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Jewish World Review June 14, 2000/ 11 Sivan, 5760

Lawrence Kudlow

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The judicial hacker

http://www.jewishworldreview.com -- IN JUDGE THOMAS PENFIELD JACKSON'S latest legal assault on Microsoft, he still refuses to acknowledge that the world's leading software company has for many years been cutting product prices to consumers while at the same time increasing the production of its application and operating systems used by businesses and individuals.

As such, Microsoft fails to meet the traditional standards of a coercive monopoly, i.e., one that price-gouges consumers by deliberately curtailing production. If there was a reason to justify trust-busting a hundred years ago under the Sherman anti-trust act, this was it. But today's Microsoft case is a completely different story.

Want to identify a true monopoly? Try OPEC. Until recently, the oil cartel deliberately, with great public fanfare, substantially hiked prices by slashing production. Consumers worldwide suffered a global shock at the gas pump. Disposable income growth slowed. Stock markets declined, as interest rates rose. Central banks acted to deflate liquidity in order to prevent a permanent inflation rise.

Microsoft decisions to reduce prices, however, have benefited consumers and economic growth everywhere. This is the exact opposite of OPEC. The U.S. is busting the wrong company.

Penfield Jackson and Justice Department arguments about so-called predatory pricing decisions by Microsoft featured plenty of could-haves, might-haves, and maybe-wills for the future. But clear evidence on anti-consumer price hikes is non-existent.

Here are some facts. Street prices for the complete Windows OS package have dropped nearly 50% since 1990, or 8.4% yearly deflation. And remember, the number of functions and features included in Windows has increased enormously. Though nearly impossible to calculate (because of the huge amount of code necessary to enhance the products), the unit cost declines each year would be far greater than the average price drops.

Stayskal

Breaking out major applications systems in the software package shows the same pattern of price deflation. Between 1991 and 1998 Microsoft Word fell to $146 on the street from $274. This is a 47% decline, or nearly 8½% per year. Similarly, Microsoft Excel dropped 41% (to $156 from $266), or 7% annually. Office also dropped 50% in price, over 8% per year.

Also benefiting consumers, Microsoft price drops forced price declines throughout the industry. This is especially the case for Microsoft Word, which drove down the price of Corel's Word Perfect, and Microsoft Excel, which forced Lotus 1-2-3 to cut prices. That's what tough competition does.

Some call this predatory pricing. But this version of predatory pricing -- completely unlike the Standard Oil case nearly a hundred years ago -- means lower costs to consumers, not higher. In this way consumers have come to love predatory pricing. It simply means greater consumer buying power. This is why 65% to 70% of consumers surveyed by various polling firms show that people support Microsoft and oppose the Justice Department.

What's more, Microsoft products are easy to use, reliable, flexible, adaptable and available to everybody. Functionality continues to expand with new features. Bill Gates and Co. have enabled computer dinosaurs like myself to harness the information technology revolution. No small feat.

As a result, the entire U.S. economy has benefited. Just as my favorite dead economist Joseph Schumpeter argued in his opus "Business Cycles,"periods of rapid technological advance are characterized by faster than normal growth, higher than typical productivity, and lower than usual inflation.

In fact, Microsoft's business strategy of producing high volume at low prices typifies the performance of the entire economy. This is not a coincidence. Take away Microsoft's value-added entrepreneurial energy by breaking up the company and heavily regulating its conduct, and the whole economy is likely to suffer.

By the middle of next week Microsoft will publish a compelling documentation of the price story and everything else involved in the government anti-trust lawsuit. This "motion to stay" will tear the government's case to pieces. I can't wait.


JWR contributor Lawrence Kudlow is chief economist for CNBC. He is the author of American Abundance: The New Economic & Moral Prosperity. Send your comments about his column by clicking here.

Up

05/16/00: Front-View Windshield
05/09/00: Don't Overreact
05/05/00: Give it Back
05/01/00: Wealth and Capital
04/18/00: Growth, Freedom and the New Investor Class--Stay the course
04/13/00: Correct Value
03/28/00: Governments roil the Markets
03/28/00: Fed should keep its powder dry
03/14/00: Reduce Debt, Derail Economy
02/17/00: Unsettled
02/10/00: Bush's Footprints
01/25/00: To preserve its standing as the world's number one economic power
01/06/00: It's not the '70s
12/28/99: They missed it
12/23/99: Bonditos
12/20/99: Dracula's Curve
12/16/99: When Alan Greenspan sneezes, Wall Street economists catch cold
12/10/99: Y2K-Related Cash
11/23/99: Y2K Money: Inflationary or Not?
11/16/99: Investor Retaliation
11/05/99: Rosy Lives
10/29/99: Drain Reserves
10/22/99: Supply-Side Is Mainstream
10/14/99: Y2K will likely bring more prosperity
10/07/99: Clinton's tax-cut veto
10/01/99: What's really bugging the stock market?
09/23/99: Growth Trade
09/09/99: Bad Dollar Logic
09/09/99: Buttered bread
08/31/99: Bull Market Alive and Well
08/26/99: Let Prices Rule
08/19/99: Blame OPEC, Not Growth


©1999, Lawrence Kudlow