Introduction

Professor Varian's overview, “Competition and market power,” analyzes a variety of competitive strategies used by high-tech companies. These strategies – such as personalized pricing, lock-in, and the adoption of uniform compatibility standards to fuel bandwagon effects – often rely on intellectual property, typically copyrights or patents. We complement the work of Professor Varian by focusing on this aspect.

First, we give some examples to illustrate how profoundly intellectual property rights influence competitive strategy in the information technology sector.

Like most computer software companies, Microsoft uses copyrights, patents, and secrecy to protect its software programs (notably Windows and Office), worth tens of billions of dollars. Microsoft uses all three of the primary strategies discussed by Professor Varian: price discrimination, lock-in, and exploitation of network effects through the control of proprietary interfaces. Copyright protection strengthens Microsoft's incentives to develop and improve its software, and gives it some control over the interfaces between its desktop software and other software, such as middleware and applications software running on Windows, and interfaces with operating system software that runs the powerful server computers linked with desktop machines in complex computer networks.

Copyright protection is also important to the modern music and movie industry. Of course there was an entertainment industry before copyright – rivals are said to have sent stenographers to Shakespeare's opening nights, and even Dickens (as a foreign author) did not get copyright protection in the United States until 1891.