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Published by: Pratik Shah on Sep 05, 2011
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In economics market structure is also known as market form. The word market structure describes the state of a market with respect to competition. Markets can be distinguished by the number of firms in the market and the type of product that they sell. Market structure is determined by a number of factors. The presence or absence of these factors will determine the nature of the market. Thus a market with differentiated products with some entry barriers and large number of sellers would be known as monopolistically competitive market and one with same features but with few sellers would be known as an Oligopoly market. Ideal markets are full with economic freedoms and they are the most competitive markets. Such markets are known as perfectly competitive markets. The competitiveness of the market depends upon the power of individual firms to influence market prices. The less power an individual firm has to influence the market in which it sells its products, the more competitive that market is. The extreme form of competitive market structure comes into existence when each firm in a market has zero market power. Market

structures are therefore either perfect or imperfect. Between perfect and imperfect competition, the two ends of marker structure, are number of markets will be found. The nature of these markets will be determined by a combination of factors. These factors or the determinants of market structure are as follows: • Freedom of entry and exit. • Nature of the product, i.e. whether the product is homogenous or differentiated? • Control over supply and output or the absence of it • Control over price or the absence of control. • Barriers to entry and exit.

Duopoly is a market consisting of only two sellers. Oligopoly in which a market is dominated by a small number of firms which own more than 40% of the market share. Monopolistic competition is also a a competitive market where there are a large number of independent firms which have a very small proportion of the market share. The imperfectly competitive structure is quite identical to the realistic market conditions where . the following types of market structures are found: 1) 2) 3) 4) 5) A perfectly competitive market consists of a very large number of firms producing a homogenous products. Monopoly is a market where there is only one producer or seller of a product or service.TYPES OF MARKET STRUCTURE Based on the factors determining market structures.

e. oligopolists. MONOPOLY Monopoly is at the other extreme end of the market structure. entry conditions. charging different prices to different consumers in different markets. a monopoly exists when a specific individual or an enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it. The monopolist is a price maker as against the price taking competitive firm. A monopoly firm may indulge in price discrimination. monopolists. In economics. i. Monopolies are thus . It is therefore the opposite of a competitive firm. It is the negation of competition. and duopolists exist and dominate the market conditions. The monopoly firm is also the industry and hence produces the entire industry’s output. and contrasted with oligopoly where a few entities exert considerable influence over an industry). and the extent of differentiation. The elements of Market Structure include the number and size distribution of firms.some monopolistic competitors. (This is in contrast to a monopsony which relates to a single entity's control over a market to purchase a good or service.

suppliers (monopsony) and the other firms (oligopoly) in a game theoretic manner . a monopoly should be distinguished from a cartel (a form of oligopoly). prices or sale of goods.meaning that expectations about their behavior affects other players' choice of strategy and vice versa. A monopoly must be distinguished from monopsony. Monopolists typically produce fewer goods and sell them at a higher price than under perfect competition.characterised by a lack of economic competition to produce the good or service and a lack of viable substitute goods. This is to be contrasted with the model of perfect competition where firms are price takers and do not have market power. The verb "monopolise" refers to the process by which a firm gains persistently greater market share than what is expected under perfect competition. Monopolies can form naturally or through vertical or horizontal mergers. monopsonies and oligopolies are all situations where one or a few of the entities have market power and therefore must interact with their customers (monopoly). in which several providers act together to coordinate services. Monopolies. resulting in abnormal and sustained profit. Likewise. in which there is only one buyer of a product or service . A monopoly is said to be coercive when the monopoly firm actively prohibits competitors . a monopoly may also have monopsony control of a sector of a market.

 The firm makes abnormal profits in both the time periods. by contrast.  Prices are in excess of marginal cost. A government-granted monopoly or legal monopoly. He sells more quantities charging less price against the . Holding a dominant position or a monopoly in the market is not illegal in itself. and trademarks are all examples of government granted and enforced monopolies. The characteristics of monopoly are as follows:  There are high barriers to entry. the firm is the same as the industry.  Price Discrimination: A monopolist can change the price and quality of the product. copyright. be considered abusive and therefore be met with legal sanctions.from entering the field or punishes competitors who do. thus forming a government monopoly. and for practical purposes. competition laws place specific restrictions on monopolies. The government may also reserve the venture for itself. however certain categories of behaviour can. In many jurisdictions. the whole market is being served by a single firm. when a business is dominant. Patents.  The firm controls either the price of the output. is sanctioned by the state. often to provide an incentive to invest in a risky venture or enrich a domestic interest group. Therefore.  Single seller: In a monopoly there is one seller of the good who produces all the output.

 It encourages innovation.  Economies of scale can be gained and consumers may benefit. product in a highly elastic market and sells less quantities charging high price in a less elastic market. A monopoly faces a negatively sloped demand curve not a perfectly inelastic curve. Advantages  Monopoly is an ideal market structure if it is a natural monopoly. .  Reduction in price of goods. Consequently. any price increase will result in the loss of some customers.  It encourages Research & Development.  No risk of over production.  There is enough capital for research.  Efficiently use of resource. Market power: Market power is the ability to affect the terms and conditions of exchange so that the price of the product is set by the firm (price is not imposed by the market as in perfect competition). Although a monopoly's market power is high it is still limited by the demand side of the market.

The issue central to the case was whether Microsoft was allowed to bundle its flagship . a monopolist may become inefficient  Exploitation of labour.  Consumer choice is limited in monopoly markets. the potential for supply is limited. Klein was the lead prosecutor.  Since the output is restricted.  Due to complacency. states.  Increase in price of product. Joel I.S. 1998 by the United States Department of Justice (DOJ) and 20 U. when price is greater than marginal cost. MICROSOFT United States vs. i. The plaintiffs alleged that Microsoft abused monopoly power on Intel-based personal computers in its handling of operating system sales and web browser sales. DISADVANTAGES  The monopolist’s preference to high price than to high output leads to exploitation of consumers.e. Microsoft was a set of consolidated civil actions filed against Microsoft Corporation pursuant to the Sherman Antitrust Act on May 18. UNITED STATES VS. Control over entire market.

Bundling them together is alleged to have been responsible for Microsoft's victory in the browser wars as every Windows user had a copy of Internet Explorer. that the two were now the same product and were inextricably linked together and that consumers were now getting all the benefits of IE for free. Microsoft stated that the merging of Microsoft Windows and Internet Explorer was the result of innovation and competition. Those who opposed Microsoft's position countered that the browser was still a distinct and separate product which did not need to be tied to the operating system. and Microsoft's intent in its course of conduct.Internet Explorer (IE) web browser software with its Microsoft Windows operating system. The case was tried before Judge Thomas Penfield Jackson in the United . Underlying these disputes were questions over whether Microsoft altered or manipulated its application programming interfaces (APIs) to favor Internet Explorer over third party web browsers. since a separate version of Internet Explorer was available for Mac OS. They also asserted that IE was not really free because its development and marketing costs may have kept the price of Windows higher than it might otherwise have been. Microsoft's conduct in forming restrictive licensing agreements with original equipment manufacturer (OEMs). It was further alleged that this restricted the market for competing web browsers (such as Netscape Navigator or Opera) that were slow to download over a modem or had to be purchased at a store.

government's interest in Microsoft's affairs had begun in 1991 with an inquiry by the Federal Trade Commission over whether Microsoft was abusing its monopoly on the PC .States District Court for the District of Columbia. The DOJ was initially represented by David Boies.S. HISTORY The U.

additional restrictions could be imposed on us that would adversely affect our business. Department of Justice. These constraints include limits on certain contracting practices. Microsoft insisted that Internet Explorer (which first appeared in the Plus! Pack sold separately from Windows 95) was not a product but a feature which it was allowed to add to Windows. 18 states. resulting in a settlement on July 15.” . and rights for computer manufacturers to limit the visibility of certain Windows features in new PCs. We believe we are in full compliance with these rules. The commissioners deadlocked with a 2-2 vote in 1993 and closed the investigation. In its 2008 Annual Report.S. Microsoft stated: “Lawsuits brought by the U. mandated disclosure of certain software program interfaces and protocols. These proceedings imposed various constraints on our Windows operating system businesses. In the years that followed. but the Department of Justice opened its own investigation on August 21 of that year. although the DOJ did not agree with this definition. However.operating system market. and the District of Columbia in two separate actions were resolved through a Consent Decree that took effect in 2001 and a Final Judgment entered in 2002. 1994 in which Microsoft consented not to tie other Microsoft products to the sale of Windows but remained free to integrate additional features into the operating system. if we fail to comply with them.

What makes Microsoft a monopoly? It's that their entire product line rests upon state enforcement of legal monopolies of duplication called "copyrights" (that's what a copyright is: a monopoly on the duplication of an .

You must invent your own non-potato if you want to compete with them. Now imagine you wanted to sell Windows instead of potatoes: you buy a copy of Windows. Imagine you want to enter the potato business. What happens here is that armed dudes show up at your doorstep and yank you into a cell. and when time comes for harvest. Exactly like in the potato example above. and start selling it. whether they were involved in the commission of this act. it is a crime to compete with Microsoft in the same products. as you can probably see now. You invest time and energy of your own into multiplying said potato and making a huge-ass farm. Let's go with an example here. but an investment in time and money nonetheless). an act after which you are no longer competing in their products.it'd be an epic disaster of the most abject variety of mercantilism. you can pick them up and sell them in direct competition with the guy who sold you the first potato. Essentially as absurd as a dairy product company claiming a monopoly on butter. You buy one potato. duplicate it N times (certainly a cheaper investment. So.intangible such as software). but selling a substitute for their products. Imagine a world where there is only one purveyor of tangible products -. Now you are poor and possibly the shameful owner of a two-inch-wide gaping anus. And the most outrageous thing is that they outsource their costs of enforcement to you. so everybody else must sell margarine or else. or not. and you plant it. and your assets are taken away from you. the taxpayer. right? This is exactly what happens .

has successfully carved a small segment of the world. the state snatches you and puts you in a cage. What you have is mercantilism for software now. What you have now is the epitome of absurdity. Why is Microsoft a Monopoly? .with software -. The fact that nobody else is allowed to compete with them on the Windows and Office businesses. They have an assortment of little monopolies enforced by the state and thus the moniker "monopolist" is objectively welldeserved. but you don't feel it's absurd because you are used to it.but you don't see how the alternatives could look like because you have always lived under this copyright enforcement regime. It is really that simple: if you compete with them.a disaster -. independently of their market share. that is what makes them a monopoly. only perhaps a bit mitigated because the free software movement -the only area in which competition in the same product is explicitly permitted -.

whenever you have a communication or data system there have to be standards. In the case of Microsoft. I think there are two reasons. as an opportunity. the need to raise huge amounts of capital. and by defining the kind of machine that could run their OSs. Then. Usually. political connections. there has to be a reason that goes beyond the market. Microsoft became a monopoly because they were able to create and enforce universal data interaction standards for personal computers. it also becomes inefficient. So. Second. and to lose creative focus. then Windows). . Microsoft was successful at this because. Understand. when a company goes from nothing. So. to suffer from destructive politics and conspiracies. to monopoly. Microsoft did this by creating a series of operating systems (DOS. in only twenty years.This is an important question because monopolies are not natural. and fill every market niche. bigness and inefficiency go together. there have to be other issues involved. unlike Apple and Commodore it set about creating nonexclusive standards that allowed anyone to get into the computer hardware business. That means that there has to be so meone to create standards. and someone to enforce the standards. for a monopoly to develop. I’ll start with technology. when a company becomes big and monopolistic. or fundamental technological necessity. new technology. for example. First. the market throws up competitors who see the overpriced products of Big Inc. the more likely it is to suffer from friction (when people and processes run into each other and jam). The larger a firm.

because of the incredible advantages of being first. they have to catch up (with a firm that is probably a moving target) before they can compete.0 (the first Macs didn’t appear until 1984). let me give you a little history. the monopoly made Bill Gates the wealthiest man in the United States. and the people. The problem is that in an unregulated market. The Microsoft monopoly was possible. the invested capital. The strategy that made Microsoft a monopoly worked because a communication/data system is valuable only in terms of the number potential users and the number of possible interactions. there is nothing new about this. Between 1850 and 1890. Understand. metallurgy. NEW TECHNOLOGY : Whenever a new technology opens up and goes into a dynamic growth mode. Within a few years Microsoft had over 90% percent of the OS market. Microsoft became a monopoly because they created the most universally useful standard for desktop computers. Microsoft is a good example of this. the first players gain huge advantages because they are the first to gain the experience. And. And. in part. So. when competitors come into the market. back in 1981 (after creating Applesoft Basic for Apple Computer) they entered the OS market with MS DOS 1. and . several technologies (steam power. the Microsoft no longer has an economic reason to produce a quality product because of it’s monopoly. the most universally useful standard is the one most valuable to computer users.So. Microsoft products were able to be in every market niche.

and the world is wrong that makes someone abandon a perfectly good job to work in a garage on some blue sky project. back in 1880? Today that would be like owning the airports. say. in the late 1970’s. Eventually. Boston. Naturally. and heating oil?). railroad barons. digital microelectronics technology went dynamic. Of course. and were probably very arrogant to begin with (it’s arrogant belief that I’m right. for example. and many became incredibly wealthy as their firms became monopolies. and shipping magnates. steel tycoons. There were. It was being involved with the new technologies at the beginning that gave these men (and a few women) the chance to become awesomely wealthy.electricity) went dynamic almost simultaneously. The first targets of the Justice Department under the new laws were the railroad trusts. Massachusetts. And you could make everyone would have to pay your rates. the freeways. a “personal computer”). More recently. Congress responded with various “Antitrust” statutes. and the railroads going into that town. These men gained an inordinate amount of power. and Bill . As a result. and the Standard Oil Monopoly (imagine what it would be like to have just one brand of gasoline. motor oil. and the monopoly creation cycle started again. Understand. there were excesses. Microsoft is a traditional technology generated monopoly. What if you owned all the railroads going into say. the first people in on the technology had enormous opportunities. today we have Microsoft.

The basic economic rule is this: A communication system is only valuable in terms of the number of people who can participate. and we shouldn’t say anything “unholynomic”). but AT&T was able to maintain its monopoly in spite of the pressure. many new companies entered the telephone business. it makes our businesses more profitable. it makes our public life go more smoothly. Here again. The language standard we use (in this case English) is enforced by the public schools. and spell. Another case is the telephone system in the United States. write. Communications systems have their own unique economic rules. the greater the value to individual users. The fact that we (mostly) use the same language standard has enormous benefits. where most of us learned to read. In the early years of this century the telephone system grew enormously. the value of the . dominated by the AT&T monopoly. there is a telecommunications sector of the economy because of these rules. So. and it improves the quality of our lives. The more participants in the system. (I know! I know! Economic rules are supposed to be made in Washington by Newt Gingrich. when we speak. we use a language standard to ensure understanding. or write. the federal courts are once again being asked to bust a trust. there is something I should explain.Gates is a traditional tycoon (and he is behaving like a traditional tycoon). THE ECONOMICS OF COMMUNICATION SYSTEMS Before I go on with Microsoft. After the Bell patents expired. and the greater the profits to the promoters of the system. So. For example.

The more the phone system was used. Of course. to the dialing systems. Standards for everything from the voltages and amperages used by each phone. Understand. the phone system could not be very valuable to anyone. Without these standards. and the greater the profits. and someone had to enforce these standards.). Having twenty (or a hundred. the government came in and regulated the AT&T monopoly. the monopoly worked because the value of AT&T to it’s stockholders was directly related to the of value of telephone service to each individual user. To maximize the value of the telephone system. So. So. to common phone rates. and so on. the greater the profits to the stockholders. or a thousand) little standards would have destroyed the value of the phone system for it’s users and it’s promoters (and AT&T’s stock holders). the more the system was used. The higher the quality of service. the value to individual users had to be maximized. to maximize the value of the telephone system to AT&T’s stock holders. gauging. . AT&T had to maintain consistently high standards of service (rare for a monopoly) to maintain it’s profits in a regulated environment. AT&T remained a monopoly because of it’s ability to create and enforce standards.telephone system to individual users (and profitability to its promoters) depended on the total number of users. etc. So. someone had to create common standards for all phones. there had to be common standards. So. every telephone had to be able to connect to every other telephone in the world. And this made the Bell System monopoly work even better because it cut off the traditional roads to monopoly profits (overcharging.

Business users have long been aware of Microsoft's lock on office productivity applications that require them to use MS Office in order to remain compatible with their business partners and customers. Windows-specialized programmers have. For years it has been a difficult decision for a professional developer to choose an environment other than Windows. Those programmers. And web-surfing users are now using Internet Explorer in a ratio of about 8:1 over alternative browsers. and tools of Windows software developers themselves. the sheer size of the Windows installed base is seen as a hedge against market change. training. the investment in skill. the continued dominance of Windows applications was also assured. The scale of that market dwarfs its competitors and opens to developers many more specialty markets than any alternative platform. who have logged many long sessions of coding for the Windows environments. through economic necessity.The courts have ruled that Microsoft holds a monopoly position in Intel PC Operating Systems. Further. With a large majority of developers writing code for Windows. and API's. Many companies. But one aspect of Microsoft's monopoly is more fundamental than any of those. and with their deep immersion in its assumptions. failing to appreciate the depth of . experience. been unable to switch to a different platform. Windows is perceived as a platform that will be with us for a long time to come. tools. Because it can take years of effort to reach the highest levels of productivity in a complex development environment. represent millions of person-years of Microsoft assets. The monopoly was elegantly self-perpetuating.

It needs no profits. or investors in order to succeed. After several spectacular failures. Further. Acknowledgement . Linux depends only on hobbyists' passion for programming and their self-imposed standards of quality in their own work. it seemed nearly impossible for such a locked market to break free of this cycle. the Linux community seems to draw motivation from its dissatisfaction with the computing landscape that Microsoft has created. corporate partnerships.Microsoft's monopoly and its determination to defend it. squandered valuable resources probing Microsoft's markets for an opportunity. the Linux phenomenon presents a very different kind of challenge. While Microsoft once made the fending off of mighty IBM look easy.

She has taken pain to go through the project and and make necessary connection as when needed. I also extend my heartfelt thanks to my family and well-wishers. Bhavna Mam the guide of the project for guiding and correcting various documents of mine with attention and care. Managerial .I owe a great thanks to many people who helped and supported me during this project. My deepest thanks to lecturer. I would also thank my institution without whom this project would have been a distant reality.

m.y.Economics MARKET STRUCTURE Pratik m.shah f.s s-124 .b.

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