Most likely Digital Research gets CP/M-86 out sooner. Possibly if Kildall didn't take a day off to go flying instead of speaking with IBM...
2. What do they use instead? (likely candidate would be CP/M)
The other OSes offered for early IBM PCs were CP/M-86 and the UCSD p-System (Pascal-based; most notably used on IBM's other personal computer of the era, the DisplayWriter "word processor"). Most likely CP/M-86 is successful. Microsoft may actually enter the market later; they already marketed a UNIX-based OS called XENIX, and in ~1983 or so offered it for PCs in OTL.
3. What happens to Microsoft?
They don't quite become the market force of OTL, but they do make decent business selling BASIC for the IBM PC and for a lot of other companies.
4. What happens to the computer industry and market at large?
Short-term, things aren't that different. People bought IBM PCs because of the good hardware and the IBM name, and in any case CP/M-86 and MS-DOS 1.0 are very similar. Either DR will develop the OS further (in which case Digital Research may become the "Microsoft" behemoth), or some other player will later push them aside. Possibly UNIX-based (such as Microsoft XENIX or Coherent), or a new GUI OS.
There may be big butterflies regarding MSX computers. MSX-DOS was sort of an 8-bit MS-DOS-like OS. I don't know if Microsoft will still develop MSX without the IBM PC. If so, the OS may have differences from OTL.
If DR becomes the big company and perseveres, then we see CP/M-86/DR-DOS as the dominant OS, flowing into a GUI system based on GEM, and a somewhat like OTL computer market with DR instead of MS. Microsoft will probably resemble OTL Borland, a company selling mostly development software and office packages (except MS had XENIX, and the Softcard - a card that allowed Apple IIs to use CP/M; MS might, like OTL, branch out into making peripherals). With Kildall instead of Gates, Digital Research might not go for being a monopoly in everything and instead focusing in on dominating the operating system market plus maybe development software and a few other specific fields.