Market Share In The Computer Industry example essay topic

Introduction The world has seen time after time that industries have the potential to change the world. The weapons industry has played a huge part in deciding wars (nuclear arms race), whereas the automotive and airline industries redefined locomotion and made the world a "smaller" place. Towards the end of the last century, it can be argued that no industry redefined and reshaped the world more than the computer industry. Computers are relied on daily in business, educational and entertainment venues.

Currently, computers play an important role in activities throughout the world. They make communication more efficient (e-mail), arithmetic faster and more precise (accounting programs), and have made commerce more globalized (e-commerce). In the midst of the accomplishments that computers and the computer industry have made there are some weaknesses. In this paper, the spirit of the computer industry will be captured, with a particular focus on the "con" side of the computer industry's structure, conduct and performance. It will be shown that although computers appear to be an asset to global society, there are some improvements that need to be made in the industry.

STRUCTURE The computer industry began as an oligopoly, where IBM controlled the market share by approximately 75%. In 1956, the five major firms competing in the computer industry were IBM, Sperry Rand (formerly Remington Rand), Burroughs, RCA, and NCR. There were other firms that entered the industry and left prior to 1969, as none could compete with IBM. The computer industry is now broken down into two divisions: software applications, in which Microsoft has a virtual monopoly; and hardware and microprocessors, which are oligopolies.

The hardware and microprocessor sector is oligopolistic in that it has a few firms that own a large market share, and typically produce homogeneous or differentiated products. The market structure for computer software was originally oligopolistic in nature, yet changed to that of monopoly in the late 1980's, early 1990's. Microsoft and its owner Bill Gates became the forefront company in the computer industry by competing against other companies that produce one major product. By bundling several software applications into an application suite, Microsoft managed to gain a huge market share. Additionally, Microsoft's market share increased because of its licensing and ownership of copyrights of the software found on most computers bought today, including their operating systems. The computer industry for central processing units (CPUs) and other hardware has remained an oligopoly, with Dell, Gateway, Compaq, Hewlett-Packard, IBM (the leader of mainframe production), Intel (the leader in microprocessor production), Advanced Micro Devices, and National Semiconductors.

One of the problems with the computer market structure is the high barrier to entry in this industry. Because price is interdependent, when one firm changes price, it will lead another firm to change price. However, the barrier to entry is lower if one firm sets a high price in the market. For example, if Firm A sets a high price for its monitors to maximize profit, then it allows room for other firms to enter the market selling their monitors at a lower price, thereby taking some of the market share away from Firm A. This will, in turn, cause Firm A to decrease its prices in order to compete with the new firms. This behavior is described by the Bertrand Model, which states that under the presumption of a duopoly, a company decides which prices to set for its products in order to capture all market demand. In general, the company will set price just below that of its competitor in order to gain market demand.

However, in Bertrand competition, the optimal price is equal to marginal cost. In addition, a high barrier to entry makes it harder for smaller companies to gain some market share in the computer industry. If the computer industry has become a virtual monopoly with one powerhouse, like Microsoft, smaller entrepreneurial firms cannot gain a market share and in most cases will either be bought out by Microsoft or deal with contracts that are both long and tedious, keeping them bonded to Microsoft and its licensing agreement. Resultantly, monopolies often face tough antitrust regulations. Another problem with an oligopoly market structure in the computer industry revolves around the price of products being interdependent upon firms. This means that price wars are inevitable when one company lowers its price on a particular product.

To compete, the other competing firms selling a similar product will then lower their prices in order to gain substantial market demand. CONDUCT In focusing on the conduct of the computer industry, one simply has to look at the industry leaders of the past and present. These leaders practically established the conduct of the industry by way of their competitive strategies, pricing behavior, and production and distribution policies. The leaders of the industry are IBM (past) and Microsoft (present). IBM started, and Microsoft sustained the conduct of the industry. The conduct of IBM (in reference to hardware) and Microsoft (in reference to software) resulted in positive financial gains, but presented potential threats to social welfare.

There were several strategies that IBM initiated to gain substantial market share as the computer industry began to expand. Whereas these strategies worked early in the industry when IBM had a virtual monopoly in the computer hardware industry, many of these strategies are weak in today's more competitive computer industry. One strategy developed by IBM was to create knowledge and preference for its computer by giving educational institutions deep discounts on its machines. This strategy enabled many generations to be knowledgeable about IBM machines as it also created a preference for IBM among new graduates who were seeking a computer. By today's standard, whereas this strategy may still be appealing, consumers are, for the most part, knowledgeable about computers. There is no longer a need to "fill a void" by creating knowledge about computers.

There is still not uncommon for many companies to give discounts to educational institutions in the form of grants, but for the most part, educational institutions must pay for their computers. Another strategy initiated by IBM that is weak by today's industry standards of conduct involves bundling. This is a concept in which the company would charge one price for multiple products, as oppose to charging a separate price for each product. IBM used this strategy to combine the cost of servicing an IBM computer with the cost of buying or leasing the computer. This strategy delayed the development of an independent service industry to service all computers.

If a computer broke down, one simply called IBM. This strategy proved to be very weak once the industry became more competitive. In today's computer hardware market, consumers are charged for each separate component. There is no longer a flat charge for a computer system that includes the hardware, software and service.

All of these have a separate price. Another IBM strategy that is considerably weak by today's standards involves that pre-announcing of non-existent systems. In the past, IBM would simply announce that a new computer was forthcoming, when it reality a new computer was months away. This would prevent buyers from committing to a competitor's new, possibly superior, computer. The industry conduct of today sees technology advancing at such a fast pace that the announcement of a new computer would not delay a consumer from simply upgrading their computer once the new technology came along.

Regarding IBM, the conduct of the industry during its reign was due mainly to IBM's monopolistic control of the industry. Once IBM's monopoly power was eliminated, industry conduct was redefined. Today's computer hardware industry sees firms that charge virtually the same price for computer systems and for different pieces of equipment. Additionally, the post-IBM industry is filled with many different firms that produce computer components for virtually every type of computer.

The industry conduct has gone from that of one controlled by a monopolistic firm to one whose conduct is similar to many other competitive industries. Ironically, with the destruction of IBM's monopolistic hold of the hardware market, arose another company that began to obtain a monopolistic-like hold of the computer software industry. Microsoft is the recognize leader in software for computers. The conduct it used to define the industry is similar to that of IBM. Like IBM however, Microsoft's conduct in reference to strategies had weaknesses that were seen over time. Microsoft, like IBM, used a strategy of pre-announcing its products.

With the announcement of a competitor's superior software, Microsoft announced that it had a new version on the way. Of course, in reality, the introduction of this new software was far from being complete. Not surprisingly however, this strategy worked. Not only did it deter consumers from buying the competitor's product, but upon the release of Microsoft's new software, Microsoft dramatically increased it share of DOS-based operating systems, while the competitor's share decreased. This strategy does not work by today's industry conduct.

Whereas Microsoft is still the recognized leader in software, consumers are not motivated to purchase new versions of software when the old software is seen as still being sufficient. As a matter of fact, many consumers believe that Microsoft's creation of new versions is a tactic that creates new revenue for the company. This happens as a result of the company making it such that documents created on new machines cannot be used on old ones. This forces a company or consumer to update its software. Another strategy used by the monopolistic-like Microsoft involves its bundling of products.

Due to the fact that Microsoft typically competes with firms that specialize and make only one major product, it decided to bundle several different types of software into one application suite. Microsoft charged a lower price for those who purchased the suite, as oppose to those who bought each type of software separately. This strategy took away the incentive for consumers to buy a competitor's product, for it would be cheaper to buy the bundled Microsoft suite that already contained many of the needed applications. This strategy worked well for a while.

The weakness of the strategy was found when anti-trust charges were brought against Microsoft for bundling Internet Explorer (an internet browser) with Windows (an operating system). Microsoft was found to be guilty of illegally monopolizing trade and oppressing the competitive process by which the computer industry stimulates innovation and benefits the consumer. Additionally, there are other potential negative effects of this strategy beyond the policies and laws. When looking at this strategy, one is made aware that bundling lowered the price of Microsoft programs that would have separately garnished a higher profit on each program sold.

Furthermore, one has to question the reality that although a program may be bundled in a suite, there is still a tendency for consumers to buy a competitor's program that they feel is superior to Microsoft's. This results in a loss of market share for Microsoft. In general, the conduct of the computer industry has changed dramatically from the onset of IBM's dominance of the market. Many things have changed, forcing IBM and Microsoft to change strategies. Market behavior and public policy have changed the way businesses operate. For instance, public policy dealing with copyright protection now dictates that a system or method of operation cannot be protected.

With this being the case, the software industry is now allowed more freedom to develop software that borrows (or copies) certain aspects of other competing software. Additionally, as mentioned in reference to Microsoft, anti-trust laws continue to stand by the belief that a company cannot use its market power and substantial profits to try to get rid of other competing firms. It is believed that doing so would deter innovations that ultimately benefit the consumer. The policies are effective in allowing other companies to compete effectively with the leaders, but more is desired.

These policies have the effect of creating an undefined environment in which firms in the computer industry must operate. For instance, when looking at the anti-trust decision involving IBM and Telex, it was decided that IBM's actions, of using its power to aggressively combat Telex's increasing market share, resulted in Telex's having to cut prices which resulted in low profits. The Tenth Circuit Court of Appeals ruled that IBM's actions were normal methods of competition. Yet, in the anti-trust decision involving Microsoft and Netscape, it was found that Microsoft's actions were not normal methods of competition, but illegal monopolized trade. There has to be a more defined understanding of what is legal and illegal in the ever-increasing global environment of the computer industry.

The market behavior, as alluded to in the structure section, definitely has changed since the onset of the computer industry. Time has seen many firms enter and exit the computer industry. During the monopolistic reign of IBM, it was hard for many companies to compete in the market for computer hardware. Likewise, Microsoft made it hard for software firms to compete in that market. The market has become increasingly more competitive, forcing firms to re-strategize. Where in the past, companies were trying to compete with simply the market leader; companies are now competing aggressively with each other.

When looking at pricing behavior in reference to this new market, companies are seen matching each other's price on computer hardware and software. When one company decreases its prices by 10%, the others will quickly follow. Whereas this price lowering and matching benefits the consumer in reference to consumer surplus, in that it increases as the charged price decreases; I question whether or not there is an increase in product quality. The consumer may benefit on price, but not necessarily quality.

History dictates that when a product was substantially better than the leading product (as was the case with MS-DOS vs. DR-DOS) the better product does not necessarily mean higher sales, even if consumers know the product is better. Consequently, firms appear to be competing on price as oppose to quality, feeling consumers are motivated mainly by price. This is a disservice to consumers in that society could potentially benefit more from new innovations than from lower prices. Yet, due to the dominance of firms in the computer industry, it is very hard to compete on quality. The industry also sees firms putting out programs that seemingly do the same thing. There is not a lot of differentiation among products.

New computer products typically have interchangeable software and hardware. This trend may be a consequence of the illegality of non-disclosure agreements or the lack of bundling. In general, in the past non-disclosure agreements protected the operating system of firms such as Microsoft. Resultantly, it was difficult for other software companies to figure out how to make similar software. With non-disclosure being an illegal practice, it is not hard to figure out the operating system of software programs, and to use this information to make a similar product. Likewise, bundling gave companies an incentive to develop hardware or software that was of better quality than those products that were bundled.

It is not uncommon today, to see a computer filled with products that are seemingly interchangeable and of the same quality (AMD vs. Intel, Excel vs. SPSS, etc.) To summarize, computer industry conduct initially involved strategies influenced by monopolistic firms, evolving later into competitive strategies among several firms. Consequently, there are not clear definitions of fair and unfair, legal and illegal competitive strategies. Computer industry conduct influenced pricing behavior in that as the industry became an oligopoly, and economies of scale were obtained, prices decreased as a result of firms acting and reacting to each other's prices. Consequently, product quality isn't necessarily as important for firms as is price. Finally, industry conduct concerning product production and distribution sees firms giving up the trend of bundling products with the hope of gaining high market share for multiple products. Instead, firms are charging separate prices for separate parts.

Additionally, it is now illegal to have a policy of nondisclosure. This allows a programmer to freely move from one software company to another. The potential problem of this conduct is that a tendency may be created in which companies may try to create similar products to those on the market, as oppose to creating products that are totally unique onto themselves. PERFORMANCE According to Adams and Brock, a market is: "Performing well if it is both statically and dynamically efficient. Static efficiency consists of both allocative efficiency (price equals marginal cost) and productive efficiency (average costs are minimized).

Dynamic efficiency implies that the rate of technological advance is at a rapid and 'optimal' rate". Static efficiency is typically better achieved in competitive markets where competing firms produce goods and services efficiently. Optimally, price must equal the marginal cost at equilibrium, but in a monopoly, there is no monetary incentive to price products at marginal cost. Therefore, due to lack of competition in a high demand industry, monopoly firms set product price high, relevant to others in the industry, in order to gain the greatest profits.

Using marginal cost pricing to regulate monopolies would be optimal for social welfare, yet setting price at marginal cost results in less than optimum output and lower allocative efficiency. This can eventually result in a loss of profit in the short term. Economist Joseph Schumpeter argued, "through some degree of monopoly, the economic benefits of superior technology can be captured by an innovating firm in a market economy. Some inefficiency in the allocation of resources is tolerated in exchange for dynamic gains from creating new technology". However, when a company has obtained a substantial market share, the quality of the product or service may not be as technologically advanced.

For instance, Microsoft has controlled the market for operating systems, but the system may not be the most technologically advanced. A result of the industry structure and the conduct of those firms in the industry is that some firms, particularly those who are the market leaders, have obtained economies of scale. Many see this as a good thing, as firms should in fact seek economies of scale. However, when a firm dominates the market (IBM in the '80's and Microsoft in the '90s), economies of scale can create an entry barrier to other competing firms. When a new firm tries to enter the industry (one having dis economies of scale), it will be nearly impossible to compete with the larger and more efficient firms. If a price war ensued, the new firm would find it hard to match prices without gaining a huge financial loss.

In the spirit of non-monopolistic competition, it is hoped that the industry will become more oligopolistic (multiple firms achieving economies of scale as oppose to mainly one) to the point that more firms can compete thereby lowering costs and providing a product of superb quality to consumers. Although computers have benefited society in many ways, there are some adverse effects on society. Computer users have become more dependent upon computers for calculating and answering seemingly easy questions and problems that could be answered without the assistance of a computer. Addition and subtraction are no longer figured out by hand, or "in the head", but with the use of a calculator. Likewise, communication is now less personal. Instead of visiting a friend, or calling a person on the phone, society sees e-mail and instant messaging as a "more convenient" way of communicating.

Everyday, people are spending more and more time in front of a computer monitor, as opposed to personally interacting with others and the surrounding outside environment. The computer industry has seen periods of profit and loss for all competing firms. IBM lost its position as the leading company of mainframe systems when other smaller companies entered the industry with lower prices and products that rivaled the quality of IBM. Intel once was the leading producer of microprocessors, but two emerging firms have brought intense competition with low prices and high quality chips. Although Microsoft is still maintains a virtual monopoly of the software industry, antitrust penalties and social policies have decreased the gap between Microsoft and other computer firms. With these changes, none can be sure of what the future holds for the computer industry and the impact it has on the growth of the United States and world economies.

The only thing that we can be sure of, is that with the passing of time the computer industry is becoming more like other industries in that competition is ever increasing, forcing firms to find efficient ways to gain market share. CONCLUSION Beyond a doubt, the computer industry has molded and cultivated our society into becoming more technological, and automated. This, however, has not taken place without the structure of the industry evolving from a monopolistic ally competitive industry into an industry that promotes oligopolistic competition. High barriers to entry have decreased, but not substantially enough for small entrepreneurial firms to compete with the larger firms. Price setting by one firm remains dependent upon the price set by competing firms. In addition, the conduct of the industry has changed from that of monopolistic strategies, where one firm dominated the market, to that of more competitive strategies, where the market is shared among similar firms.

Computers have made multiple contributions to society. The majority of these contributions are possible. It can be argued, however, that the computer industry has contributed to the decline in personal communication, social interaction, and analytical thought. Initially, the computer industry was unlike any other, providing an endless amount of benefits to society. Over time, the computer industry has proven to be just like any other competitive industry, producing both benefits and consequences for firms and consumers alike. Adams, Walter and James Brock.

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