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"The Microsoft Monopoly Should Be Broken Up." Evaluate This Claim Using Economic Theory And Evidence On The Welfare Effects Of Monopoly And Competition

2010 words - 9 pages

In the United States, monopoly policy has been built on the Sherman Antitrust Act of 1890. This prohibited contracts or conspiracies to restrain trade or, in the words of the later Clayton act, to monopolise commerce. The claim that a company should be broken up is clearly not a new concept in America. In the early 20th century this law was called upon to reduce the economic power wielded by so-called "robber barons," such as JP Morgan and John D. Rockefeller, who dominated much of American industry through huge trusts. These trusts were formed as a number of competing companies agreed to assign the whole of their stock to a group of trustees, receiving in exchange trust certificates ...view middle of the document...

Total surplus in this market is maximised at this output and is the sum of all the areas 1 to 5. Under conditions of monopoly, the producer will produce at Q* charging a prevailing price of P*. (B) This creates a deadweight welfare loss which is defined as the net loss of total surplus. This inefficiency is caused by price controls which leads to the loss in producer surplus exceeding the gain in consumer surplus.The size of the deadweight loss will depend enormously upon the elasticity of demand in the industry. Campaigners that argue for Microsoft to be broken up ensure that, as there are so few substitutes for the Microsoft products such as Windows, the demand is very price inelastic. This means that the deadweight loss be considerably larger as shown below.In figure 2 the demand is relatively elastic and, in figure 3, relatively inelastic. The deadweight loss (shaded) is significantly greater in figure 3.In practice, the social cost of monopoly power is likely to exceed the deadweight welfare loss in triangles 3 and 4. One reason for this is that the firm might engage in such activities as rent-seeking. This is defined as the spending of money in socially unproductive efforts to acquire, maintain or exercise monopoly power. (Pindyck & Rubinfeld) A monopolist may undertake actions such as this in order to avoid antitrust scrutiny. Due to its social cost, antitrust laws prevent firms from accumulating excessive amounts of monopoly power.Microsoft's Anti-trust problems started early in 1990 when the Federal Trade Commission started investigating them for possible violations of the Sherman and Clayton Anti-Trust Acts. After settling the case in 1994, Microsoft agreed to a consent decree as a way of settling the government antitrust suit, and agreed not to engage in particular practices. Microsoft signed a settlement that said they would sell MS-DOS and other operating systems at a 60% discount to the original equipment manufactures if they agreed to pay a royalty for every computer they sold whether it had Microsoft's operating system on it or not. Microsoft was also able to specify the minimum number of operating systems the retailer had to buy and could also sign them up to long-term contracts. This eliminated the chance of any new operating systems becoming popular as the competitors had to create a system faster than Microsoft and beat them to vendors.There are economists who have argued that a monopoly is not always an economic bad. In the 1980's, such theories were released from the Chicago School of Economics. These theories said that the only justification for antitrust intervention should be that a lack of competition harmed consumers, and not that a firm had become, in some ill-defined sense, too big. Some monopolistic activities previously targeted by antitrust authorities, such as predatory pricing and exclusive marketing agreements, were much less harmful to consumers than had been thought in the past. They also criticised the...

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