Monopoly and Microsoft
Webster s dictionary defines monopoly as exclusive ownership through legal privilege, command of supply, or concerted action; exclusive possession or control; a commodity controlled by one party. In other words, through a variety of means, a producer may obtain sole or near sole control of a market. Through the control of the market, a monopoly restricts production, raises prices above fair market value, and prevents markets from efficient use of resources. This is accomplished towards the goal of maximizing profits (Parkin 120).
Certain characteristics identify a monopoly. First, no close substitutes in the goods market, such as electricity or local phone access. Secondly, barriers to entry prohibit potential competitors from entering the market, for example, legal barriers, natural barriers, and resources. Thirdly, a monopoly is able to economically manipulate the market with respect to its products, to the intent of prohibiting competition. This will be the yardstick by which the company Microsoft will be measured.
Since the 1980 s, Microsoft has held a virtual stronghold on the operating system market. Beginning with MS-DOS (disk operating system), and culminating with Windows 95/98, Microsoft has become an integral part of society. Its software not only includes the Windows operating systems, but spreadsheets, word-processing programs, databases, and reference works. Microsoft programs run on a great percentage of all the computers in the world. We rely upon them to sort, send, and receive information in school, business, and even our personal lives. The Microsoft Network provides online content, and it s Internet Explorer browser battled Netscape’s for market share. It also provides free e-mail and other services. The fact is inevitable; our lives have come to rely upon the computers that we use every day.
Microsoft s dominion in the market began with quality and accessibility. The company produced a good product and provided the product and support to developers and PC manufactures. Because of the ease of accessibility and quality of software and support, developers were soon creating applications solely for use with Microsoft products. In essence, Microsoft set the standard for all PC (personal computer) based applications. This contributed to the position in the market Microsoft now holds. Now, Microsoft holds approximately 90% of the OS market with no close substitute.
Barriers to entry prevent possible competitors from entering the market. Barriers fall into distinct categories. Control of all or most resources, legal barriers, and natural barriers form obstacles to competition in the market.
Microsoft controls a major portion of the software market due to the standardization of it s products across the PC market. Furthermore, because Microsoft controls the operating system of the PC, its competitors must render their applications and software compatible with the parameters contrived by Microsoft. As stated earlier, most applications are written for Windows 95/98. Consequently, these competitors must always at the mercy of changes made by Microsoft. Other OS developers, such as Linux, Unix, and OS2, lack much of the support provided by Microsoft. Today s PC market is geared solely toward Windows and Windows applications. This limits the ability of any possible competitors to plan for the long run.
In fact, an example of controlling resources is Microsoft’s practice of tying. Tying is a practice in which Microsoft would use their leverage in one market area, such as graphical user interfaces, to gain leverage in another market, such as operating systems, where they may have competition (Maldoom 2). In the preceding example, Microsoft bundles their World Wide Web browser, Internet Explorer, into their operating system, Windows 95/98. Netscape, the maker of Netscape Navigator, currently the most widely used Internet browser on the market is now facing some fierce competition from Microsoft’s Internet Explorer.
Netscape claims that in addition to bundling the browser, Microsoft offers Windows at a discount to original equipment manufacturers (OEM’s), to feature Internet Explorer on the desktop of the computers that they shipped, thus eliminating any competition for space on the desktop by rival companies (”Netscape’s Complaint against Microsoft.” 2). This example displays control of a specific resource, in this case, Internet browser applications.
Legal barriers are another way to obstruct entrance into the market. Microsoft would contract MS-DOS and Microsoft’s other operating systems to original equipment manufacturers (OEM’s) at a 60% discount if that OEM agreed to pay a royalty to Microsoft for every single computer that they sold (Check 2) regardless if it had a Microsoft operating system installed on it or not. By the contract, Microsoft is guaranteed payment for every computer shipped, regardless of whether or not his operating system was installed in the computer. Thus, without paying double, the manufacturers could not install another company s operating system.
Additionally, Microsoft would specify a minimum number of operating systems that the retailer had to buy, thus eliminating any chance for another operating system vendor to get their system installed until the retailer had installed all of the Microsoft operating systems that it had contracted first (Maldoom 2). Offering its programs as pre-installed applications of Windows software allowed Microsoft to seize a large portion of the software market.
Furthermore Microsoft also would sign contracts with the vendors for long periods of time such as two or three years. In order for a new operating system to gain popularity, it would have to do so quickly, in order to show potential buyers that it was worth something. With Microsoft signing long term contracts, they eliminated the chance for a new operating system to gain the popularity needed, quickly (Maldoom 2).
Not only are contractual laws a legal barrier, but also patents and copyrights. Due to it s vast amount of wealth, Microsoft is able to buy patent and copyrights. An example of this is disk compression and antiviral technology purchased from Stacker, Inc. and Symantec, respectively, which was subsequently improved and marketed as part of the Windows bundle.
This entitles Microsoft with an unrestrictive and exclusive median to promote, feature, and offer its programs.
Natural barriers occur when one firm can supply the entire market at a lower cost than two or more firms can (Parkin 264). Microsoft is able to accomplish this through the packaging of multiple applications under one title. An example of this is in the word-processing and spreadsheet division where Microsoft presents its Word and Excel programs. These two applications have been incorporated, along with others, into a package known as Microsoft Office. With this program, Microsoft has captured a majority of the market by charging less for the package than for a single word-processor of a competitor.
This leads to economic manipulation of the market. Microsoft displays this advantage when it comes to the browser wars. Their browser, Internet explorer, matches Netscape’s feature for feature, with one added plus: it is free and Microsoft says that it is always free. So is their Internet server, Internet Information Server, whereas Netscape charges $50 and $1500 for their browser and their web server, respectively (”Netscape’s Complaint against MicroSoft.” 3).
Another example was the issue involving the release of Microsoft s operating system, Windows 95. Whether intentionally or not, the arrival of this new operating system was delayed again and again by Microsoft. This in turn delayed other companies dependent on the Microsoft operating system in order to maintain some degree of competition. These delays resulted in additional, unwanted expenditures and other costs easily swallowed by the Microsoft Corporation, but inflicting severe detriments to other smaller companies who could not afford the added costs. Consequently, many firms exited the software market.
So, by definition, Microsoft is definitely a monopolistic company. But what is the nature of the company? Is Microsoft a danger to free enterprise? Does the company limit the software market? Does it produce a substandard product? Are consumers really unhappy with the products and services? Should the government intervene?
First and foremost, Microsoft sets standards for the rest of the industry to follow.
Washington, and the executive director of the Windows Solutions Conference, says it best with this statement: “To use a railroad analogy, Microsoft builds the tracks on which the rest of the industry ships its products.” (”Why Microsoft (Mostly)Shouldn’t Be Stopped.”4) With Microsoft creating the standards for the rest of the computer industry, they are able to create better standards and build them much faster than if an outside organization or committees were to create them. With these standards set, other companies are able to create their applications and other products that much faster, and better, and thus the customers receive that much better of a product. So, while Microsoft may be limiting its competition, it is aiding the consumer. They simply created products that the people liked, and the people bought them.
Moreover, Microsoft is not the stereotypical monopoly, in that it continues to innovate — how else are upgrades to its present software explained. Thus, by rule of reason it would not be right to break-up this firm, for its existence is beneficial to the public. For it is able to charge a lower price and produce more efficiently because of smaller costs than if it existed in a purely competitive industry. Slight regulatory action may be needed though in order to provide its competitors with more of a fighting chance. Competition still exists though and in the unpredictable industry of technology a firm can plummet and rise swiftly (IBM, for example, replaced Apple Computers in the early 1980s, but was soon ousted by the incumbent Microsoft).
When considering whether a monopoly should persist or not the factors must be examined closely. Whether or not the consumers are being exploited is something that is essential when contemplating the break-up of a monopolistic firm. Often times, and in the case of Microsoft, the consumers benefit from the monopoly. In the matter of Microsoft, being in the industry of PC and the products that are complementary to the PC, economies of scale can only be present where there exists little or no competition. This is evident in the dealing with Microsoft. Because Microsoft is thriving, the other firms in the industry are thriving as well, but only not in comparison to Microsoft. Microsoft freely provides the technical details of its software to rivals, thus allowing them to get up to speed with Microsoft and, to some degree, compete with it. Capitalism and free market allowed Microsoft to thrust ahead of it s competitors and develop what is nearly a natural monopoly.
The simple aspects of supply and demand are being enforced here (O’Brien 132). There is a demand for a product and Microsoft is simply filing that demand. The reason why Microsoft is so successful is because it gives the public exactly what it wants and needs, when it needs it and wants it. We can’t limit Microsoft for delivering a product that the public prefers. It’s simply the basic economic principle of supply and demand.
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Parkin, Michael, et al., eds. Economics. 4th ed.
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“Why Microsoft (Mostly) Shouldn’t Be Stopped.” Antitrust.org. World Wide Web.