Microsoft is a(n) _________ (secure/insecure) monopolist, and the limit price is roughly _________ (10, 20, 40, 60, 90, 100) percent of the pure monopoly price.

Transcribed Image Text:

Application 4 MICROSOFT AS AN INSECURE MONOPOLIST APPLYING THE CONCEPT #4: How does a monopolist respond to the threat of entry? Microsoft has a virtual monopoly in the market for personal- computer operating systems and business software. But there is a constant threat that another firm will launch competing prod- ucts, so Microsoft engages in limit pricing to deter entry into its key markets. A recent study revealed some of the numbers behind the insecure monopoly. 1 The pure monopoly price for a software bundle of the Win- dows operating system and the Office Suite of business tools is about $354, but the actual price (the limit price) is about $143. The estimated cost for a second firm to develop, maintain, and market an alternative software bundle is about $38 billion, and Microsoft's actual price is just low enough to make such an investment unprofitable. 2 The pure monopoly profit would be about $191 billion, while the profit under Microsoft's limit pricing is about $153 billion. Although the profit under the entry-deterrence strategy is less than the pure monopoly profit, it is greater than the profit Microsoft would earn if it allowed a second firm to enter the market ($148 billion). In other words, entry deterrence is the best strategy. Related to Exercises 4.8. Hall, SOURCE: Based on I Competition, Limit Pricing, and Price Elevation from Exclusionary Conduct" in Issues in Competition Law and Policy 1 (Chicago: ABA Publishing, 2008), pp. 433-448.