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Microsoft is a "Natural Monopoly"

Some critics of the U.S. government's ongoing antitrust case against Microsoft defended the software powerhouse as a legal natural monopoly because it earned its dominance by outmaneuvering its free market competitors.

The real definition of a natural monopoly is actually quite different from its conventional meaning. In economic parlance, a natural monopoly is a company that is allowed to monopolize an industry because it's in the best interest of the state and the consumer.

Utility companies are classic examples of natural monopolies [source: Investopedia]. In most cities and towns, you have no choice about which electric company to use. That's because there's a huge barrier of entry for starting a competing electric company. You'd have to build power plants and string miles of cable to create a workable infrastructure. It's cheaper for the consumer -- and more efficient for the state -- to have one tightly regulated private company running the show.

On the surface, Microsoft looks like a natural monopoly of the computer industry. Since the company has some 90 percent of the global operating system market share, Microsoft enjoys huge economies of scale. For instance, smaller software developers could never spend as much as Microsoft can on product development and marketing. They would never make the money back without having to charge much more than Microsoft would for the same products.

The biggest difference is that Microsoft used its "prodigious market power and immense profits," in the words of U.S. District Judge Thomas Penfield Jackson, to not only erect higher barriers of entry for its competition, but to threaten and intimidate anyone who dared knock at the door [source: Moore]. And there's nothing "natural" about that.

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