MONOPOLY CHARACTERISTICS REGARDING MICROSOFT COMPETITION

Introduction
Monopoly is a term derived from the Greek words 'monos' or alone and 'polein' or sell.
The term is extensively used in economics. It refers to controlled power over the market,
by an individual or company.

Monopoly symbolizes control over a product to the extent that the enterprise or

individual dictates the terms of access and the markets for availability. The term is
specific to a seller's market. A similar situation in the buyer's market is referred to as
monophony. Monopoly first appeared as an economics-related term in 'politics' by
Aristotle. In his work, the thinker describes the rise and fall of monopolies of olive
presses. 

In ancient times, common salt was responsible for natural monopolies, till the time
people learned about winning sea-salt. Regions that faced scarcity of transport facilities
and that of storage were most prone to notorious escalation of commodity prices and
uneven distribution of daily-use products and services. The characteristics of monopoly
are unique to the condition generated by intent. 
A Firm is considered a monopoly if :
(1) A single firm selling all output in a market,
(2) A unique product,
(3) Restrictions on entry into and exit out of the industry, and more often than not
(4) Specialized information about production techniques unavailable to other potential
producers.
(Ref 3)

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Characteristics of monopoly
The characteristics of monopoly are in direct contrast to those of  perfect competition. A
perfectly competitive industry has a large number of relatively small firms, each
producing identical products. Firms can freely move into and out of the industry and
share the same information about prices and production techniques. (Ref 13)

The fundamental cause of monopoly.

 Barriers to entry , Barriers to entry have three sources:
a. An ownership of key resource
b. A legal barrier by government
c. A large economy of scale
 Exclusive ownership of an important resource that cannot be readily duplicated is
a potential source of monopoly.
 Government-created monopolies
 Patent and copyright laws are a major source of government-created monopolies.
Governments also restrict entry by giving a single firm the exclusive right to sell
a particular good in certain markets.
Monopoly versus perfect competition (Ref 20)
Competitive firm Monopoly
 A is one of many producers  A is the sole producer
 A has a horizontal demand curve  A has a downward-sloping
 A is a price taker demand curve
 A sells as much or as little at  A is a price maker
same price  A reduces price to increase
sales

Price control:
In a monopoly, on account of a single market entity controlling supply and demand,
degree of price and supply control exerted by the enterprise or the individual is greater.
The absence of competition spares the monopolizing company from price pressure.
Nevertheless, to evade the entry from new market participants, the company needs to
regulate the set product or service price within the paradigms of the monopoly theorem.
Monopoly has scope for entrepreneurship to make available limited goods and/or
services at a higher price. The price and production decisions of such firms target profit

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maximizing via predetermined quantity
choice. This helps to cut even on the
marginal and revenue outcomes. (Ref 2)

Total Revenue P x Q = TR
Average Revenue TR/Q = AR = P
Marginal Revenue TR/ Q = MR
- MR does not equal AR

Increased scope for mergers:

 In a monopoly, due to the dictates of a single
entity, scope for vertical and/or horizontal
mergers increase. The mergers take on coercive form to effectively blot out competitors
and carry on supply chain management. (Ref 2)

Monopoly’s Marginal Revenue

A monopolist’s marginal revenue is always
less than the price of its good. The demand
curve is downward sloping (Figure 1). When
a monopoly drops the price to sell one more
unit, the revenue received from previously
sold units also decreases
When a monopoly increases the amount it
sells, it has two effects on total revenue (P x
Q). The output effect—more output is sold, so Q is higher.
Figure 1
The price effect—price falls, so Q is higher.
(Ref 2)
Legal sanctions:
Competition laws restrict a monopoly with regards to the extent of dominant position
held and exhibit of illegal and abusive behavior. This is, however, milder in the case of a
government-granted monopoly. Such a legal monopoly is offered as an incentive to a
risky, domestic venture. (Ref 2)
Predatory pricing: 

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 This feature of monopoly benefits the consumers. These are short term market gains
when prices drop to meet scarce demand for the product (Figure2). The suppliers and
direct consumers benefit from the monopolizing company's attempt to increase sale
for business marketing. This kind of pricing also helps the government to step in and
address any unregulated monopoly. If the predatory pricing is not managed efficiently,
the monopoly environment could be split. 
A monopoly maximizes profit by producing the quantity at which marginal revenue
equals marginal cost (Figure3). It then uses the demand curve to find the price that will
induce consumers to buy that quantity. (Ref 2)

Figure 2

Price elasticity:  Figure 3

with regards to the demand of the product or
service offered by the monopolizing company or
individual, the price elasticity to absolute value
ratio is dictated by price increase and market
demand. It is not uncommon to see surplus
and/or a loss categorized as 'dead-weight' within
a monopoly (Figure4). The latter refers to gain
that evades both, the consumer and the
Figure 4
monopolist.
(Ref 2)

Lack of innovation:
 On account of absolute market control, monopolies
display a tendency to lose efficiency over a period
of time. With a one-product-shelf-life, innovative
designing and marketing techniques take a back
seat. (Ref 2)
Lack of competition: 

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When the market is designed to serve a monopoly, the lack of business competition or
the absence of viable goods and products shrinks the scope for 'perfect
competition'(Figure5). (Ref 2)

Figure 5

Monopoly litigation: 
Lack of competition does not eliminate consumer dissatisfaction. High market share
results in consumers defying increased prices and welcome new entrants to the seller's
market. Competition law dictates are designed to pronounce a monopoly illegal, if found
to be abusing market power via practices of exclusionary nature. The law addresses
abusive conduct in the form of product tying, supply cuts, price discrimination and
exploitative deals. (Ref 2)

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Monopoly in terms of Microsoft

Officials of the US department of justice and the attorneys general of 17 states have
requested that a federal judge split the Microsoft Corporation into two companies. The
argument is that the split would provide greater competition in computer software.
If all other things are held equal, a monopoly can raise the price of its product above that
which would prevail in a competitive market, to the disadvantage of consumers. But in
the case of software, other things are not equal. Many computer programs complement
one another, working together in an integrated way to create a whole greater than the
single parts. This synergy would be lost if the windows operating system is split into one
company and applications into another.
Another aspect of the case is the global economy. The USA has a huge trade deficit with
the rest of the world, and one major exception has been computer software. The US has
been the leader in developing computer programs. Breaking up Microsoft will open the
door to more foreign as well as domestic competition, and exports of American software
will decline. Other countries encourage their leading industries, while us policy is to
punish any firm that gets too successful.
Microsoft is not an absolute monopoly, since it is not the only producer of operating
systems. Apple-Macintosh computers use different operating systems, and there are
competing systems available, though not yet widely used, for IBM-type computers. It is
possible to enter the field, either with a new operating system, or with software that
bypasses such systems via the internet. At most, Microsoft has monopoly power, the
power to raise prices and to stifle competition.
Microsoft is accused of exploiting such monopoly power. If the company has behaved
wrongly, then the appropriate remedy is a lawsuit or prosecution of the relevant
executive’s .Splitting the firm in two goes beyond any needed remedy for bad behavior.
Monopoly power in software is quite different from that of some natural resource such as
oil, as the technology is advancing rapidly, and even a dominant firm must innovate or
be left behind. Moreover, Microsoft’s biggest competitor is its own past products. The
biggest competition for windows 98 or 2000 is Windows 95, since the new version is not
just sold with new computers, but also to previous users who wish to upgrade. If the new
version is priced too high, then users will stick with their older versions.

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Many people envy the great wealth that has been obtained by the shareholders and
especially the top executives of Microsoft. They think it's not fair that so much wealth
should be concentrated in a few hands. But the moral criterion should be how this wealth
was obtained, not how much it is or who has it.

Figure 6

If the wealth came from land values not generated by the owners, then the appropriate
remedy is the community and public collection of the rent, not interference in the
enterprises using land. If excessive wealth came from protection granted by patents, then
the appropriate remedy is to reform the patent system. Effective remedies eliminate the
causes rather than just treat effects.
If splitting Microsoft really benefited the public and other software firms, then the
response would be an increase in the prices of the shares of stock of these companies
(Figure6). But instead, the share prices and market averages have tumbled down. This
indicates that the breakup is seen as damaging by shareholders in general. The investing
public does not think the breakup will help. (Ref 4)
The best evidence that Microsoft is a monopoly and insulated from price
competition is its huge profits. As Microsoft's installed base expands, its average
cost per unit of software is dropping dramatically, but it doesn't want to pass the
savings on to the customer, as they would have had to if they had true
competition, which they minimized primarily by OEM distribution of their
software, which continues to this day.
As a monopolist, Microsoft provides as little value as possible to each upgrade,
to extend the upgrade cycle as long as possible for greater profits. Maybe this
explains the lack of innovation in a company with so many advantages as a
monopoly and with so many billions of dollars to invest for research and
development! Thus, ironically, Microsoft's best strategy is NOT to innovate.
(Ref 12)

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Monopolistic characteristics regarding Wall Mart competition

Introduction
Market situation in which many independent buyers and sellers may exist but competition is
limited by specific market conditions. It assumes product differentiation, a situation in which
each seller's goods have some unique properties, thereby giving the seller some monopoly
power.
A type of competition within an industry where:

1. All firms produce similar yet not perfectly substitutable products.

2. All firms are able to enter the industry if the profits are attractive.
3. All firms are profit maximizers.
4. All firms have some market power, which means none are price takers. (Ref 11)

i. Monopolistic competition (Figure7)

Figure 7

ii. Economic analysis of monopolistic competition

      A. P is high compared to pure competition (P>MR=MC)
      B. Quantity will be restricted causing ATC to be higher than  that indicated by the
curve's lowest point. (Figure 7)
      C. Tends to be more competitive than monopoly and oligopoly. 
      D. Some believe economic profit tends toward zero as the number of firms  adjust
to varying profit levels.(Ref 6)

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iii. Attitudes differ toward monopolistically competitive companies using advertising to
emphasize product differentiation.
For
Informs potential customers
Finances national communication
Rewards and thus stimulates
technological advancement and
innovation
Increases output resulting in economies of
scale and lower ATC
Promotes spending and employment
Against
Persuades potential
Social costs (billboards)
Adds little to a product
Ads cancel each other's effect, output
doesn't change, ATC increases
Promotes of spending cannot be proven.

Characteristics of Monopolistic
Monopolistic competition refers to a market structure that is a cross between the two
extremes of perfect competition and monopoly. This allows for the presence of
increasing returns to scale in production and for differentiated (rather than homogeneous
or identical) products. However this retains many features of perfect competition, such
as the presence of many many firms in the industry and the likelihood that free entry and
exit of firms in response to profit would eliminate economic profit among the firms. As a
result, this offers a more realistic depiction of many common economic markets. The
best describes markets in which numerous firms supply products which are each slightly
different from that supplied by its competitors. Examples include automobiles,
toothpaste, furnaces, restaurant meals, motion pictures, romance novels, wine, beer,
cheese, shaving cream and many more.
Monopolistic Competition
A firm engaged in monopolistic competition which is considering reducing prices in order to
increase total revenue has two conflicting factors to consider. Reducing prices will increase
the quantity of a good sold, but the reduction in price will also apply to quantities of the good
that would have been sold at a higher price.(Ref 11)

Marginal revenue curve in monopolistic competition .

The phrase "contestable markets" describes markets where there are few sellers, but they
behave in a competitive manner because of the threat of new entrants. For instance, an airline

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 may serve a particular route exclusively, but does not charge excessive prices because those
prices would entice additional airlines to offer that route.(Ref 15)

Government regulation is often used to keep new firms out

Figure 8
of markets. Economists generally favor deregulation as this
helps to keep prices low. Prices over the long run in a
competitive market will move to the lowest point of the
firm's average total cost curve.(Figure 8)
Because price searchers face downward-sloping demand
curves, the price they charge will exceed the firm's marginal
cost. The price charged and the quantity produced will not be where the firm minimizes
average total costs. (Figure9) (Ref 12)
A monopolistically competitive market has
features which represent a cross between a Figure 9
perfectly competitive market and a
monopolistic market (hence the name). Below
are listed some of the main assumptions of the
model.
1) Many, many firms produce in a
monopolistically competitive industry
2) Each firm produces a product which is
differentiated (i.e. Different in character) from all other products produced by the other
firms in the industry.
3) The differentiated products are imperfectly substitutable in consumption. This means
that if the price of one good were to rise, some consumers would switch their purchases
to another product within the industry. Consumer demand for differentiated products is
sometimes described using two distinct approaches: the love of variety approach and the
ideal variety approach.
Love of variety: the love of variety approach assumes that each consumer has a demand
for multiple varieties of a product over time.
Ideal variety: the ideal variety approach assumes that each product consists of a
collection of different characteristics. For example each automobile has a different color,
interior and exterior design, engine features, etc. (Ref 7)

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4) There is free entry and exit of firms in response to profits in the industry. Thus if
firms are making positive economic profits, it acts as a signal to others to open up
similar firms producing similar products. If firms are losing money, making negative
economic profits, then, one by one, firms will drop out of the industry. Entry or exit
affects the aggregate supply of the product in the market and forces economic profit to
Figure 10
zero for each firm in the industry in the long run
5) There are economies of scale in production (internal to the firm). This is incorporated
as a downward sloping average cost curve. (Figure10)
These main assumptions of the monopolistically competitive market show that the
market is intermediate between a purely competitive market and a purely monopolistic
market. The analysis of trade proceeds using a standard depiction of equilibrium in a
monopoly market. However, the results are reinterpreted in light of the assumptions
described above. (Ref 5)
Output, Price, and Profit of a Monopolistic Competitor
A monopolistically competitive firm prices in the same manner as a monopolist—where
MC = MR. But the monopolistic competitor is not only a monopolist but a competitor as
well. (Figure11)(Ref 14)

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 A
Monopolist A
ically Monopolisti
Figure 11

Competitiv cally
e Firm: Competitive
Above Firm:
Normal Economic
Profit Loss

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Output, Price, and Profit of a Monopolistic Price
Competitor
At equilibrium, ATC equals price and economic
profits are zero. This occurs at the point of tangency
of the ATC and demand curve at the output chosen
by the firm. (figure12) (Ref 19)
0 Quantity
Figure 12
Product Development and Marketing in Monopolistic
Competition

Firms engaged in monopolistic competition invest in product development and marketing so

as to differentiate themselves from other firms in the industry. By doing so, they hope to gain
more monopolistic pricing power. Since advertising increases costs, it will shift supply curves
up and to the right.  Ultimately, over the long run, consumers pay for the advertising in the
form of higher prices.

In comparison to the pure competitive market, prices will be higher and quantities produced
will be lower when there is monopolistic competition. However, there will be a greater
variety of goods. This may be a worthwhile tradeoff.  (Ref 20)

Criticism of Wal-Mart

Wal-Mart has been subject to criticism by various

groups and individuals. Labor unions, community
groups, grassroots organizations,religious
organizations, and environmental groups protest
against Wal-Mart, the company's policies and business practices, and Wal-Mart
customers. Other areas of criticism include the corporation's foreign product sourcing,
treatment of product suppliers, environmental practices, the use of public subsidies,
and the company's security policies. Wal-Mart denies doing anything wrong and
maintains that low prices are the result of efficiency. (Ref 8)
In 2005, labor unions created new organizations and websites to influence public opinion
against Wal-Mart, including wake up Wal-Mart(united food and commercial workers)
and Wal-Mart watch (service employees international union). By the end of 2005, Wal-

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Mart had launched working families for Wal-Mart to counter criticisms made by these
groups. Additional efforts to counter criticism include launching a public relations
campaign in 2005 through its public relations website, which included several television
commercials. The company retained the public relations firm Edelman to interact with
the press and respond to negative or biased media reports, and has started interacting
directly with bloggers by sending them news, suggesting topics for postings, and
sometimes inviting them to visit Wal-Mart’s corporate headquarters. (Ref 9)
Economists at the Cato institute suggest that Wal-Mart is a success because it sells
products that people want to buy at low prices, satisfying customer's wants and needs.
However, Wal-Mart critics argue at the same time Wal-Mart's lower prices draw
customers away from other smaller businesses, hurting the community.
Wal-Mart is anti-capitalist, anti-competition, pro-corporate welfare. Even the staunchest
capitalist would admit that monopolistic competition is not conducive to consumers or
profit-makers. This is exactly what a multinational retailer like Wal-Mart does. By
undercutting local business, regional/national chains, and even smaller international
retailers, Wal-Mart makes huge profits which it then sits on allowing said money not to
cycle back into the economy. (Figure 13)(Ref 10)
Monopolistic competition, provided that it is not coerced by physical force, is not
destructive to capitalism. If, at a particular time, it is most efficient to have one business
control an industry, then there is no "loss" to the economy, provided there is no
government coercion involved. If Wal-Mart is inefficient and "sits on profits", holding
that money back, then it will soon cease to be the world's largest retailer. Wal-Mart is
big because people choose to shop there. If Wal-Mart has accepted "corporate welfare",
they deserve to be criticized for that, but calling them a "monopoly" is pointless.

Conclusion Figure 13

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Within this topic we have focused on the monopoly and monopolistic competition, the
properties of demand and supply, price takers and searchers, and demand and supply for
resources and capital. For a quick review, we've summarized the characteristics of the various
market types below. (Ref 22)
Table: Comparison Between Monopolistic, Oligopoly, Monopoly

Types of Quantity Price Marginal Marginal Demand Average total

market Revenue
Produced cost cost
Pure Expand output Take market price Same as Will equal Firm is small In the long run
competition unit MC is
market market compared to ,market price must
equal to price
price price overall equal or exceed
market ,can ATC will expand
sell as much production if
as it wants at expected long run
market price price exceeds at
ATC
Monopolistic Expand output Search for best MR will be P >MC in May face In long run profit
competition unit MR=MC price unit less than short run highly elastic maximizing price
MR=MC AR (price) demand must equal or
exceed ATC to stay
in business ;will
tend to expand long
term output if price
exceeds ATC

oligopoly Firm has Will try to avoid MR will be P>MC Elasticity of Price will tend to
control over severe price
less than demand is exceed ATC ,may
quantity of competition :
output but it price set AR (price) very not expand output
must take into somewhere dependent even if price is
account the between
reaction of competitive price upon the greater than ATC
competitors and monopolistic pricing of due to potential
price
policies of reaction of
rivals competitors
monopoly Firm will tend Search for price MR will be P>MC in As firm faces Price will tend to
to set output so as to maximize less than both short the entire exceed ATC ; price
such that profit ,price AR (price) and long market and quantity will
maximum exceed MC both run demand curve not to be set where
profit are in long run and for its product ATC is minimized
produced short run ,demand will
tend to be
inelastic
Reference:
By Internet:

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1)http://www.amosweb.com/cgibin/awb_nav.pl?s=wpd&c=dsp&k=monopoly,
+characteristics (5-1-2010)
2) http://www.buzzle.com/articles/characteristics-of-monopoly.html (5-1-2010)
3)Mark.wsc.ma.edu/101/monopoly.ppt (8-1-2010)
4) http://www.progress.org/fold140.htm (5-1-2010)
5) http://ingrimayne.com/econ/international/monocomp.html (8-1-2010)
6)http://www.businessbookmall.com/economics_25_monopolistic_competition.ht
m (6-1-2010)
7) http://internationalecon.com/trade/tch80/t80-5a.php (11-1-2010)
8) http://www.youdebateit.com/score.php?score=578 (5-1-2010)
9) http://en.wikipedia.org/wiki/criticism_of_wal-mart (25-1-2010)
10)http://wiki.answers.com/q/does_wal_mart_have_the_characteristics_of_a_firm_i
n_pure_competition (25-1-2010)
11)http://www.answers.com/topic/monopolistic-competition (25-1-2010)
12)http://thismatter.com/articles/microsoft.htm (8-1-2010)
By Books:
13)Author :sloman, j, (2001) essentials of economics (2nd) p133 (22-1-2010)
14)Author :sloman, j, (2001) essentials of economics (2nd) harlow, person 
education ltd. (22-1-2010)
15)Author :gillespie, a, (2001) advanced economic through diagrams oxford  
university press (22-1-2010)
By Journals:
16) economic review (09/2003) volume 21 no.1 (15-1-2010)
17) economic review (02/2003) volume 20 no.3 (15-1-2010)
18) economic review (09/2000) volume 18 no.1 (15-1-2010)
19) handout, 2004, the â ‘public interestâ ’ (25-1-2010)

20) handout, 2004, the model of perfect competition (22-1-2010)

21) handout, 2004, allocative efficiency & market structure (28-1-2010)
22) handout, 2004, price discrimination (22-1-2010)

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