HAT Manifesto Part 1/3 - Rubric Cube - 241201 revision

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5^th Ed.

PART 5 Firm Behavior and the Organization of Industry

Chapter 15 of 36 Monopoly

Section 28 of 32

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Monopolies fail to allocate resources efficiently.

Unlike competitive markets they produce less than the socially desirable quantity of output.

This is because they charge prices above marginal cost creating deadweight loss.

Policymakers in the government can respond to the problem of monopoly in four ways

·1· try to make monopolized industries more competitive

·2· regulate behavior of the monopolies

·3· turn some private monopolies into public enterprises

·4· do nothing at all

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·1· Try to make monopolized industries more competitive.

If Coca-Cola and PepsiCo wanted to merge, the proposed merger would be examined by the federal government.

The lawyers and economists in the Department of Justice might decide a merger between these two large soft drink companies would make the U.S. soft drink market substantially less competitive with resulting higher prices.

In the case of this decision the Department of Justice would challenge the merger in court and possibly disallow the merger.

The U.S. Supreme Court prevented Microsoft from buying Intuit in 1994 deciding the merger would give Microsoft excessive monopoly power.

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The government has anti-monopoly power over private industry due to federal antitrust laws aimed at limiting monopoly power.

The Sherman Antitrust Act was the first and most important of these laws.

Congress passed this into law in 1890 to reduce the market power of the large and powerful "trusts" (monopolies) at the time including Standard Oil.

Another was the Clayton Antitrust Act of 1914.

This strengthened the government's anti-monopoly powers and authorized private lawsuits.

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The U.S. Supreme Court has said the antitrust laws are "a comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade."

The antitrust laws provide the government with various ways to promote competition, they

· allow the government to prevent mergers, such as Microsoft and Intuit

· allow the government to break up companies, in 1984 AT&T was split into eight smaller companies

· prevent companies from coordinating their activities making markets less competitive

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Along with benefits antitrust laws have costs.

Sometimes companies merge not to reduce competition but rather to lower costs through more efficient joint production to gain “economies of scale” or “synergies.”

These allow companies to reduce costs, lower prices, and become more competitive.

Many U.S. banks have merged in recent years and by combining operations have been able to reduce administrative staff lowering costs.

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If antitrust laws are to raise social welfare, government must be able to

· determine which mergers are desirable and which are not

· measure and compare the social benefit from synergies to the social costs of reduced competition

Critics of antitrust laws are skeptical the government can accurately measure the costs and benefits that would result from mergers.

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