Microsoft's antitrust investigation and monopoly power in software

Microsoft Monopoly

Since feudalism gave way to capitalism and the Industrial Revolution sparked a number of economic ideas, scholars have debated the idea of competition within the market. In most any economic system, competition forms the basis of the market economy. As well, within economic systems, there may be ethical and unethical practices and arrangements. Most of the unethical practices, after a time, become illegal and are discouraged, but others become part of the economic landscape. In many ways, strength in the competitive marketplace has been seen as both ethical and unethical. One player in the marketplace that uses unethical tactics is often seen as negative -- a bad monopoly. This is especially true when that organization uses unfair competition (price gouging or price fixing) to retain their market share. If, within a specific market or area one business is the sole or overwhelming player, that is said to be monopolization. Within the definition of a monopoly, there can be several kinds: geographic (using an area that is easiest for distribution); natural (the organization becomes more profitable because of economies of scale); technological (technological advantage or technology prevents other businesses); or even coercive (a monopoly kept by force, legal or not) (Schenk, 2010).

Monopolies derive their market power by controlling barriers to entry from other firms. These can be economic barriers in which there are cost advantages, technological superiority, or economies of scale that ensures that one major seller of a good or service is dominant. They are characterized by decreasing costs for their own range of production, while trapping others in the market into using their products. Usually, monopolies are large, well-funded businesses because production processes that require a large amount of capital can limit competition (e.g. The Steel Industries at the beginning of the 20th century, etc.). A monopoly, like perfect competition, minimizes cost in order to maximize profits. However, because the monopoly has relatively few costs to retain market share, their profits can be used to either enrich the owners or advance the technological capacity of their business, and thus increase market power (Friedman, 2002).

One company that has been accused of being a monopoly is Microsoft. The company, based in Redmond, Washington, is one of the leading manufacturers of computer software and operating systems. It has dominated the market for decades with its OS, Internet Explorer, and Office Product. With this increasing popularity and a rise in market share to over 90%, the United States Government sued Microsoft in 1998 under the Sherman Antitrust Act. Microsoft was accused of using its market power unfairly by requiring the OS and Internet Explorer products to be installed on PCs together. By bundling the two products together, and requiring hardware manufacturers to use both if they wanted either, they virtually owned the personal computing market. Microsoft robustly defended its product indicating that the company had spent millions on research and development with a product profile that was innovative, not a monopoly, since users could opt for another OS, Office or Internet search program. The Judge, however, found that Microsoft had indeed used principles of a powerful monopoly to reduce market share from Apple, Netscape, and Java. Microsoft appealed, and a settlement was reached forcing the company to share its application codes with other companies ((Department of Justice, 2012).

By definition, a monopoly is a marketing structure where there is only one producer and that producer can raise prices and control the market. While this was somewhat true, at any time any consumer could find alternatives -- that they did not is certainly what Microsoft wanted, but hardly a true monopoly. In addition, the price of Windows OS was very low in comparison to the market, a strategy of being low to increase market share, but again, hardly monopolization (Is Microsoft a Monopoly? 2009). Microsoft likely did have monopoly power, but it does not seem as if they used it as such, but instead, used pricing and features to dominate the market. Instead, the Windows OS, IE browser and Office were more of a natural monopoly because they were the most efficient and cost-effective for the market at the time.