Market Structure of Software Business - Case Study Example

Contents Market structure of Software business 1 Introduction 1 Background of the business 2 Type of monopoly 3 Basic constituents of a monopoly 4 A market made up of a lone or dominant firm 4 Commodities without similar substitutes 6 Existence of a market with entry barriers 8 benefits accrued thourgh monopoly 9 advantage of price 9 economies of scale 10 conclusion 11 Works Cited 12 Market structure of Software business There are numerous kinds of market structures that exist today such as Monopoly, Oligopoly, Perfect competition and their derivatives. These market structures depend mostly on the nature of the product or service that the industry has to offer as due to that the sale and share of the market comes in to play. This not only affects the share but also affects the quality as well as the price of the commodity or service. All the market structures have their comparative advantages and disadvantages as they affect the price and quality of the products. The industry and business selected to be analyzed is the business of software business which is one of the most running and fast extending business globally. Introduction The business of software development, sale and marketing is largely based on the technological aspect of the business as the more advance the industry and the components are, the more competitive the business can become. So far, the business has been dominated by very few of the companies and it will not be unjust to say that out of all the companies, one company has maintained the most of the share in the market and is considered as the greatest producer of software and other concerned products. That company is the company of Microsoft which has given this business a shape of a Monopoly by dominating the revenues and the products thus controlling the prices and quality of the goods and services produced by it. Background of the business Since the commencement of the technological era and the advancement in the field of computers and software generation, there has been vast interpretations and scrutiny relating to the market arrangement, pricing and strategic performance of the software development companies. Every time an innovative advancement come up and grows into a vibrant growth approach the initial participants expand enormous benefits as they become the first to add to the practice, the invested resources and the public Therefore, when challengers approach the market, they have to pull alongside prior to the fact that they can struggle to gain the same status. Microsoft can be said to be a good illustration of this fact. Microsoft developed into a monopoly for the reason that it was able to generate and put into effect worldwide data communication benchmarks for personal computers and they did it by producing series of operating systems and by presenting the type of mechanism that may well run their Operating Systems so their merchandise was able to be in each market place that they wanted it to be, thus making it a monopoly in the software business. (Linzmayer 1994) Type of monopoly There are numerous kinds of monopolies that depend on the nature of the business which render it a monopoly. The software business makes Microsoft as a monopoly because of its character of having the advancements in the technology and the economies of scale which do not render possible for other companies to compete with it. Microsoft can be said to be a combination of technological and natural monopoly. This is because of the fact that the company has enough advantages over other smaller companies with respect to the advancement in the technology that other companies cannot compete with it at Microsoft’s level. It can also be said to be a natural monopoly because the use of the operating systems produced by Microsoft have become so common that it has become very difficult for other smaller companies to come and present something up to the standards of Microsoft in order to fetch a reasonable share of the market. The competitors of Microsoft have been unable to produce operating systems in place of Microsoft which can become readily acceptable as the company was one of the first to step into the business and took up most of the market share with its early arrival in the business. It can be rightly said that Microsoft are, themselves, the birth of the software industry as they hold up most of the share, thus rendering it as a monopoly. (Beer 2011) Basic constituents of a monopoly There are some basic constituents that render a business as a monopoly, perfect competition, and oligopoly or alike. These constituents are applied to the business of software development and shown whether the software business proves to be a monopoly or is it just a myth about it. In order to be called a monopoly a company shall meet the criteria. It must be prominent that even the firm is said to be a monopoly, it is neither illegal nor harmful in any way as it is an economic peculiarity given in order to avoid any worthy judgement. Those constituents are: A market made up of a lone or dominant firm Commodities without similar substitutes Existence of a market with entry barriers A market made up of a lone or dominant firm Monopoly accurately means single firm but discovering a market made up of a lone firm is almost impractical. As a result, practically there can be no firm that could be said to be a monopoly. (Cuellar 2000) A more sensible and rational description of a monopoly market may comprise of a market dominated by one firm. The consideration of the applicable market comprises of two criteria: The relevant productivity market of the commodity The relevant location of market The relevant commodity market has all commodities made by the firms which have matching characteristics and the relevant location of the market has the commodities which are not the same although can be used as substitutes for each other. In the case of Microsoft, it is essential to shed some light on the relevant market where it carries on its business. It has been disputed about the relevant market of Microsoft which is the software market, where its sales are only 5% of total dollar sales. However, if the relevant market is termed as the market of operating systems, where Microsoft’s Windows operating system takes greatly large portion of the market, it would become are rather more relevant market to determine the nature of the competition it carries on. Even if we consider only the operating systems, it can be said that Microsoft has been seen to hold share around 80% and 90% or more of the market of personal computer operating systems. There are several reasons why Microsoft is called as a single dominant leader in the world of software and exclusively the market of operating systems. One reason can be the fact that it initially came to produce the operating systems which were used in the personal computers and started to dominate the market where most of the users of the personal computers used the Microsoft’s product which is the Windows as their operating systems and thus the operating system became much more popular and was spread among the market. There is a great deal of compatibility if one user wants to integrate with another and thus the fact that since the product has been used all over the world, it has become more easy to use and little education regarding the product is required which makes it more saleable. Thus, for a new competitor to enter the market, it will require a long time for the product to be understood and educated for the users even though there are much more features in that product so the users will prefer a system which they have prior knowledge. This makes Microsoft a lone and single dominant in the market of software, especially the market of operating systems. Commodities without similar substitutes The next portion of the definition points out that a monopoly functions in a market where there are no or little close substitutes. The accessibility of a substitute commodity relies on the description of the relevant market. As a result, the availability of a near substitute can have numerous interpretations and understandings. To a degree, there can be existence of substitutes for all products but how “close” that commodity is a substitute for the other, nonetheless, is established by end users. In the same way, with the operating systems, there are substitutes for the operating system Windows that is produced by Microsoft. For instance, Free BSD Linux, BeOS, OS2 Warp developed by IBM and Mac etc are all similar to the operating systems. Conversely, some of the users do not take BeOS, Linux, or the other peripheral operating systems as close substitutes to the operating system produced by Microsoft i.e. Windows for a number of basis. In spite of the act, the majority of the users decide not to observe the current choices as close substitutes for Microsoft’s product. In the market economies, it is determined by the consumers as to what constitutes and does not constitute a substitute for a product and as for the operating systems; the consumers have determined that. In spite of, whether users liberally choose Microsoft over other alternative operating systems available or that there exist no close substitutes to Windows for the reason that it makes a far greater operating system, users do not recognize the alternative operating systems as close substitutes for Windows. Not saying specifically that there can by no means be a close substitute for Windows. Technology advances rapidly and Microsoft’s Windows may be replaced by any of the current operating system or a potential operating system. Existence of a market with entry barriers Another important criterion in the description of a monopoly is the difficulty to enter the market. The Barriers to enter the market are significant to the continuation of a flourishing monopoly. Microeconomic concepts argue that if a firm makes a successful commodity which is also cost-effective and profitable, it will unavoidably draw other firms in search of imitating it for making gains. If the competitor firms are given the authority to penetrate in the market, profits will not only be short-term but will also be divided among all the players of the market so as the competition in the middle of the firms will take away the economic profits of the previous firm. (Is Microsoft a monopoly? If so, why does it matter? 2011) Therefore, in order for a firm to productively earn constructive economic profits in the long run, there must exist the barriers to entry for other competitive firms. Initially, it is still disputed that there are economies of scale involved in the development of operating systems for personal computers. Even though, there exist great fixed costs coupled with the investigation, study, development and promotion of operating systems, the unit costs in long run of developing the operating systems diminish as additional operating system units are developed as only copies are to be made. As a result, the marginal cost of developing the replica of Windows is very low and consequently the price to users is also low. The user of the operating systems take the lower per unit cost as good prospect but as for the potential rivals the high fixed costs are exorbitant for entry in the market. The Economies of scale in development and use, specifically being the indirect network externality, play a role collectively to generate the applications entry barriers. These barriers are applied to clarify the cause of slight contest for Windows and the reason because of which is it improbable that rival operating systems will be generated in the coming future. Another main component of the barriers to entry is Microsoft’s copyright to its products which is the Windows operating system. This confines other companies from replicating its operating system. The Government has granted patents reward inventors by granting them the elite right to trade their Windows for a period of twenty years. benefits accrued thourgh monopoly There have been many benefits to Microsoft due to the monopoly that it has established. advantage of price Initially, like it is claimed that a monopoly can determine and force the price at which it wants to sell the products, a monopoly is unable to charge “any” price as it deems fit. A monopoly charges the highest price which the end users are eager to pay. The degree to which it can charge a high price is its capability to diminish the marginal cost of production against the price it is charging. (Shopper n.d.) It has been seen that even though the competitors are eager to pay a very low price for their set of operating systems but they are still unable to gain a considerable share in the market where their cost of production is very high comparatively. economies of scale It has been able to gain the advantage of economies of scale as it has grown up to be the largest seller of operating systems and thus minimizing the cost of production a great deal. It is frequently disputed that the marginal cost of developing an added copy of Windows is nearly zero. Conversely, this does not incorporate the cost of support and other marginal costs linked with the sale and advertisement of the additional unit. Therefore, it can be said that the marginal cost of distributing an extra unit is marginally more than zero. (Internet Cork Board n.d.) conclusion In order to be regard as a monopoly, the criterion has got to be met: Market dominance, lack of close substitutes and barriers to entry. Clearly, Microsoft is the dominant firm in the operating systems industry. In spite of the fact the way Microsoft achieved its supremacy, the users decisively prefer to use Windows above rest of the operating systems which is why the industry truly shaped to a Monopoly and thus dominates the market by eliminating the rest of the competent. Works Cited Beer, Stan. "Vista to play second fiddle to XP." iT Wire, 2011. Cuellar, Steven. Is Microsoft a Monopoly? Argumentative Report, San Jose: Department of Economics, 2000. Internet Cork Board. http://www.internetcorkboard.com/servers-storage/operating-systems/ (accessed May 15, 2011). Linzmayer, Owen W. The Mac Bathroom Reader. Sybex, 1994. Shopper. http://shopper.cnet.com/buy-software/ (accessed May 15, 2011). "Is Microsoft a monopoly? If so, why does it matter?" This Nation. 2011. http://www.thisnation.com/question/027.html (accessed May 14, 2011). Read More