ECON 308 Lecture Notes - Fixed Cost

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Fisher- The IBM and Microsoft Case: What’s the Difference?
The IBM Case: Bundling Software and Services with Hardware
- Until 1968 IBM offered systems support and software with its computer systems
at no separately stated charge. The government alleged that this bundling forced
other hardware producers also to bundle, thus raising barriers to entry into the
supposedly monopolized computer systems market.
- This was quite untrue. There was a large independent software industry, making
it easy for hardware manufacturers to get the necessary software to produce a
- IBM’s bundling in the early days was a response to consumer demand, providing
a guarantee that computers would function and solve users’ problems
- Had consumers not wanted the bundle, IBM’s bundling would have made entry
easier- not harder.
Bundling Formerly Separate Hardware Components Together
- Until the early 1970s, most of the control circuitry for disk drives was located in a
separate box (the controller). Such boxes became obsolete when IBM introduced
2 control devices. These devices placed the control circuitry inside the central
- The government contended that these introductions were anticompetitive acts
designed to extend or preserve IBM’s power over the supposed market for disk
drives attachable to IBM systems and to eliminate competition in control circuitry
- IBM also introduced new memory devices, far smaller than the old. It then offered
its new central processors with a substantial amount of memory included (more
could be bought separately)
- Government claimed that this was an attempt to stifle competition in the
supposed market for memory used with IBM systems
- Each of these acts involved obvious innovation. The new devices were faster and
- If the provision of technological improvement were dispositive, however, then
anticompetitive bundling, no matter how large its effects, could be justified as
being accompanied by consumer benefits from innovation, no matter how small
- The disk-control devices didn’t change any connections between existing CPU’s
and existing disk drives. Second, anyone who wished to attach the new CPU’s in
the old way still could. Third, competing manufacturers of disk drives could and
soon did attach their products to the new control devices. Memory manufacturers
still had a sizeable market in additional memory
- IBM was and is engaged in competition with many other firms both in boxes and
in complete systems. Had consumers not found the bundled offering of the new
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