There are four types, or causes, of market failure. Monopolies exist where a single buyer or seller is able to exert significant influence over prices or output. To minimize such market failures, antitrust regulations are implemented. In recent years, Microsoft has been accused of violating antitrust regulations and thus being a monopoly. The accusation is that Microsoft, as a seller, is able to control the market place, thus reducing competition and creating a market failure.
Specifically, the decision of United States v. Microsoft, issued on April 3, 2000, called the company an "abusive monopoly." The suit arose out of the merging of Microsoft and Internet Explorer (created when the company bought out Netscape). The decision further required that the company split into two separate units, one for its windows-based features and one for its Internet-based features. However, part of this ruling was subsequently overturned by a federal appeals court and the case was eventually settled with the U.S. Department of Justice in 2001. The settlement requires Microsoft to share its appliation programming interfaces with third-party companies and appoint a panel of three individuals who will have full access to all the company's systems, records and source codes for a period of five years in order to ensure compliance. Interestingly, the settlement does not require Microsoft from refraining from tying its other software...
For one, many saw it as merely a slap on the wrist, believing that free market competition can only be restored with government intervention to breakup the Microsoft monopoly. These individuals argue that because Microsoft creates software only compatible with Windows, along with Internet services only compatible with Windows, they have created a monopoly in this area, essentially cutting off all roads for possible competition and therefore leading to a failure in the market. In fact, Andrew Chin said of the ruling gave Microsoft, "a special antitrust immunity to license Windows and other 'platform software' under contractual terms that destroy freedom of competition."
Specifically, Microsoft operates as a coercive monopoly under microeconomic principles, essentially able to influence the market through coercion. A coercive monopoly is one where a business is able to make pricing and production decision independent of competitive forces because all potential competition is barred from entering the market. According to the principles of microeconomics, a market depends on open competition in order to maintain the supply and demand balance and benefit the consumer. Because Microsoft has created a monopoly, the market principle as promoted by microeconomics, is failing.
