Microsoft has a monopoly in the market for Windows operating systems, which is used by over 90% of PCs worldwide. As the sole seller of Windows, Microsoft can influence the market price for its product. A monopoly has no close competitors and is referred to as a "price maker" that charges prices above its marginal costs. While monopolies can charge high prices, they are constrained by consumer demand - if prices are too high, fewer people will buy the product.

1. In brief, what is a monopoly In relation to Microsoft
A copyright from the Government gives Microsoft the right to make and sell copies of
the Windows operating system. So when we decide to purchase a copy of Windows, we
have little choice but to pay the price that the firm charges for the product. Microsoft is
said to have a ‘Monopoly’ in the market for windows as it is used by over 90% of the
PC’s in the world! A Monopoly like Microsoft has no close competitors and therefore can
influence the market price of its product. A Monopoly firm is referred to as a ‘price
maker’.
Market Power:
Alters relationship between a firm’s costs and the price at which it sells that product to
the market.
A competitive firm takes the price of its output as given by the market and then
chooses the quantity it will supply so that price=marginal cost.
The prices that a monopoly charges exceeds marginal cost. This is evident in the
case of Microsoft’s Windows.
So, without a doubt, it’s no surprise that monopolies charge high prices for their
products. So why don’t Microsoft charge €500 instead of €50 for their software?? The
answer is simple- Because the higher the price they charge, the fewer people who will
purchase their product at that price. People would find other alternatives such as
purchasing less computers, changing over to other operating systems or take the illegal
route..
We must remember that monopolies cannot actually obtain any level of profit they
wish. Why? Because higher prices result in fewer customers.
Below is a link on an interesting article on the issue of ‘The Microsoft Monopoly: The
Facts, the Law and the Remedy’.
http://www.pff.org/issues-pubs/pops/pop7.4microsoftmonopolyfacts.html

2. Why monopolies arise?
Monopoly: A firm that is the sole seller of a product without close
substitutes.
Firms are said to have a monopoly power if they are a dominant seller in
the market and can exert some control over the market because of this.
The fundamental cause of a monopoly is ‘’barriers to entry’’: a monopoly
stays the only seller in its market as other firms cannot enter/compete with
it. Barriers to entry have four main sources:
Key research owned Barriers To
by single firm
Entry
Government gives a firm A firm can gain control
the exclusive right to of other firms in the
produce some good/service market and therefore
grow in size
Costs of production make a single
producer more efficient than
large numbers of producers

3. Example- owner of a well
Exclusive ownership of
has a monopoly on water
a key resource is
Firm owning a key potential cause of a
resource monopoly
Monopoly
Resources
Monopolists have much Monopolies
greater market power rarely arise
than single firms in because if this
competitive markets Monopolists can
charge high price for
necessities like water
There are few examples of
firms that own a resource
that has no close
substitutes
Monopolies happen
Patent/Copyright laws are used
as Government has
by Government to create a
given one
monopoly to serve public
person/firm the right
interest
to sell a good/service
Government Eg:Pharmaceutic
European Kings used to al companies
grant exclusive licences created applying for a
to friends and allies to patent
raise money monopolies
Laws on
Governments can Patents/Copyrights give patents/copyrights
grant a monopoly as 1 producer a monopoly have benefits and
it’s viewed to be in costs
the public interest.
Higher prices occur
Privatization of alcohol would
In Sweeden-can control
result in fatal accidents, suicides
directly the sale of alcohol
etc.

4. Firms less concerned about
An industry is a natural
new entrants which may
monopoly when a single
threaten its monopoly
firm can supple a
power Monopolist’s profit
good/servide to an entire
market attracts new entrants
into market
Natural Monopolies
Market becomes
more competitive
Economies of
scale over range
Distribution of As markets expand, a
of output
water natural monopoly can
evolve into a
competitive market.
A firm can produce a Pipes must be built
large amount of by a firm in the town
output at a low cost
Average costs of water are
lowest if only 1 firm
serves the entire market.
Large firms grown partly
through Example: In UK, any
takeovers/merging and merger that gives a firm
acquisitions 25% or more of market
may be investigated
External Growth
Industry becomes
more concentrated
Firm may develop monopoly Governments monitor
power over their rivals + use acquisitions to notice any
barriers to make it difficult implications for
for new firms to enter competitions.

5. Monopoly Vs Competition:
The main difference between a competitive firm and a monopoly is the ability the
monopoly has to influence the price of its output. Competitive firms are small relative to
the market in which it operates so it takes the price of its output as given by the market
conditions. In contrast, because a monopoly is the sole producer in its market, it can
change the price of its goods by altering the quantity it supplies to the market.
The following video link below describes what a monopoly is in simple terms and also
the problems associated with it.
http://www.youtube.com/watch?v=b93mTVukuiE&feature=related

6. A Monopoly’s Revenue:
Total Revenue = Quantity sold × Price
Average Revenue = Total Revenue ÷ Quantity of output
Marginal Revenue: A monopolists marginal revenue is always less than the price of its
good and very different from marginal revenue for competitive firms. When a monopoly
increases the quantity it sells, it has two effects on total revenue: more output is sold
and the price falls.
Profit Maximization:
How exactly do monopolistic firms maximize their profit?
- They maximize profit by choosing the quantity at which marginal
revenue equals marginal cost.
The Welfare Cost of Monopoly:
A monopoly charges a price above marginal cost. This makes monopoly undesirable to
consumers. The monopoly earns a profit from charging this higher price. This makes it
desirable to the owners of the firm. A consumer surplus is consumers’ willingness to pay
for a good minus how much they actually pay for it.

7. Examples of Monopolies:
Iarnrod Eireann
Microsoft
American Telephone & Telegraph
Major League Baseball
Telkom
Long Island Power Authority