Microsoft and its owner Bill Gates became the forefront company in the computer industry by competing against other companies that produce one major product . By bundling several software applications into an application suite, Microsoft managed to gain a huge market share. Additionally, Microsoft's market share increased because of its licensing and ownership of copyrights of the software found on most computers bought today, including their operating systems. The computer industry for central processing units (CPUs) and other hardware has remained an oligopoly, with Dell, Gateway, Compaq, Hewlett-Packard, IBM (the leader of mainframe production), Intel (the leader in microprocessor production), Advanced Micro Devices, and National Semiconductors . .
One of the problems with the computer market structure is the high barrier to entry in this industry. Because price is interdependent, when one firm changes price, it will lead another firm to change price. However, the barrier to entry is lower if one firm sets a high price in the market. For example, if Firm A sets a high price for its monitors to maximize profit, then it allows room for other firms to enter the market selling their monitors at a lower price, thereby taking some of the market share away from Firm A. This will, in turn, cause Firm A to decrease its prices in order to compete with the new firms. This behavior is described by the Bertrand Model, which states that under the presumption of a duopoly, a company decides which prices to set for its products in order to capture all market demand. In general, the company will set price just below that of its competitor in order to gain market demand. However, in Bertrand competition, the optimal price is equal to marginal cost. .
In addition, a high barrier to entry makes it harder for smaller companies to gain some market share in the computer industry.