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1. In United States v. Microsoft Corp., Microsoft expert witness Richard Schmalensee testified: The software industry is intensely competitive. Microsoft does not have monopoly power over operating systems, nor does it act like a company with monopoly power. Microsoft's pricing for Windows is far, far lower than what a rational, profit- maximizing company with a monopoly over operating systems would charge. Computer manufacturers pay Microsoft a royalty for their license to Windows that is considerably less than 5 percent of the price of a typical new PC. Application of a standard economic formula for pricing by a monopolist shows that Microsoft charges less than one-sixteenth the price for Windows that a monopolist would charge.73 a. Professor Schmalensee is referring to the static monopoly price as defined in figure 3.2 and equation 8.1. How might you come up with an estimate of the static monopoly price? b. Assuming it was a monopolist, why might Microsoft price below the static monopoly price? c. Do you agree or disagree with Professor Schmalensee? Substantiate your position. $ PM B DWL D P AC = MC Demand MR 0 Qm Q Q Figure 3.2 Monopoly versus Competition Assume that the entrant's optimal pricing strategy is to match the price of the incumbent firm: TE(M, M)>TE(M, L) and Te(L, L) >TE(L, M). In addition, assume that entry is profitable when the incumbent firm does not set a low price: TE(M, M)>k>TE(L, L). (8.1) 1. In United States v. Microsoft Corp., Microsoft expert witness Richard Schmalensee testified: The software industry is intensely competitive. Microsoft does not have monopoly power over operating systems, nor does it act like a company with monopoly power. Microsoft's pricing for Windows is far, far lower than what a rational, profit- maximizing company with a monopoly over operating systems would charge. Computer manufacturers pay Microsoft a royalty for their license to Windows that is considerably less than 5 percent of the price of a typical new PC. Application of a standard economic formula for pricing by a monopolist shows that Microsoft charges less than one-sixteenth the price for Windows that a monopolist would charge.73 a. Professor Schmalensee is referring to the static monopoly price as defined in figure 3.2 and equation 8.1. How might you come up with an estimate of the static monopoly price? b. Assuming it was a monopolist, why might Microsoft price below the static monopoly price? c. Do you agree or disagree with Professor Schmalensee? Substantiate your position. $ PM B DWL D P AC = MC Demand MR 0 Qm Q Q Figure 3.2 Monopoly versus Competition Assume that the entrant's optimal pricing strategy is to match the price of the incumbent firm: TE(M, M)>TE(M, L) and Te(L, L) >TE(L, M). In addition, assume that entry is profitable when the incumbent firm does not set a low price: TE(M, M)>k>TE(L, L). (8.1)