Question

An interesting example of strategic behavior comes from a 1997 article about Microsoft’s investment in Apple (New Straits Times, 1997). The article is included in the Required Readings list. Facing tough anti-trust scrutiny from government agencies, Microsoft provided financial support to Apple in order to ensure Apple’s survival and, therefore, to ensure that competitiveness in the industry remains. Moreover, the partnership with Apple provided an additional market for Microsoft’s products – the MS Office and the IE products were to be bundled with the MAC OS as one of the conditions for this financing. Discuss this case in the context of market structure and strategic behavior. What market structure do these firms operate in? Why did Microsoft need to preserve competitiveness in the industry? What was Microsoft afraid of in the event that Apple did not survive?

Answer 1

It is well known that companies are interconnected and have created supply chains for one another which make them interdependent. For example companies such as Samsung supply display units to Apple and this helps both in gaining from sales of Smartphones.

The industry in which companies such as Apple and Microsoft operate are a mix of Monopolistic Competition and Oligopoly. This is because while these companies are limited and they have high barriers to entry, yet their exists some differences in their offerings. An oligopoly is one wherein some companies come together and decide for mutual profits. While the mobile phone industry at present retains some of the characteristics of an oligopoly it also retains some of monopolistic competition in which differences are there in the offerings.

It was further essential for Microsoft to save the market because it feared that a large section of the market would become unorganized if Apple failed. As a large producer microsoft new that Apple had an already existing customer base. All of this customer base would not go to microsoft automatically and people may prefer to use smaller vendors to fulfill their needs in the absence of Microsoft.

This was one of the prime reasons for Microsoft to bail out Apple. The bail out conditions meant that Apple had to give access to Microsoft for its product and the company in turn made profits out of an existing market type. Thus to protect the oligopoly which was existent at that stage, Microsoft thought of bailing out Apple and it indeed paid out well for both the companies.

An oligopoly rides on self dependence for its survival. If competition increases, the nature of the market changes rapidly and could lead to wide spread problems for the market. Competition could rise and profits could thin down. This is one of the key reasons why Microsoft aimed at saving Apple from bankruptcy respectively.

Please feel free to ask your doubts in the comments section if any.