Sample Economic Term Paper on Is Microsoft a Monopoly

Is Microsoft a Monopoly

Introduction

For many years, Microsoft has been the leading developer and producer of almost every essential component of a computer. It has developed multiple versions of the famous operating system software, which initially entered the market in 1981 but officially appeared in 1984 (Khan et al. n.p.). The threat to Microsoft is not necessarily from the entrance of new operating system manufacturers but from alternative products like browsers that are software that can be used with different operating systems and may also function as an alternative platform on which applications can be written.

The Microsoft Company has a huge success history, but some have challenged this ideology citing that Microsoft is a monopoly, which gives it power over other competing firms like Netscape, Apple and Sun Microsystems, through the advantages in factors of production. Initially, Microsoft had made attempts to subdue competition by proposing explicit market sharing agreements with competitors, Netscape in case (Shughart n.p.). Failure of the deal allegedly prompted Microsoft to adopt anti-competitive strategies, whose outcome was a set of consolidated civil actions against Microsoft by the US Department of Justice and nineteen states as well as the District of Columbia (Shughart n.p.). They accused Microsoft of abusing its monopoly power by way of managing the trade of its operating system and browser. This paper will present an analysis and present facts that support the idea that Microsoft is a monopoly.

Microsoft is a Monopoly

First, one needs to define what a monopoly is and its characteristics and compare them with the situation of Microsoft in order to ascertain this claim. A monopoly is a market arrangement characterized by a single seller of a product or service, which has little or no alternatives. The market demand curve for a monopoly is similar to the demand curve for a monopoly, as it is almost the only company in the industry. In monopoly markets, the market demand curve is negatively sloped and it can determine the price of its products (Khan et al. n.p.).

Monopolies gain surplus profits in the long run, compared to perfect competition markets, due to the high inelasticity of its demand curve and its lower average costs of production (Slambrouck n.p.). In the perfectly competitive markets, firms cannot sustain surplus proceeds due to the entrance of new competitors in the market. This implies that perfectly competitive markets have a higher output level and a lower price for clients.

Given the negatively sloped demand curve of a monopoly,  the firm under it should lower the price of all of its products, if really needs to sell any extra unit of its product, but because there are no viable substitutes for the product or service in the market, the monopoly firm has the power to charge high prices. The high prices translate to the excess profits, while keeping a lower level of output in order to minimize the overall cost of production (Khan et al. n.p.). By way of public interest, a competitive market allows the production of higher quality products at lower costs, but the monopolies have the financial capability to carry out advanced research and development of the products.

The excess profits enjoyed by a monopoly would make curious companies to want to enter the market for that product, but they will not be able to due to barrier of entry restrictions (McKenzie n.p.). The barriers of entry may be natural given the advanced technology used by the monopoly firm, which may not be accessible to the willing new entrant; therefore, the cost of production will be higher for the new entrant.

In the Microsoft case, the Apple system was the pioneer in this technologically advanced field and therefore, stood a greater chance of being the monopoly firm. The question that everyone would ask is why the government would ignore or not act promptly to stop the creation of the evident monopoly. On this ground, it can be said that the case of Microsoft is a government created monopoly, but this does not mean that the government actually predicts whether a firm will be a monopoly (Nash n.p.). Rather, the government only permits the said firm to own rights to the particular field(s) they want to create. Therefore, monopolizing markets can be created by the government through the issuance of patents and copyrights. The government allowed Microsoft to exist because it was seen as a company acting in the best interest of the public. The field of communication normally has its own set of economic regulations, with the common understanding that every individual must benefit from the firm’s creation. Microsoft has perfected this through their evolving operating system software, which has been consistent and up to date with the client’s way of life (Slambrouck n.p.).

Microsoft is a monopoly because of its power over Operating Systems for all personal computers compatible with Intel. This is because; customers who have Intel compatible computers have no other choice in the market for an operating system such as Windows, for their personal computers and this can only make sense if Microsoft has a monopoly to protect (Nash n.p.). Lacking an alternative for certain Microsoft products makes Microsoft a monopoly. For a long time now, there has not been any company that has produced any realistic commercial alternative for an operating system from Microsoft. The customers and the computer manufacturers all lack any commercially feasible replacement for some of the Microsoft products (Slambrouck n.p.).

Computer manufactures are mostly the direct customers of Microsoft by purchasing the operating systems and given that the business has intense competition, the OEMs have to comply with the needs of the consumers (Khan et al. n.p.). Thereby, they end up opting for Microsoft products because they lack other alternatives on the market and because they have to meet the consumer’s demands. This not only makes the OEMs significant clients to Microsoft, but also a crucial body in the determination of the commercial options offered to clients.

For most of the new personal computers, before they leave the OEMs stores, they are installed with the Microsoft Products such as the Operating Systems (Khan et al. n.p.). This implies that consumers end up with Personal computers running Microsoft Operating Systems. The OEMs, therefore, represents the consumers in some sense and would not care about the restrictions as long as their dealings with the consumers are doing good and the business as well. This is because they respond to consumer demands, which would be killing the business if they did not. By doing so, they continue promoting the monopolistic nature of Microsoft through the continual purchase of Microsoft’s products and selling them to consumers at the other end.

For these reasons, the choice of Microsoft products has become popular in the market than any other upcoming product. If for instance, there were several customer demands for varied operating systems in the market, Compaq, for example, would license that software. Therefore, several alternatives of software’s from different companies would be evaluated and considered for the consumers, which would provide a choice of products and preventing Microsoft from being a monopoly in the market. This would offer alternatives that have competitive advantages in the market and/or have a price advantage to present the consumer with several characteristic to consider while weighing the option of what product to purchase (Khan et al. n.p.). However, this is not the case because, even though there are several products out there, which have competitive and price advantage to the consumer, they have not been presented to the consumers.

OEMs testified that they do not have a choice of any commercially viable Operating System other than Windows. The OEMs have to put up with what is in the market to please their customers; otherwise, their businesses would collapse. This continues to publicize the products that are manufactured by Microsoft because they are what the consumers demand. Therefore, Microsoft continues to retain its domination status in the market share. In 1995, IBM Computer Company testified that if they did not have acquired a license for Windows 95, their business would have lost most of its profits because consumers would not purchase their items, which would result in huge losses and IBM would probably go out of business in 3 to 12 months (Khan et al. n.p.). A study showed in 1999, that Compaq Computer Company used Microsoft Operating System on over ninety percent of all their computers and a hundred percent of its Presario line (Slambrouck n.p.). It did not load any other Operating system alternative since 1993 to their computers because it could not find any other in the market. In addition, Gateway testified that it could not stop licensing Microsoft software such as the Windows, because this would “be suicide”. Many OEMs cite that they install the Microsoft Operating System in 100% of all their computers because there is not any other choice out there in the market (Slambrouck n.p.).

Microsoft’s power to be a monopoly also comes from the customer’s belief that there is no other serious choice that can be competitive like Microsoft (Khan et al. n.p.). This has given Microsoft the power to dominate the market and raise the short-term price of Windows. Microsoft is considered commercially necessary by many of the OEMs and many confirm that even if the license increases with 10% price, they would still consider Microsoft. In addition, Microsoft is aware that OEMs do not have an alternative for Windows.

This monopoly power further proves to be stronger because structural analysis proves that Microsoft has a dominant market share that is highly protected by immense barriers to entry (McKenzie n.p.). The ability of the Microsoft Company to control prices also proves it has a monopoly power.

There are other smaller software companies, such as Netscape, Sun Microsystems and Apple, among others, but it has been almost impossible for these firms to develop a strong and firm market niche in the software world, especially the Operating System (Shughart n.p.). This is because, Microsoft has been abusing its monopoly powers and this has even raised concerns from the antitrust bodies. According to the investigations done, the nature of dominance of Microsoft in the software market is considered immoral. Not many people are aware of any other operating system besides that of Windows, which is only produced by Microsoft.

Many computer machines are installed with Windows when they are purchased by the consumers. Reason being, many people insist they do not know any other commercially viable operating System besides Windows. This has created the Microsoft software’s popularity, making it even more and more known to the people, thus locking doors for other smaller companies in the same business. This has made the market share of the Microsoft Operating System grow so much and become incredibly popular to the consumers.

Initially, Apple Company was the first to produce an operating system in 1981, but since Microsoft hit the market and acquired their rights, they have monopolized the market by; for instance, producing their products at a lower cost. Its software products have been from then used in over eighty percent of Intel based PCs. Initially, for Microsoft to subdue the operating system market competition from another competitor, it was asking for explicit market sharing agreements with these competitors such as Netscape (Shughart n.p.). When these firms refused to enter into such deals with Microsoft, the company adopted other strategies such as turning to anti-competitive approaches, to outdo its competitors in the market. The consequences of these acts by Microsoft landed the company into civil actions by American State of Justice in 1994.

The US Department of Justice, together with other nineteen US States and the District of Columbia claimed that the Microsoft Company abused monopoly powers in the way it handled the sales of its operating systems and other web browsers. The concerns originated from its move of bundling all the windows software with its flagship browser software (Internet Explorer IE). This action implied that any person who purchased a personal computer and had the Windows Operating System installed, to have the Internet Explorer browser bundled in the Operating System as well (Shughart n.p.). This was a big victory for Microsoft in the browser wars against its counterpart competitors because acquiring the operating System forced every consumer of Windows to have Internet explorer. This was an unfair threat to the other web browser competitors in the market such as Netscape Navigator and Opera, which were slow to download or had to be purchase separately (Shughart n.p.). The questions included the concerns raised over Microsoft’s adopted anti-competitive strategies and imposing restrictive licensing agreements with OEM computer manufacturers.

Since the anti-trust legal trials on Microsoft, the company has gone through a great deal of commentary and scrutiny concerning its market position, pricing and strategic behavior. The Courts Findings of Facts and the Conclusion of Law over the case of Microsoft monopoly status intensified the interest in the issue and eventually resulted in even more questioning and analysis over the court ruling on this matter. The important provision of the approval decree stated that Microsoft was at free will to enter into any licensing accords whose conditions are on the basis of licensing of any other product, be it the operating system software or any other product. Nevertheless, Microsoft was not prohibited from producing integrated products. Microsoft dominates the operating system market and it sells the software with no close substitute. Microsoft is a market with barriers to entry and for these reasons, Microsoft classifies as a monopoly (McKenzie n.p.).

Conclusion

The conduct of Microsoft has caused and for a long time will continue to have substantial and far-reaching harmful effects on the consumers. The maintenance of its monopoly over the operating system market has for a long time and seemingly in the future, will deprive consumers of the benefits that come with greater competition in the market of operating systems. The competition would most probably provide a greater choice in operating systems, lower prices, innovations in markets related to the operating systems and the benefits from other potential paradigm shifts that are deterred by the conduct of Microsoft.

The tactics employed by Microsoft in its anticompetitive and voracious strategies aimed at blunting middleware threats worked to reinforce the applications barrier to entry through the extension of Microsoft’s capability of influencing and controlling standards (McKenzie n.p.). This has in turn contributed to the harming of the consumers because the domination over operating system software conserves its power over innovation, which is detrimental to consumers. This may be predictable and would result in further strategic innovation that would not serve the interests of the clients. Microsoft has attained its goal of retaining noteworthy influence over network based standards and application developments by substantially impeding the most effective channels of distribution for both Netscape and Java, raising the costs of production of its rivals’, and, ultimately, successfully eliminating Netscape as a platform threat. The declining of Netscape posed a threat to the monopolization of the Internet browser market and further entrenched and maintained Microsoft’s operating system monopoly.

Works Cited

Khan, Saleheen, Faridul Islam, and Syed M. Ahmed. “Is Microsoft a Monopoly: An Empirical Test.” American Business Review22.2 (2004): 130. ProQuest. Web. 22 Apr. 2014.

McKenzie, Richard B., “Microsoft’s ‘Applications Barrier to Entry:’ The Missing 70,000 Programs,” Policy Analysis No. 380, Cato Institute, Washington, D.C., August 31, 2000, http://www.cato.org/publications/policy-analysis/microsofts-applications-barrier-entry- missing-70000-programs.

Nash, Kim S. “Microsoft: We’re Not a Monopoly.” Computerworld 32.33 (1998): 6. ProQuest. Web. 22 Apr. 2014.

Shughart, William F., II, “Barbarians at Bill Gates,” The Freeman, April 1, 2000, (reproduced by The Independent Institute, Oakland, CA, http://www.independent.org/publications/article.asp?id=155)

Slambrouck, Paul V., Staff writer of The Christian, Science Monitor. “A Monopoly Game with New Rules the Ruling Weakens Microsoft, but also shows how Hard it is for Antitrust Law to Keep Up with Technology’s Pace.” The Christian Science Monitor: 1. Apr 05 2000. ProQuest. Web. 22 Apr. 2014.