Economics Department
|
Economics Department |
|
Week 6 worksheet
Monopoly
For a revision sheet on this topic, click here. To return to this worksheet, use the “Back” button on your internet browser.
Read the articles below about Microsoft McNealy: Microsoft monopoly must be broken Mercury News To Scott McNealy, chairman and chief executive of Sun Microsystems, Microsoft is an out-of-control monopolist that needs to be disciplined.
And if the appeals courts don't stop the company, he said, Microsoft will use its monopoly over the core software of personal computers to become the gatekeeper to the Internet.
``Microsoft becomes the kingmaker,'' McNealy said Tuesday in an interview with Mercury News editors and reporters. ``They're going to get you coming, going and being there, all leveraged through their Windows monopoly.''
Sun, a Palo Alto server maker, competes with Microsoft in providing software for server computers and Web-based services, and McNealy helped prod the Justice Department to file its landmark antitrust case against Microsoft in 1998.
Last year, U.S. District Judge Thomas Penfield Jackson ruled that Microsoft violated antitrust laws, and he ordered the break-up of the company. But Microsoft appealed the ruling, and a federal appeals court is scheduled to issue an opinion on the case any day.
McNealy said the appellate judges should uphold Jackson's findings. ``Execute on the law, execute on the findings of fact and deliver the sentence,'' McNealy said.
Instead of a complete break-up, McNealy said he would prefer that the government ban Microsoft from spending its cash on anything except dividends and its own core business. Right now, Microsoft makes equity investments in many companies, making it difficult for competitors like Sun to get a fair shake.
``It's like Standard Oil going out and buying 20 percent of every gas station in the country. How does Shell Oil sell gas to a company that's got an influencing equity owner?'' he said. If unchecked, Microsoft will extend its monopoly into Internet services, the Sun chairman said.
As an example, he pointed to a set of upcoming Microsoft services called Hailstorm, which will be built into Windows XP, the new version of its Windows software to be released this autumn.
Microsoft hopes Windows users will entrust their credit-card data, e-mail address book, calendar, favourite Web sites and other personal data to Microsoft, which will store the information on Microsoft servers so it's accessible from anywhere.
While convenient for consumers, the arrangement will give Microsoft access to a huge database of information about PC users.
``Microsoft is building the directory of all time,'' McNealy said.
McNealy compared Microsoft to a drug dealer, offering an enticing service free at first, then charging after the user gets hooked. ``The first hit of heroin is free,'' he said.
MICROSOFT WITNESS DISPUTES MONOPOLY POWER Computergram International 01/22/99 , Issue: 3581 By William Fellows Microsoft Corp is not a monopoly according to MIT economics professor Richard Schmalensee, because it does not behave like one.
Traditional models say a monopolist restricts output, maintains high prices and does not innovate. Moreover in a monopoly market there are barriers that prohibit the entry of competitors. Schmalensee said Microsoft exhibits none of these characteristics and in his redirect attempted to demonstrate to Judge Thomas Penfield Jackson why it does not.
Conflicting arguments of key economic witnesses over whether Microsoft is a monopoly continued to dominate the 41st day of the antitrust trial in which the US government and 19 states charge Microsoft has market, or monopoly power, and maintains this power through the use of certain illegal actions.
Windows and cigarettes Schmalensee's use of an economic equation to demonstrate how Microsoft would have to be charging $2,000 for Windows in order to be considered a monopolist provoked the Judge to ask why it must always be assumed that a monopolist maximises its price. He said he could imagine a situation in which a monopolist - his example was a cigarette maker - might maintain lower short term prices in pursuit of long-term gain.
Schmalensee made a couple of attempts - before, and then after the recess when he'd had time to think - to incorporate the Judge's example into his model, but appeared to side-step the issue when he said that in Microsoft's case there is no evidence of addiction. He said Microsoft is also different to a cigarette monopolist because it operates in a dynamic market. It's "at odds with the concept of monopoly that Microsoft would only charge $50 for such a product [Windows]" on PC systems that cost $2,000 or more. Moreover rather than raising prices as the government maintains, Microsoft has, Schmalensee argued, lowered the price of Windows when adjustments for improvement in quality are made.
The government's lead attorney David Boies dismissed this argument, saying that "because Microsoft is not charging a monopoly price now is irrelevant, because the absence of market power can't be determined just by looking at price, you have to look at profit too." Microsoft, Boies says, wouldn't be able to sustain its profit or price if it was operating in a competitive market.
"Even the defence witness [Schmalensee] says there is no viable alternative [to Windows] today." Other behaviour that Schmalensee said indicates that Microsoft is not a monopolist include its expansion of the PC market and the hundreds of millions of dollars it spends attracting ISVs† to Windows. Clearly they not being prevented from entering the PC business, he argued. Schmalensee used Java to try to prove his point, observing that if Java is to realise its (cross-platform) potential it needs to attract ISVs to write in pure Java. The government's argument, he said, is that ISVs write only to the most popular platform, in which case "Sun's effort to get ISVs to write to Java is futile." Later in court the Microsoft witness went on to forecast, using market research data, that by 2002 Netscape will have 60 million users, double the number it had in the third quarter of last year because of the "rapidly rising tide of the internet." Even if Netscape's market share continues to decline "it will have a very large number of users," Schmalensee argued, "60 million should attract ISVs."
† Independent software vendor
1) On the basis of these articles, do you agree that Microsoft is abusing its monopoly power. If it was decided that it would be in the public interest to restrict Microsoft's power, what would be the best way to accomplish this? (15 marks) 2) Explain the difference between a theoretical monopoly and a monopoly defined by the Competition Commission. (2 marks) 3) How can the degree of monopoly power in a market be measured? (2 marks) 4) What factors influence the degree of power a monopolist can wield? (6 marks) 5) Outline the assumptions of monopoly. (3 marks) 6) Draw the long and short run equilibrium positions for monopoly, marking on any abnormal profit (5 marks) 7) Explain the main barriers to entry which might allow monopoly power to be generated. (6 marks) 8) Explain with an example what is meant by barriers to exit? (3 marks) 9) (i) Explain what is meant by price discrimination (3 marks) (ii) What conditions are necessary for price discrimination to occur? (3 marks) (iii) Outline the main costs and benefits of price discrimination (4 marks) 10) What are the main advantages of monopoly as compared with perfect competition (6 marks) 11) What are the main disadvantages of monopoly as compared with perfect competition. (6 marks) 12) Using 9&10 as your base, under what circumstances do you feel that a monopoly is unlikely to be in the public interest? (6 marks) 70 marks
|