Monopoly Market Structure and Behaviour of Firms - Essay Example

Microsoft Introduction Monopoly form of market is a market structure that is characterised by a single firm and many buyers. The firm is the only provider of a particular product or service in the market and caters to all customers. Microsoft is one of the leading companies in the high technology sector, but the company has been accused to practice monopoly practices. The paper discusses the negative and positive aspects of Microsoft’s monopoly. Monopoly market structure and behaviour of firms The fundamental conditions of this form of market have been given below: The monopoly market is one in which there are many buyers while only one seller caters to the demand of all the buyers. There are strong barriers to entry to the market. In a monopoly market, the seller sets enjoys maximum market share. More the market power more is the monopoly power enjoyed by the seller. Entry barriers are designed by producers to restrict entry by potential firms. Since new firms cannot enter the firm profitably, the monopoly power of the incumbent firms is protected and they are facilitated to enjoy supernormal profits in the short run as well as in the long run (Abramson, 2005). Therefore, one implication of barriers to entry is supernormal profit, often termed as monopoly profit. The other implication is that competition among firms is typically absent in monopoly market. Monopoly market generally exists when production of certain products or offer of certain services requires specialized production equipment or specialized skills. Thus, monopoly firms need to bear high start up costs. Monopolists practice the policy of bundling. They bundle two or more products, mostly when they are complementary with one another. This would further restrict entry of other firms in the production process of complementary products. Thus, market power of monopolists rise (Pike, 2001). The factors mentioned above indicate that the entire market demand curve is faced by the monopolist firm and price is determined at the intersection of Marginal revenue (MR) and Marginal cost (MC). This is illustrated in the following diagram below: Figure: Equilibrium in monopoly market (Source: The University of Alabama, n.d.) Behaviour of Microsoft Microsoft is not only a market leader, but one of its products, the Windows operating system, is installed in almost 90 percent of desktops and laptops in the around the globe. In 1998, a case had been filed in the U.S. District Court of the District of Columbia regarding the fact that “Microsoft possesses (and for several years has possessed) monopoly power in the market for personal computer operating systems” (McKenzie and Shughart II, 2013). According to the judgement delivered by the Justice Department, Microsoft is a monopolist. Bundling of Netscape & Media Player Bundling is the situation in which two or more products are offered simultaneously by the same seller (Krämer, 2009). When products are bundled, they are sold simultaneously and at lower price than if they would have been sold together. It also reduces heterogeneity among customers since unique price is set for all goods customers that buy these goods are heterogeneous (Belleflamme and Peitz, 2010). Microsoft adds several product with its Windows operating system, such as web browser (Internet explorer) or media player (Windows media player). Since the windows is the commonest form of operating system used currently, the applications and software bundled with it becomes ubiquitous very fast. Microsoft has been accused of crushing the market prospects of its rival Netscape. Netscape web browser and its media player, the RealNetworks, are gradually losing market share since these have to be downloaded and installed separately. Microsoft’s bundling strategy has not only cut off Netscape’s growth prospect, but also is suspected to deter innovation and control and reduces consumer choices in future (Economist, 2004). Research and development activity; Research and developmental activities are dependent on the current state of technology. Higher forms of research work are made for the advancement of man and the products are later on commercialised for the purpose of revenue maximization by the company that sells it. Since Microsoft is acting as a monopolist, investments made by the company for R&D is highly profit centric. Hence, often companies invest in such products that are expected to be readily adopted by target customers. Therefore, the direction of innovations is controlled by the company. Since the products of Microsoft are well known among the customers, future innovations would be made in such a way that these new products or services are compatible with Windows. Thus the scope of innovation is restricted. Discussion and conclusion Rampant criticism has been raised against Microsoft’s allegedly unencumbered market power. If it is to be believed that the company is a monopolist in the market for computer operating systems, critics have openly condemned the founder of the company and CEO, Bill Gates for directing his business operations in this direction. According to several market observers, publicists and other reporters, antitrust intervention against Microsoft is necessary. This is because after a long observation, it has been deduced by critics that Microsoft has probably aimed at a higher position in the high technology industry (Rittenberg, 2008). The company depends heavily on the strategy of bundling in order to retain its monopoly power (VanHoose, 2011). However, apart from the issues arising with regard to future of innovation, economic problems pertaining to monopoly power relates to high price. Since there are no other sellers, customers are forced to buy products offered by the monopolist at a high price. Besides, due to less competition, monopolists often reduce their quality standards to increase profit level or net rent. This indicates higher cost to community (Newman, 2002). However, Microsoft’s monopoly position also holds certain arguments in the public interest. Microsoft has the necessary infrastructure and financial soundness to conduct outstanding research works. If other firms undertake this duty, it might be a suboptimal decision. Cost incurred by them might be greater than the cost incurred by Microsoft for similar innovations (Hirschey, 2008). Besides, Windows operating system is highly user friendly and easy to use than other operating systems, such as Linux, Mac or Unix. Therefore, in public interest, Windows is installed in majority of personal computers around the world. References List Abramson, B., 2005. Digital phoenix: Why the information economy collapsed and how it will rise again. Massachusetts: MIT Press. Belleflamme, P. and Peitz, M., 2010. Industrial organization: Markets and strategies. Cambridge: Cambridge University Press. Economist, 2004. Windows à la carte. [online] Available at: < http://www.economist.com/node/2539832 > [Accessed 9 October 2013]. Hirschey, M., 2008. Managerial economics. Connecticut: Cengage Learning. Krämer, J., 2009. Bundling telecommunications services: Competitive strategies for converging markets. Munich: KIT Scientific Publishing. McKenzie, R. B. and Shughart II, W. F., 2013. Is Microsoft a Monopolist? [online] Available at: < http://www.independent.org/publications/tir/article.asp?a=322 > [Accessed 9 October 2013]. Newman, N., 2002. Net loss: Internet prophets, private profits, and the costs to community. Pennsylvania: Penn State Press. Pike, C. G., 2001. Virtual monopoly: Building an intellectual property strategy for creative advantage - From patents to trademarks, from copyrights to design rights. London: Nicholas Brealey Publishing. Rittenberg, L., 2008. Principles of microeconomics. California: Flat World Knowledge. VanHoose, D. D., 2011. Ecommerce economics. New York: Taylor & Francis. Read More