Economics is defined as the study of the mechanism of people’s decisions on how to utilize their scarce resources (Baumol & Blinder, 2007).
Economics assumes rational behavior in people, thus, expecting them to maximize profits, and at the same time minimize the utility of scarce resources available to them.
Monopoly is defined as the power possessed by an enterprise whereby it is the only manufacturer of a good or service.
Understanding why the Microsoft Company has been labeled as well a trustworthy one, as well as analyzing the factors which have led to the above-mentioned conclusion will help to understand the positive and the negative aspects of monopoly and to evaluate Microsoft strategy.
As for the reasons which led to the decline of Microsoft reputation, it was alleged that Microsoft illegally monopolized operating systems (OS) market as pertains to personal computers (PCs).
The given fact can be proven if taking into consideration the information offered in the Act 2, Sherman Antitrust Act.
It was also alleged that Microsoft had signed anti-competitive contractual agreements with other sellers of related commodities (Rubini, 2010), e.g. Original Equipment Manufacturers (OEM), and at the same time had taken measures to maintain and enhance its monopoly (Rubini, 2010).
Another allegation made against Microsoft was that the company illegally tried to monopolize the internet browsers market, but failed. In accordance to Sherman Antitrust Act, Cap 2, the given attempt is considered illegal (Rubini, 2010).
In addition, Microsoft Co. went even further, bundling its internet explorer IE with the Windows Operating Systems, which is considered illegal under Sherman antitrust Act cap 1.
Opinion as regards allegations against Microsoft
Therefore, it is obvious that Microsoft used monopoly. The above-mentioned conclusion can be made if taking into account that Microsoft owned over 70000 applications on Windows, whereas other companies, such as Macintosh, possessed fewer. (Rubini, 2010)
However, it must be born in mind that a monopoly has the power of price control. With this in mind, the Microsoft Co. can be hardly regarded as a monopolist, since Microsoft’s’ price of operating systems was quite low as compared to what a monopoly would set, namely, around $1800.
Yet Microsoft priced the commodity at $40-60 (Rubini, 2010), which was considerably lower than a monopolist company would.
As for the accusations of monopoly concerning the market browser, it was investigated and found out that Netscape had the initial monopoly in the existing browser market and that Microsoft changed the situation, turning the Netscape monopoly into the duopoly of the two companies (Rubini, 2010).
However, the case of the internet explorer with Windows should be considered as well, for the given instance can also be viewed as monopolizing the market.
According to Rubini (2010), both services belonged to different markets, which was supported by the judge’s decision that Microsoft tried to marginalize Netscape’s market share by tying Windows and internet explorer together.
Incorporating the above-mentioned findings, one must admit that claiming that Microsoft was guilty as charged would be appropriate.
Since the market wasn’t monopolized since Netscape, Microsoft obviously tried to gain majority of the market share.
Despite the ace that a monopoly can bring considerable profit to the organization which rules the market, it is worth mentioning that a monopoly can also serve as the stumbling block of the market development and the state economic progress.
Nevertheless, it must be also kept in mind that, eliminating a monopoly presupposes having various producers of a commodity all charging high prices as compared to a monopoly charging a reasonable price. (Baumol & Binder, 2007)
Characteristics of a monopoly
A monopolistic market is developed only when no other firms enter the market. If any new firms enter the market there will be no monopoly as completion will appear.
Lack of close substitutes
Monopoly presupposes that the market lacks a similar company providing a similar product, hence the company’s ability to maintain is monopoly status stems.
A monopoly earns profits in a long term as there is no competition whatsoever to minimize the monopolist’s profit earning capacity.
Therefore, the monopoly controls the entire market share being the only producer of the commodity (Baumol & Binder, 2007).
Price discrimination is enjoyed by the monopoly as no one can dictate what prices are to be set and for what products. Only the monopoly determines what prices it will set and what the reasons for the prices are (Hirschey, 2008).
The monopoly is also a price maker since it determines what amount of money customers will pay for a certain commodity, thereby being the ultimate decision maker concerning the commodity price (Hirschey, 2008).
Barriers to entry a monopoly are designed to block any other entrants to the monopoly. The methods used include the use of patents, limiting pricing, heavy spending on research and development (Hirschey, 2008).
Natural monopolies are the monopolies that evolve as a result of high costs of business start-up, whereas government monopoly is a phenomenon that exists as a result of the government’s decision to be the only producer of a particular commodity (Hirschey, 2008).
Dead weight loss is the result of the inefficiency which, in its turn, stems from the monopolist operating in the market.
The demand curve is a curve indicating the slope of the demand depending on the price. A downward sloping demand curve indicates that more goods tend to be purchased at lower prices.
Marginal revenue is said to the additional profit made by making one extra unit of production (Baumol & Blinder, 2007).
Microsoft Co. enjoys the majority of the market share in the software market, yet it is not a monopoly in the market since it faces completion from other producers such as Linux.
Baumol, J. W. & Blinder, A. S. (2007). Microeconomics: Principles and policy. Kendallville, IN: Courier Kendallville, Inc.
Hirschey, M. (2008). Managerial Economics (12th ed.). Stamford, CN: Cengage Learning.
Rubini, L. (2010). Microsoft on trial: Legal and economic analysis of a Transatlantic Antitrust case. Northampton, MA: Edward Elgar Publishing.