The Microsoft Monopoly - Essay Example

Shakil Sharif Greenwich BS272132 November 2009 The Microsoft Monopoly A monopoly exists when there is only a sole producer of a particular good or service which has no close substitutes. A few characteristics of a monopoly are as followed: Single producer- An absolute monopoly is an industry in which a firm is the sole producer of a particular good or provider of a certain service. Blocked entry- The barriers to entry for this industry make it virtually impossible for other firms to enter. These barriers may be technological, financial, economical or legal. Price maker- The monopolist controls the supply of his product or service, therein giving him control over price. A monopolist can control the price of its product by changing the quantity supplied into the market. No close substitutes- The product of a monopoly is unique. There are no products in the market which can substitute the product supplied by a monopolist. Non-price competition- The product produced by a monopolist can either by standardized (as with petrol or electricity) or differentiated (such as Frisbees or windows). Monopolists who produce standardized products primarily engage in public relation advertising where as those who produce differentiated products, advertise their products features and attributes. Economies of scale are a vital advantage to a monopoly. These entail all the advantages a company gains as it grows beyond a certain size. Due to modern technology, large suppliers of state of the line electronics such as Microsoft or Sony are able to reduce their total average cost. Over a large range of output, a firm is able to spread out its fixed cost. The fixed cost per unit of the firm will reduce significantly as output increases. The ability for a product to satisfy a large number of consumers at the same time is called simultaneous consumption. i.e Dell computers needs to produce one desktop for each consumer but Microsoft needs to design one Windows program only once.(Brue 438-449) . Eight years ago, Judge Thomas Penfield of the US district court declared Microsoft an official Monopoly. However, it is hardly as powerful as it was when his claims were first made because more corporate giants have entered the market. Microsoft has the majority of market share in the video game industry after its release of the Xbox 360.The closest substitute for the Xbox 360 would be the Sony Ps3. Both consoles are in monopolistic competition with one another because there are very few in the market. The market structure under which they operate is not a pure monopoly but monopolistic competition. Microsoft has legal and technological barriers which prevent other companies from entering the market. The software developed by Microsoft are patented. The financial advantage of such a large company enables them to use production techniques which would be impossible for new firms to afford. There are a few misconceptions about Monopolies that not everyone is aware about. Monopolies do not charge the highest possible price for their product. Monopolists dismiss many prices in order to set a price which yields maximum profit. Majority of times, if prices are set too high for people to afford, then the total revenue of the firm decreases (varying by price elasticity of demand). A monopolist sets a price which results in maximum total profit and not maximum unit profit. The quantity is usually set at the point where Marginal Cost and Marginal Revenue are the same. Once the quantity is set, then the demand for the product is analyzed and a price is set. At this point, it is at the profit maximization position. Is the existence of Microsoft beneficial or detrimental to the economy as a whole? Income transfers from the hands of consumers to stockholders. Stock holders are higher income groups who benefit from consumers who overpay for Microsoft brand products. On the other hand, an economy may experience equality if stockholders are low or middle income groups. Microsoft also employs thousands of people which inject funds into the market and stabilizes the economy. The government is obligated to the economy to regulate monopolist affairs. The government sets legislations in order to ensure that no sole business dominates the market for a product to the degree where it s anti-competitive. When a business does do that, it can stagnate innovation. However, when the government further investigated the monopoly, they realized that Microsoft maintained its 70% market share by innovating, successful products and marketing. Overall, the government found only a few unfair practices which it forced Microsoft to cease. The organization was forced to change some licensing packages for its operating system. During 1995, Judge Stanley Sporkin of the US district court for the district of columbia dismissed the agreement made between the government and Microsoft and said: This pact is not in the public interest and does not constitute an effective antitrust remedy. (LA Times, 11/15/95). Judge Sporkin then tried to force the department of justice and the FTC (Federal Trade Commission) to reconsider Microsoft and look closely at its tactics for unfair practices. During June of 1995, the court disregarded Judge Sporkins claims and stated that his actions breach the nature of the antitrust agreement. Judge Sporkin still pleased with his actions believed he was right regardless. (Conigliaro, cse.stanford.edu) Economic traits indicate that Microsoft may decline in the upcoming years. With old competitors like Apple releasing new products in the market and the potential for new competitors, it is safe to say that this will reduce Microsoft’s profits. This unique monopoly can only be regulated through the entrance of new competitors or the improvement of old ones. Government intervention showed no signs of unjust practice. (Albro, pcworld.com) In conclusion, Microsoft is a natural monopoly which thrives on innovation and production. This wipes the notion of all monopolies being detrimental to the economy.This organizational structure isn’t bound to particular features. The pure monopoly concept is impractical with the economcs of today because the government will hinder any business from growing to the point where they are a risk of becoming the sole and absolute producer of a product in an industry. Works Cited McConnell, Campbell R., Brue, Stanley R. “Pure Monopoly”. Economics, Sixteenth Edition. Urbana-campaign: University of Illinois. Retrieved on 13 November 2009. Conigliaro, Andy. “When Microsoft met the FTC”. (n.d). The dangers of corporate monopolies. 13 November 2009. http://cse.stanford.edu/class/cs201/Projects/corporate-monopolies/government_msftc.html Albro, Edward. “Eight years later, is Microsoft still a monopoly?”. November 9 2007. PCWorld. 13 November 2009. http://www.pcworld.com/article/139458/eight_years_later_is_microsoft_still_a_monopoly.html Read More