Thursday, September 13, 2007

Does Microsoft have too much monopoly power?

Hi I found your blog really useful and it helped improve my grades! So thanks alot! You're doing a really great job here:)
I would like to ask you a question,
What are the merits and demerits of breaking up a monopoly? i.e Microsoft
Would really appreciate it if you could give me some help here.
Looking forward to ur response:)

Hmm... why does this question sound so familiar? Is it because I perhaps set this exact question for one of my students today?... :)

Anyway, it is of course an interesting question.

At one stage the US Justice department had nearly succeeded in getting Microsoft broken up into 3 smaller companies. They argued that Microsoft had abused its monopoly power to engage in illegal activities.

These illegal activities included:

  • Combining Internet Explorer browser with the Windows operating system - This had violated anti-trust laws.
  • Note this is an example of a monopoly using its power in one area to gain market share in another. Because it had a monopoly in operating systems. It was able to use this to gain a monopoly for web browsers. It is a kind of vertical integration. - Controlling different stages of production. New web browsers were at a disadvantage because it was too much effort to change from the default web browser.
The decision to break up Microsoft was, under the Bush administration, eventually reversed. However, the judge did agree Microsoft had violated anti trust laws

The merits of breaking up a monopoly are similar to the arguments for and against mergers but in reverse
Points to Consider
  • Is the monopoly abusing its market power? - setting higher prices being inefficient?
  • To what extent does Microsoft need Profit for Research and development. To what extent do Microsoft benefit from economies of scale?
  • Do these benefits justify the higher prices and inefficiency associated with Monopoly power.
  • Is Microsoft inefficient because it is a monopoly, or is it a monopoly because it is innovative and efficient?
  • Price of operating systems is coming down in real terms. Internet provides greater competition over time. e.g. growth of Mozilla Browser
  • Are there alternatives to breaking up a monopoly. For example, the government could regulate the monopoly like Privatised water companies.
Essay: Should govt be concerned with a merger between Tesco and Sainsbury?

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