Microsoft is one of the most profitable corporations on earth. Most of its profit comes from selling its operating system and software at prices above marginal cost. Microsoft can price above marginal cost not because its products are necessarily the best in some absolute sense but because most people want to use the same software as most other people. Microsoft products are, in most cases, the most likely to be compatible with other products and other readers, writers, and publishers.

The power of coordination in “Office-like” software is so strong that Microsoft can sell Office for hundreds of dollars even though there are free alternatives such as OpenOffice, Think Free Office, and Google Docs, all of which are roughly similar in quality to Office. But don’t make the mistake of thinking that if one of these products became the dominant standard, we would all enjoy free software. The only reason these products are given away for free is that the owners hope to become the dominant standard so that they can charge a high price!

Sometimes the pressures for coordination are strong, but other factors mean that more than one firm can compete in the market. eBay is the market leader in online auctions and it uses its market power to charge higher prices than would occur in a standard competitive market. But a handful of other firms in the industry offer slightly different features. Craigslist, for example, is able to compete with eBay because it offers buyers and sellers a way to buy and sell locally, which is especially useful for products that are expensive to ship. As we saw in the previous chapter, a market dominated by a small number of firms is called an oligopoly.

The market for Internet dating is an oligopoly simply because most people want to join large networks with many other people. But it’s not a monopoly because OKCupid and eHarmony compete with the market leader Match.com by offering different matching algorithms. In addition, there are competing niche services, such as JDate.com (for those looking for a Jewish partner), but notice that JDate dominates its competitors within that niche.

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