Argument #4: Microsoft is a threat to consumers because it "could" raise its prices.

Dr. Locke's argument : Dr. Locke argues that an agreement that Microsoft is a threat because it "could" raise its prices infers that anyone could be prosecuted for anything. He then continues to state that Microsoft has a right to sell its products for any price it chooses but faces mass market reasons to keep prices low rather than creating a product that only the rich can afford.

Response : Dr. Locke promotes the concept of a free market yet relishes the fact that one does not exist here. In any market where competition thrives, profit margins, as a result, are kept low. Competitors seeking to gain market share often utilize cost-cutting measures to increase sales. The other competitors in the market are generally forced to do the same if they intend not to lose ground. As no competitor wishes to lose money, the cost-cutting tactic can only be taken so far, resulting in slim profit margins. The PC industry is a prime example. During fiscal year 1999, Dell, regarded as one of today's most successful companies, had a net income of $1.46 billion on revenues of $18.2 billion resulting in a profit margin of 8%. Gateway Computer had a net income of $427.9 million on revenues of $8.6 billion resulting in a profit margin of only 4.9%. Even a company as diversified in their offerings as IBM, which had a net income of $2.1 billion on revenues of $24.2 billion for 4Q '99, had a profit margin of only 8.7%. The slim margins allowed by flourishing competition are obvious. The results are lower prices and increased returns for consumers. They essentially get more for their money.

Compare this to a company like Microsoft which derives the large majority of its revenues from operating system and office suite sales mainly to PC manufacturers and not the general public, two markets in which they arguably hold a monopoly. For 4Q '99, Microsoft yielded a net income of $2.44 billion on revenues of $6.11 billion, resulting in a profit margin of a staggering 40%. In a year when overall PC prices plummeted due to rampant competition in the marketplace, the cost of Microsoft's operating system never changed. The point is not so much that Microsoft can or will raise its prices. The fact is that Microsoft faces no reason to lower them, resulting in diminished returns to the consumer.

Microsoft's outrageous profit margins not only illustrate the company's monopolistic power, they also illustrate how easily the company can leverage its dominant position in these markets to enter and dominate other markets. If Microsoft observes a market it wishes to enter in which there is already a dominant player, Microsoft can utilize the outrageous profit margins afforded by its monopoly(ies) to price their competing product in the new market at a loss, sometimes a substantial one, even so far as giving it away. Any competitors in that market are forced to do the same or risk losing hard earned market share based on innovation and market vision, the very concepts Dr. Locke wishes to protect. However, unless the competitor is operating in other markets in which their margins can compensate for the losses now being experienced in the market Microsoft now wishes to dominate, that company will steadily lose market share and corporate livelihood. Few companies in the world have bankrolls sufficient to survive such an economic onslaught. In such a situation, there is no incentive for Microsoft to make a 'better' product than those already offered by the existing players in that market. It simply has to create an equivalent product through feature mimic and then slowly, economically bleed its competitors to death, thus eliminating competition and creating yet another Microsoft monopoly.

This is anything but the model of free market competition of which Dr. Locke speaks so highly. The consumer may benefit in the short term by getting something for nothing but pays a much higher long term price in the elimination of market competition. Dr. Locke wishes to protect the consumer who is getting something for free while at the same time wanting to protect a company whose long, hard work, vision, and innovation results in a marker dominant position. As illustrated above, these issues can and are often in conflict with one another. Yet, Dr. Locke defends each side depending on the argument presented. If a free market is the desire, the only true conclusion that serves to render the greatest consumer return in the long run is that, yes, consumers can indeed be harmed when receiving something for free.