Economic theory
begins with the proposition that firms compete in the market on prices. If a
firm were to offer higher prices than its competitor, the buyer will shift to
those competitors who are offering the lowest price. Therefore, the sales would
be nil if the competitor charges higher prices than their rivals. If one firm
lowers the price, all firms will follow suit, yet if one firm increases its
prices, the others would not follow suit. The assumption of course is the goods
are homogenous. There is no differentiation. Therefore, in this scenario of
perfect competition, the firms become the price taker with the market setting
the price. The firms have control over the output they produce but no control
over the price. Yet the firms will seek to control the price.
In absence of
control over the price, the firms might not be in a position to gain and
sustain supernormal profits in the long run. This is due to the absence in
barriers of entry and exit. The presence of supernormal profits will make other
firms enter into the market and wipe out the same, thus a key characteristic of
perfect competition. The firms therefore seek to place barriers of entry for
the rival firms to gain control over both output as well as price. There are
multiple ways of placing the barriers of entry. One such is the seeking and
maintaining control over an essential resource that would help them control the
market upstream and downstream.
MS-Office is
quite popular. It comes as a package of MS-Word, MS-Excel, MS-PowerPoint and
MS-Access. When someone talks about
publishing, it is usually MS-Word, MS-Excel seems default for accounting and
financial analysis, MS-PowerPoint appears without hesitation as a first choice
for presentations while MS-Access seems to be most favoured for database
management. It is not that there are no alternatives. There have been
alternatives and there continues to be the presence of alternatives both
offline and online. Yet it begs to wonder how Microsoft managed to capture a
lion’s share of the market for these packages. It is not as if these come free
though it is perceived to be free. The answer lies in the control of an
essential resource. These packages are not conducive for mobiles or palm tops
etc. they require the usage of a laptop or a desktop. This is not surprising
given the functions they seek to serve.
All laptops and
desktops barring those from Apple stable and perhaps one or two others have
Microsoft Windows as their operating system. Ages ago or at least in the
computer parlance, Microsoft licensed its MS-DOS as the operating system for
IBM systems. While IBM enjoyed the monopoly, the fact that they had a mere
licence made them lose market share as other competitors came up offering the
same MS-DOS as the operating system. Given the preponderance, it was not
surprising the network externalities came into effect. The network effects
ensured that people got comfortable and used to this and thus almost every
system began to carry the same. The MS-DOS with passage of time gave way to
Windows and its different versions. The Microsoft control over DOS and Windows
ensured that people would be used to these operating systems and environments. It
was natural for Microsoft to leverage this monopoly and offer the package of
MS-Office, Internet Explorer. They were licensed to the manufacturer and to the
consumer it appeared free, though it was charged along with the price of the
laptop or the desktop. The control over the essential resource the operating
system made Microsoft achieve control on the downstream Over the Top (OTT)
services. Since these OTT services were available, it was natural for the
buyers to use these unless the competitors offered these for free. This was something
not sustainable. In fact for Microsoft, given the marginal costs of MS-Office
etc. were negligible, they could afford to package it as a free tool. Thus the
barriers of entry emerged implicitly through controlling an upstream resource.
As a matter of
fact, both upstream and downstream resources could be controlled through
controlling an intermediate resource. An example that could be cited is the
diamond giant De Beers. De Beers does have captive mines. But it does not
confine to its captive mines for purchasing raw diamonds. It buys raw diamonds
from all mines, the means not exactly being above board. Despite the criticism
for its ham-handed approach, De Beers has continued to justify its approach. While
it has emerged as a monopsony to the mines as a single buyer, it uses this
status to control the supply of raw diamonds for downstream applications. Again
the methods might be questionable, but De Beers continues to shrug them off. An
old case study examining the origins and practice of De Beers monopoly can be
found here.
This feature is
found across technology industries. Apple when it launched the iPhone line of
devices or in fact i-Pad or iTunes and iPods etc. they were with an objective
of controlling the resources. The iPods were essentially designed to create a
complement for iTunes. iPods were sleeky, cool to own. Once people bought
iPods, they would subscribe to iTunes. The incentive to subscribe to
alternatives like Rhaspody among others would diminish since the cost of
migration would be high. The same principle was followed in iPhones or iPads.
SAP too used the walled garden approach for development and updates thus
keeping potential competitors at bay. AOL when it emerged in the internet
space, chose the walled garden approach to control who accesses what. In fact,
AOL’s monopoly over connecting to the internet determined the quantum of access
and the nature of access. It was a different point, that changes in the way we
access net disrupted the monopoly of AOL. The cable television model too
followed the same principle. The recent debate on net neutrality too centred on
the application of control over resource to block or allow downstream
applications.
The above
examples demonstrate at some length on how firms seek to monopolize the market.
A control over a resource which is inelastic makes it possible for the firms to
exercise varying degrees of monopoly thus giving it a control over the price. Each
firm’s endeavour is to capture 100% market share so that it can reap all the
profits. Yet the markets are great levellers which through innovation would
ensure the firm’s endeavour remains a mirage at least in varying degrees. The competition
authorities frown upon monopolies thus seeking to eliminate them through different
means. The see-saw battle might see varying ups and downs yet in the long run,
the control over the resources invariably collapses with the entrenched Goliath
giving way to the challenger David.
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