Microsoft Monopoly - Term Paper Example

Word Count excluding Bibliography: 2136 Topic: Does Microsoft have monopoly power in the market(s) for personal computer operating system? If yes, did Microsoft maintain this power by using anticompetitive practices? Introduction The name Microsoft was probably coined from microcomputer software and refers to a worldwide corporation that primarily started as a personal computer (PC) software development corporation for IBM-and-compatible microcomputers (Meese, 1999). Published information further indicates that the corporation was incepted sometime in 1975 before incorporation in 1981. It is at this time when the integrated company developed “a command user interface (CUI) operating system (OS) called Disk Operating System (DOS)” as observed by Reynolds (2005). From this time on, reports illustrate that Microsoft has grown in might and fame to rule the world of information technology in modern times. The corporation is currently boasting of a plethora of products and software useful in the world of informatics and computing as cited by Page and John (2009). In spite of this colourful and robust growth attributed to Microsoft, critics argue that the playing field has been lopsided in favour of Microsoft. It is from this argument that the author intends to establish whether Microsoft has monopoly power in the markets for personal computer operating system and whether this power has been maintained by using anticompetitive practices. The essay is divided into the sections discussed hereunder. Microsoft’s monopoly powers From the economics perspective, monopoly is taken to refer to “a market in which there are many buyers but only one seller” (Garry, 1990). In a monopolistic situation, the seller is usually at liberty to assign any price to the products on offer as propounded by Craig and Steven (1999). Elsewhere, Bill (2004) has defined monopoly as “the exclusive possession or control over something”. A number of arguments have stipulated that there is a lot of dominance when one organisation possesses monopoly of a certain commodity. Although this preposition has highly been contested, certain preconditions justify the situation. Consider the following situation for instance. When one company is the sole provider of a particular product or has a very large portion of it and therefore controls most of its usage, then that company is said to wield a lot of monopoly power. In line with this observation, it can be concluded that “monopoly is the dominant ownership of a thing in which one has a severe influence over its usage including even the portion owned by others” (Garry, 1990). Economists across the globe have concurred that a big characteristic of monopoly is the scarcity of the item in question. In view of the foregoing definition, the current author takes on the real Microsoft monopoly. There is no doubt that Microsoft has monopoly in Intel PC Operating Systems and other micro-computing applications. Available data has shown that other players in the industry have been aware for quite sometime about Microsoft’s bundling tactics where one must office productivity applications that are tied to MS Office for compatibility. This idea brings more profitability to the company as illustrated by the following model. Windows sold at £4, profit is £8; WMP sold at £5, profit is £10. When both items are sold as a bundle, profit is £24 (Leslie, 2004), hence the consumer suffers. Similarly, web-surfing users are reported to be using Internet Explorer produced by Microsoft in disproportionate ratio of about 8:1 over other available browsers (William and John, 1999). Proponents have come out in defence of Microsoft’s monopoly by arguing that it fundamentally supersedes any other company that has ever found its way to the market. This has been attributed to the simple reasons resident in Microsoft’s heavy “investment in skill, experience, training, and tools of Windows software developers themselves”. In principle, I tend to agree with this argument for the fact that research has unearthed a wealth haven of Microsoft assets and a window of opportunity to specialised developers. In contrast, Microsoft distracters have been busy wasting precious moments coding for the Windows environments instead of initiating efforts that can offer fair competition. Further reports by Page and John (2009) have continued to demonstrate Microsoft’s might in industry dominance by submitting that the best of seasoned professional developers have been unable to choose an environment other than Windows. In their views, the scale of market set by Windows has dwarfed its competitors leaving market developers no other option. Additionally, the sheer size of the Windows’ installed base is seen as a hedge against market change (Meese, 1999). Windows is thus perceived as a platform that has come to stay. This claim clearly demonstrates how enormously Microsoft has invested in human capital to improve on its Windows platform and continue dominating Windows applications, thereby making its monopoly self-perpetuating (Scherer, 1993). Unfortunately, many companies have refused to acknowledge Microsoft’s evident monopoly and its sheer resolve to maintain it. Instead, these companies are reported to be engaged in useless and endless struggles of looking for possible opportunities to penetrate Microsoft’s well established markets (Leslie, 2004). These efforts have been dismal because Microsoft operates in a seemingly “locked market”. This cushioning has not been without challenges. It is reported that in recent times, Windows dominance in operating systems is no longer assured. Scherer (1993) observes that perfect monopolistic situations remain safe only when competitors have a penchant for making money. That’s why Microsoft was once capable of fending off the mighty IBM which had insatiable desire to make money as reported by Bill (2004). The entry of Linux in the computing setup is feared to work against the interests of Microsoft. It is rumoured that Linux has no interests in economic gains, thus upsetting the arrangements for a perfect monopolistic cushion. In the observations made by Bill (2004), Linux “needs no profits, corporate partnerships, or investors in order to succeed. Additionally, it depends only on their campaigners’ infatuation with programming and their self-imposed standards of quality in their own work”. Moreover, supporters of Linux are motivated by their zeal to level the otherwise lopsided computing landscape created by Microsoft (Reynolds, 2005). It is therefore speculated that the expected robust growth of Linux will come from the other broad market targets left open by Microsoft busy defending its monopoly status. Microsoft’s anti-competitive practices In an effort to defend its position in the market, Microsoft is blamed for engaging in anti-competitive practices in order to maintain the hard earned monopoly powers. Friend and foe alike have accused Microsoft of using exclusionary policies in dealing business according to views proffered by Michael (2001). In marketing sense, exclusionary practices are considered in relation to the practice of monopolisation which, as indicated in the foregoing paragraphs exists between existing firms and new entrants in most cases but at times between existing firms (William and John, 1999). Further reports clarify that exclusionary practices compose predatory pricing, strategic investment, bundling and tying, incompatibility and networking. Reviewed literature has indicated that Microsoft has used a number of these practices discoursed in coming paragraphs to put their competitors out of business. In my informed view, use of exclusionary practices is permitted by law considering the business nature in contention. Nevertheless, numerous claims show that Microsoft used some of these practices in its exclusive favour. Observations pointed out by Meese (1999) illustrate that Microsoft has been intentionally bundling its operating system with its applications software, giving it indisputable lead in most microcomputers. In the views of Leslie (2004); Meese (1999) and Michael (2001), bundling and tying comprise an example of non- pricing exclusionary behaviour in which case a product is offered under the condition that another product is purchased. These are alternatively referred to as ‘tie-in sales’ and may include the selling jointly of Internet Explorer with Windows operating system or shoes with laces just to mention a few examples (Leslie, 2004). Market experts have argued that bundling and tying have noticeable positive and negative effects to the company. Positively, the company increases efficiency by assembling for the consumer since it enjoys division of labour and scale economies (Page and John, 2009). Similarly, the consumer is bound to benefit from a multiplicity of information emanating from the manufacturer who has a rich knowledge base for the various products on offer. The negative effects on the other hand are particularly to the consumer as illustrated by the model mentioned above. Another situation may occur where the manufacturer may sell for instance, a photocopying machine at low price but sell the cartridge at high price (Page and John, 2009). This will be very costly to the consumer in the end because the photocopying machine is once for all purchase while the cartridge is purchased continuously as need may arise. In addition to bundling and tying, Microsoft is also accused of exercising predatory pricing which is considered as a price exclusionary behaviour. In the views of Reynolds (2005), predatory pricing occurs when a firm wielding monopoly power charge a low price to a similar product to force aspiring competitors as well as existing ones out of the market. The immediate impact of this behaviour is higher benefits for consumers due to low prices in the short run with the firm counting losses. The practice of predation is best explained by the reputation model where the incumbent will not fight new entrants due to the presumption that fighting will be useless especially in the presence of perfect information (Bill, 2004). Microsoft has thus been enjoying the benefits of its reputation. Alternatively, Microsoft has similarly been signalling false idea of price or demand to deter entrant who lack knowledge of cost or demand of the market (Page and John, 2009). Low prices are also set to show low profitability as demonstrated by the signalling model. The ‘deep-pocket’ model clearly illustrates the status enjoyed by Microsoft where the company has fully established itself in the OS market. Microsoft has always emerged the winner in a price war involving ‘shallow-pocketed’ new entrants (Page and John, 2009). The overall effect of predatory pricing is delayed benefits to the consumer. Available study findings indicate that Microsoft is revered for its propensity to acquire competitor’s firms in most competitive buyouts, including those in markets other than computer software (Leslie, 2004). As noted by Bill (2004), Microsoft did its first buyout in 1987 by acquiring Forethought’s presentation program that became the modern day Microsoft PowerPoint presentation program. Ever since this first successful acquisition, Microsoft has repeatedly done numerous purchases of competitor companies that total to approximately 200 different firms. This unobstructed acquisition of competitor companies within a very short period of time is reportedly said to have send shock waves down the spines of industry players. This is attested by the recent denial of Microsoft to purchase a software company Intuit, specialised in selling a leading personal finance program according to claims by Page and John (2009). The argument behind this denial is to avoid concentrating too much market power into one firm according to market experts. Finally, further reports allude that Microsoft has resorted to colluding with firms in other markets in cases where it has failed to purchase a firm it has been eyeing. In market terms, Scherer (1993) argues that collusion is equitable to networking which simply involves cooperation with other companies that effectively blocks entry of new players. In the view of certain government authorities, collusion is blacklisted to control the amount of market power wielded by one firm or group of firms (Garry, 1990). But reports are widespread showing that Microsoft in one way or the other has been able to circumvent these anti-trust laws and managed to collude with other firms (Bill, 2004). A case in point is presented by the current arrangement Microsoft has established with the existing notebook manufacturers in Poland to have Windows OS pre-installed on the notebooks as cited by Reynolds (2005). This arrangement has put the consumer wishing to buy the notebook in a very awkward position because, once hooked on to Windows OS remains so until an extra fee is paid change to another operating system (Page and John, 2009). However, a number of manufactures are reported to have confessed that they were offered irresistible benefits to cooperate with Microsoft. Conclusion From the foregoing discussion, it has been categorically illustrated that governments the world over have taken a more strict stance against Microsoft since 2002. A number of these harsh resolutions have started influencing the way Microsoft is making business decisions as noted by Reynolds (2005). Consumers’ enlightenment about their rights to innovation and choice has effectively led to Microsoft’s diminishing market share to other upcoming firms. In this regard, continued enforcement of strict regulations and rampart consumer sensitisation will see Microsoft streamlining its business ideals to remain relevant. But one very clear issue in this discourse is that Microsoft has enjoyed enormous monopoly power in the markets for personal computer operating system since inception. Secondly, there is no doubt that what Microsoft did to maintain this power was not different from what any other company would have done in the same position. Bibliography Bill, L. (2004) Monopoly Capitalism in Crisis. New York: Palgrave Macmillan. Craig, R and Steven, S. (1999) Preserving Monopoly: Economic Analysis, Legal Standards, and the Microsoft Case, 7 Geo. Mas. L. Rev. 617 Garry, O. K. (1990) Monopoly Power: How It Is Measured and How It Has Changed. Salt Lake City, Utah: Crossroads Research Institute. Leslie, Christopher. (2004) Cutting through Tying Theory with Occam’s Razor: a Simple Explanation of Tying Arrangements, 78 Tul. L. Rev. 727. Meese, A. (1999) Monopoly Bundling In Cyberspace: How Many Products Does Microsoft Sell? 44 Antitrust Bulletin 65. Michael, D. W. (2001) Exclusivity and Tying in U.S. v. Microsoft: What We Know, and Don’t Know, 15 Journal of Economic Perspectives, 63-80. Page, W. H. and John, E. L. (2009) The Microsoft Case: Antitrust, High Technology, and Consumer Welfare. University of Chicago Press. Reynolds, A. (2005) The Microsoft Antitrust Appeal, Hudson Institute: 40 Wake Forest Law Review 1. Scherer, F. M. (1993) Monopoly and Competition Policy. Brook-field, Vt.: Edward Elgar. William, Page and John, L. (1999) Antitrust on Internet Time: Microsoft and the Law and Economics of Exclusion, 7 Supreme Court Economic Review 157-231. Read More