People nag all the time about Microsoft’s monopoly. But, maybe this isn’t that bad. I’m going to quote professor Christian Rieck. He supposes the monopoly of Microsoft isn’t bad.

Network effects

Imagine: Microsoft isn’t the dominant producer of operation systems or office suites, but that there are about three companies of equal size. Beforehand, you can’t determine what’s going to be the dominant system, because some users think system A is better, and others like B or C more.

All systems exist next to each other for a while till some users come to the conclusion that the benefit of a suite isn’t only subject to quality, but also in which extent it’s scattered. If you have a system for which there are little programs available, for which aren’t much experts available and where you can’t exchange files with, you’ll soon be behind the times.

(Just take a look at the Video-2000 and VHS-story. Video-2000 was the best choice, but VHS did win, just because there were more tapes available for that format.)

External influences, like the extent of scattering, are often referred to as network effects (…). As a consequence of network effects, a system can become extinct (…). However, it’s also possible that multiple system exist next to each other, like the different storage methods for digital cameras.

Scale profit

What the outcome will be, is subject to many influences. Like, the head start a system can gain in the starting phase of the system. In many scenarios, the consumer comes of worst. Especially if the system becomes extinct, because people who bought the system lose their money. But also if multiple systems exist next to each other, because development costs must be paid multiple times. Particularly with complex software as operation systems and office suites, the development costs are high, while the spreading of the product is cheap. If three companies make such a product, the costs must be paid three times – and paid by the consumer.

Natural monopoly

A market that behaves like that, is called a natural monopoly. A natural monopoly is characterized by high constant costs (…) and low variable costs (…). Under all circumstances, in a natural monopoly, the bigger the production, the cheaper the product. Such markets are the cheapest with just one producer.

The reasons are the above-mentioned network effects and scale profits (…). If there’s no interference in such markets, the outcome will always be a small number of providers. And almost is the period in which such a process takes place a disaster for technology and consumers. Products are made which use incompatible technology and require specific knowledge. In spite of these disadvantages, which don’t occur with only one provider, monopolists are always negatively received.

State interference

By state interference, this attitude has been created. Markets which develop as a natural monopoly, became legal monopolies. (…) Due to this interference monopolists were protected who didn’t need protection, because this market only has place for one or few providers. By this state protection, however, the stimulus for business to protect its lead from potential newcomers disappeared. They became in the position to ask much higher prices then was justified. Above all, the focus on developing new products or improving quality of existing products fell away.

If a natural monopolist is exposed to possible competition, it has to be on its guard. That weights even more if, next to scale profits, there are also network effects. If the monopolist isn’t careful, another system can spread in a specific part of the market. This system has captured its own natural monopoly, even if it’s in a market segment. For example, in the market of server operation systems, Linux has gained a big share at the expense of Microsoft and Unix.

The pricing policy of a monopolist has therefore its limitations, even if there isn’t a actual threat at the moment. With too high prices for, for example, Windows or Office, there’s always the potential of people switching to Linux or OpenOffice.

The fear of losing market share guarantees that natural monopolists keep trying to innovate and will keep their prices low, discouraging potential rivals investing in the same market. The monopolist can keep it’s prices lower than rivals due to its size. The cost advantage of the monopolist even has the size that it can offer consumers a cheaper product then other producers can.

So, it’s just the question if it’s that bad that Microsoft has such a dominant position at the market for operation systems and office suites. Would you like to pay extra for the expensive development of similar products by smaller developers who have to split it’s constant costs on less sold parts – just because you believe in ‘fair’ competition? Or is it better that the fear of competition for a natural monopolist shares it’s cost advantage with the consumer?

This post appeared earlier in Dutch on my previous blog.