Microsoft Vista: A Tale of Two Market Structures On January 30, 2007, Microsoft
ID: 1109151 • Letter: M
Question
Microsoft Vista: A Tale of Two Market Structures
On January 30, 2007, Microsoft launched what was at the time its newest operating system, Vista, to consumers. The project, years late and billions of dollars over budget, was one of the largest technology projects in history. Microsoft spent somewhere in the neighborhood of $6 billion developing the 50 million lines of code that constitute Vista, but some analysts projected it would make nearly twice that in operating profits in just the first six months following its release. Because each copy of Vista cost Microsoft only a few dollars to produce, Microsoft's profit margins were to be enormous.
The launch of Vista also translated into more revenue for retailers like Comp USA, Best Buy, and countless mail-order catalogs and Internet "e-tailers." However, as this article from the Financial Times pointed out, the profit margins of these retailers were much slimmer than Microsoft's.
Read the following article from the Financial Times (January 28, 2007), and then answer the questions that follow.
http://on.ft.com/1dJJvka
This analysis concentrates on the differences between to market structures: Monopoly and Perfect Competition. Because it holds a patent, Microsoft was the only company that can produce Vista, so it has a monopoly in the market For Vista (though not in the more general market for operating systems). However, the consumer market for Vista was perfectly competitive.
1. Is this the most efficient arrangement possible? Would it be more efficient if more firms could have produced Vista? Would Microsoft have spent the money to develop Vista if it didn't hold a patent, €”that is, if once it, developed Vista (or any of the operating systems It has developed since), anyone could have produced and sold copies of the program?
Explanation / Answer
This is the most efficient arrangement as patent system induces higher levels of Research and Development.
If other firms would also develop Vista, this would lead to losing the incentives which drove Microsoft to develop the product. If it didn't hold the patent, Microsoft would not have invested such a huge amounnt of money, mounting into billions of dollars.
Hence. patent held by Microsoft led to innovating the product and giving the society its benefits. Now, after the launch as the market for Vista swells, the prices will automatically reduce and will be affordable by the larger section of the society.