An oligopoly is a market economy dominated by only a handful of companies. Such a market is difficult to penetrate since certain existing resources or technologies are required to help firms enter the industry (Corporate Finance Institute). As there are many large producers of technology in this market, Microsoft is considered to be an oligopoly in several market components. For instance, both Microsoft and Apple are oligopolies as they are the only two organizations producing globally-used operating systems. Besides, Microsoft has been in the home computer business for a long time and has a complete understanding and knowledge of its products. This perfect knowledge characteristic is a factor that is common in companies operating as an oligopoly.
Thus, this research finds that in an oligopoly, there is plenty of interdependence among companies. For instance, when Microsoft started to dominate the software industry, the company was taken to court in a case called the US vs. Microsoft. Here, the plaintiff argued that Microsoft had become too influential and dominant in the industry (Department of Justice). Additionally, firms in an oligopoly have similar but slightly distinct products, for instance, Microsoft produces widely-used software programs and operating systems such as Microsoft Word and Microsoft Excel. Additionally, Microsoft tends to keep its prices high to obtain greater profits, a feature that is common with many oligopolies. Here, the company has more control over its output and prices compared to its rival companies or those operating in a monopoly.
Level of Interdependence
One of the distinct characteristics of companies operating as oligopolies is their level of interdependence. These companies are normally made up of only a handful of firms. Such firms are quite large that their actions affect the existing market or industrial conditions. Hence, competing companies have to monitor the company’s market actions and respond promptly. It also means that in contemplating various market actions, an oligopoly firm must put into close consideration all the possible effects of competing companies and possible countermoves.
For instance, oligopolies considering reducing prices on their commodities will estimate the chances of a rival company lowering their prices in retaliation, thereby starting a disastrous price war. This price anticipation creates a lot of rigidity, as companies will only opt to decrease or increase their prices on goods depending on the actions of the market ‘price leader’ (Mankiw 109). Therefore, a company that is operating as an oligopoly is often larger than its existing market and if such a firm changes its marketing strategy; it significantly affects the rival companies. For instance, if Coca-Cola was to decrease its price by 20% for every bottle, the Pepsi Company would be severely affected and will have to respond to avoid losing a huge portion of its market share.
US vs. Microsoft
For Microsoft, its rather predatory practices of offering a free web browser known as Internet Explorer led to the eventual collapse of Netscape browsers. Notably, from 1995, anyone going through the World Wide Web did so using the Netscape Navigator. However, after a huge 1995 IPO, Netscape got its first actual competitor in Microsoft, a ‘giant’ in making operating systems (Department of Justice). Thus, by giving away its software browser for free, Microsoft triggered the re-opening of a previous 1990 case, which sort to determine whether the company was on the verge of creating an unfair market environment dominated by one industrial player.
The case was later picked up in 1998 when the attorney generals and Department of Justice (DoJ) of 20 states decided to file antitrust charges against the company. In their submissions, they felt that Microsoft’s bundling of extra programs in its operating system was an act of an oligarchy. The presiding judge felt that Microsoft had violated a section of the Sherman Antitrust Act that was introduced in 1890 to outlaw cartels and monopolies. He further ruled that the company’s position within the marketplace constituted unfair competitive and oligopolistic practices, which threatened both the level of innovation and competition in the industry (Department of Justice).
The judge also directed Microsoft to divide its organization operations to create two different entities known as ‘baby bills’. These two halves will include the operating system and software arm. However, after Microsoft appealed the court’s decision, the DoJ decided to enter into a settlement agreement with the company (Department of Justice). It scrapped off the requirement calling on Microsoft to divide its operations and in return, the company agreed to share all computing interfaces with other organizations.
Producing Similar but Slightly Different Products (Product Differentiation)
In an oligopoly, a group of firms, normally two or three control the market. Here, no one company can prevent the other from holding significant influence within the industry (Mankiw 319). As such, each might sell slightly different products to gain some competitive advantage over the other. When it comes to computer operating systems, Microsoft Windows is the most dominant desktop operating system. Currently, it has a market share of 73% and since its initial release back in 1985, Microsoft Windows has gone through a series of mutations (Liu). Today, some of its notable operating systems include Windows XP, Windows 7, and Windows 95. Besides, its latest edition is Windows 10, an operating system that can run on tablets, personal computers, and all embedded devices.
Compared to Apple Mac, Microsoft PCs present a wider genre of computers than Macs and are more popular than Apple Macs. However, for all their differences, these two operating systems have similar characteristics. For instance, they can share the same scanners, printers, keyboards, and other integral peripherals. Both systems are also efficient in the application of common file types such as JPEGs and PDFs. Microsoft has created an Office version for both operating systems allowing users to access programs such as Excel and Word seamlessly. The Mac can also read and interpret many of Windows’ DVDs and CDs (Garfinkel 310). However, today, Microsoft through its Windows Operating System is more preferred by customers compared to Apple Mac, Linux, and other computer operating systems, which has made its competitors claim that Microsoft is operating as an oligarchy.
The company’s Windows operating system is naturally more adaptable compared to Macs, offering both improved configuration options and hardware. It is also easier to navigate through various software developments, modifications, and other vital internal system PC needs. Gamers too prefer using Windows because of its unique hardware and impressive graphic cards. Although Apple offers decent graphic cards, it fails to provide a variety of options, tools, and hardware that can take the gaming experience to a whole new level (Garfinkel 310). Lastly, Windows continues to succeed in its sale of products because of the extensive number of applications supported by its operating system. While the Mac App Store has less than 14,000 applications, the Windows Store has over 50,000 software apps (Liu). Even though there are both effective and ineffective apps in the two stores, the more the number of apps in Windows continues to make it a popular option.
Similarly, compared to Linux, which is known for its security and speeds, Windows offers better and seamless ease of use. It means that even the lesser tech-savvy individuals can easily work on Windows devices or personal computers. That said, both Windows and Linux have similar features such as the ability to run several different web services such as MySQL, e-mail, and DNS services. They also have used open-source software like Mozilla Firefox and Mozilla Thunderbird. Despite such similarities, Microsoft and its Windows operating system are still more preferred and trusted. After all, they provide customers with an extensive list of the most globally-used apps such as Adobe Photoshop and Microsoft Office, which do not exist on Linux (Patayon 95). Windows also get its drivers rather fast, while users of Linux have to struggle to receive any drivers, and once they arrive, they often lack certain key features or are incomplete.
It is such product differentiation that has made Microsoft become an oligopoly. This process of distinguishing its services and products from those of its close competitors has made it more attractive to a wide market base. Note that the main idea behind differentiating a company’s products from its rivals is to create a position that compels potential customers to see it as unique and appealing. By developing a more compatible, easy-to-use, adaptable, and reliable operating system, Microsoft has gained huge market power and continues to dominate this part of the technology industry.
Under perfect economic conditions, the prices are slightly above the current marginal cost, which leaves firms with limited profits. As such oligopolies combine the market power to ensure high prices and to obtain more profits. In this case, if Microsoft was to reduce prices on its products, other companies within this oligopoly market such as Apple would follow suit. Rather than fixing its product-pricing model in line with the present market dynamics, Microsoft dictates its product’s prices internally. It is such tendencies that have seen the company maintain huge profits in the long term (Mankiw 350). Statistics even show that Microsoft’s net revenue in 2015 stood at $93.58 billion, a sharp increase from $44.28 recorded in 2006 (Liu). The main reason behind the company’s unusual profitability is its inelastic demand curve that has seen Microsoft maintain significantly low costs of production.
Microsoft does not adhere to the pricing model of traditional monopolistic companies. However, its strategies for squeezing out profits are common with firms operating in oligopoly markets. One oligopolistic factor is in the software industry, which follows the negative demand curve where production costs decrease as the total product output keeps on increasing. Thus, Microsoft’s overall objective is to look for ways of getting rid of its competition without competing on prices and where profits would massively increase as the company sells more of its software products.
These high profits have made Microsoft’s stocks to be one of the highly sought-after forms of equity in the USA and across the world. Such a situation shows a marketing deficit. In competitive markets, it is quite normal for high-profit organizations like Microsoft to introduce new market players that can manufacture products similar to those in Microsoft’s catalog. However, Microsoft has developed high-entry barriers such as development and advanced research costs. As a result, the funds that would have been deployed by these firms to compete with Microsoft are allocated to other competitive industries. What’s more, as an oligarchy, Microsoft has maximized its profits by setting high product prices, which decreases the motivation or need for price reduction and price controls.
Moreover, Microsoft’s ability to restrict output has given it the advantage of setting up any product price. It also can harness its long-term competitive advantage by maintaining sustainable profits (Mankiw 180). One suitable example is the maintenance of current business practices instead of adopting innovative or new practices. Furthermore, by looking at Microsoft’s operational history, the organization only changes its business practices when its rather monopolistic entity is threatened. Such market strength has allowed the company to perform in ways that go against the basic principles of a free market. For instance, the cost of most of its software products rises when they are supposed to fall. In doing so, Microsoft has made sure that the prices of products that the company has an interest in stay high but remain stable. That said, a good number of those using Microsoft’s operating systems no longer rely on competitive market dynamics as the main value determinant in products manufactured by Microsoft. Instead, such customers subscribe to Microsoft’s products with the belief that it is the only software provider that can meet their needs (Corporate Finance Institute).
Conclusively, when Microsoft was sued by the DoJ for violating the antitrust laws, the court ruled that the company be divided into two. However, this ruling has not stopped the company from being an oligarchy. For instance, its marketing characteristics show that the company’s pricing strategies do not follow the normal supply and demand curve. Even though Microsoft has invested a lot of resources in trying to protect its competitive image, according to the current market dynamics, the company is operating as an oligopoly. Its software product prices influence those of Apple and other top rival companies and it continues to differentiate and improve its operating systems, offering easy to use and adaptable software packages.
Corporate Finance Institute. What is an Oligopolistic Market or Oligopoly? n.d. <https://corporatefinanceinstitute.com/resources/knowledge/economics/oligopolistic-market-oligopoly/>.
Department of Justice. U.S. V. MICROSOFT: COURT’S FINDINGS OF FACT. n.d. https://www.justice.gov/atr/us-v-microsoft-courts-findings-fact. 5 December 2021.
Garfinkel, Simson L. Design Principles and Patterns for Computer Systems That Are Simultaneously Secure and Usable. May 2005. https://core.ac.uk/download/4398599.pdf. 5 December 2021.
Liu, Shanhong. Global market share held by operating systems for desktop PCs, from January 2013 to June 2021. 10 September 2021. https://www.statista.com/statistics/218089/global-market-share-of-windows-7/. 5 December 2021.
Mankiw, N. Gregory. Principles of Economics. Cengage Learning, 2020.
Patayon, Urbano. “Operating Systems Usability: A Comparative Study.” JPAIR Multidisciplinary Research (2019): 93-101.