Alan G. White

Analysis Group, Inc.

Dr. White began by disclosing that Microsoft had funded most of the research on which he and Dr. Berndt had been collaborating, a pair of studies conducted over the previous 4 years. Counsel for Microsoft had retained Dr. Berndt in 2000 to work on price-measurement issues in the software industry, his essential tasks having been to demonstrate how to measure software prices, and to explain how they had been changing over time. Dr. White said that he and Dr. Berndt would not be speaking about the merits or otherwise of Microsoft’s actions, but rather would describe their own work in estimating price changes for prepackaged software over time.

Although better estimates of price change existed for prepackaged than for own-account or custom software, Dr. White said, many of those studies were old, dating to the late 1980s or early 1990s. And, in any event, important challenges remained for those constructing measures of price and price change, even when their activity focused on prepackaged software. One such challenge, at the fundamental level, was ascertaining which price to measure, since software products may be sold as full versions or upgrades, as stand-alone applications or suites. Evoking Windows to demonstrate the complexity of this issue, Dr. White ran down a variety of options: buying a full version of Windows 98; upgrading to Windows 98 from Windows 95; or, in the case of a student, buying an academic version of Windows 98. Other product forms existed as well: An enterprise agreement differed somewhat from a standard full version or an upgrade in that it gave the user rights to upgrades over a certain period of time. The investigators had to determine what the unit of output was, how many licenses there were, and which price was actually being measured. Adding to the challenge was the fact that Microsoft sold its products through diverse channels of distribution. It was selling through original equipment manufacturers (OEMs) like Compaq, Dell, and Gateway, which bundled the software with the hardware, but also through distributors like Ingram and Merisel. Prices varied by channel, which also needed to be taken into account. Another issue, to be discussed by Dr. Berndt, was how the quality of software had changed over time and how that should be incorporated into price measures. These issues had to be confronted, because measuring prices matters for producing an accurate measure of inflation, which is used to deflate measures of GDP both at an aggregate level and by sector.

Prices Received by Microsoft Declined Between 1993 and 2001

Dr. White said he would discuss one of two studies he and Dr. Berndt had done, both of which showed that software prices had been declining. The study

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