Microsoft has often been accused of maintaining and exploiting its monopoly position. Using appropriate theory and real world information, examine whether Microsoft’s monopoly position is in the public interest.
A monopoly is a market structure in which a single seller of a good or service dominates the whole industry and no close substitutes come available. The market demand curve is the same as the demand curve for the monopoly as it is basically the only firm in that industry. Its market demand curve is negatively sloped and unlike firms under perfect competition it can determine the price of its own products.
Monopolies gain excess profits in the long run in comparison to firms under perfect competition. This is due to the high inelasticity of its demand curve and its low average costs of production. Under perfect competition firms cannot sustain excess profits as new firms will enter the market and compete. This entails that in comparison to monopolies; perfectly competitive markets have a higher output level and a lower price for consumers. Because of its negatively sloped demand curve, a monopoly needs to lower the price of all its units if it wants to sell an extra unit of product. As there are no viable substitutes for that product in the market, the monopoly has the power to charge high prices, sustaining its excess profits, and keeping a low output level to minimize the overall costs of production. In terms of the public interest, a competitive market brings about higher quality products and lower costs, but monopolies have the financial capacity for advanced research and development.
These abnormal profits that are gained by the monopoly will naturally drive in curious firms to want to join the market for that product; however barriers to entry restrict these firms. The barriers may be natural as the efficiency of production for the new firm will be low compared to the established monopoly, thus the costs of production will be high and so the new firm will not be able to compete with the market value of the product. The monopoly firm may also use various methods to maintain its monopolistic position over the market.
Microsoft is the world’s leading operating system producer and holds a large monopoly on a worldwide scale. Other products that they own include operating systems for mobile phones, gaming console (Xbox), and software development tools. They have been criticised by many to hold strong barriers of entry into the operating system market. In technology markets, in general, the initial costs of product development are high as investments need to be made into the older systems and employees should be trained for the new product. Also as the network of Windows operating systems are established around the world and integrated into work and personal life, the switching costs to another system is very high or even impossible because users adapt to a common standard. Thus entry into this market for a new competitor will be difficult. In summary, it can be said that with the advantage of a large network of users and economy of scale, with the restrictions caused by switching costs, a natural monopoly situation is created for Microsoft.
A method that Microsoft used to create its monopoly was to patent its products, preventing other firms from reproducing a similar software. A method they used to maintain their monopoly was to pre-install a base of application programs onto the operating system that were only compatible with Windows, causing a common standard to develop between users for the applications they used. They also provided software’s such as the Internet Explorer and Windows Media Player for free if the Windows operating system was purchased, allowing them to gain an advantage over media player and web browser competitors such as Netscape. Microsoft has received many antitrust issues from its competitors and the government, and was claimed to have limited consumer choice in the industry and chocked of competition for internet browsing. Another issue concerning barriers to entry is that most software developers prefer to write programs for an operating system that has already a large consumer base, and consumers prefer an operating system in which most applications are compatible with, thus creating a natural monopoly. But in recent years many developers have made their applications compatible with other operating systems such as Apple and Linux, and it can be seen that the users of Apple Mac are increasing.
In the 1980’s Microsoft required its OEM’s (original equipment manufacturers) to pay a ‘per processor license fee’ for the computers that they shipped and this discouraged those OEM’s such as HP and Dell to install any other operating systems. In 1994 an antitrust suit was filed against Microsoft as the arrangement method that they followed seemed to be anticompetitive. Although Microsoft agreed to not use the ‘per processor license fee’, they had already gained a large advantage over their competitors. In the 1990’s as IBM was an OEM and also made operating systems and other application software’s they were considered by Microsoft to be a competitor and a possible threat. Thus Microsoft, in a discriminatory fashion, charged IBM higher license prices for its operating systems and withheld technical support from them. IBM later filed a suit against Microsoft and they settled the claim, but Microsoft had again, already gained the upper hand.
In 1995 Intel was developing a system called Native Signal Processing (NSP) that would be compatible with all operating systems, and Microsoft saw this as a threat to their monopoly position in the market. Microsoft formed a boycott against IBM and its development of the NSP, and forced its OEM’s to concur. IBM was to later stop its development. It is evident that Microsoft has performed many aggressive tactics over the years to maintain its position as a monopoly, otherwise the market for operating systems and its counterparts would have long ago become ruled by oligopolies.
Microsoft’s misconducts have allowed it to maintain its monopoly and has lead to the restriction of innovation in many cases, where innovation may have happened more so under more competition, but competition was always chocked out. High prices and a lack of choice were also forced onto the consumers. But Microsoft played a large part in acquiring firms and bringing them together, and this can be seen as a transforming innovation. It’s unclear to give a certain decision whether Microsoft has been in the public interest or not, as if Microsoft were to step down, it could have been possible that another firm would have taken the role of the monopolist. Observing the situation from the outside, it is possible to say that a lot of development and innovation has come about in the past two decades and Microsoft and its decisions have been the forefront of this movement.
Fisher, G.A., (2000) ‘Why is Microsoft a Monopoly?’, viewed January 10th 2012, http://www.zaimoni.com/George/MicrosoftMonopoly.htm
Lipsey, R.G., Chrystal, K.A., (2004) ‘Economics’, Oxford University Press Inc,. New York
McKenzie, R.B., Shughart II, W.F., (1998) ‘The Independent Review: Is Microsoft a Monopolist?’, viewed January 10th 2012, http://www.independent.org/pdf/tir/tir_03_2_mckenzie.pdf
‘Microsoft, A History of Anticompetitive behaviour and Consumer Harm’ (2009) viewed January 10th 2012, http://www.ecis.eu/documents/Finalversion_Consumerchoicepaper.pdf
- Quote paper
- Amir Colombus (Author), 2012, Is Microsoft's Monopoly Position in the Public Interest?, Munich, GRIN Verlag, https://www.grin.com/document/185073