Using the Concept of Network Externalities in Detecting Monopolistic Essay

Using the Concept of Network Externalities in Detecting Monopolistic Practices as in the Case of Microsoft Company - Essay Example they are connected in a virtual network. Examples of compatible products are computer hardware and software, phonographs and records, and television sets and programing. In extreme cases, network externalities may cause markets to fail as when an inferior product ‘tips’ the network towards adopting it over a superior product because it arrived first (Page & Lopatka, 1999, p.955). A market is said to have ‘tipped’ when it settles on a single standard for a product, such as software platforms (p.960). Proposition: ‘Microsoft acted illegally to extend its monopoly power.’ Corporate acts deemed anticompetitive are those that foster competition not on the merits, and lead to insufficient distribution compensation. An example is when a sufficiently large number of distributors agree to exclusivity over a sufficiently lengthy period, because this tends to drive rival firms out of the market. Distributors who have not by then signed up with the dominant firm will then have to pay a monopoly price (Rasmusen, Ramseyer & Wiley, 1991). Microsoft, as dominant firm intending to defend its market position, undertook four actions with regard to Internet Explorer (IE) vis-a-vis original dominant browser, Netscape Navigator: (1) Microsoft invested massively in browser technology; (2) IE was zero-priced; (3) Microsoft signed exclusive distribution contract with Internet access providers; and (4) Microsoft bundled IE with Windows. The court found that investment in browser technology and zero pricing were not uncompetitive, but declared exclusive distribution contracts and tying or bundling arrangements as uncompetitive (Klein, 2001, pp.46-47). Arguments in favor of illegality Microsoft engaged in actively ‘tipping’ the market, thus preventing the adoption of what could...This paper offers a comprehensive review of the concept of network externalities and its practical applications in helping to detect the uncompetitive actions f rom companies. Using the example of the Microsoft company, the essay exhibits its possible excessive use of dominant market position, through the help of provisions of network externalities theory In separate cases, governments (the US and EU) and attorneys in class action suits claimed that Microsoft’s contracts with original equipment manufacturers (OEMs) were exclusionary and anticompetitive, thereby maintaining its operating system (OS) and later its internet browser. These allegedly caused consumers to pay higher prices, discouraged innovation, and restricted trade in violation of the Sherman Act. Microsoft countered that it was not a monopoly because it still faced strong competition in a dynamic industry; its success was procompetitive because consumers benefited from its software distribution; and imposition of antitrust remedies would reduce innovation instead of encouraging it. Corporate acts deemed anticompetitive are those that foster competition not on the merits, and lead to insufficient distribution compensation. Microsoft’s OS provided a platform with network and family effects, and its contracts, while exhibiting some arguably anticompetitive characteristics such as imposing penalties, also includes terms that provide exceptional value to its customers that, as in the case of AOL, tangibly improve their businesses.