, Research Paper
Monopoly Power in the Computer Industry
A requirement for pure competition is the absence of significant barriers to entry into the market by new firms. Monopoly, correspondingly, arises because of barriers to entry. A monopoly firm is the only seller of a good or service with no close substitutes. The market in which the monopoly firm operates is called a monopoly market. The definition of a monopoly firm or market may seem precise, but in the real world, when we try to decide which markets are monopolies and which are not, things aren t always so clear. How close must a substitute for a product be before we no longer consider a firm
that makes the product to be a monopoly?
Two forces dominated developments in the computer industry in 1995- the arrival of Microsoft Corp. s new Windows 95 personal computer operating system and the overnight authority of the Internet and the World Wide Web, a subset of the Internet for multimedia use. Events in 1995 drew so much attention to both Windows and the Web that by year s end the computer mouse had become almost as well known to the world s population at large as the television set remote control. Both Windows 95 and the Web were mileposts on what clearly emerged during the year as the road toward something analysts started calling convergence. The term pointed toward the coming integration
of all forms of information from simple text to moving video as digital data that could be processed, stored, and manipulated by computers using a graphic interface. In May the US Justice Department filed an antitrust suit against Microsoft, alleging that Microsoft had used monopoly power to restrict competition. Based on the contention that Microsoft improperly sought to dominate the market for Internet browser software-to the disadvantage of Netscape, maker of the most popular World Wide Web browser- the case
grew to include allegations of broader anti-competitive actions to dominate the Internet software market. The broadened suit alleged that Microsoft, which in September passed General Electric to attain the highest market value in the nation, had used its influence as the maker of the Windows operating system for PC s to restrict competition. Among the actions at issue was the government s contention that Microsoft offered AOL, the world s
largest on-line service provider, a prized spot for its software on the Windows desktop in exchange for AOL s decision to use Microsoft s Internet Explorer as its main web browser. The Federal suit was joined by twenty states and after some delay went to trial in October before District Court Judge Thomas P. Jackson. Microsoft responded that the Justice Departments broadening of the case reflects desperation and that, whereas the
company undeniably was a powerful player in the software market, it had done nothing illegal. It also asserted that, rather than trying to hurt competition by combining its Internet Explorer with Windows, as the government claimed, Microsoft had combined the products to improve Windows. Government lawyers introduced testimony by some of Microsoft s competitors and partners, internal memos and electronic mail messages, and excerpts from a videotaped deposition by Microsoft s founder and chairman, Bill Gates.
In late November AOL announced two startling deals: a $4.2 billion agreement to acquire Netscape and an alliance with Sun Microsystems, which had filed a separate suit against Microsoft over the alleged misuse of Sun s Java programming language, Government lawyers denied that the AOL-Netscape-Sun deal weakened their arguments, and the case was still pending at year s end. A lower profile antitrust suit was filed by the Federal Trade Commission in June against computer chip giant Intel Corporation. That suit accused Intel of using monopolistic practices when it stopped or threatened to stop
providing vital information about Intel chips to three computer manufactures that declined to license key patents to Intel. Intel maintained that it had the right to act as it did. A trial on that suit was set for February 1999. Apple Computer staged an amazing recovery that became apparent in January when the firm returned to profitability and continued during the year with the introduction of successful new computer models, such as the Power Macintosh G3 and the iMac consumer computer. Apple introduced the iMac in August and promoted it on the basis of its ease of use and obvious physical differences
from other machines. By early in the Christmas season, Apple s iMac had become the top-selling PC in retail stores. During 1998 Apple turned doubters into believers as it consistently remained profitable, but the company remained a relatively small player in the industry, where its machines were overshadowed by computers that used Windows. In the biggest acquisition to date in the computer industry, Compaq announced in January that it would buy DEC for $9.6 billion in cash and stock. The purchase represented a sea change in the computer industry, since it entailed the takeover of an aging maker of
minicomputers, a 1970s technology, by the largest manufacture of PC s, an industry that began only in the 1980 s. Once the world s third largest computer maker, DEC had lost billions of dollars and half its employees since the late 1980 s. The purchase was expected to make Compaq the world s second largest computer manufacturer, behind IBM. While DEC had been financially ill as interest in its proprietary computers and software waned, it
still provided a doorway through which Compaq, still basically a PC manufacture, could enter the markets for higher-end computer workstations and computer networks. In 1997 Compaq had paid $2.8 billion for Tandem Computers, which manufactured computers used by banks and telecommunications firms. Consolidation also occurred in the software industry. Mattel Inc., known primarily for its toys but also as a player in the entertainment
software business, said that it would purchase educational software firm The Learning Company., Inc,. based in Massachusetts, in an exchange of stock valued at about $3.8 billion. The Learning Company had been in the world s second largest consumer software firm, after Microsoft. The acquisition followed The Learning Company s agreement earlier in the year to buy Broderbund Software, another entertainment firm, for about $420 million in stock.
So in conclusion, as you can see, the computer industry has blown up through theyears. There are many different companies that offer many products and services to fit to the customers needs. But who can say which ones are a monopoly and which ones are not. How close do the substitutes for products have to be before they, the company, are considered to be a monopoly? We all as individuals have different likes and dislikes, so we can agree to disagree about what is a substitute for a product. So it makes sense to view monopoly as a spectrum, rather than a strict category.