It wasn't the kind of high-level maneuvering that's going on over in the Senate where President Clinton's impeachment trial is about to get under way this week, but in Judge Thomas Penfield Jackson's courtroom, Microsoft and the Justice Dept. spent Jan. 11 behind closed doors. The sides are wrestling over how to deal with the testimony of the government's last witness, Massachusetts Institute of Technology economics professor Franklin M. Fisher, whose testimony involves confidential Microsoft pricing information that the software giant and its big customers want kept under wraps. The wrangling pushed back the testimony of Microsoft's first witness, Richard Schmalensee, dean of MIT's Sloan School of Management.

From his written testimony, it's clear that when Schmalensee does start talking, he'll hammer home the now-familiar central point of Microsoft's defense: that the software giant isn't a monopoly and that its actions have benefited customers and actually provided more competition. Schmalensee argues that Microsoft, which has 90% of the personal-computer operating-systems market is merely a momentary leader in its category -- and could be dethroned at any time, given the enormously competitive nature of the software business.

In other words, Microsoft's monopoly-like market share does not confer monopoly power. He argues that the company has to innovate endlessly, providing benefits to consumers. Justice has argued that Microsoft is a monopoly that harms consumers, including through its pricing policies. One indication, Justice argued, is that prices of Microsoft operating systems have risen, while the prices of other PC industry products dropped. Schmalensee contends that the "quality-adjusted" price of Microsoft's products has declined.

LABOR-INTENSIVE. Microsoft is arguing that the software business is special and can't be judged by many of the traditional definitions of monopolies because the market changes so quickly. The difference between pricing in operating systems and pricing in computer hardware, Schmalensee says, has to do with the differences between mass producing items such as chips or disk drives and writing software, which is far more labor-intensive.

Justice attorney David Boies says Microsoft's view contrasts with "standard economic analysis" -- as rendered by his economist witnesses, MIT's Fisher and antitrust expert Frederick Warren-Boulton. Boies went on to characterize Microsoft's economic approach as a "new way of looking at things using papers mostly paid for by Microsoft."

Schmalensee also says the Windows desktop software doesn't give the company a competitive chokehold on software distribution. In fact, the professor argues that PC makers control 85% of what goes into desktop computers. He goes further to argue that Microsoft earned distribution contracts from the PC makers by virtue of creating a superior product. In its case, Justice spent a great deal of time building an argument that Microsoft used its leverage over PC makers and other companies such as America Online and Intuit to head off the competitive threat from Netscape Communications' Web browser.

"INSECURE." In the final analysis, Schmalensee argues, the government's suggested remedies would harm consumers and competition more than help them. The government, he maintains, isn't equipped to pick market winners and would handicap Microsoft by forcing it to share intellectual property with competitors. No one could conclude that Microsoft "enjoys the quiet life of a monopolist, because the company is so insecure about its leadership in the operating system [market]," he says.

Justice will get a crack at those arguments after it finishes with Fisher on Tuesday, Jan. 12. Fisher's final testimony was closed to the public after PC makers, including Dell and Compaq, argued that releasing the information would hurt them competitively. In open court, Fisher said Microsoft's practice of charging different prices to different PC makers is an indication of market clout, because the software company can set its price without any regard to market pricing. Microsoft countered by saying that if it were truly a monopoly, it could set a high price and insist everyone pay it.

By Heather Green in Washington