Does Microsoft Has Monopoly Power in the Market for Personal Computer Operating System - Assignment Example

Does Microsoft has monopoly power in the market(s) for personal computer operating system If yes, did Microsoft maintain this power using anticompetitive practices Introduction Microsoft is the largest software firm in the world with virtual dominance over the operating system markets in the world. More than 95% of the world's computers use the Windows operating system developed and marketed by Microsoft and it is because of such high market share that Microsoft is often labeled as a monopoly. Almost nine years ago, US District courts of Washington DC declared Microsoft a monopoly. Such allegations and declarations suggest that the Microsoft has wielded enormous power over the market and may have engaged into practices which could not allow other players in the market to successfully sale and market their products. In order to fully understand and explore the question of whether Microsoft has the monopoly over the personal computer operating system or not, one must understand the dynamics behind the market structure of monopoly besides understanding what anti-competitive practices have been employed by Microsoft to capture the market and gain the leading position in operating systems market in the world. Further, it is also critical to understand that the question of Microsoft monopoly shall also be viewed in a broader perspective of antitrust laws and regulations and the perceived role of government in creating legislative environment which discourages such practices. This paper will attempt to understand and explore the question of whether the Microsoft has the monopoly power in the PC operating systems market in the world. And if yes, did Microsoft maintain this through using anticompetitive practices. A brief introduction to Microsoft "Microsoft Corporation develops, manufactures, licenses and supports a range of software products for computing devices." (NY TIMES). This description of Microsoft virtually covers everything for which the firm is famous for. Technically, Microsoft is a software developer which develops different software such as operating systems to run the personal computer machines, Office suites including helping to accomplish different tasks such as word processing, spreadsheet analyses, presentations etc. It is however, critical to mention that Microsoft has successfully developed itself as a firm with diversified portfolio of software as well as hardware products. It not only has huge presence in software market but also manufactures and develops Xbox- a gaming portal and Zune- a new MP3 player. Established in 1975 as Microsoft by Bill Gates and his friend Paul Allen, the new company was initially established in order to provide DOS based operating system to IBM's newly developed personal computer. Microsoft developed its first Windows bases operating system during 1983. This new operating system was potentially aimed at removing the deficiencies of the old MS- DOS and provide a more flexible and robust operating system which can cater to the needs of different users according to their own requirements. It is critical to note that at the time of introduction of this new Windows based operating system which worked on the Graphical User Interface (GUI) basis, Apple Computers was already in the market and was developing its own operating system to be sold with its own brand of personal computers. As the market for personal computers market soared, the demand for the Microsoft's operating system increased because of its relative ease and platform free nature which allowed Microsoft Windows to run on any personal computer machine. The era of 1990's saw an unprecedented growth in personal computers market and with the introduction of Microsoft Windows 95, Microsoft virtually started its journey towards dominating the operating systems market in the world. The rapid increase in the demand for personal computers and relative ease and inexpensive nature of MS Windows software made a very explosive combination for users to get a comprehensive package. What is however, critical to note that Microsoft started to use its operating system as bundled software by clubbing other peripheral software with it at no cost. This provided Microsoft an opportunity to beat other players in the market by including software which was traditionally being sold as standalone products. It was because of this reason that Microsoft arrived at an antitrust settlement with the justice department of US for not to engage in anticompetitive practices however, the competitors of Microsoft continue to press hard because it was generally believed that Microsoft did not refrained from its anticompetitive practices. In 1998, Justice Department and State Attorney Generals of 20 states filed a combined legal suit against Microsoft for allegedly throwing out other competitors selling internet browsers in the market. Microsoft & Monopoly In order to understand whether Microsoft is a monopoly and engaged into the anticompetitive practices, it is important that a detailed look at the economic behind the monopoly and anticompetitive practices are understood and explained fully. A monopoly is said to exist where a single source of supply exists in any given market. (Mansfield and Yohe) therefore the single most important characteristics of the monopoly is the presence of only one supplier which is catering the whole market. In order to understand what determines the monopoly, it is critical to note that there are various reasons which are practically behind the existence of monopoly. Single Supplier As discussed above, monopoly exists where a single firm has the power and ability to control the entire market in terms of supplying the input which is required to manufacture a given product or service. From this perspective, it is critical to note that Microsoft is not the single supplier of operating systems in the market. Before it, Apple was already selling its operating system bundled with its own brand of personal computer. Further, there are other operating systems such as Lynx etc are already in the market. Further, other software bundles such as internet browsers such Netscape navigator etc as well as Office suites such as Word Star were also present in the market to fulfill the needs of the consumers. From this perspective, Microsoft may not fit as the monopoly because it is not the only supplier in the market. It is however, critical to note that the dynamics of the Software market are slightly different than the traditional manufacturing market. Consumers tend to prefer the products of Microsoft because of the relatively low and cost as well as the easiness with which users can use its operating system. Because of its graphical interface, it is easy to understand and use by even most nave users. Economies of Scale The monopoly power of the firm increases when the average cost of producing any good or service reaches at minimum level where it becomes profitable for the business to cater the whole market. This is based on the assumption that at a long run downward sloping average cost, the most efficient way to tackle the market is to concentrate the market power into single firm because at this point, the market may be served in most cheapest way. It is also critical to understand that a natural monopoly in the market exist when the market can be served in most inexpensive way. Due to the economies of scale, monopolies have the power to slash prices to drive competitors out of the market and monopolies often attempt to gain rent from such situation. Further, monopoly has the power to set prices at exorbitantly high to take advantage out of its unique position in the market. Considering the above situation, Microsoft may not be considered as wielding the monopoly power because neither it has the ability to drive prices both ways nor it has demonstrated any such thing in the past. According to Clayton Antitrust Act of 1914, a monopoly legally exists when an individual or an organization has the power to force its competitors out of the market by drastically reducing the prices, buying and hoarding the essential supplies in the market as well as use bribery and intimidation as means to achieve the unique monopoly power. However, given the facts, Microsoft's prices are competitive as most of its latest versions of its Windows Vista Operating system ranges between $ 50 to $150 each. Further, it is important to note that other operating systems specially Apple's operating system is platform specific and cannot run on machines other than those manufactured by Apple itself. As such this position suggests that Microsoft does not enjoy the necessary cost advantage over its competitors. Most of the critics believe that Microsoft enjoys its market share in operating systems market because the product it delivers is so good that the consumers do not prefer any other operating systems over it. Patents Patents are confirmation of exclusive legal rights to any individual or organization to enjoy the exclusive benefits coming out of the use or invention of any typical product or service. As such there are no patents being allotted to Microsoft for exclusive development of the operating system. Further, granting of patents to monopoly often lead to the higher prices to the consumers which in Microsoft's case is not possible because of the economies of scale achieved due to enormous market share achieved, Microsoft sells at competitive prices. Government Licenses or Franchises One of the key reasons as to why the monopoly can exist and exercise its influence is the fact that government may restrict the entry into the market by giving exclusive rights to any organization to produce a given good or service. In order therefore to exercise the monopoly power, it is critical that the government give exclusive rights however, the licensing can be strict too because through strict regulatory framework, government can restrict the licensee for doing and not doing any particular actions. (Frank). Given such situation, Microsoft does not have any government license or franchise to develop its operating system therefore considering the above situation, it does not seem that the Microsoft exercise monopoly power or not. Is Microsoft a Monopoly The above discussion suggest that Microsoft may not be the monopoly in its strict sense because the factors which are considered as typical behind the creation of a monopoly do not fit in case of Microsoft however despite this fact, Microsoft has been labeled as violating the anti-trust laws because it exercise significant power over the market. A possible explanation of the above fact can be the fact that monopoly power and monopoly existence are two different variables. In real world, monopolies do not exist due to blocked entry into the market but because of their market shares and as such due to imperfect substitution of the products, firms tend to enjoy monopoly power. (Viscusi, Vernon and Harrington). Monopoly power can be examined through the ability of the firms to set prices above the marginal cost and if a firm cannot charge a price above the marginal cost than it may not be exercising monopoly power. Further, monopoly power may not exist if the so called monopoly has insulated itself from the external competitive shocks i.e. the actions of competitors no longer bother the firm. From this perspective, one can consider Microsoft a monopoly because it not only has the largest and most significant market share but it also engaged itself into discriminatory prices by offering more at the price of one i.e. technically it offered an operating system but that system was bundled with many stand alone software such as internet browsers, multimedia software as well as other communication software which are sold separately by other players in the market. In this way, Microsoft intent on to monopolize the operating systems market by taking measures which may be termed as anticompetitive in nature. Conclusion Considering the latest developments into the antitrust regulations, any firm enjoying more than 90% of the market share is termed as a monopoly no matter whether such monopoly fulfills the conditions laid down in economic theory. Microsoft may be termed as a monopoly due to its market share however if one considers the conventional economic theory, Microsoft may not be termed as a monopoly because it does not fall any of the conditions laid down for determining the existence of the monopoly. Read More