honor society on Sept. 19. McKenzie was referring to Microsoft's sales strategy, which sometimes involves giving away or paying consumers to take their software products like Internet Explorer. McKenzie, author of Trust on Trial, spoke to the honor society gathering about how the Microsoft antitrust case continues to shape the rules of business competition. Because the Microsoft trial encompasses new electronic concepts of the business world, the outcome of the trial will shape antitrust policy for the next century.
Richard McKenzie

McKenzie argued that Microsoft cannot be considered a monopolist that fits the requirements of the Sherman Anti-Trust Act because the inflation-adjusted price of the Windows operating system has fallen by over 50 percent during the 1990s.

According to one estimate, Microsoft could sell Windows for as high as $1,800 per copy without a major decrease in sales. However, the company continues to charge no more for Windows than its competitors charge for their operating systems, thereby continually bringing in more customers. "Microsoft is Microsoft's biggest competitor mainly because Windows users can always elect to not upgrade their version of Windows," McKenzie argued. He implied that Microsoft would have to abuse its pricing power as a dominant producer in order to be considered a monopolist.

To avoid antitrust prosecution in the future, McKenzie suggests that Microsoft will likely raise its prices in order to reduce its market dominance. The breakup of Microsoft into two companies -- judicially ordered this past June -- would likely increase software prices, but McKenzie feels that a breakup is unlikely to be endorsed by the Supreme Court or appeals court. He reasons that the Supreme Court will likely remand the case to the appeals court because too many factual and procedural issues have been appealed by Microsoft.
McKenzie with his book on the Microsoft case, "Trust on Trial."

McKenzie first became interested in Microsoft's legal troubles three years ago while planning a course on "network economics" for MBA students at The University of California, Irvine, where he is a professor of economics in the Graduate School of Management. He is on sabbatical for the 2000-2001 academic year and is spending the months of September and October in Davidson, researching, speaking, and writing.

"This book has been the most rewarding project of my academic career," McKenzie said, alluding to the importance of the trial and to the innovative economic theories he encountered in his research. Fifteen students are members of the Davidson chapter of the Omicron Delta Epsilon honor society in Economics, which sponsored the lecture. ODE officers are president Gagan Khanna '01, president, and David Johnston '01, vice-president.
(l-r) Kelly Chaston, assistant professor of economics, speaks with McKenzie following his talk.

Davidson is a highly selective independent liberal arts college for 1,600 students. Since its establishment in 1837, the college has graduated 23 Rhodes Scholars and is consistently ranked among the top liberal arts colleges in the country by "U.S. News and World Report" magazine.

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