ch09 - The Economics of e-Commerce and the Internet Edward...

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The Economics of e-Commerce and the Internet Edward J. Deak, Ph.D. Ch. 9 – Answers for Discussion and Review Questions 1. In what ways did the Internet and Web pose a threat to the market power and profits of Microsoft? How did Microsoft react strategically to this threat of creative destruction? The source of Microsoft’s market power and financial strength is the Windows operating system that controls the inner workings of most desktop and laptop computers. Net appliances, using a browser, would allow users to connect to the Internet and conduct business without the use of Windows. This bypass of Windows threatened the future of Microsoft, so the firm introduced its own browser, Internet Explorer (IE), to compete with Netscape Navigator (NN). Microsoft reasoned that if it could control the browser market it could control access to the Internet. To ensure the dominance of IE, the product was bundled along with the Windows product, effectively making the browser available for free. This bundling and pricing strategy raised the market share of IE and ended the dominant role of Navigator in the browser market. 2. Describe the nature of the economic tension that exists between defending the use of private property to encourage risk taking and innovation, while ensuring that the use of the property does not inhibit competition or the ability to compete. How is this tension demonstrated with the bundling aspect of the Microsoft antitrust case? Private property allows the holder to potentially reap the rewards of entrepreneurial risk taking and innovation. However, society can be worse off if the property is used in such a way as to inhibit or eliminate competitors or the ability to compete. Microsoft has been richly rewarded for putting forth the DOS and Windows operating system that has standardized computer interconnections. This has been of great benefit to society. But the use of the operating standard to bundle Internet Explorer and crush Netscape Navigator has potentially lessened competitive benefits in the browser market. 3. Cite evidence in support of both sides of the first-mover advantage strategy, that it is real and sustaining, as opposed to the view that it is simply part of the e- commerce folklore. Being first to the market with a new product or process is thought to covey substantial benefits to the first mover. They are the first to launch and learn from the new product, with the ability to improve upon it quickly. Second, they can get-big-fast and build up economies of scale that render the first mover as the low Deak e-Commerce Answers Ch.9, Page 1
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cost firm. Third they can establish their brand name in the mind of the consumer and make their brand synonymous with the identity of the product. Amazon.com is thought of a being one example of a very prominent and effective first mover.
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