The Economics of Software

The software industry possesses several features that suggest that software -- especially operating system software -- is a natural monopoly, meaning that the natural tendency of the market will be for a single firm to emerge as dominant. In particular, the software industry is characterized by increasing returns to scale and positive network externalities. Furthermore, Microsoft has developed monopoly power in the personal-computer operating system market and leveraged that power to develop large market share in desktop applications and PC server software.