Microsoft is the largest computer software manufacturer founded in 1975 by Bill Gates. Microsoft is the producer of the notably successful software applications that run on the Windows family of operating systems. Most of Microsoft products are complementary to a member of the Windows family of operating systems.
The United States Department of Justice and the Federal Trade Commission on various antitrust allegations have investigated Microsoft (Cusumano & Selby, 1995). The company faced accusations of violating the Sherman Act. This Act prohibits any person from attempting to monopolize or monopolizing any part of a trade as well as obtaining monopoly power in the PC market.
It agrees that Microsoft was trying to gain monopoly power in the computer software industry. A monopoly exists where one firm dominates the market. In a pure monopoly, a single firm solely produces a product for which there are no close substitutes. A natural monopoly exists when a firm enjoys large economies of scale, and the firm can achieve minimum efficient scale (Helpman & Krugman, 1984). A government may also create a monopoly through issuing patent rights to an original inventor or by licensing to limit or control the production of a product. Some firms use rent – seeking behavior by manipulating the government to protect their interests through such things as copyright law, tariff protection quotas, and subsidies thus reducing competition.
One of the characteristics of a pure monopoly is being the price maker whereby the firm controls the price since it controls the quantities supplied. The price is too high, or it is set to destroy competitors (predatory pricing). Microsoft used zero marginal cost pricing by signing contracts with the original equipment manufacturers whereby there was unlimited number of copies at a flat fee for a limited period which reduced the price by half (Chamberlin, 1954).
Another characteristic of a pure monopoly is erecting barriers to entry. This is by making it difficult or impossible for a competitor to enter the market. Microsoft used technical incompatibilities to discourage the use of its applications with the competitor’s operating system. This created a perception that one had to install a Microsoft operating system in order to use a Microsoft application. Due to the growth of the company, Microsoft continuously enjoyed economies of scale leading to reduced production costs (Lindsay & Rand, 1979). Another barrier used is product bundling where, in Microsoft’s case, certain applications such as Media Player and Internet Explorer are close to the operating system shielding them from competition.
Monopolies eliminate competition, which may cause the collapse of smaller firms in the market as well as discourage new entrants (Bernstein & Phillips, 1980). A monopoly may also take advantage of the dominance to charge high prices from buyers and to provide low quality products. Monopolies also may have x-inefficiencies whereby due to the lack of competition there may be no incentive to invest in innovation or in consumer welfare. This may eventually water down the benefits of economies of scale.
On the other hand, monopolies also have advantages. To begin with, the monopoly price is normally higher than the perfect competition price that provides surpluses which are in research and development (Marina, 1999). In addition, the possibility of maintaining and attaining a monopolistic position provides stimulus to stay ahead of potential competitors by investing in cost-saving production techniques and innovations of new products.
In a personal opinion, monopoly can be advantageous in some case. There are, indeed, several examples of good monopoly in the global arena like the development of Google website, which has greatly influenced several fields in the economy. Google has influenced several academic sectors. It also has important research archives. Some important and risky businesses in the country may also enjoy the principle of monopoly in order to protect their citizens from unscrupulous businesspersons (Farrell and Shapiro, 2010).