4.For the past two decades, a significant trend toward deregulation has been spreading across the economy.From airlines to trucking to banking to electricity, many industries have shed the yoke of regulation andentered the world of free competition. Most of these industries have emerged stronger and more competitivethan they were under regulation.
B. Antitrust Policy
1.Antitrust policy exists to limit the excesses of imperfect competition.
monopoly power allows firms to operate at socially inefficient levels, charging too much for too little product. Monopolistscharge a price that is greater than marginal cost, and often greater than average costs, allowing them to earneconomic profits into the long run. This means that the monopoly solution yields a distribution of resourcesthat is not allocatively efficient.Imperfect competition can emerge due to the existence of economies of scale. If the technology in anindustry is such that output can be produced efficiently only when a single firm exists, we have a naturalmonopoly.2.Of course, antitrust policy is written with full knowledge that imperfect competition has both a good and a bad side. Unbridled exploitation of market power can, on the one hand, depress output and generate excessive prices and profits. On the other hand, however, there do exist economies of scale that should not be sacrificedsimply for the sake of having many firms instead of few. There is, moreover, a demonstrable correlation between market concentration and research into discovery and development of new products and new processes.In light of this dichotomy of properties, it is the primary lesson of this chapter that antitrust activity should (1)keep the barriers to competition low, (2) tolerate bigness when size is determined by technology, and (3) bevigilant against anticompetitive practices whenever they occur.3.The three most significant pieces of antitrust legislation in the United States are the
Sherman Antitrust Act
, and the
Federal Trade Commission Act
. The Sherman Act declares contracts, combinations,and conspiracies in restraint of trade illegal and further states that attempting to monopolize is illegal. TheClayton Act outlines specific anticompetitive behaviors that are illegal, such as price discrimination, tyingcontracts, and interlocking directorates. The Clayton Act also limits corporate mergers that would lessencompetition; horizontal mergers are the most troublesome in this regard. The FTC Act established acommission whose duty is to prohibit “unfair methods of competition” and to warn against anticompetitiveactivity.4.The application of these antitrust laws is not an easy task. It is often difficult to know if any illegal behavior exists or to determine exactly what a firm’s intent might be. Thus, on the basis of
, it is hardto know whether or not firms are behaving illegally. In addition, it is often difficult to know exactly how todefine a
or how to define
. For example, consider the automobile industry. Is itoligopolistic, consisting of just three big firms (Ford, Chrysler, GM) in the United States, or is it perfectlycompetitive, consisting not only of Ford, Chrysler, and GM but also of Honda, Toyota, BMW, Mazda, etc.?How do we define markets, and, once we define them, how can we describe the behavior of firms relative to oneanother? On the basis of
, it is hard to know whether or not firms are operating in an illegal fashion.5.Recent antitrust activity has, in fact, focused on promoting efficiency in business practices and not onattacking “bigness” per se. The notion underlying this concentration on conduct rather than structure, in aneconomy that is facing increasing competition from around the world, is that collusive agreements that try tofix prices are the most troublesome source of inefficiency. Large firms that can exploit decreasing costs as theycompete internationally can be a source of economic strength as long as they do indeed compete.
V. HELPFUL HINTS
1.Figure 17-2 in your text is complicated, so we have reproduced it here as Figure 17-1. First, notice theshape and position of the average and marginal cost curves. Because they are everywhere downward-sloping,this looks like a natural monopoly. The larger the firm gets, the lower its per unit costs. Given a marketdemand and marginal revenue curve, the profit-maximizing firm will produce where marginal cost is equal tomarginal revenue and set the highest price it possibly can. This leads to
as industry price andoutput.