Is the Software Industry a Natural Monopoly

Factor One – Diminishing Costs

In the world of PC-based software, Microsoft enjoys what economists call a “natural monopoly. Microsoft programs include: Access, Excel, Groove, Info Path, One Note, Outlook, Power Point, Publisher and Word. This natural monopoly has occurred as a result of several factors, including barriers to market entry (such as the cost and inconvenience for existing customers to switch operating systems) and barriers to competition (such as patents and proprietary source-code control).

Microsoft’s natural monopoly has also been sustained by a basic law of software economics: as a vendor’s business grows, the average cost of reproducing its software decreases. With downloadable software, vendors can produce virtually unlimited copies of their software, and each download reduces the unit cost for producing that software. At the same time, each uit downloaded increases the barrier to competition. [ (Boudreau, 2010) ]

Factor Two – Network Effect

As a company’s software becomes widely distributed, it draws more third-party support. There will be more schools, businesses, websites, and private tutors using, teaching, and supporting the software, and there will be more books and magazine articles. Third-party support helps to advertise Microsoft’s products, and increasingly, people and businesses see it as a standard, and a safer investment in both time and money. [ (Unknown, 2011) ]

Factor Three – Lock-in Effect

The best time to attempt creating a lock-in effect is when your new product is having maximum market impact and growth. The reason is that at this time you will have most goodwill in the market, so customers and prospects will be uncritical to your attempts of creating a lock-in.

In the computer industry, both hardware and software, vendor lock-in can be used to describe situations in which there is a lack of compatibility or interoperability between equivalent components. This can make it difficult to switch systems at many...