Entry barriers are designed by producers to restrict entry by potential firms. Since new firms cannot enter the firm profitably, the monopoly power of the incumbent firms is protected and they are facilitated to enjoy supernormal profits in the short run as well as in the long run (Abramson, 2005). Therefore, one implication of barriers to entry is supernormal profit, often termed as monopoly profit. The other implication is that competition among firms is typically absent in monopoly market.
Monopoly market generally exists when production of certain products or offer of certain services requires specialized production equipment or specialized skills. Thus, monopoly firms need to bear high start up costs.
Monopolists practice the policy of bundling. They bundle two or more products, mostly when they are complementary with one another. This would further restrict entry of other firms in the production process of complementary products. Thus, market power of monopolists rise (Pike, 2001).
The factors mentioned above indicate that the entire market demand curve is faced by the monopolist firm and price is determined at the intersection of Marginal revenue (MR) and Marginal cost (MC). This is illustrated in the following diagram below:
Microsoft is not only a market leader, but one of its products, the Windows operating system, is installed in almost 90 percent of desktops and laptops in the around the globe. In 1998, a case had been filed in the U.S. District Court of the District of Columbia regarding the fact that “Microsoft possesses (and for several years has possessed) monopoly power in the market for personal computer operating systems” (McKenzie and Shughart II, 2013). According to the judgement delivered by the Justice Department, Microsoft is a monopolist.
Bundling is the situation in which two or more products are offered simultaneously by the same seller (Krämer, 2009). When products are