Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 5 Firm Behavior and the Organization of Industry
Chapter
15 of 36 Monopoly
Section
28 of 32
…
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
…
·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.
…
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.
…
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
…
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.
…
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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