Wednesday, December 06, 2006

The myth of monopolies

I have oft heard a myth about companies that manufacture consumer products. The myth is that companies with expansive market shares have monopolies in those markets. I will take an objective (as much as I can) look at two controversial companies, Apple and Microsoft, and determine their potential status as monopolies.

First, we must understand the criteria for monopolies. To be a near-monopoly or a monopoly, a firm needs to have close to or all of, respectively, the sales in a specific market. That means, to be a near monopoly, one of three specific things must happen:

  1. A firm controls a resource critical to a market.

  2. A government signs a contract with a firm that makes the firm the only competitor.

  3. A firm can make a product cheaper than anyone else can.

Any of those three things can turn a corporation into a monopoly. For instance: A company patents a specific technology and then sells it; the government contracts a single company to produce trains for a public railway; a firm can launch cheap long-distance telephony service by launching satellites cheaper than anyone else.

Once you are a monopoly, you have the market. There is no one else. You have all the sales. No one can compete with you, since there are no close substitutes. Coke and Pepsi are close substitutes, for instance, so they can't be monopolies. And the best part is that you can keep other companies out of your market by use of technology, legality, or force. That sounds great, doesn't it?

What really makes a company a monopoly is the presence of barriers to entry. If your company can keep other people out of the market, you have exclusivity. You are a monopoly. Now, there are many potential barriers to entry. If you are a large company, you are an incumbent. That means you have a big legal team, loyal customers, patents, research and development, and lots of advertising. Those are all factors that can keep another company out of your market. A new company is building a new operating system? Threaten the little guy with patents and advertise how great you are, and you have successfully kept another firm out of the market, etc.

So is Apple a monopoly in regards to the iPod? Well, the iPod has 75% of the market share. That's hardly limiting anyone else from entering the MP3 market - hey look! There are lots and lots of MP3 players! There are other big competitors in the market, like Creative, Sandisk, and Microsoft. Apple hardly controls the means of productions, since any of the other companies listed above produce MP3 players that can replace the iPod. Apple certainly doesn't have any legal power that prevents anyone else from creating a similar MP3 palyer - hell, apparently Apple can't stop companies from producing identical fake iPods!

Next up is Microsoft. You would probably say that Microsoft is a monopoly. First, are they the only operating system producer in the market? Nope. Say hello to Linux, Macintoshes, BSD, YouOS, and a Windows clone, ReactOS. Microsoft is certainly not alone. And certainly some of those are close substitutes for Microsoft Windows. Apple OS X is an obvious choice, as would be the Ubuntu distribution of Linux. Does Microsoft possess any resources crucial to the market? Maybe. Microsoft, like any large technology corporation has patents on code - in Windows. Microsoft likes to talk about those patents when bringing up the possibility of litigation to keep Linux from competing with Microsoft. That is a barrier to entry if I ever saw one. Threatening a group of volunteers with litigation is taking advantage of your status in the market. While it is possible to build an operating system without violating Microsoft's patents, Microsoft can scare businesses into shying away from Linux by making Linux look illegal.

Microsoft also has deals with hardware manufacturers, like Dell and HP. Windows is bundled with that hardware. That in turn makes life difficult for the other competing operating system developers, since the hardware companies won't bundle anything but Windows. That in turn leads to customer loyalty: Consumers know that Windows comes with every OS they buy, so they feel safe. The hardware companies in turn don't want their customers to feel alienated by bundling different OSes.

I covered iPods and Windows because those are the most frequently discussed brands when it comes to monopoly debates. While there are certainly more monopolies and mistaken monopolies in the wild, such examples are not particularly relevant at this point in time. I know that there are people who will disagree with me and those who will hold me up, but the fact of the matter is that the evidence truly decides. I have not covered all the evidence, to be sure: There are other mentionable examples of Microsoft's status as a monopoly that I deemed insignificant overall. All I can do is hope that I've convinced at least one person of the true status of the iPod and Windows in the market.

No comments: