You are using a PC? Probably there is a version of Microsoft’s Windows operating system running on it. When Microsoft, nowadays with 90% market share the worlds leading operating system producer [Eisenach/Lenard, 2001], years ago started to develop and to distribute Windows the company applied for a worldwide copyright. Which allows them to be the only supplier of this particular software. Therefore Microsoft is a monopoly in the Windows-market and might be one in the whole operating system market. But Microsoft is more than this. They are also producing completing application programs and tools for the Internet. Question is now whether Microsoft is abusing its market power or not. And how this behaviour might affect consumers. This essay is going to outline how their operating system monopoly arose and if this power is transferred into adjacent markets. It will be tried to be both critically and descriptive with a final statement at the end.
Essay - Industrial Organization
Microsoft is a monopoly, which operates against the public interest?!
By Michael A. Braun – EEM/3 (ERASMUS)
You are using a PC? Probably there is a version of Microsoft’s Windows operating system running on it. When Microsoft, nowadays with 90% market share the worlds leading operating system producer [Eisenach/Lenard, 2001], years ago started to develop and to distribute Windows the company applied for a worldwide copyright. Which allows them to be the only supplier of this particular software. Therefore Microsoft is a monopoly in the Windows-market and might be one in the whole operating system market. But Microsoft is more than this. They are also producing completing application programs and tools for the Internet. Question is now whether Microsoft is abusing its market power or not. And how this behaviour might affect consumers. This essay is going to outline how their operating system monopoly arose and if this power is transferred into adjacent markets. It will be tried to be both critically and descriptive with a final statement at the end.
First of all it might be helpful to have some definitions as a basic idea. So what means to be a monopoly? According to Waldman/Jensen ‘a monopoly is the sole producer of a good for which there are no close substitutes’ [2001]. A reason for monopoly might be high barriers of entry [Mankiw, 2001]. This could be (1) a factor of production, which belongs only to this firm. Or (2) a state licence that is only given to this particular company. As well (3) the cost of production could make the difference. Higher volume might make this organization more efficient in terms of economies of scale. And, going on with the question, what might be the public interest in general? On one hand in theory consumers individually want to get most out of their available amount of money, or in other words they want to pay the relative lowest price for the relative highest consume mixes [Mankiw, 2001]. On the other hand they also want to get the highest degree of product quality and rate of product-use. And moreover consumers are as well searching for a high variety of choice in both products and manufacturers. But in terms of a monopoly this might fail. The reason is that there might be only little to no substitutes available.
But how does this theoretical background affect the Microsoft case? Microsoft, as indicated, produces several tools for using computers effectively. According to Eisenach/Lenard it can be assumed that the company has a monopoly and barriers of entry into the operating system market are high [2001]. In general (1) costs for product-development in technology markets are large in the beginning. In terms of software this is also described as large costs of the first copy. But there will be (2) low costs for the replication and distribution of any further copy. And (3) low marginal costs lower average costs. This means the more is produced and sold the lower the relative costs for each single copy are. Furthermore (4) in the software market high switching costs make it difficult for customers to change to another system. An example: In terms of a operation system this might be the price for the new software and the ‘sunk costs’[1] for the previous used system. And often the costs of a change are higher than its reached gain. This phenomenon is called ‘lock-in’ and catches the customers so to say. In this context U.S. management professor Drucker argues ‘No new system can displace an established system unless it outperforms it by a factor of ten.’ [in: Zerdick/Picot, 1999] . Further on software as a particular good has another interesting characteristic. In this market, so called, net effects (or network externalities) arise. According to Metcalfe’s Law this means that the value of a network or system increases with the number of its users in square [in: Zerdick/Picot, 1999]. In other words this are huge demand-side economies of scale. Therefore it can be assumed that this market tends to make entry for new competitors difficult. Summarized it can be said that indeed a singularly product in the beginning of the digital age, huge economies of scale and great network benefits combined with respective switching costs unfolded some kind of sucking effect leading to a natural monopoly for Microsoft. These characteristics mainly helped the company to become the market leader in operating systems rapidly. And the more users the Windows-program had the more completing application programs were written for it.
But in general it is not seen that a firm, which has a monopoly or even a dominant position in one market, is going to leverage[2] this market power into an adjacent market. The risk that all profits might be extracted from the first market would be too high. This is different to Microsoft’s situation. Eisenach/Lenard argued that Microsoft had a clear incentive to become dominant in the browser market [2001]. Potential entrants into the operating systems market could step in with the help of their browser software. And once it is installed it can be the basis for a new operating system.
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[1] Investments into the old system: e.g. completing application programs, training of employees and specific hardware.
[2] So called leveraging-theory. Indicated as being become outdated this theory is not very popular in the US anymore. But the European Commission as reasoning used it while the trusts proceed against Microsoft. Source: Dorfs, J., Abschluss des europäischen Kartellverfahrens vermutlich bis Ende dieses Jahres, Handelsblatt, issue 213, 05.11.2002, p. 18
- Quote paper
- Michael A. Braun (Author), 2003, Microsoft is a Monopoly, which operates against the Public Interest?!, Munich, GRIN Verlag, https://www.grin.com/document/116897
