Understanding Monopoly: Impact on Markets and Consumer Welfare

The global market economy includes several market structures. One of these structures is the monopoly. Monopoly happens when only one firm provides a specific good or service to the consumers and generally dominates the whole industry by controlling the market. In this case, the dominant firm has the ability to set the price while there are no other rivals to force competitiveness. In order to keep their domination, firms are likely to grow a behaviour that prevents other potential companies from breaking in the industry (Krugman, P.

R.et al, 2012).

How firms will behave, especially in a monopoly market where the demand is inelastic, is a very significant factor for the public interest. For a firm having no rivals, consumers run the risks of high prices for low quality and quantity products as the dominant firm loses the incentive to satisfy them. Furthermore you will be provided with a brief description on how firms tend to behave in this market structure, together with some information of Microsoft’s behaviour against public interest.

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Monopoly is a very crucial position to be.

A firm wants to maintain this position and keep controlling the market by using as barriers the advantages the monopolistic power offers. Due to their long existence, established monopolies afford to grow special skills that makes their production and marketing very efficient. Together with the good control of their finance and costs they come to great results and supernormal profit in the long-run. Part of this profit is usually spent researches, investments and generally for their further development.

The huge amount of output they produce, gives them the opportunity to reduce their average costs and form a low, but profitable price.

These factors make the entrance of new firms almost impossible. A new company has to invest gigantic amounts in order to break in, something that is very risky. Even if they do, the firm owning the monopoly position can start a price war or enormous advertising campaigns which will again bring the new firm in a very difficult position (Sloman, J. et al, 2013). Figure 1: (Riley, G. , College E. , 2006) “Differences between monopoly and perfect competition markets”. Through the diagram above, the main differences of a firm operating in a monopolistic market rather than a one with perfect competition are identified.

As stated before, the dominant firms are able to regulate the price of its product according to its marginal revenue and costs as the market appears to be of inelastic demand. This gives them the ability to operate in a profit maximising point (MC=MR) of Pmon-Q2 rather than Pcomp-Q1. As a result, firms are pushed away from the demand supply equilibrium that might had been set if there was competition, creating inefficiency and consumer surplus is lost because less output is supplied in higher price.

This brings the reduction of welfare which is likely to be purely transferred to the producer through higher profits, but part of the loss is never reassigned to any other economic agent, bringing the known as “deadweight welfare loss” which is equal to the area ABC (Riley, G. College, E. , 2006). Inappropriate use of this power can sometimes be considered as consumer’s exploitation and market abuse in general. In these cases, governmental policies are likely to intervene. These can be departments or organizations that enforce the consumer protection and competition law in order to adjust justice and equality in the market.

A good example were the US Justice Department took action is in Microsoft’s case. Microsoft is the biggest software company in the planet holding the reins of the industry for many years. Microsoft afforded to have its operating system, MS-DOS, installed in more than 90% of the world’s computers. For more than the half of its lifetime, Microsoft was taken to the courts by the US Government for exploiting its monopolistic power and trying to obliterate all its rivals. “Microsoft attempted to collude with Netscape Communications to divide the Internet Browser market.

Netscape Communications refused” (Sloman, J. et al, 2010:170). Then, using a series of illegal actions, Microsoft tried to force other computer manufactures to promote and use its web browser “Internet Explorer” rather than Netscape’s Internet navigator (CNN Money, 2002). Microsoft was also sued for illegally restricting the multimedia player market by bundling Windows Media Player with its operating system and making it mandatory for all clients using Windows. (European Commission, 2007).

To defend itself, Microsoft pointed that these actions were part their effort further innovation and development of their product, actions that had nothing to do with market abuse and consumer’s exploitation. This excuse was never accepted by the law. It was in the early 2004 when this case finally and Microsoft was forced to pay a fine of 497 million dollars for abusing its monopoly position (Sloman, J. et al, 2010; Sloman, J. et al, 2013). The main consideration is how were consumers affected by these series of actions across the years, was it against or in the public interest?

On the one hand, considering what Microsoft stated in the court, this can be deemed to be a good kind of monopoly operating positively for the consumer’s interest. The continuously process of product innovation through research and development offered the ability to the consumer to enjoy an improved and updated product at reliable prices and satisfying quantities. In a market where the demand is so high, and the technology is growing so rapid this is of great importance. On the other hand, some of these actions might considered to be against them.

The way Microsoft tried to promote its product, not only left consumers with no alternative choice in the operating system’s market but also forced them to make use its substitute programs (e. g. Windows Media Player). As a result, the consumer was indirectly ‘locked in’ a one way road consuming specified products produced by a single firm. To sum up, as all market structures monopoly carries both advantages and disadvantages. Whether this structure is deemed to be for or against the public interest is in basis of how firms owning the monopolistic position will behave.

As for the market outlined above, my opinion is that Microsoft’s behaviour had a good overall approach towards consumers and should be considered as a good kind of monopoly. Relatively low prices on products with excellent quality and performance I think is a fair treatment for them. Especially now, after the entrance and gradual growth of some new players in the industry such as iOs and Android, the market has reached a fair level for the public interest giving the opportunity to the consumers to choose through a wide range of products that still offer good qualities.