Economist: Oracle-SAP duopoly would hurt market

Key Department of Justice witness Kenneth Elzinga, a professor of economics at the University of Virginia and a leading authority on antitrust issues, said in a federal court here that the resulting duopoly would give Oracle and SAP the power to raise their prices in the United States for their human resources and financial management software.

"The merged firm will have pricing authority or pricing discrimination they wouldn't have independently," Elzinga said.

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Oracle announced its attempt to buy an unwilling PeopleSoft a year ago. The Department of Justice has been fighting the proposal, saying smaller players would provide insufficient competition against the two remaining giants. Oracle is arguing that other viable contenders abound.

Elzinga noted that even in the current market, SAP, Oracle and PeopleSoft already engage in pricing discrimination, as evidenced by the wide range of discounts they offer to different customers. Some customers receive discounts of as much as 90 percent, while others are offered only a 20 percent break, he said.

That discrimination would only intensify as a result of the elimination of one competitor in a highly concentrated market, Elzinga said. His analysis of the deal relied in large part on Oracle's own discount approval forms, which the company uses in highly contested sales situations. According to Elzinga, the forms showed that Oracle discounts its products most often when competing against PeopleSoft. However, SAP also drove Oracle to cut its prices quite frequently, he said.

Elzinga said Lawson Software and a number of other smaller rivals were unlikely to become significant competitors to the big three in the near term, as Oracle has suggested. Neither would Microsoft, which has entered the market but not yet established a presence at the higher end, he added.

In the economist's view, Microsoft's business model is "just the opposite" of the business model used by the big three. Microsoft excels at selling high volumes of low-price software and offering little customer service. By contrast, Oracle, SAP and PeopleSoft sell high-price software through a prolonged sales process that requires a lot of hand-holding. It would be difficult for Microsoft to change its highly successful formula, Elzinga said.

As for Lawson and other so-called midmarket suppliers, Elzinga said the experience of J.D. Edwards, which PeopleSoft acquired, shows how difficult it is to move upmarket. For years, J.D. Edwards attempted to break into the big three's territory and never quite succeeded, he maintained.

Oracle had sought to exclude Elzinga as a witness in the trial, a motion denied by presiding Judge Vaughn Walker. The trial, which began June 7, was expected to run about four weeks.