"The Microsoft monopoly should be broken up." Evaluate this claim using economic theory and evidence on the welfare effects of monopoly and competition.

Essay by abeagsUniversity, Master'sB, March 2004

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In the United States, monopoly policy has been built on the Sherman Antitrust Act of 1890. This prohibited contracts or conspiracies to restrain trade or, in the words of the later Clayton act, to monopolise commerce. The claim that a company should be broken up is clearly not a new concept in America. In the early 20th century this law was called upon to reduce the economic power wielded by so-called "robber barons," such as JP Morgan and John D. Rockefeller, who dominated much of American industry through huge trusts. These trusts were formed as a number of competing companies agreed to assign the whole of their stock to a group of trustees, receiving in exchange trust certificates representing the valuation of their properties. The trustees were thus able to exercise complete control over all the businesses. Du Pont chemicals, the railroad companies and Rockefeller's Standard Oil, among others, were broken up.

A pure monopoly exists where there is a sole supplier. In this case the firm will be the industry. The government definition of a monopoly is a firm which has a minimum 25% of the market share. A reference does have to be made to natural monopolies where there is room for only one firm in the industry producing at minimum efficient scale. This situation arises when there is just one source of supply of a raw material or more commonly when economies of scale are significant and permit one firm to supply the entire market at a lower price than any other number of firms. E.g. water supply.

Under perfect competition, the industry will produce an output of Qp at a price of Pp where marginal cost equates to average revenue, marginal revenue and demand. (A) The consumer surplus, which is the total benefit or...