Question

3. Microsoft’s Word program enjoys a 94% share of the word processing market, which is considered a monopoly. Are they taking advantage of any of the usual practices that we associate with monopolies (if so—what)? Do you think something should be done about their dominance, or is this a monopoly the world should accept?

Answer 1

A monopolist is definitely the only seller of a product, and a firm with a dominant position in an identified market may be a monopolist. However, contrary to claims by the Justice Department’s lawyers and software market critics, a dominant producer—or even a single seller—is not necessarily a monopolist.

A monopolist is a firm that can, to a significant degree, exploit its market position by restricting output and raising price to generate profits in excess of those expected in a competitive market environment. Although Microsoft surely has some market power, as do many other firms in the computer industry, its market pricing and product development strategies do not square with those of a monopolist. Far from restricting output, Microsoft has expanded it. Rather than hiking the price of the Windows operating system, the firm has lowered its price and enhanced its power and usefulness. Microsoft proposes to increase long-run profits by adding value to Windows by integrating its Web browser into the operating system. If the firm is not adding value to its products, a number of other computer firms are in a position to erode its market share. As we have shown, claims that Microsoft can control the software market because of that market’s alleged special attributes—network externalities, path dependency, and essential facilities—have not been carefully considered. Such claims are weak because the underlying arguments have serious flaws.

Microsoft’s critics come far closer to the mark when they complain that Microsoft has been “brutally competitive” than when they claim Microsoft is a “monopoly.” From our perspective, it appears that once again the Justice Department is using the antitrust laws to thwart competition by a highly successful American firm. To protect unsuccessful competitors, it is squelching competition.