Introduction
Microsoft is a true heavyweight. Not only does it have an international presence, with a market capitalization of 279 billion dollars, this company’s international reputation places it at the helm of the international acclaim. However, this has not gone unchallenged. With the emergence of competitors such as Google and Linux, and even traditional competitors such as IBM and Sun Microsystems (Cravens and Nigel, 423), Microsoft’s position is increasingly under threat. In the face of growing opposition, it is paramount that Microsoft applies strategies that will allow it to stay ahead of the pack.
Main body
The option Microsoft has chosen time and time again is the use of a combination of bullish pricing tactics and exclusionary tactics. It has effectively excluded the competition by making sure that their software is not optimally supported by the Windows OS and that PC makers do not distribute the competitor’s software (Klein, 46; Karnik, 2949).
This strategy is not new to the firm. In the war to gain control of the internet browser, this tactic was ruthlessly applied. Microsoft aggressively pushed to push out Netscape through pricing strategies and promotional tactics that earned them a law suit (Klein, 49). Klein details how Microsoft zero priced its product in order to heavily undercut the market share that Netscape had (49). The truth is that this strategy was more than just a defence tactic for internet browser control. Microsoft’s key aim here was to defend its platform (Spinello, 343; Lopatka and Page, 178). The true value of a platform is not in truly inherent but rather depends on the complimentary products it supports (Spinello, 343). Therefore, by undercutting its competitor’s complimentary products the company maintains its monopoly by warding off any other potential platform development.
In order to do this, Microsoft priced its product at zero cost. This pricing strategy was one of the weapons used against Netscape (Klein, 49). Additionally, over 100 million dollars worth of research and development annually were invested in the browser (Klein, 47). The ratings for Internet explorer shot through the roof shattering the competition that Netscape had potentially posed (see fig. 1). The end results were very effective. Microsoft took over the market by storm and secured a contract with AOL as their default browser effectively making it the top browser (Klein, 47).
This pricing strategy has a few problems, first and foremost being moral and legal problems. In matters of legality, their pricing strategy constituted what the courts referred to as “predatory pricing” which is defined as the “Practice of temporarily selling below survival prices or giving goods away…..to undermine or eliminate the existing competition” (Businessdictionary.com). This practice is deemed both unfair and illegal. However, critics argue against this accusation. Klein explicitly states that it is the customers, who experienced reduced costs of products, who are the main winners in such competitive environments, despite the motives that may have existed for doing the same (50).
There is also welfare inefficiency brought about by the use of such brutal tactics. Since the larger company kills the competition, the market suffers from choice deficit (Lopatka and Page, 177). The market has only one product to choose from thus being derived of choice. The market, is forced was forced to use Internet Explorer as it “imposes no financial or technical obstacle” (Lopatka and Page, 209). This forcing was deemed unfair.
However, this accusation has an unfair element. Statistics show that Microsoft’s product was much better than that of Netscape (Klein, 47; see fig. 1). If the market was being forced to take up a superior product, then what harm is done. The welfare can at best be compromised if the product is not good and there lies better or at least as good options around. Secondly, we know that competition leads to improvement in both product and price. In fact, the improvement in product quality such as reliability, speed and ease of use are almost guaranteed in competitive environments (Klein, 49). I find this accusation plausible only if the product offered was not good, which we know was not the case in this situation. However, the fact that Microsoft could stop investing in improving its browser once the competition is eliminated does give this threat some credibility.
Conclusion
In summary, I think that the market should not blame Microsoft for its techniques. They were out of true territorial defence and in the end benefited the most important person in the chain: the consumer. However, I think that the most viable solution is to have mandatory open platforms (Spinello, 359). This will allow for a fairer competitive atmosphere thus increasing the quality of product available for the user. It will also make sure that pricing also becomes consumer friendly.
Works Cited
“Predatory Pricing Definition.” BusinessDictionary.com – Online Business Dictionary. Web.
Cravens, David, and Nigel Piercy. Strategic Marketing. 9th ed. McGraw- Hill Higher Education, 2009.
Karnik, Ajit. “Microsoft, Competition and Competition Policy.” Economic and Political Weekly 35.33 (2000): 2949-2951+2953-2958.
Klein, Benjamin. “The Microsoft Case: What Can a Dominant Firm Do to Defend Its Market Position?.” The Journal of Economic Perspectives 15.2. (2001): 45-62.
Lopatka, John, and William Page. “Antitrust on Internet Time: Microsoft and the Law and Economics of Exclusion.” Supreme Court Economic Review 7 (1999): 157-231.
Spinello, R. “Competing Fairly in the New Economy: Lessons from the Browser Wars.” Journal of Business Ethics 57.4 (2005): 343-361.