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The antitrust case against IBM lasted for 13 years and the firm did not break up. But IBM committed to independent prices for its hardware and software products, formerly marketed as an indivisible package, as part of its strategies to avoid looking to be a monopoly. This offered the founders Bill Gates and Paul Allen an chance to create a new software-only business called Microsoft. The emergence of technological advances that have followed can easily trace the IBM settlement to its beginnings.

On JANUARY 8, 1982, Assistant Attorney General William Baxter dropped the antitrust case of the Justice Department against the International Business Machines Company, calling it "without substance." The complaint brought by the Department of Justice in 1969 charged that, in breach of section 2 of the Sherman Act, IBM monopolised the general-purpose mainframe computer industry. The case generated over 104,000 pages of transcript in its thirteen years, and absorbed Department of Justice funds at a cost of $1 to $2 million a year. Apart from the substantial litigation fees faced by the sides, this significance and value of an antitrust suit may bring other social costs and benefits. Deterrence is one of the potential bonuses. The imminent threat of antitrust punishment may deter companies from charging monopoly rates (among other things). The proof, however, suggests that the IBM case has the opposite effect. While some potentially anti-competitive activities (bundling, for example) may have been stopped by the lawsuit, they have had the unintended effect of rising inflation.

How could this even happen? A company is contemplating how market costs impact potential, as well as existing, earnings while deciding its pricing policy. A business that demands a higher price (quality-adjusted) than its competitors usually loses the competition Share as other businesses are now expanding in the business and as new firms are joining. The company's reduction of clients would be incremental in a market like that of computers. Established consumers would refuse to move suppliers because of the considerable costs of programme migration and retraining employees. It may be difficult for new buyers to differentiate between the prices and attributes of various computer systems. And it would take time for rival companies to prepare and develop new plants and expand promotional activities. However, it will eventually lose clients. Present prices thus impact potential profitability through accelerated market share impacts. The optimum pricing policy of a company, leaving aside antitrust issues, depends on factors such as its present and anticipated future market share, its present and anticipated future costs compared to those of its competitors, and the projected growth of the industry. It will sometimes be in the best interest of the company to set prices in order to gain market share. But the optimal price strategy in a fast-growing industry could be to accept market share declines, since the internal costs of growing along with the market are too high. The antitrust action challenge is likely to influence the price policy of the target firm by altering the company's view of how high its potential market share will be permitted to be. By challenging the company's right to attain a prospective market share, an imminent anti-monopoly suit limits the company's opportunity for future revenues. By raising the price into the monopoly level, the suit thereby allows the corporation to take short-run profits. More precisely, if the corporation sees a fair risk of losing the litigation, the filing of an antitrust suit aimed at decreasing the market share of a company would force the company to raise prices. And, on the other hand, improving the litigation prospects of the firm will lead it to adjust prices downwards, in which case market shares will rise or fall less rapidly than before, at least.

Reaction from IBM:

The case against IBM plainly challenged the market share of the company, trying not only to place financial fines on IBM, but also to split the company into many smaller businesses. (In the case of Standard Oil in 1911, the precedent for such a separation was developed and reaffirmed in the case of Alcoa in 1945.) IBM took this challenge seriously and with good reason: it had a history of losing cases of antitrust. It was forced to sell as well as rent computers in the famous tie-in suit of 1936; it lost a second suit 20 years later; and it has been forced to surrender its Service Bureau to Control Data Corporation in settling a private antitrust suit brought by the latter group in 1968. IBM has little motivation than before to retain its market share by fiercely dynamic pricing, in the face of the prospect of reductions in potential market share. Growing profits much more by rising rates and causing market share to steadily slip to the amount desired by antitrust regulators. A broad market share has been considered a key sign of monopolisation since the Alcoa example. A reduction in market share would therefore undermine the case for the break-up of IBM, and further proof of rivalry in the computing market would be provided by the related growth by competitors and the introduction of new businesses. Delays of as long as twenty to thirty years were predicted when the 1969 action against IBM began. This undermined the reward effect in one way, as it allowed a relatively distant possibility of an eventual split. Yet it added yet another opportunity to sacrifice market share in a particular direction. The more the lawsuit went on the more expensive it would be for IBM, both directly in the cash spent and implicitly in its behavioural restrictions. Losing market share would increase the likelihood of getting the ordeal to a fast conclusion. Evidence suggests IBM 's reaction to these rewards was reasonable. In 1967, the Department of Justice launched its investigation of IBM and filed the suit in 1969. Two analyses of mainframe machine pricing activity, one by Ratchford and Ford for the year 1967 and 1971 and the other by Michaels for 1971, showed that IBM generally paid a price premium compared to other mainframe vendors in those years. The results of IBM in the antitrust suit had dramatically improved by 1980.

Most of the private antitrust cases had been resolved, none of the monopolisation charges had been formed and no penalties against IBM had been measured. And our study of mainframe prices for 1981-83 showed that by that time IBM had reversed direction and discounted the (quality-adjusted) price by an average of 20 percent compared with other mainframe manufacturers. We also looked at evidence of real shifts in market shares in the overall electronic data processing (EDP) sector, and specifically submarkets. All these interventions have displayed a more violent campaign trend after 1979. IBM 's share of the U.S. Takes industry-wide estimates first, The EDP sales of the 100 biggest EDP companies dropped by just 2 percentage points between 1961 and 1968, from 52% to 50%; but, between 1968 and 1972 it dropped by 13 percentage points, from 50% to 37%. IBM's market share therefore started to decline significantly after IBM was prosecuted by the Justice Department in 1967. It progressively declined over the 1970s, hitting 31 percent by 1979. Then it rose to around 36 percent in the four years 1980-83 (based on statistics from the industry publication, Datamation). It should be remembered that this market share reduction was not possibly the result of internal restrictions stopping IBM from expanding demand. IBM 's rise in size (real sales) slowed dramatically during the period 1968-72, when the company's market share was steadily shrinking, but it then gained momentum during the period 1979-82, when market share started to increase. The evidence is therefore consistent with the theory that in an effort to minimise market share, IBM deliberately decreased its rate of growth in the earlier era. We see a parallel tale with respect to the separate submarkets of the EDP industry. During the 1970s IBM's market share for mainframe computers decreased as new rivals appeared manufacturing "plug-compatible" machines. IBM 's share of mainframe computer revenue eventually grew from 69.4% in 1981 to 73.8%in 1983. The company's turnaround has become even more rapid in the fast-growing mini- and micro-computer industries. Criticized for its late penetration into these markets during the 1970s, it ended up joining minicomputers in 1975 and microcomputers in 1981. In both areas, IBM soon became a leading company. In summary, the evidence suggests that IBM had started demanding a price premium by the time the antitrust suit was filed, and that its portion of the electronic data processing market started a significant decline from that point on. Over the Seventies the downturn persisted. The giant firm has discounted its costs and increased its portion of both the EDP sector as a whole and the numerous submarkets since 1980, when there were early signs that the suit would be decided on conditions favourable to IBM. IBM's recent market shift in price policy and its rapid launch of innovative technologies and penetration into emerging industries (office services , telecommunications, automation, others) have also been noticed by other industry analysts. A simple picture emerges: With the filing of the antitrust suit IBM increased its prices and eventually lowered its prices as its chances improved in the lawsuit.