Since Microsoft enjoys monopolistic power in the PC operating system maeket, can it set as high a price as it likes for its internet browser? In what way do you think that microsoft might be inefficient?

Microsoft enjoys monopolistic power in the PC market but it cannot overprice its internet browser even there are not close competitor so they are described as a price maker.

The difference between a competitive firm and a monopoly is the monopoly's ability to influence the price of the output. A competitive firm is small relative to the market in which it operates and therefore takes the price of its output as given by market conditions. By contrast, because a monopoly is the sole producer in its market, it can alter the price of its good by adjusting the quantity it supplies to the market. The demand curve of a competitive firm is a horizontal line as they can sell as much or as little as it wants at this price. In effect, because the competitive firm sells a product with many substitutes, the demand curve is perfectly elastic. However, a monopoly demand curve is a negative gradient curve as if the monopolist raises the price of its good, consumers buy less of it.

A monopoly charge price that exceeds marginal cost. The marginal cost of selling extra copy of internet explorer is only a few dollars(cost of making 1 more cd) where the market price of windows in many times the marginal cost. It is perhaps not surprising that monopolies charge high price for their products and customers of monopolies might seem to have little choice but to pay whatever the monopoly charge. But even so, microsoft cannot sell the internet explorer cd at $500 or even $5000 as if microsoft set the price too high, fewer people would buy the product. This is because fewer people will buy computers, switch to other operating systems or browser such as firefox or even make illegal copies if the price is set too high.Hence, monopolies such as microsoft cannot achieve any level of profit they want because high price reduce the amount that their customers buy. Although monopolies can control the prices of their goods their profits are not unlimited.

A competitive market use the invisible hand of the maeket and this leads to an allocation of resources that makes total surplus as large as it can be. Because a monopoly leads to an allocation of resources different from that in a competitive market, it fail to maximise the total economic well being. The socially efficient quantity is found where the demand curve and marginal cost curve intersect. Monopoliset choose to produce and sell the quantity of output at which the marginal revenue and marginal cost curves intersect. They will choose the quantity at which the demand and marginal cost curves intersect so monopolist produces less than the socially efficient quantity of output which result in deadweight loss. Therefore, microsoft monopoly is inefficient.

(reference: principles of economics by Mankiw)

Labels: Monopoly