Microsoft, Google and Nonprice Competition

Holman Jenkins wrote a wonderful article tilted, "Techdom’s Two Cold Wars," about competition between Microsoft and Google for the Wall Street Journal dated July 22, 2009.  In introductory microeconomics classes, students usually learn about various market structures including oligopoly.  Oligopolist engage in strategic behavior to earn rents or economic profits.  Holman describes how Microsoft and Google use strategic behavior to nip at the other's heals, not to earn higher profits, but to protect their high-profit turf while perhaps seeking a competitive truce that may invite antitrust action from the Attorney General.   Consumers will benefit from the battle.

Microsoft and Google also have the power to damage each other, and are better off if they don’t. They too spend a lot of money on deterrence—a puzzle since both are inevitably owned by many of the same shareholders, including large mutual and pension funds. Even more than the Cold War superpowers, they have every incentive quietly to agree to be deterred without investing quite so much on an arms race.

These are thoughts designed to trouble the naïve delight of many who heard Google’s announcement last week that it intends to roll out an operating system to compete with Windows. Partisan Google fans imagine Google finally is preparing to go toe-to-toe with its nemesis. They couldn’t be more wrong.

Google might do so if Microsoft were unilaterally to disarm in some way. That’s not going to happen. Microsoft merely is being reminded that its fat Windows margins are vulnerable to attack.

Microsoft sent the parallel message to Google when it spent millions to launch Bing, a new search engine that’s receiving good reviews even from Microsoft haters. Bing, Microsoft hopes, will finally prove a weapon that can seriously threaten Google’s margins, though only to keep Google from raiding Microsoft’s...

Their little secret is that neither Google nor Microsoft really have an interest in challenging each other’s core franchises if it means risk to their own. Their posturing is primarily defensive—fear of loss is greater than hope of gain...

Naturally, the fondest wish of both companies’ shareholders is that they find a cheaper way to deter each other, or better yet strike a cease-fire. In short, they wish Google and Microsoft would reach the kind of condominium that Google and Apple have reached.

For, whatever the advertised purpose of Google CEO Eric Schmidt’s presence on Apple’s board, the obvious purpose is to manage competition between the two companies. Of all the dabbling Google has done, notice that it hasn’t dabbled in music-playing software, in cataloging music files (though Google says its mission is to “organize all the world’s information”), or even in allowing users to create playlists of YouTube music videos. Google’s dabbling has been restricted to markets where Microsoft, Nokia or others are dominant, not where Apple is dominant...

One thing that keeps Apple and Google maneuvering so cautiously with respect to each other is that both currently benefit from an aura of “coolness” that would be jeopardized if they found themselves clashing in public. Keep your friends close and your enemies closer.

Even if antitrust weren’t in the way, Microsoft and Google would find it harder to engage in a similar frigid entente simply because Microsoft’s “uncoolness” requires Google partly to define itself as anti-Microsoft. But don’t doubt the two would opt for a competitive cease-fire if they could figure out how.