Macro & Micro economics. Windows by Microsoft - Essay Example

?Macro & Micro economics The Economic Behaviour of a Firm in a Monopoly Market Structure Market structures are of various types in the modern economic system. If the analysis is based on the producers market, then monopoly market structure is an exclusive example of a market structure without competition. The essay tries to focus in the exclusive monopoly power of the popular software company Microsoft. Though very rare, business firms in the contemporary world often enjoy the power of a monopolist seller (Chass, n.d.). A monopolist market structure is primarily characterised with a single seller and many buyers in the industry. The products produced by a monopoly seller may or may not be differentiated. It should be carefully analysed that since the monopoly seller is the only major producer in the market, it faces the entire market demand. Thus, the price or average revenue (AR) curve and the marginal revenue (MR) curve faced by monopolists are always negatively sloped. Figure1: AR and MR Curve of a Monopoly Producer AR, MR Price or Average Revenue Curve (P or AR) Marginal Revenue Curve (MR) Quantity (Source: Authors Creation) The above diagram shows the AR and MR curve faced by a monopolist. A monopolist seller is a ‘price maker’ in the industry. A monopoly business organization often discriminates among the customers in terms of the price at which it sells its manufactured product or service. Figure 2: Price Discrimination (Source: Stole, 2003) The above diagram shows the varied prices p1 and p2 is charged by a monopolist in the market to two different group of consumers (s=1 and s=2). The monopolist faces a large share of the total market demand so its business often enjoys the benefits of economies in scale in production. The advantages in scale help the monopolist enjoy low average costs. A lower average cost creates a natural monopolist in the market, who generates strong entry barriers in the industry (Richtel, 2000). Figure 3: Natural Monopoly (Source: Tragakes, 2011) Figure 41: Price and Output Determination (Source: Mankiw, Gregory and Mark, 2006) The price and output determination of a monopolist clearly generates a dead weight loss in the society, as the monopolist is a profit maximizer. In the contemporary business world it is often found that monopoly business firms actively involves in antitrust practices in the market. The policies of the government in an economy are also influenced by the power and decisions of a monopolist in the market. Microsoft Behaviour Microsoft Corporation is a famous American software company with its headquarters in Washington. At the current market conditions, business firms can never imagine to operate without the use of computers. The rise in the level of literacy in both developed and developing economies have increased the use of computers for both commercial and non commercial purposes with time. Most of the computers in the modern world comprise of an operating system of Microsoft. Such technical products supply has made Microsoft behave like a monopolist in the market. In 4th April 2000, the Federal government claimed that Microsoft Corporation has violated the antitrust laws in the market. Antitrust laws are the laws set with the mixture of federal and state government laws. The antitrust laws are strongly implemented on all the business organizations in the modern world because such laws prevents the economy from the unfair trade practices of monopoly business firms and promotes competition in the economy. It is believed by economists and analysts that rise in market competition in the business segments would help to augment the net social welfare in the economy (Manne, 2012). Bundling of Netscape and Media Player The Federal Justice department accused Microsoft Corporation for altering the satisfaction of the consumers by shifting competition in the software marketplaces in particular with the disbursement of the Netscape browser. Microsoft desired to bundle its business with the famous company of web browser Internet Explorer. The company desired to join its operating system with Internet Explorer in order to enjoy a greater monopoly power in the market. Since almost all the internet users possess an internet explorer package in their computers, such a merger would enable Microsoft enjoy a large monopoly power in the market. This type of a bundling would be harmful for the other competing web browsing companies like Netscape Navigator and Opera. The bundling was not only bad for the existing competing producers, but was also harmful for the consumers in the industry. Bundling the features of Microsoft with Windows would enable the company benefit from higher monopoly power in the market. Research and Development Activity Though strong monopoly powers of giant companies like Microsoft generates large amount of deadweight losses in the market, still it is the high profits of the monopolists that encourage them to invest large sums of money in research and development purposes. Microsoft is also a strong monopolist in the market, constantly investing large sums of money annually in research and developments (Baye and Scholten, 1994). Research and developments further helps the firm in making technological advances in its software services. The technology delivered in the Microsoft services render high security, accessibility and speed to all its users. It is estimated in the annual report of the Microsoft Corporation that it has spent $8.7 billion, $9.0 billion and $9.8 billion in research and development purposes in 2010, 2011 and 2012 respectively (Richtel, 2000). Argument There are a lot of advantages and disadvantages of monopoly business existence in the economy. For Natural monopolies existing in the market helps manufactured goods and services at low average costs, such benefits allows the firms to lower the selling prices of such commodities. Research and development expenses could never be encouraged in the industry in the absence of monopoly powers of business firms. Microsoft incurs high costs of technological enhancement in the greed of winning greater profits (Hall, 2008). Against Extreme monopoly is harmful for the economy, oligopolistic market conditions are better for the economy, as it encourages cut throat competition. It should be always considered that greater competition generates welfare in the society. Thus, such bundling intensions of Microsoft would allow the company to discriminate among consumers in terms of utility and welfare (Shepherd and Shepherd, 2003). Reference List Baye, M. and Scholten, P., 1994. Strategies Used by Microsoft to Leverage its Monopoly Position in Operating Systems to Internet Browser Markets. [pdf] Available at [Assessed 1 October 2013]. Chass, (n.d.). Behaviour of Monopolistic Firms. [online] Available at [Assessed 1 October 2013]. Hall, R. E., 2008. Potential competition, limits pricing, and price elevation from exclusionary conduct. [pdf] Available at [Assessed 1 October 2013]. Mankiw, G. N. and Mark P. T., 2006. Microeconomics. Connecticut: Cengage Learning EMEA. Manne, G., 2012. Section 5 of the Ftc Act and Monopolization Cases: A Brief Primer. [online] Available at [Assessed 1 October 2013]. Richtel, M., 2000. Technology; Microsoft aims at real net works in media-player software duel. The New York Times. 10 Jan. Shepherd, W. G. and Shepherd, J. M., 2003. The economics of industrial organization: Fifth edition. Canada: Waveland Press. Stole, L. A., 2003. Price Discrimination and Imperfect Competition. [pdf] Available at [Assessed 1 October 2013]. Tragakes, S., 2011. Economics for the ib diploma with cd-rom. Cambridge: Cambridge University Press. Read More