Economist for Microsoft: Penalties Will Hurt Consumers

Tough antitrust penalties sought by nine states against Microsoft Corp. (MSFT) would hurt consumers and encourage other companies to use federal antitrust law as a substitute for their own research and development, an economist said Wednesday.

Testifying as an expert witness for Microsoft, University of Virginia professor Kenneth G. Elzinga said the remedies proposed by the states would raise consumer prices and stifle innovation by Microsoft and other high technology companies.

If Microsoft is required to disclose technical information about its Windows operating system, as the states propose, Elzinga said it would result in "a dampening of incentive" for companies to do their own research and development.

"Forcing any firm to share its intellectual property with rivals reduces incentives to innovate in the future," he said.

The nine states refused to go along with a settlement the Justice Department reached with Microsoft last year. In addition to the disclosure of product technical information, the states want the company to release a version of its Windows operating system that will permit computer manufacturers to replace Microsoft features with competing products.

Elzinga has testified as an expert witness for Microsoft in two previous cases, and Steven Kuney, a lawyer for the states, questioned Elzinga extensively about his connection to Microsoft.

Elzinga acknowledged that Microsoft had funded some of his early research into the software industry and that he never has concluded that the company "has monopoly power of antitrust concern."

Asked by Kuney if he though consumers were hurt by the anticompetitive behavior in which an appeals court found Microsoft had engaged, Elzinga said he was not asked to make such an assessment. Instead, he said, he was asked to compare the states' proposed remedy with the negotiated settlement "through the lens of consumer welfare."

Elzinga said many of the penalties proposed by the states are unrelated to the findings of antitrust violations and appear designed more to protect Microsoft's competitors than consumers.

Elzinga is one of Microsoft's final witnesses as the software company wraps up its defense.

The states want Microsoft to disclose its technical product information so competitors' software can work as well with Windows as Microsoft's own products. The overwhelming market share of Windows gives Microsoft a leg up on other software makers, they say.

The original judge in the antitrust case ordered Microsoft broken into two companies after concluding that it illegally stifled competitors. An appeals court upheld many of the violations but reversed the breakup order and appointed U.S. District Judge Colleen Kollar-Kotelly to determine a new punishment.

States that rejected the government's settlement with Microsoft last fall and are pressing for tougher penalties are Iowa, Utah, Massachusetts, Connecticut, California, Kansas, Florida, Minnesota and West Virginia, along with the District of Columbia.