By Simon Grey, on November 11th, 2011
As I mentioned before, I’m currently enrolled in a microeconomics course that makes use of Mankiw’s textbook. I haven’t read much of the book, save for the assigned homework questions and his chapter on oligopolies. He begins with a discussion of monopolies, and asserts that Microsoft is an example of a market monopoly. This claim struck me as quite hilarious for two reasons.
First, Mankiw uses a very narrow definition of market to prove his point. Instead of placing Microsoft in a software market, he claims that Microsoft has a natural market monopoly on Microsoft software, since one can only acquire Microsoft software through Microsoft.*
What Mankiw should say, in order to be precise, is that one can only legally acquire Microsoft software from Microsoft. But this would undermine his point, because what enables Microsoft’s monopoly power is not the natural mechanisms of the market but rather the government, via intellectual property laws. Therefore, Mankiw’s narrow definition fails because it Microsoft’s monopoly power is the result of governmental favoritism and is not a natural market monopoly.
The second thing that makes Mankiw’s claim laughable is that he ignores the broader market of software. There are plenty of alternatives to Microsoft software. Mac, Linux, and Unix are all alternatives to Windows; OpenOffice is an alternative to Microsoft Office; Wii and PS3 consoles and games are alternatives to the Xbox console and games; etc. Mankiw, if he were being honest, would say that Microsoft cannot force anyone to buy any of their software, and is therefore not a monopoly in the sense of being able to make prices.
Of course, if Mankiw were concerned with honesty, he would have to say that Microsoft, though not a true monopoly, does have a limited form of monopoly power via government regulation. Saying this would be heretical to mainstream economics because the natural conclusion of this assertion is that improving market function would require less government, not more, and we can’t have that.
* Of course, this latter claim is patently false as one can easily acquire Microsoft software on a variety of torrent sites.
By Ajay Shah, on February 14th, 2011
I have long marveled about how quickly the world of mobile phones has rapidly moved through four paradigms. My first mobile phone was a Nokia and they seemed to rule. But then Blackberry won because Nokia did not get the importance of email. And then Apple won because Blackberry did not look beyond email. And then Google Android seems to have won because Apple did not understand the problems of a closed system. At each stage, it looked like there was a dominant solution, but the pace of change was brutal and the king of the heap was rapidly unseated. What an amazing pace of creative destruction.
So when I heard that Nokia was now going to be quite wedded to operating system from Microsoft [press release], I thought to myself “That can’t be so bright”. Then I looked at the stock price and it said:
So the market seems to have knocked Nokia down by 18% for wanting to run with a loser like Microsoft. And what’s more funny, the market seems to have knocked Microsoft down 4% for this contract too (which I don’t understand – compared with being wasteland, it seems that it is good news for Microsoft to have the support of Nokia).  
By Ajay Shah, on June 3rd, 2010
C. Raja Mohan in The American Interest on India’s strategic directions.
A Reuters report on how Pakistanis are responding to the global backlash against Pakistan.
Writing in the Wall Street Journal, Matt Ridley has some great insights into economic development.
M. K. Venu on corruption in Indian telecom.
Sanjeev Sanyal in the Business Standard on how to think about the role of the university in the city.
When Israel graduated into OECD, it got dropped from the MSCI Emerging Markets index, which helped India gain a bit of weight there.
Economic Opportunities and Gender Differences in Human Capital: Experimental Evidence for India by Robert T. Jensen finds that when the BPO industry brings economic opportunities to women in India, this positively impacts investments in girls – who are more likely to gain body mass and go to school.
The global university and the future of human capital by Andrew Kelly in The American.
Thailand’s grief: Thomas Fuller in the New York Times, a set of pictures at boston.com, and another one.
How to save the news by James Fallows in the Atlantic magazine: an important article that everyone interested in the future of newspapers should read.
5 Ways Steve Ballmer Can Save Microsoft’s Mobile Bacon by Galen Gruman: A careful and thorough guide to Microsoft about how to come back into the mobile phone game.
Robert Samuelson says the story of Greece tells us something about the sustainability of the European-style welfare state. Martin Feldstein has a suggestion for how to achieve fiscal prudence in Europe (and by analogy, in India). Also see Feldstein on the Euro crisis.
Taiwan got their corporate income tax rate down to 17%.
By Ajay Shah, on July 6th, 2009
Microsoft has long faced by a credibility gap in getting into mission critical, enterprise settings. One initiative they embarked on was the `TradElect’ system which did trading at London Stock Exchange. This trading system was built by Microsoft and Accenture who were keen to prove that it could work. It utilised a series of Microsoft technological components. It was used in ad campaigns by Microsoft who claimed that if they could handle London Stock Exchange then they are ready for Serious applications [example, until they take down the page].
This is not as much of a big deal as meets the eye. The London Stock Exchange is a famous and well known brand name, but it’s not particularly a big exchange by world standards. That is, it’s not a really demanding IT problem. Here’s some data, from the June newsletter of the World Federation of Exchanges. At page 39, they show the number of trades through order matching that are seen on all member exchanges for Jan-May 2009, a period of five months. I have added one column where I translate this into trades per second under the assumption that there were 110 trading days in these five months and trading took place for six hours a day.
| Exchange |
Million trades (Jan-May 2009) |
Estimated trades/s |
| NYSE Euronext |
1403 |
590 |
| Nasdaq OMX |
1167 |
491 |
| Shanghai |
794 |
334 |
| NSE |
602 |
253 |
| Shenzhen |
456 |
191 |
| Korea |
371 |
156 |
| BSE |
222 |
93 |
| Taiwan SE |
108 |
45 |
| London SE |
72 |
30 |
| NYSE Euronext (Europe) |
70 |
29 |
| Hong Kong Exchanges |
53 |
22 |
This shows NYSE and NASDAQ at 590 and 491 trades per second, which is a challenging IT problem. The two big Indian exchanges — NSE (rank 4) and BSE (rank 7) — are also difficult problems at 253 and 93 trades per second.
These are averages for the system load; in this business there is an extreme peak-to-average ratio. E.g. NSE routinely exceeds 1000 trades/s and occasionally does a lot more. There are days when half of the days activity happens in the last 30 minutes. So the IT challenge is much bigger than the average trades/s seems to suggest.
In this ranking, London Stock Exchange is not that big; it’s ranked 9th in the world and does an estimated 30 trades per second on average. So it was a good choice for a certain kind of vendor who tries to make a point using a toy problem which does not sound like one.
The story seems to have gone badly wrong for Microsoft. LSE consistently failed to match rivals like Chi-X, which run Linux, in becoming a credible choice for algorithmic trading. Then there was a day when the trading system collapsed (9 Sep 2008).
This played a role in the CEO of LSE, Clara Furse, getting sacked. The new CEO, Xavier Rolet, is said to have decided to dump TradElect. Here’s the story, by Steven J. Vaughan-Nichols.
To be sure, complex engineering projects can fail for many reasons. But it’s ironic that the marquee adoption at an exchange, that was advertised by Microsoft as proof that they had arrived, should have flamed out like this despite direct staff involvement from Microsoft.
By Bhagwad Jal Park, on December 18th, 2008
We recently saw that Yahoo had removed the so called “Severance Benefits” that it had planned to implement were it ever subject to a hostile takeover. In this article, we take a closer look at this mechanism as well as how effective “Poison Pills” like this can be.
A Poison Pill is a strategy employed by companies to ensure that the existing managment is not harmed by a hostile takeover. We know that takeovers can be accomplished by more ways than one. In the recent interactions between Yahoo! and Microsoft, there was a threat in the air that Microsoft would either replace Yahoo!’s board members with those more sympathetic to it at the AGM, or buy up a dominating percentage of Yahoo! share.
Image Credit: Steven Fernandez
Yahoo! management has every right to be afraid of something like this since it would be quite likely that Microsoft would want to replace a number of Yahoo! managers with their own people. In order to prevent this from happening (After all, no one likes to lose their jobs), Yahoo! enacted a clause that in the event of a hostile takeover, Yahoo employees could avail themselves of massive benefits by walking away.
These massive benefits would of course financially harm the company effectively raising the cost of the takeover by hundreds of millions of dollars. This “Poison Pill” is like a suicide attempt. The threat is, don’t try and take me over, otherwise I’ll self destruct.
The question is, is this threat credible? In Game theory, a credible threat is one where the person who is making the threats actually benefits by carrying out the said threat. By this logic, if a robber takes hostage a single victim, threatening to shoot him if the police came in, would he actually do it? After all, killing the hostage provides him with no protection afterwards and will probably only increase his sentence! The only reason why he would ever carry out his threat and kill the hostage, was if he was insane. A perfectly rational robber would never kill a single hostage. This is why it is sometimes best to be insane.
The situation is strikingly similar when discussing corporate Poison Pills. It’s reasonable to assume that Yahoo! management holds a considerable stake in the company, and harming the company will harm them too. Moreover, the Poison Pill will be swallowed only if the hostile takeover succeeds. Assuming that the Pill is swallowed, this cannot reverse the acquisition. What then is the purpose of swallowing the pill? It is just a threat, and not a very credible one. The managment doesn’t gain anything by swallowing a pill that hurts the company after the acquisition has taken place.
One can devise a Poison Pill in such a way that it reduces the effectiveness of a hostile takeover by allowing existing shareholders (But not the acquirer) to purchase shares at a discount. This means that having bought a certain percentage of Yahoo! (in this case, 15%), Yahoo! shareholders can then get more shares at a huge discount. This means that the percentage of shares owned by Microsoft will come be less than 15% and may not be enough for a takeover. This is called a Dilution Poison Pill.
Will this be effective? Let’s say that Microsoft has bought 15% of Yahoo! stock for tens of billions of dollars. That money is a sunk cost. Once they’re bought, they’re bought. Microsoft must treat this as a sunk cost, and continue to buy up more Yahoo! shares to gain a controlling interest since the additional cost of buying the shares is much less than the amount already sunk in. So this Poison Pill holds no threat either.
The only way that the management can effectively threaten to swallow the pill, was if they were considered insane. Unfortunately, the Insane argument doesn’t really work in a corporate environment. In fact, an insane management has no right to run the company at all. And thus the Poison Pill threat is negated.
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