Tuesday, June 03, 2003

When is a monopoly not a monopoly?

Winterspeak reader Joe Gregorio asks:
[Microsoft is now bundling and integrating its browser with its operating system to get people to upgrade. I don't think this will work] This does make me wonder if there is an economics term for this, a monopoly that can't be leveraged. Or is it not a monopoly if it can't be exploited?
Personally I don't like using the term "leveraged" unless you're referring to debt (it's finance jargon, don't worry) or "exploited" because it's too emotionally charged, but I understand Joe's point. I would answer that a monopoly that can't be used is a weak one.

The most useful way to think about a monopoly is to ask yourself how easily the product can be substituted. If you raise the price and everyone buys it anyway, it's probably pretty tough to substitute. If you raise the price and everyone switches to something else, then it's very easy to substitute. Ford Motor Company has a monopoly on Ford cars and they're welcome to it. There are lots of substitutes for Fords, namely cars made by everyone else.

When people say that Microsoft has a monopoly on the desktop PC operating system market, they're referring to Win 95, Win 98, Win 2000, and Win XP. But each of these operating systems are actually pretty good substitutes for each other and Microsoft is struggling to get people to upgrade. License 6.0 was their attempt to push businesses to XP and get folks to rent operating systems, thus solving the problem, and I'm not sure how much success they've had. Integrating browser upgrades seems to be the plan for the consumer market. The point is that Microsoft's biggest source of competition is old versions of Microsoft stuff, and they're doing the best they can to kill that off. While Microsoft may have a monopoly on desktop PC OSes, Windows XP does not.

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