Sophisticated Pricing Techniques

Discussion on Most US Firms Paid No Taxes Over 7-Year Span” by Carolyn Said (SF Gate, August 2008)

In Carolyn Said’s article “Most US firms paid no taxes over 7-year span” published in August 2008, Said reveals that about two-thirds of US companies and foreign firms doing business in the US paid no federal income taxes from 1998 to 2005. Although many of these companies were small or new companies who probably were not profitable, a surprising number of large companies did not pay any income taxes.  The US tax system has the second highest corporate tax rate of any developed country, but due to the complicated tax laws, there are many loopholes that companies can use to evade taxes. One of these methods is transfer pricing. Transfer pricing occurs when a parent company is incorporated offshore where there is no tax. The parent company will then charge its US subsidiary large amounts for the use of the corporate logo or trademark. The US subsidiary then reports no income or a loss on the year, due to the fact that they had huge expenses. Transfer pricing and other tax evasion techniques are responsible for a low effective tax rate in the US.

Transfer pricing can be seen as sophisticated pricing techniques on a larger scale. Just as the sophisticated pricing techniques we discuss in class are largely used to increase profits, transfer pricing is used to protect that profit and decrease the loss incurred by taxes. The goal of both is to increase profits. Of course transfer pricing as referred to in this article is a very large-scale tax evasion technique that exploits regular transfer pricing. Regular transfer pricing involves the cost of transferring a product between a company’s divisions.  This transfer pricing just changes the company’s divisions to the company’s subsidiary companies that are subject to different tax rates.

As the article states, most corporations and individuals find loopholes in taxes to minimize the amount they pay.  This saves corporations money and allows them to keep more of their profit. Similarly individuals file taxes and get the most deductions that they can so they can keep more of their income.  This practice is legal, unless a person or corporation takes it beyond the scope of the law, but is this practice ethical?  With so many firms and individuals taking deductions it would be more beneficial to lower the tax rate as a whole, as the article suggests, than allowing all of the tax breaks.  As the article states, the US has the 2nd highest corporation tax rate in the world, and is tied for 4th to last for amount of revenue raised through corporate taxes.  Through the practice of getting deductions firms gain more profit, giving them a competitive advantage.  Firms have the right to work toward a competitive advantage and doing transfer pricing is a way to achieve this goal. 

Another real world example of sophisticated pricing techniques is a 3rd degree price discrimination, where firms charge different groups of consumers different prices for the same good due to differences in elasticities of demand.  For example, in a city the more affluent area of the city is more willing to pay higher gas prices than the less affluent end of the city.  This is because consumers in the less affluent part of the city have a lower reservation price for gas, and therefore demand for gas is more elastic in that part of town.  The differences in elasticity in different parts of town allow for gas companies to charge more for gas in the parts of town that have a higher elasticity of demand.

Posted by Grace, Chrissie, and Jeff (Section 4)

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Questions for Classroom Discussion on SOPHISTICATED PRICING TECHNIQUES

Although this real-world application provides an example of an abuse of a pricing technique, it shows how the pricing technique works nonetheless. The application then invites thought on the ethics of various pricing techniques (abused or not), which may allow firms to increase profits at the expense of consumers. Consider the following:

  • Does the fact that effective non-uniform pricing (NOT single pricing) raises the monopolist’s profit at the expense of consumers make it an unethical practice?
  • Is it fair to charge consumers more for a product just because they value it more?  Does it matter why consumers value the good more?
  • Firms often gather information regarding tastes, preferences and willingness to pay from consumer searches on the internet and the use of things like the “Martin’s Card.” In fact, in late 2010, the FTC proposed a plan to let consumers choose whether they want their internet browsing monitored by online businesses and advertisers.  Is this a violation of consumer privacy?  Is it fair that firms can then use this information to charge consumers higher (or lower) prices?  

Time permitting, our classroom discussion will take place on Thursday, April 12.

Posted by Prof. C-S

Sophisticated Pricing Strategies Blog Post

Discussion on Most US Firms Paid No Taxes Over 7-Year Span” by Carolyn Said (SF Gate, August 2008)

About two-thirds of US companies and foreign firms in this country paid no income taxes from 1998 to 2005. Although many of these non-payers were new, small companies that actually didn’t make any money, a quarter of companies with more than $250 million in assets or $50 million in gross receipts paid no income taxes.

There are a few legal ways that companies can dodge taxes, including writing off losses from the previous year, tax exemptions from expenses, or even writing off liabilities from stock options. However, there are a few other, less palatable ways that companies can duck paying income tax, including “transfer price abuse.” This practice shifts money within corporate subsidiaries by inflating the fees associated with the goods as opposed to charging the going market rate. This is made even easier by having an off-shore parent company to blame, since off-shore profits are tax-free.

Transfer price abuse is relevant to our class, especially in relation to our recent lesson on transfer pricing, where “the price set by the transferring division becomes the cost of the receiving division.” It is important to find the optimal transfer price that ensures the company’s profit maximization and that the transferring division will continue to produce the product efficiently. Transfer price abuse inflates the cost, which may interfere with producing the product efficiently. However, it allows the company to exaggerate their costs and pay a lower amount of income tax.

This abuse of transfer pricing is unethical as it provides misleading information regarding the state of the firm that could potentially influence the decisions of investors. Firms have an obligation to its investors to be honest regarding the state and value of their firm and by abusing the use of transfer pricing they are going against this core value. The taxes that these firms are avoiding by engaging in transfer pricing are to be used to benefit the country as a whole. By abusing transfer prices they are eliminating a portion of funds that would be used for the masses, which does not reflect positively on the firm as a whole. It is understandable that firms are looking to avoid taxes; however, going to the extent of many of these firms by not paying any taxes for seven years is crossing the line and ought to be addressed and regulated.

A similar issue of transfer pricing can be seen in the current state of Nigeria. According to reports done by PriceWaterhouseCoopers, Nigeria has lost a large amount of tax money due to transfer pricing. Tax earnings, excluding the taxation on oil revenue, in Nigeria make up approximately two percent of GDP while in other countries this can be as much as thirty five percent. By monitoring transfer pricing and clearly stating rules and regulations which ought to be followed, Nigeria could increase their earnings from taxes by a great deal as they are losing close to a million naira (their national currency) (Eboh, 2012). This shows that this is not just an issue with large firms in the US but can be detrimental to nations around the world.

Posted by Mick, Charles and Rachel (Section 3)

Resources:

Eboh, Michael. “Nigeria losing trillions from non-regulation of Transfer Pricing – PWC.” April 6, 2012. Retrieved from: http://www.vanguardngr.com.

Sophisticated Pricing Techniques

Discussion on Most US Firms Paid No Taxes Over 7-Year Span” by Carolyn Said (SF Gate, August 2008)

 Article Summary and Classroom Relevance

The article titled “Most U.S. Firms Paid No Taxes Over 7-Year Span”, discusses the growing concern over the number of U.S. companies that did not pay federal income taxes between 1998 and 2005 based on a study conducted by the General Accountability Office. About two-thirds of U.S., foreign companies avoided paying taxes to the government during the observed seven year span. While most of these nonpayers were small companies that in fact made no money, about one-fourth of the large corporations in the U.S., those companies making over $250 million in assets or $50 million in gross receipts, paid no income taxes according to the report. There are various legal ways for companies to avoid taxes, with the underlying rule remaining that if a company does not make money, then it cannot pay taxes. Many inventive measures can be taken to give the appearance of losses that graze the line of legality. The practice of abusive transfer pricing is one of these measures which is discussed in the report. Transfer prices are what subsidiaries of the same corporation charge each other for goods and services and so when this practice is abused, goods and services are charged at inflated high prices and money is moved around among the subsidiaries. As an example of this abuse, companies will incorporate in a foreign location free of taxes. The companies will then subtract any royalty fees as an expense from the U.S. company and the profit will be moved to the foreign parent company, free of taxes. Transfer pricing is a type of sophisticated pricing technique, which is to be discussed in class. It is the goal of the firm to find the optimal transfer price so as to maximize the profit of the overall company since profit maximization is the ultimate objective of the firm. Transfer pricing is common, with 91% of Fortune 150 companies applying this practice, though not necessarily abusive.

A Commentary On Ethics

One technique used by the firms was to essentially transfer all profits to offshore parent companies, where the money would remain tax-free. Specifically, the article uses the example of a company making $50 million in profits, then paying that money to a parent company in another country for rights to logo usage.

Clearly this technique is not completely ethical. Technically, firms can legally use this tax avoidance strategy. However, they do not have the ethical “right” to deprive the government of their taxes. The money was earned in the United States so the company has a duty to pay the taxes required of everyone. The fees paid intra-company should be the same rate expected in the market. Tax free havens should not be utilized in such an unethical manner.

Real World Application

Sophisticated pricing techniques exist in many forms in the real world, not just to creatively avoid taxation. Microsoft, in 2009, cut prices on many of its software packages, conducting a risky experiment in price elasticity. This price slashes were in response to a terrible downturn for the company, increasing competition, as well as problems with piracy, especially in developing countries.

A particularly interesting aspect of this pricing technique is discrimination based on country. In China, piracy rates for Microsoft Office were near 95%. Microsoft began offering the product for $29 in China, and sales boosted 800%. Meanwhile, in the US, where piracy is a problem, but on a lesser scale, the effective price for office was dropped to $100 down from $150. Thus same product is offered to two different groups of customers at two different prices.

 This pricing technique used by Microsoft discriminates customers based on country. Consumers in the US and China react differently to price changes, demonstrating different price elasticities. This shows that sophisticated pricing techniques come in a wide variety, including some to avoid taxation, and some in an attempt to increase sales based on differing price elasticities. 

Posted by Ricky, Maureen and Patrick (Section 2)

Resources:

Burrows, Peter. “Microsoft’s Aggressive New Pricing Strategy.” BusinessWeek. 16 July 2009. Web. 9 Apr. 2012. <http://www.businessweek.com/magazine/content/09_30/b4140051491507.htm>.

Said, Carolyn. “Most U.S. Firms Paid No Taxes Over 7-Year Span”. SFGate. 13 Aug 2008. 10 Apr 2012 <https://www.library.nd.edu/reserves/ereserves/item_retrieve.cgi?item_id=49172&course_id=2012S_FIN_30210_01&copyright_accept=I+Accept>.

 

Sophisticated Pricing Techniques

Discussion on Most US Firms Paid No Taxes Over 7-Year Span” by Carolyn Said (SF Gate, August 2008)

Summary

The article “Most U.S. firms paid no taxes over 7-year span” by Carolyn Said, discusses how almost two thirds of U.S. companies did not pay income taxes to the government between 1998 and 2005. While it does admit that many of these companies were small and little to no profit, about a quarter of corporations that had over $250 million didn’t have to pay taxes either. The way that this avoidance of taxes is achieved is through what is called “transfer pricing abuse”. Transfer pricing is when, in your company, you increase the prices on goods and services being moved from one part of the company to another. Prices technically should be set using an arm’s length standard, meaning that prices should be set within a reasonable distance of the market rate. This can be viewed as a creative form of accounting and is not technically illegal. For example, a business unit in the U.S. with a foreign parent company can write off profits that they make because the parent company has “overcharged” them for odd goods and services such as using the corporate logo.

Discussion

A problem arises however when with the use of transfer pricing and its ethical complications. On one side of the argument, citizens would prefer for large multimillion dollar companies to support the domestic government by paying the appropriate amount of federal income taxes. It’s easy to take this stance when budgets and company performance aren’t at the forefront of importance. However, in a capitalistic, profit maximizing economy everyone wants to pay as little taxes as possible to reduce their costs. Companies, just like the average tax payer, have the right to earn as many tax benefits and write offs as they can find. Taxpaying citizens go out of their way to avoid paying higher than necessary taxes so why can’t a corporation do the same? Transfer pricing is not illegal so the companies have the right to take advantage of it. If companies abuse transfer pricing to an extreme extent, although it is still legal and they have that right, it begins to fall into a grey area of what is saving and what is going beyond ethical and appropriate acts.

Real-World Example

There are many other types of sophisticated pricing techniques. Not all are used to avoid paying income taxes such as transfer pricing. One example is bundling that media and communication corporations such as Comcast use to draw customers into purchasing multiple services from them. For example, Comcast charges $70 per month for cable and internet whereas the internet package by itself is $50 and the cable package is $30. This sophisticated pricing technique is an attempt by companies to attract customers with what they perceive as saving more by convincing them that they’re getting a much better deal than what they actually are.

Posted by Laurel, Patrick, Kyle and Case (Section 1)

Resources:

www.comcast.com/shop

Questions for Classroom Discussion on Monopoly

The purpose of this real-world application from 2008 is to not only provide an example of a monopoly created by a common barrier to entry, but to also show how the wireless industry wasn’t necessarily always monopolized. (It might also be considered a social commentary on the dominance of Apple?) Consider the following:

  • What does this article argue is the reason for the dominance of one firm in the wireless industry?
  • What would life be like without monopolies?

Our classroom discussion will take place on Thursday, April 5 after we talk a bit about Monopolistic Competition.  

Posted by Prof. C-S

 

Monopoly

Discussion on iSurrender: Apple’s new iPhone augurs the inevitable return of the Bell telephone monopoly” by Tim Wu (Slate Magazine, June 2008)

Summary

In “iSurrender: Apple’s new iPhone augurs the inevitable return of the Bell telephone monopoly,” Tim Wu argues that the previously broken up Bell telephone monopoly may be reforming with the help of Apple’s revolutionary phone.  

Wu begins by citing a personal experience: his impending purchase of the, at that time, new iPhone 3G. In order to connect the phone to the network, he must sign a two-year contract with AT&T. No other provider offers or has the ability to offer the plan for the new phone. He uses this example to make the point that the wireless industry, once thought of as the “poster child for competition,” is becoming more and more monopolistic, just like the days when Bell Telephone had a monopoly on the phone industry. Since the contract between Apple and AT&T ended a couple years ago, Verizon has become another big player in the iPhone sector. Wu argues that these two companies’ takeover of providing wireless for iPhones puts all the power back in the two halves of the old Bell company. Many of the small providers are being bought up, and others like T-Mobile just aren’t big enough to play with the bigger providers. Wu cites the high costs of being a player in this market as the main reason for its monopolistic characteristics. There is the possibility of change if Google and Android can make a run at Apple’s chokehold on the industry (Android’s coverage is provided by the Open Handset Alliance- Intel, Sprint, and T-Mobile). Wu finishes with an ironic fact that Apple, which used to be the victim of larger firms like IBM and Microsoft, is now a symbol of industry consolidation.

This is relevant to our discussion of monopolies since AT&T’s contract with Apple gives them the right to provide the network for the fastest growing phone on the market. Consequently, AT&T has a monopoly on wireless plans for iPhones. With no competition for the duration of the contract with Apple, they could charge a higher price than if the market was competitive.

Commentary

The justification behind the argument that monopolies are unethical is that it gives one firm the power to set a higher price than is necessary, or a higher price than would be set in a competitive market. This can be especially problematic in markets that contain necessities, or goods that everyone needs. Setting a higher than equilibrium price will cause people to devote more of their income to that item, and therefore make them worse off than they would be if the price was at market equilibrium. They are allowed to exist when economies of scale can be achieved at high levels of production only. For example, in the wireless industry a large amount of infrastructure is necessary to operate, making it hard for companies to enter the market.

Real-World Example

The utilities industry is a real world application of a monopoly market. There are very few providers that are all very big and often span large areas across the country.  This industry is similar to the wireless industry in that it also requires a large investment in infrastructure. Because of its monopolistic tendencies, this industry is highly regulated by the government.

Posted by Ian, Monica and Gunnar (Section 4)

Monopoly

Discussion on iSurrender: Apple’s new iPhone augurs the inevitable return of the Bell telephone monopoly” by Tim Wu (Slate Magazine, June 2008)

Summary

This article highlights the effects of a potential monopoly in the wireless industry. Today, more so than when the article was even written in 2008, AT&T and Verizon dominate the wireless industry. Both companies are the two offshoots of the Bell telephone empire. All other companies who try and compete in the market are either dying (Sprint Nextel), bought out (Altell) or significantly smaller (T-mobile). The old Bell empire, then, still holds a monopoly over the wireless industry since it is essentially a duopoly today. Sales of the iPhone, only serviced by Verizon and AT&T, have driven the market further into this monopolistic model. Apple continuously comes out with new models of the iPhone that are always in high demand and dominating the wireless phone market. What is key about the iPhone though, is that it requires a plan from only AT&T or Verizon. Thus as demand for the phone rises, the structure of monopoly is advanced.

The article points out that the main reasons for the wireless industry tending towards being a monopoly is because the costs of competing in the industry are so high. Auctioning for rights to transmit signals across the electromagnetic spectrum costs firms billions; so only firms that are strong enough can compete in the market. This leads to the success of either a single firm or only a couple of firms, like AT&T and Verizon. While the article recognizes that Google and the Open Handset Alliance could pose a challenge to the structure, but the chances, especially with the existence of the iPhone are slim.

 Relevance to Classroom Theory

This article is relevant to classroom theory because it gives a close to real world example of a monopoly market. Government regulation today has prevented most firms from forming monopolies, however, this article highlights how the wireless industry operates in a virtual monopoly where only the offshoots of the Bell empire dominate and survive. Further, the theory in class assumes that entry and exit from the market is difficult. This article shows that this is the case for the wireless industry because of the extreme costs of spectrum auctions forming strong barriers to entry. Finally, the theory assumes that the firm is unique or without close substitutes. Because AT&T and Verizon have acquired the most rights to transmit signals across the electromagnetic spectrum there are no substitutes that can offer nearly the same quality of wireless service.

 Discussion

 

Monopolies are considered unethical because of the detriment they cause to society as a whole. Although one could make the argument that monopolies are beneficial because they occur naturally in a capitalistic economy and they provide jobs, the negatives outweigh these positives. Monopolies are caused by barriers to entries in an industry. Barriers to entry can include a high cost of starting a business, as in the wireless phone industry, to an established customer base, as in the National Football League. These barriers to entry lead to a lack of innovation from potential competitors. Another detriment of monopolies is the high cost charged to the consumer because of little competition. This elevated cost causes a deadweight loss because the supplier is making a larger profit and thus is able to produce less. Monopolies are allowed to exist because the products that monopolies produce are usually the best in the industry. Monopolies also tend to have the support of a loyal customer base, which makes it hard for the government to disband them in a legal battle. Another possible reason why monopolies may exist is with government intervention. In industries such as the oil industry and the postal service, it is crucial that the products these producers provide arrive on time and at an appropriate price. Government intervention assures that these companies are run smoothly and in the best interest of the country.

 Real World Application

Another real world application of the monopoly market is the credit card industry. Until 2004, Visa and MasterCard operated in a virtual monopoly with the banks. Banks would generally only issue credit and debit cards through either Visa or MasterCard associations. Visa and MasterCard were able to standardize procedures with the records to reduce fraud and misuse of the cards and both worked to establish international systems so the cards could be used globally. However, in 2004, Visa and MasterCard have been slapped with an antitrust court ruling that was originally brought up by smaller competitors. From then on, banks have been issuing Discover cards and American Express cards through banks in addition to Visa and MasterCard. This market provides a good example of what could happen to virtual monopolies should government intervention come into play.

Posted by Derek, Maria and Robert (Section 3)

Monopoly

Discussion on iSurrender: Apple’s new iPhone augurs the inevitable return of the Bell telephone monopoly” by Tim Wu (Slate Magazine, June 2008)

In this article, Tim Wu discusses the potential for a monopoly to form in the wireless phone industry, using Apple’s iPhone 3G to show how AT&T and Verizon are gaining power over competitors. The author discusses how the launch of the then latest iPhone 3G, with its groundbreaking features, will force him to leave T-Mobile and sign a two year contract with AT&T (at the time, AT&T was the only provider that Apple had partnered with). He goes on to argue that the huge demand that Steve Jobs and Apple created for the new iPhone is just another force that is propelling the industry into a state of monopoly where AT&T and Verizon are by far the strongest competitors, while Sprint recorded a huge loss in a single quarter of 2007, and T-Mobile didn’t have the market share to compete strongly with AT&T and Verizon at the time. This is significant because AT&T and Verizon were both part of the Bell Telephone monopoly that was broken after an anti-trust lawsuit in the 1980’s. The fact that these two firms seem to be monopolizing the industry leads Wu to argue that some industries, particularly the utility industries with high costs and high barriers to entry, leading to opportunities for economic profit in the long run, are prone to monopolies forming over time.

Many people argue that monopolies are unethical, justified by the fact that, when they control an industry, they become price makers rather than price takers (as in perfect competition), and can charge as high of prices as they want giving the consumer little to no power at all. This can be seen in the iPhone example, where AT&T can charge high prices for iPhone contracts because they are the only provider that has partnered with Apple. In other words, Apple’s choice in partnership has made it so that, if a consumer wants an iPhone they must pay whatever price AT&T wants to charge for service, since the iPhone is a unique good with almost no close substitutes, one of the main characteristics of a monopoly. It’s important to note that there will be an upper limit to what AT&T can charge since demand for the iPhone is not perfectly inelastic, and still has a downward sloping demand curve, but AT&T and Apple can still both make billions from this partnership by excluding the other wireless providers from this deal.

As Wu touched on in the article, some industries are more prone to the formation of monopolies than others, the cell phone industry being just one example. Therefore, one reason that the government may allow, or even create monopolies, is so that it can have more control over the industry and the supply of that particular good or service. Although this may seem unethical, many argue that it is necessary in certain industries that aren’t naturally capable of perfect, or even any, competition.

The cartoon that will be displayed in class (memory peg) is among the most famous political cartoons in U.S. history.  This depicts the infamous Standard Oil monopoly as a giant octopus, with each tentacle representing the company’s influence in various different spheres.  They include the Capitol, the White House, lobbyists, etc.  It was truly one of the most powerful forces in America at the time.  By 1890, Standard Oil controlled 88% of refined oil in the United States. This allowed them to control the price of oil. Also, since oil refining has such high barriers to entry, they had no serious competitors, making them basically the only company in the industry.  In 1911, the Supreme Court declared the company anti-competitive and broke it up into 34 independent companies under the Sherman Antitrust Act of 1890.

Posted by Brenna and David (Section 2)

Monopoly Blog Entry

Discussion on iSurrender: Apple’s new iPhone augurs the inevitable return of the Bell telephone monopoly” by Tim Wu (Slate Magazine, June 2008)

 Summary

In his article “iSurrender,” Tim Wu argues that the wireless telephone industry has returned back to a monopoly. With the iPhone being continuously upgraded and improved, Apple is dominating the wireless industry leaving competitors far behind.

Wu notes the blame companies have placed on the iPhone for their severe losses and fall to acquisitions. Well known telephone companies have recently plummeted, with Sprint Nextel losing $29.5 billion in only one quarter last year and Alltel being bought by Verizon. The recent failure of these formerly successful companies is due to the lack of competition present in the wireless telephone industry. The article points out that the wireless market is no longer the “poster for competition,” but now includes only few producers with Apple as its single powerhouse.

One reason the iPhone appears to be a monopoly is barriers to entry, with costs of entering the market being sky high. Wu notes the soaring prices of fair spectrum and specifically how it serves as a barrier to entry in the wireless telephone market. In perfectly competitive markets, firms enter the market with ease when they view economic profits, forcing prices to go down until firms choose to exit. In such markets, profit in the long run is inevitably zero. Without free entry and exit, as in the wireless telephone industry, firms can earn profits in the long run and thus have no incentive to exit the market. The lack of competition in a monopoly allows a firm to be price maker instead of a price taker, thus earning high profits and dominating the market as Apple does.

In Wu’s opinion, the growing popularity of the iPhone is not Apple’s fault. Rather, it is due to the economic nature of monopolies that so many wireless companies have begun to fail. The absolute dominance of the iPhone has surely changed the wireless telephone industry as we have recently known it. Wu notes, however, that the iPhone has actually brought back the telephone monopoly that has lasted for most of our history.

 Commentary

Monopolies have an immense amount of power in the marketplace due to the lack of substitutes and little to no amount of competition. A monopolistic company can sometimes be formed because the barriers of entry to the industry are so high, such as in the oil industry. They can also be created by gradually beating out the smaller competitors and local businesses on price until they can no longer compete which is argued to be unethical. By being the only producer of a good, this also means that the demand curve of the company and the demand curve of the market are equal. In essence, a single business encompasses the entire industry. This allows a monopolistic firm to set their own prices and maintain complete control over the production decisions. Monopolies are able to sell fewer products at higher prices without being effected by any competition in the market place that would normally drive their prices down.  To some, this is viewed as unethical because it allows the company to become inefficient over time and charge unreasonably high prices for a product and high profit margins.

Even though they are sometimes viewed as unethical, some monopolies are allowed to exist. In fact, the government often creates specific monopolies (called government-granted monopolies) through patents and copyrights. These granted monopolies are argued to ensure a degree of organization over a certain industry, without having the industry actually be run by government. The government would also want to create a monopoly over certain goods such as electricity, the postal system or public utilities in order for them to remain carefully controlled.

 Real World Application

Monopolies have a history of forming in the technology and telecommunications sectors of the market.  The former titan of the technology space, Microsoft, was accused of monopolistic practices and taken to court in the famous United States v. Microsoft case.  The Department of Justice claimed that by bundling Internet Explorer with Microsoft Windows the market for alternate web browsers was severely restricted, as they were less convenient to acquire.  Moreover, there were questions over whether Microsoft’s programming interfaces were designed to work better with Internet Explorer, which would further cement the argument.  These claims point to one of the main causes of monopoly power, barriers to entry.  The harder it is for other firms to enter into the space Microsoft occupies, the easier it is for Microsoft to maintain as high a market share as possible.

Posted by Benjamin, Jennifer and Kayla (Section 1)