Oct 3, 2018 in Case Studies

Introduction

Microsoft, a leading manufacturer of computer software programs and operating systems, was sued by the United States Federal Government for antitrust allegations.

Reasons for Microsoft’s Investigations for Antitrust Behavior

Microsoft has been the leading supplier of Operating Systems (OS) and other software programs in United States of America and the world for centuries. It was investigated for antitrust behavior because of its bundling and integration of the Internet Explorer browser in the Windows Operating System. It also started charging high prices for its software programs since it enjoyed so much power in the software industry. This price was above what could be sustainably charged in a competitive market.

In addition, their Windows and Office software did not allow interoperability with third party products. Microsoft was accused of withholding crucial technical information that was vital for development of the software industry (Gordon, 2002). It was observed that its dominance in the Information Technology industry posed a threat to the American economy.

Microsoft was alleged of violating the Sherman Act that prohibits certain business activities that trim down competition in the market. The Act requires the Federal Government to investigate, track and sue companies that are suspected of violating laws for free and fair competition. The Federal Government thus wanted to prevent Microsoft from suppressing and quelling competition in the computer software industry.

Monopoly Market Structure

This is a market structure in which there is only one single seller offering goods and services for sale in the market. This single seller or producer is usually called the monopolist. Products of a monopolist often lack close substitutes. Monopolies can be created naturally (natural monopoly) where it becomes relatively cheaper for one single producer to operate in the market due to high fixed costs of producer, or can be created by governments (government monopoly) where the government grants power and privilege to a given producer to solely supply the entire market. Generally, monopoly is one of imperfect competition market structures. Other types of imperfect competition where market fail to meet perfect competition conditions include oligopoly, monopsony and oligopsony.

Characteristics of Pure Monopoly

Generally, monopoly markets are usually characterized by existence of one single seller or producer in the entire market. There is often no economic competition or close substitutes for the products of a monopolist. The monopolist bears all the market power and acts as the price maker or setter. Entry into the market is often restricted or naturally hard. However, in pure monopolistic market, there is only one single firm with totally no close substitutes. The firm forms the industry, and the two are synonymous. Barriers to entry into the market are either artificial or naturally created, usually due to economies of scale. In addition, the marginal revenue curve a pure monopolistic firm is usually below the demand curve.

Last but not least. Monopoly markets often results into X-inefficiency, a condition in which firms fail to behave in the expected manner described by major economic theories. A monopolist thus earns economic profits in contract to earning of zero economic profits for firms in a perfect competition market.

Microsoft’s Attempts to Gain Monopoly Power in the Computer Software Industry

In my opinion, Microsoft was trying to gain monopoly power in the computer software industry. This is because it put across certain restrictions on vendors of its software, licensed copies of its software programs directly to customers, imposed unnecessary burdensome restrictions on the consumers as well as inducing them to behave in a certain manner that would favor its products (Page & Lopatka, 2007).

Its software programs could only run on specific computers, thus restraining the consumers’ choice of using other operating systems. Additionally, its pricing behavior was geared towards monopoly. It had a substantial discretion in setting the price of its products, for example, Windows 95 and 98.

This dominance in the market posed high barriers to aspiring and new entrants. Through these malpractices and other anti-competition means, it gained monopoly power. It also threatened other firms from entering the market. For instance, it discouraged Netscape, Apple and Intel from developing competing software programs. Microsoft threatened Netscape that their Navigator platform could not run on its Windows operating systems. Similarly, Apple was discouraged from developing a software called QuickTime that would play multimedia contents on its Windows OS.

Monopolies Are Always Bad

In my view, monopolies are not healthy for business enterprises and the society at large. This is because it denies the consumers the choice to choose from a variety of goods and services.

Since there is only one player a monopolistic market, the consumers are left with only one choice; to either purchase and use what is offered in the market by the monopolist or do without it. Pure monopolistic markets lack of commercially viable options or alternatives available to consumers (Solow, 1998).

Monopolists rarely deliver high quality goods and services to consumers. They do not deliver value. More often than not, monopolists are not able to sustain the market demand due to their low levels of output. There are high possibilities of poor supply responses to customers’ demand. Dissatisfaction of customers often leads to a downward sloping demand since few consumers will be interested in the poor quality products available in the market.

The quality of goods and services offered for sale in the market usually reduce as competition levels decline. Furthermore, lack of a competitive market results into high prices charged on goods and services since the monopolist is the sole price maker, exploitation of consumers, increased restrictions on consumers’ choice and other market inefficiencies (Orbanes, 2007). It also leads to deadweight loss to the society.

Cases When Monopoly Becomes a Good Thing

A monopolistic market may be deemed good when fixed costs of production are very high thereby granting one single firm a chance to produce goods and services are a lower cost and sell at cheaper prices as compared to if there are too many industry players. Moreover, monopoly would be effective if the market is relatively small with limited resources that cannot be shared amongst numerous producers. A single producer will thus be able to effective enjoy economies of scale with the little resources available.

Conclusion

In my view, the antitrust case against Microsoft monopoly set suitable platform for government intervention in the economy. It also opened up the software industry for free and fair competition that consequently resulted into more inventions and innovation and provision of high quality computer software programs at relatively cheaper prices.

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