Micro

Critical Analysis of Microsoft Monopoly Power

Introduction

A monopoly is a situation in which one firm is the sole supplier in the market or a firm control substantially the market supply. Microsoft has enjoyed monopoly position in the supply of software that is used as operating systems in personal computers around the globe. The company has been accused of pursuing anti competition strategies that are unlawful in order to dominate the market and benefit from the monopoly power (Meller 2009).

In a monopoly, the firm will have the entire control in setting prices and sometimes derails innovation due to lack of competition. Moreover, the firm will stand to benefit from the economies of production and the cost per unit of products will be lowered (Baumol & Blinder 2011). This will create entry barriers to new entrants.

There are various sources of monopoly power. The first source of monopoly power is the control of an important factor of production that is fundamental in the production process (Allen 2003). A firm that has exclusive control on an important factor e.g. technology, land, or production process is likely to acquire monopoly power and hence lock out competitors. Secondly, monopoly power may also be attained from the government where the government licenses only one firm to be the sole supplier in the industry thus prohibiting entrance from competitors. The monopoly power may also be attained because of the market size i.e. where the market is small; one supplier may supply the whole market. Finally, the amalgamation and mergers of firms in the industry could also create monopoly power. Firms may merge to benefit from the economies of scale production or to avoid competition that could cause losses to the firm. Such factors may lead to monopoly in an industry (Learning & Moyer 2010).

In the case of the software industry, Microsoft has enjoyed monopoly position by creating entry barriers to their potential competitors. Entry barriers arise in terms of high costs, time, quality, and lack of resources to advertise in order to make successful entry. One of the strategies that Microsoft used to lock out their competitors was the large number of applications that were necessary to make an operating system preferred by the end users (Kobie 2009). The ends users require software that can be used to execute the different functions at once and this will ensure that they get the convenience they require. It would thus expensive for a new entrant to develop software with many applications that will compete those of Microsoft (Kobie 2009). The users of computer software are also likely to remain loyal to Microsoft application software because of the multi application that the soft ware can perform.

The second way of creating entrance barrier is by entering into exclusive agreements whereby a firm will enter into agreements that prohibits the use of their competitors’ products. In the case of Microsoft, the company created exclusive agreements in which the company’s operating software would be solely used in their PC’s (Meller 2009). As a result, their competitors or potential competitors would lack the market for their software and this would make them incur heavy losses that lead to their termination or dissolution. This anti competitive strategy is not healthy for the users of the products, as they will lack a variety of products to make choices from (Mankiw 2008). They will thus be compelled to adhere to the available and little viable option. These therefore deny the consumers their sovereignty making Microsoft monopoly unjustified.

In addition, Microsoft used their financial power and strength to keep their competitors at bay. Monopolists firms make large profits that is can use in lowering the selling price or giving offers that are meant to make their products cheaper compared to those of the competitors (Kobie 2009). Due to this new entrants or existing smaller competitors will be barricaded from accessing the market and hence the continuation of the monopoly power. In the case of Microsoft, the company distributed the internet explorer software for free and went ahead to induce some users to install the software in their PC’s just to sell their other products and to ensure they arrest their competitors products from the market. This strategy led to the wiping out of the Netscape browser that was developed by their competitors. This kind of strategy is detrimental for competition in the industry and is an ethical mode of competition if a liberal market has to be realized (Mansfield 1968). Microsoft should therefore embrace better and ethical competitive strategies if the consumers have to benefit from the introduction of quality and new products. The paying of customers to install the internet explorer in order to lure more other customers is unethical and should be discouraged.

The unlawful requirement that the manufacturers of personal computers preinstall internet explorer in their computers in order to obtain the license of Windows 95 is in itself a misuse of monopoly power (Meller 2009). The manufacturers were demanded to install the explorer as a precondition of getting the license to use Windows 95 hence eradicating Microsoft competitors out of the market. The company in so doing endeavoured to block the software users the opportunity to make choices. Internet explorer will also be tied to windows 98 to make customers face difficulty in uninstalling the explorer from their system. The company further argues that if not regulated, they will continue with such a move just to continue enjoying the monopoly power. Further, other manufacturers would be bound by the contractual agreements that were entered into making them vulnerable to the Microsoft discrimination.

Misuse of the operating system monopoly use has also been observed by the condition that was issued to the manufacturers of personal computers who were required to ensure that Microsoft software appear on the screen upon booting of the system in the desktop. The restriction further required that no other software competing those of Microsoft was to appear on the screen thereby depriving the manufacturers the freedom to customize their computers to the interest of the customers. The manufacturers were therefore denied the freedom of improving on their products quality to the interest of the customers and were deprived the ability to use other competing browsers in the system. Consequently, the PC manufacturers lost the control of the design of their computers. The move also hampered on the competition in the market of browsers and other software. Monopoly power must not be misused at the expense of the consumers and should not be aimed at restricting entry or discouraging competition (Meller 2009).

Notwithstanding, Microsoft entered into agreements with internet service providers(ISP) and internet content providers(ICP) to accelerate their discrimination and exclude their competitors from the market. The ISP and ICP were instructed to make available Microsoft explorer to the customers and ensure that the competitors’ soft ware was barred from accessing the content of the web pages. This made the competition difficult and gagged the competitors their right to have their products made available for the consumers to make the choices from. Such exclusive agreements and contracts should be eliminated if positive progress is to be made in the market or industry (Smith & McCulloch 1928).

In the current economy where liberalization is championed and the market forces of demand and supply preferred for the setting of prices and in determination of the quantities to be produced, it can be said without aspersion that monopoly is not desirable (Smith & McCulloch 1928). Monopoly leads to inefficiency in the market and impairs the quality of the products to be made. A firm that enjoys monopoly power has no intention and priority and improving services and processes to maximize the value to their customers. In this regard, monopoly makes companies discriminate and become bureaucratic making changes in the market take a longer duration (Baumol & Blinder 2011). Customers’ desire and needs are therefore not prioritized in markets where monopoly is practiced.

Monopoly is also a hindrance to innovation where companies fail to improve on their products and introduce completely new products for the customers to buy. The bureaucratic organizations will fail to become flexible in satisfying and meeting the demands of the consumers. Again, monopoly can cause price discrimination since the consumers will lack viable options to pursue in their quest for products (Baumol & Blinder 2011). Consumers’ sovereignty is also denied because the consumers will lack a wide range of products to select from. These reasons therefore make us view and see monopoly as a retrogressive act that needs to be discouraged by the government and even firms for fair competition and better output is to be achieved. The support of the US government and that of European Union in granting Microsoft the exclusive mandate to supply OS to their customers should be criticized in the strongest terms possible. Such actions will rob the consumers their fundamental rights that are guaranteed by the constitution and most government laws.

Conclusion

The negative impacts of monopoly have been similarly observed in the software industry and Microsoft actions has made the consumers have limited product choice, substandard quality products and higher charges for products. This therefore make one conclude that monopoly causes more harm to the consumers than benefits that arises. Businesses and governments should therefore move towards a system where allocation of resources is fully based on market forces. Competition must also be promoted as it leads to improvement in quality and reduction of prices hence improving consumers’ welfare.

Reference List

Allen, GC 2003, Monopoly and restrictive practices, Routledge, London.

Baumol, W J & Blinder, AS 2011, Economics: principles and policy, Cengage Learning, South Western.

Kobie, N 2009, Microsoft accused of monopoly abuse over IE . ITPRO , Retrieved from http://www.itpro.co.uk/609559/microsoft-accused-of-monopoly-abuse-over-ie

Learning, C & Moyer, R C 2010, Managerial economic, Cengage Learning South Western.

Mankiw, N G 2008, Principles of microeconomics, Cengage Learning South Western.

Mansfield, E 1968, Monopoly power and economic performance: the problem of industrial concentration. W. W. Norton.

Meller, P 2009, Europe charges microsoft with abuse of monopoly again , Network World .

Smith, A & McCulloch, JR 1928, An inquiry into the nature and causes of the wealth of nations, Printed for A. Black and W. Tait, New York.

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