Question.3087 - Antitrust Practices and Market Power
Answer Below:
Contents Introduction 2 Types of market structures 2 Antitrust Practices 3 Monopoly and Oligopoly: Are they always bad? 4 Conclusion 4 Bibliography / References: 5 Antitrust Practices and Market Power 2 Market structure and Market power Introduction Market power is the key for antitrust authorities to pitch in to save guard consumers interest. Market Power arises when company/companies have the ability to raise price beyond the competitive level without losing sales as fast that the price rise has to be withdrawn due to decline in sales. Such situation primarily arises in a monopoly or oligopoly market structure. Market structure is defined by the organizational and other characteristics of a market. The factors which determine the market structure are costing, number of competitors, market share of the largest firm, extend of vertical integration of the industry, level of product differentiation and the structure of buyers in the industry. Types of market structures There are four basic market structures: Monopoly, oligopoly, perfect competition and monopolistic competition. Monopoly is a market structure, which is characterised by only one seller or producer of a commodity/product/services to which there is no close substitute. There are strong barrier to entry for the new entrant in the market, which results in no competition and only seller/producer dictates the prices to the consumer if there is absence of any regulatory interference. The concept of market power is illustrated in the figure below, highlighting the price setting by the monopolist. The monopolist sets the price at a point on the downward sloping demand curve where marginal cost equals marginal revenue, to benefit the monopolist than the customers. At the profit-maximizing monopoly price, P m , price surpasses marginal cost, C', by the vertical distance between the marginal cost curves at the monopolist's output, Q m and the demand; that is, by P m - C'. Monopolist tries to maximize its profit. As per the chart above, the profit maximization point P m on the demand curve will be a point, where Marginal cost is equal to Marginal Revenue Antitrust Practices and Market Power 3 and at output Q m, . Along with higher prices, monopolist will also curtail output which will reduce social welfare because the rise in price to P m reduces consumer surplus. The lack of competition or imperfect competition may give a monopolist less incentive to control cost and produce efficiently, since the firm has the pricing power. Hence, it lead to 'X' inefficiencies, where the firms do not focus of operational efficiencies or ways to reduce cost of manufacturing. Rent seeking behaviour is also witnessed in the monopoly market. Due to market power, monopolists usually seek trade benefits from the government in the form subsidies, import quotas, tax breaks and other benefits. Such behaviour eventually negatively impacts the consumers. First, the privileges themselves represent a deadweight loss to consumers. Second, the expenditure of resources on their pursuit arguably represents a rent-seeking social cost because of the more productive alternative uses for such resources. Antitrust Practices In the past, several companies have been investigated for their antitrust behaviour on account of having monopolistic business. For instance, American Tobacco Company was found violating the federal Sherman Antitrust Act of 1890 by seeking to monopolize practically all sectors of the tobacco industry and to promote competition in the market four firms were created from the American Tobacco Company’s assets. On the other hand monopolistic structure has a positive aspect also in the form of Natural Monopoly. A natural monopoly comes into being due to economies of scale, i.e. decrease in the per unit cost of production because of the increase in the firm’s production. When economies of scale are extensive relative to the size of the market, one firm is able to produce the industry’s whole output at a lower unit cost rather than two or more firms doing it and it include public utilities such as water services and electricity. The second market structure which is actively monitored by antitrust authorities is the oligopoly. When only a few firms dominate the market structure it is called an oligopoly. When a market is shared by a few firms, it is said to be a highly concentrated market. Though few firms may be dominating the market but many small firms also operate in the market. For example, major airlines such as British Airways (BA) and Air France operate their routes with only close competitors who are very few in number, but there are also many small airlines which cater to the holidaymaker or offer specialist services. The main characteristics of firms operating in a oligopolistic market structure include interdependence among the firms, and various strategical decisions such as whether to compete with rivals, or collude with them, whether to raise or lower price, or keep price constant, whether to be the first firm to implement a new strategy, or whether to wait and see what rivals do. In such markets, antitrust authorities primarily look for collusion or price fixing. Recently, the Competition Commission of India imposed fine on the Indian cement companies for acting together in attempting to control the production and fixing price in the market in India. Monopoly and Oligopoly: Are they always bad? Just because monopoly is bad in a theoretical economic sense, however, does not mean that it is illegal. And, in fact, there is nothing clearer in the antitrust laws than that pure, lawfully attained monopoly is not prohibited. The thought that monopoly power that results Antitrust Practices and Market Power 4 from growth or development as a consequence of a superior product, business know how or historic accident is not objectionable was expressed by the courts in cases like (United States v. Grinnell Corp., 384 U.S. 563 (1966)). Good monopolies come in several forms: 1. Encourage innovation, invention, research and development in technology and pharma companies 2. Natural monopoly encourages economies of scale in local electrical utility 3. Government monopoly- controlled prices of utilities Theoretically, the only way for a firm to become a monopoly, without government sponsorship, is to win the loyalty of consumers which can be done by lowering the price of the product and creating a more useful product than competitors. One of the real world examples of a good monopoly which helped the society was of Standard Oil in the United States. It was Standard Oil, which introduced the usage of oil as an affordable way to light people's homes in the evening, which was by far better than blubber and lard. By the mid 1860s, whale-oil was unaffordable to most people. Because of the size of the firm, it was able to undertake projects which disparate companies could never agree upon and it encouraged innovation and invention as the company developed products (ex- Vaseline) out of its industrial waste. Conclusion Market power of the firms arises when there are no substitutes or other competitor in the market for the company’s products and the customer has to pay a higher price than what he/she would pay in competitive market. Such market structure is called monopolistic market. The Antitrust laws steps in whenever there is actual or likely market power or monopoly power to establish most types of antitrust violations. However, we have seen in the past that monopolistic markets are not always bad as they help achieve economies of scale resulting in lower prices for the customers and also motive companies to innovate. Antitrust Practices and Market Power 5 Bibliography / References: ? Glick M. Is Monopoly Rent Seeking Compatible with Wealth Maximization? Retrieved May 21, 2013, from Web site: lawreview.byu.edu/archives/1994/3/gli.pdf ? Henderson D. R, Natural Monopoly. Retrieved May 21, 2013 from Web site: www.econlib.org/library/Enc/Monopoly.html ? Klein B (June 3, 2011), The ?”Hub-And-Spoke” Conspiracy That Created The Standard Oil Monopoly. Retrieved on May 22, 2013 from University of Southern California Web site: http://weblaw.usc.edu/why/students/orgs/lawreview/KleinHubAndSpoke.cfm ? Krattenmaker, Thomas G, Lande, Robert H. and Sanlop, Steven C (1987). Monopoly Power And Market Power In Antitrust Law, Retrieved May 22, 2013, from website http://www.justice.gov/atr/public/hearings/single_firm/docs/222144.htm ? Leslie C. R., Revisiting The Revisionist History Of Standard Oil. Retrieved May 23, 2013 from University of Southern California Web site: http://weblaw.usc.edu/why/students/orgs/lawreview/LeslieRevisionistHistory.cfm ? Landes W. M. and Posner R. A. Market Power In Antitrust Cases. Retrieved May 23, 2013 from Web site: http://academico.direito- rio.fgv.br/ccmw/images/9/9e/Landes_e_Posner_-_Market_Power.pdf ? Manne G. A. & Wright J. D (March 24, 2010), Google And The Limits Of Antitrust: The Case Against The Case Against Google. Retrieved on May 23, 2013 from Social Science Research Network website: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1577556 ? Mayer D. A., The Good, the Bad, and the Ugly. Retrieved on May 22, 2013 from http://www.netplaces.com/economics/imperfectly-competitive-markets/the-good-the- bad-and-the-ugly.htm ? Shenefield, Stelzer J. H., Irwin M, Antitrust Laws: A Primer. Retrieved on May 24, 2013 from DeVry University Library ? Titan C. Ron,: The Life of John D Rockefeller, Sr. Retrieved from http://www.h- net.org/reviews/showpdf.php?id=5292More Articles From Economics
.ico)
.ico)
.ico)
.ico)
