The Microsoft Corporation stands out in its market position as the number one supplier of computer operating systems whereas the company holds a significant market share worldwide. In the course of its operations, Microsoft has faced legal problems in connection to its monopolistic tactics. In 2003, a United States judge ordered the company to be split into two. In another incident, the European Commission Fair ordered Microsoft to reveal some operational secrets and pay a substantial fine (Choi, Whinston, & Stahl, 2007).
Other than operating systems, Microsoft also exerts dominance on the manufacture of operating platforms for games, mobile phones, and software-developing platforms. It is a commonly held belief among industry players that Microsoft has instituted significant barriers for any new companies that venture into the operating systems business. Another monopolistic aspect of Microsoft’s mode of operation is that the “Windows Network” has become entrenched into modern life and it is part of personal and professional operations around the world. Consequently, most Microsoft products users find it costly and cumbersome to switch to other products.
All these factors among others create a monopolistic market environment with Microsoft being the benefactor. Overall, “the advantage of a large network of users and economy of scale, with the restrictions caused by switching costs, a natural monopoly situation is created for Microsoft” (Eisenach & Lenard, 2012, p. 2). This case study review focuses on how Microsoft as a monopolistic firm restricts output with the view of charging higher prices and maximizing profits. The case study also explores how this proposition is both true and false in reference to the industry under which Microsoft operates.
Journey to Monopolistic Tendencies
In order to become a partial monopoly in its respective markets, Microsoft used various strategies. First, the firm ensured that it patented its creative products in order to prevent other companies from making similar products and floating them in the market. In addition, Microsoft cultivated its monopoly through an early decision to “pre-install a base of application programs onto the operating system that was only compatible with Windows, causing a common standard to develop between users for the applications they used” (Camarinha-Matos, Paraskakis, & Afsarmanesh, 2009).
In the market environment, Microsoft began providing free products with every Windows Operating System purchase and this allowed the firm to stretch its monopolistic tentacles. There are complaints that users of the company’s products miss out on diversity when it comes to Internet browsers. Furthermore, the Microsoft monopoly forces upcoming software developers to create programs that favor the Windows operating system.
For example, in the last decade, most software programs have become operable under various platforms and this development has turned out to be a strong challenge on Microsoft’s monopoly. Some of the competitive threats that have been manifested in the course of Microsoft’s monopolistic reign include the advent of companies such as Netscape, Java Software Language,
Microsoft and Market Structures
Where monopolies are applied, a single producer exerts dominance within an entire industry using a variety of tactics. In the case of the market demand curve, the only difference that will apply to a monopoly is that its curve will be facing downwards. A quick evaluating indicates that Microsoft does not face in some areas of its operation, particularly in the software development market. For example, instead of fixing its product-prices in accordance with market dynamics, Microsoft dictates its own prices internally.
In the course of its monopolistic tendencies, Microsoft has managed to maintain profitability in the long run. Statistics indicate that Microsoft’s net revenue has increased from $44.28 billion in 2006 to $93.58 billion in 2015 (Reynolds, 2010). The reason behind Microsoft’s abnormal profitability is that its demand curve has managed to remain inelastic and this has enabled the firm to maintain low production costs.
Theoretically, “perfectly competitive markets feature higher output levels and lower prices for their products, a sequence that monopolistic markets do not accommodate” (Leslie, 2013, p. 1695). On the other hand, if a monopolistic firm wants to increase output it would have to reduce its prices. This phenomenon is adequately represented within the context of Microsoft’s operations. For example, Microsoft has never reduced the prices of its monopolistic products in the course of a ten-year period.
Furthermore, the products that the company offers at a discount such as Google have restrictions that maintain profitability for the firm. The lack of alternative products means that Microsoft has the ability to charge higher for its ‘signature’ products in an effort to sustain high profitability and a low-output at the same time because this combination will minimize production costs. Nevertheless, Microsoft has not encountered any major issues with respect to public interests because the firm is able to keep producing high-quality products due to its vast research and development resources (Hovenkamp, Janis, & Lemley, 2014). A court case that was lodged against Microsoft in 1998 proved that the company was indeed perpetuating antitrust practices.
Microsoft Monopolistic Pricing
Microsoft does not necessarily follow the pricing modalities of traditional monopolistic firms but its strategies for churning out profits adhere to a monopoly. The most monopolistic aspect of Microsoft’s business is the software business, which aligns with the negative demand curve because the costs of production reduce as the overall output for the company keeps rising. Consequently, it would appear that the overall goal for Microsoft would be to “find a way to eliminate competition without having to compete on price, whereby profits would increase significantly as Microsoft would sell more software” (Gilbert & Katz, 2011).
A closer analysis of the company indicates that the company has succeeded in this regard using a concept that might be referred to as ‘predatory pricing’. Predatory pricing involves the distribution of products at no direct cost to the user, but the actual price of the product is paid by original equipment manufacturer (OEM) distributors who are forced to toe the line that favors end consumers (Leslie, 2013). Eventually, some of Microsoft’s software programs have become standards and this allows the company to charge OEMs a price that ensures maximum profits for the company. Incidentally, it is the OEMs that charge consumers high prices while Microsoft appears to be giving away its products.
Microsoft’s concerns are not necessarily with high prices but also with profit maximization. Therefore, the company’s profit maximization tendencies are the main determinants of output levels. At the optimal price, the company’s marginal cost (MC) intersects with the downward-facing curve resulting in marginal revenue (MR). Economists observe that “the MR curve of the monopoly firm is below its average revenue or demand curve at all levels of output, and at the equilibrium output level marginal revenue is equal to marginal cost, the profit-maximizing monopoly price is greater than marginal cost” (Roberts, 2014, p. 141).
On the contrary, in a perfectly competitive market environment such as is the case for firms such as Samsung profits are only maximized in reference to marginal costs. For example, at equilibrium, Microsoft’s pricing does not reflect the average market costs. Therefore, even under normal market circumstances, Microsoft might still end up earning ‘super-normal’ profits.
The high profits that make Microsoft stocks to be one of the most sought after equities in the United States and the rest of the world appear to suggest that there exists a market deficit. In a competitive market environment, it is normal for a high-profit industry such as Microsoft to spawn a series of new market entrants. These competitors are in charge of producing products that are similar to Microsoft’s catalog.
Nevertheless, the Microsoft institution has created high-entry barriers including the network effect and the element of high research and development costs. Consequently, the resources that would be deployed in competing with Microsoft are better off deployed in other competitive industries. Another strategy that is often used to maximize profits by monopolistic firms is by setting high prices of products thereby reducing the motivation of price-controls and price-reduction.
Therefore, a monopolistic entity has the advantage of being able to set up any price due to its ability to restrict output. Moreover, the monopolistic firm will have the ability to harness its competitive advantage in the long run because the profitability is sustainable. One notable practice in Microsoft’s case is the maintenance of existing business practices as opposed to adopting new and innovative practices. Microsoft’s history reveals that the company only changes its business practices when its monopolistic entity is under threat.
Another adverse effect with respect to monopolistic market pricing is that this model “places limitation on the negative rights that perfectly free markets respect” (Choi, Whinston, & Stahl, 2007). The market strength of a monopoly has enabled Microsoft to perform in a manner that goes against the principles of the free market. In that regard, Microsoft has shaped the information technology industry because the firm has been solely responsible for the inflow and subsequent outflow of resources in this market. Notably, the prices of most software products in the world rise when it is supposed to fall and vice versa.
For example, Microsoft has ensured that the prices of various products that the company has an interest in remain high but stable. On the other hand, users of Microsoft products have stopped relying on competitive market dynamics as the determinant of value when it comes to Microsoft products. For instance, most consumers subscribe to Microsoft products under the assumption that this is the only provider who can satisfy their needs. This popular notion can be attributed to the fact that Microsoft has been quite successful in the restriction of output throughout the information technology industry.
When Microsoft was sued by the Department of Justice for violation of antitrust laws, the verdict was that the company be split into two. However, this decision has not had a significant impact on Microsoft’s monopolistic tendencies. The market characteristics that are exhibited by Microsoft indicate that the firm pricing strategies do not adhere to normal demand and supply curves. Although the company has done all that is in its power to project the image of a competitive entity, its market dynamics reveal that this firm is indeed monopolistic.
Camarinha-Matos, L. M., Paraskakis, I., & Afsarmanesh, H. (2009). Leveraging knowledge for innovation in a collaborative network. New York: Springer.
Choi, S. Y., Whinston, A. B., & Stahl, D. O. (2007). Is Microsoft a monopolist?. Brazilian Electronic Journal of Economics, 1(2), 2-4.
Eisenach, J., & Lenard, T. M. (2012). Competition, innovation, and the Microsoft monopoly: Antitrust in the digital marketplace. New York: Springer Science & Business Media.
Gilbert, R. J., & Katz, M. L. (2011). An economist’s guide to US v. Microsoft. The Journal of Economic Perspectives, 15(2), 25-44.
Hovenkamp, H., Janis, M. D. & Lemley, M. A. (2014). IP and antitrust: an analysis of antitrust principles applied to intellectual property law. Washington: Aspen Publishers.
Leslie, C. R. (2013). Predatory pricing and recoupment. Columbia Law Review, 1(2), 1695-1771.
Reynolds, G. W. (2010). Principles of information systems. Boston, MA: Course Technology Cengage Learning.
Roberts, K. (2014). The limit points of monopolistic competition. Noncooperative Approaches to the Theory of Perfect Competition, 3(4), 141.