The Microsoft Corporation has lead people believe that they were attempting to gain monopoly power in the computer operating systems market. A monopoly market structure consists of having one firm that has control of the resources and market by selling a unique good that has no available substitutes, in which; make it very difficult for others to enter into this market. In America, we enjoy a free market rather than monopolies because monopolies create disadvantages to our society. However, having monopolistic power in a market is not necessarily bad, in some cases, monopolies are tolerated.
There is reason to believe that Microsoft was trying to gain monopoly power, this is why they were investigated for anti-competitive activities. To regulate corporations, the federal and state governments put in place antitrust laws. These laws helped to keep companies from becoming to large to prevent monopolies and these laws encourage competition. Microsoft Corporation was investigated for breaking such laws, trying to monopolize and competed to be dominate the web browser marketplace.
As Gilbert stated, “Microsoft engaged in anticompetitive conduct designed to maintain its operating system monopoly to the detriment of consumers” (2001, p.25).
The U. S. department of Justice began the investigation of Microsoft’s predatory practices when a complaint accusing Microsoft using “anticompetitive contracts with personal computer manufacturers to maintain an unlawful monopoly in this market” (Gilbert, 2001, p. 26). This gives us buyers no substitutes for purchasing a personal computer and creates imperfect competition for this industry. This type of competition and rent seeking behavior is crippling to our country by damaging economic growth.
Microsoft wanted to “organize themselves in a special interest group in order to improve their ability to affect distributional outcomes.
The process of expending resources in an attempt to influence public policy outcomes is rent-seeking” (Krueger, 1994, p. 292). Gilbert (2001) states that Microsoft gained market power and achieved monopoly power in the market for operating systems for Intel-compatible desktop personal computers to protect its dominance over Windows operating system from other competitive producers and suppliers (p. 20). One way they achieved power is when Microsoft bundled up its own web browser, Internet Explorer, with Windows operating system.
The bundling of their products gave them leverage to sell them as a single unit. This strategy destroyed another competitors company, Netscape. This should how Microsoft deliberately was creating an imperfect competition by not meeting the conditions of a perfect competition. In a perfect competition no one supplier can influence prices. However, Microsoft was establishing the cost of personal computers, therefore, created an imperfect competition in the operating systems market and allowed them selves to become price makers of this product.
Price makers are the monopolists that have control over the price and quantity of their item. Microsoft was using strategies to maximize their profits, by adjusting prices to attain financial gain. This type of strategy is known as monopoly pricing. A monopolist price is higher than the price that would be found in a competitive industry. To establish or determine the price of the product, Microsoft or the monopolist will consider consumer demand, which is a downward sloping demand curve, when marginal revenue equals marginal costs.
Marginal revenue being the change in total costs divided by the change in quantity, which is always less than the price of the good and marginal cost being the value of the additional resources needed to produce another unit of output or the change in total costs over the change in quantity. This causes a problem in the economy and the operating systems market. Monopolies alone create problems to our economy. Monopolies are allocatively inefficient or x-inefficient. A monopoly firm produces less than the socially efficient quantity of output.
Also, a monopoly is less likely to cut costs because they do not face competition. Due to the small amount of product produced, monopoly firms can charge a price that exceeds the marginal cost of production, which generates a deadweight loss to our society or consumer loss surplus. We as consumers prefer to have substitutes, therefore, more firms in the industry. However, Microsoft was creating barriers of entry to create a perfect competition. McKenzie (2000) states, “Judge Jackson found that Microsoft had substantial market dominance which applied barriers to entry” (p.3).
Legal barriers give exclusive rights granted to the firm or inventor to supply a good or service while government controls entry in the industry, some examples are patents or copyrights, and government licenses. The government gives grants and privileges to firms to be the sole providers of a good or service. An example of a Government monopoly is the U. S. postal service. Other barriers that exist in a monopoly-structured market are large start up costs, price-cutting, resource ownership and advertisement.
A natural barrier or a natural monopoly exists because of a unique raw material that is supplied and is served at a lower price to customers than if there were two firms supplying the good or service. This type of monopoly proves that monopolies are not always unfavorable. A natural monopoly that produces a “good or service is at a lower price due to economies of scale, which is experienced when an increase in the production of a good or service causes a decrease in the average total cost of producing the good or service” (Vaubel, 1984, p. 29).
An example of a natural monopoly is electric power distribution firm or trash Collection Company. A monopoly market structure can be detrimental to the welfare of society and causes unnecessary power when we encourage a free competitive market. However, in some cases monopolies can also benefit us, by having one firm to provide us a natural good or service. However, the computer industry is not a natural service, even though we would like to believe that in our highly technological society. Microsoft introduced us to these goods and has attempted to monopolize this industry to prevent others to compete fairly.
As a result, Microsoft was investigated for making the operating systems of personal computers industry leverage into a monopoly, therefore, disobeying laws, obligation to the economy, and hobbled the innovation process. Judge Thomas Jackson issued and took action to stop Microsoft from monopolizing. He ordered a remedy, which forced Microsoft to be split into two separate units. Through 21 years of investigation and behavioral remedies, Microsoft is officially at an end over fighting these antitrust lawsuit battles.