Monopoly Economics Essay

Monopoly Essay Question 1

"Having been found guilty, in April 2000, of abusing its monopoly, Microsoft, the software giant was ordered to be broken in two."

- Economist 7 Nov 2002

a) Why do monopolies exist? [ 10 ]

b) What are the relative merits or demerits of breaking up a monopoly like Microsoft? [ 15 ]

Suggested essay outline:

Part (a)

INTRODUCTION

1. (i) Define monopoly

Spectrum of Market Structures:

Definition: Most extreme form of imperfect market with little or no competition & firm supplies a major part of industry output.

Definition: Most extreme form of imperfect market with little or no competition & firm supplies a major part of industry output.

(ii) State the characteristics of a monopolist

* There are no close substitutes

* There is presence of barriers to entry.

* Demand is likely to be price inelastic

BODY

2. Why monopolies exist?

- EOS

In some industries, high overheads mean that the market size limits the no. of firms that can exist & simultaneously benefit from EOS in the industry. (Natural monopoly)

- Legal Barriers

Patent creates the exclusive right for an inventor to exploit his invention for a no. of years.

It has used its Windows monopoly of PC operating systems, built in the 1980s, to extend its grip on the software market.

Microsoft had restrictive licensing agreements with PC makers & would not grant access to 95% of the source code of its Windows 2000 and Windows XP operating systems to its users.

- Advertising and brand loyalty as a barrier to entry

Advertising Ðo build up brand loyalty Ðo prevent new company to compete with microsoft

- Aggressive tactics & intimidation

The practice of predatory pricing or limit pricing i.e. using anticompetitive measures to preserve its monopoly and by being predatory towards its competitors (using deliberately low prices to limit entry to the market).

Eg: During 1996, Microsoft giving away its web browser, Internet Explorer, for free (zero dollars Ðo very very low price)

- Mergers and takeovers

Microsoft has been actively seeking out & buying up new businesses related to its core business area.

CONCLUSION

3. The monopolist is a price setter and can choose which price to charge.

Still it is constrained by the demand curve. A monopolist (like a perfectly