Monopoly and Monopoly and Antitrust PolicyAntitrust Policy

Imperfect CompetitionImperfect Competitionand Market Powerand Market Power

An An imperfectly competitive imperfectly competitive industryindustry is an industry in which is an industry in which single firms have some control over single firms have some control over the price of their output.the price of their output.

Market powerMarket power is the imperfectly is the imperfectly competitive firm’s ability to raise price competitive firm’s ability to raise price without losing all demand for its without losing all demand for its product.product.

Pure MonopolyPure Monopoly A A pure monopolypure monopoly is an industry with is an industry with

a single firm that produces a product a single firm that produces a product for which there are no close for which there are no close substitutes and in which significant substitutes and in which significant barriers to entry prevent other firms barriers to entry prevent other firms from entering the industry to compete from entering the industry to compete for profits.for profits.

Collusion and Monopoly Collusion and Monopoly ComparedCompared

CollusionCollusion is the act of working with is the act of working with other producers in an effort to limit other producers in an effort to limit competition and increase joint profits.competition and increase joint profits.When firms collude, the outcome would When firms collude, the outcome would

be exactly the same as the outcome of be exactly the same as the outcome of a monopoly in the industry.a monopoly in the industry.

Public Choice TheoryPublic Choice Theory The idea of government failure is at The idea of government failure is at

the center of the center of public choice theorypublic choice theory, , which holds that public officials who which holds that public officials who set economic policies and regulate set economic policies and regulate the players act in their own self-the players act in their own self-interest, just as firms do.interest, just as firms do.

Remedies for Monopoly:Remedies for Monopoly:Antitrust PolicyAntitrust Policy

A A trusttrust is an arrangement in which is an arrangement in which shareholders of independent firms shareholders of independent firms agree to give up their stock in agree to give up their stock in exchange for trust certificates that exchange for trust certificates that entitle them to a share of the trust’s entitle them to a share of the trust’s common profits. A group of trustees common profits. A group of trustees then operates the trust as a monopoly, then operates the trust as a monopoly, controlling output and setting price.controlling output and setting price.

Landmark Antitrust LegislationLandmark Antitrust Legislation Congress began to formulate antitrust Congress began to formulate antitrust

legislation in 1887, when it created the legislation in 1887, when it created the Interstate Commerce Commission Interstate Commerce Commission (ICC)(ICC) to oversee and correct abuses in to oversee and correct abuses in the railroad industry.the railroad industry.

In 1890, Congress passed the In 1890, Congress passed the Sherman ActSherman Act, which declared every , which declared every contract or conspiracy to restrain trade contract or conspiracy to restrain trade among states or nations illegal; and among states or nations illegal; and any attempt at monopoly, successful any attempt at monopoly, successful or not, a misdemeanor.or not, a misdemeanor.

Landmark Antitrust LegislationLandmark Antitrust Legislation The The rule of reasonrule of reason is a criterion is a criterion

introduced by the Supreme Court in introduced by the Supreme Court in 1911 to determine whether a 1911 to determine whether a particular action was illegal particular action was illegal (“unreasonable”) or legal (“unreasonable”) or legal (“reasonable”) within the terms of the (“reasonable”) within the terms of the Sherman Act.Sherman Act.

Landmark Antitrust LegislationLandmark Antitrust Legislation The The Clayton ActClayton Act, passed by Congress , passed by Congress

in 1914, strengthened the Sherman Act in 1914, strengthened the Sherman Act and clarified the rule of reason. The act and clarified the rule of reason. The act outlawed specific monopolistic behaviors outlawed specific monopolistic behaviors such as tying contracts, price such as tying contracts, price discrimination, and unlimited mergers.discrimination, and unlimited mergers.

Landmark Antitrust LegislationLandmark Antitrust Legislation The The Federal Trade Commission Federal Trade Commission

(FTC),(FTC), created by Congress in 1914, created by Congress in 1914, was established to investigate the was established to investigate the structure and behavior of firms structure and behavior of firms engaging in interstate commerce, to engaging in interstate commerce, to determine what constitutes unlawful determine what constitutes unlawful “unfair” behavior , and to issue cease-“unfair” behavior , and to issue cease-and-desist orders to those found in and-desist orders to those found in violation of antitrust law.violation of antitrust law.

The Enforcement of Antitrust The Enforcement of Antitrust LawLaw

The The Wheeler-Lea Act (1938)Wheeler-Lea Act (1938) extended the extended the language of the Federal Trade Commission language of the Federal Trade Commission Act to include “deceptive” as well as “unfair” Act to include “deceptive” as well as “unfair” methods of competition.methods of competition.

The The Antirust Division (of the Department Antirust Division (of the Department of Justice)of Justice) is one of two federal agencies is one of two federal agencies empowered to act against those in violation of empowered to act against those in violation of antitrust laws. It initiates action against those antitrust laws. It initiates action against those who violate antitrust laws and decides which who violate antitrust laws and decides which cases to prosecute and against whom to cases to prosecute and against whom to bring criminal charges.bring criminal charges.

The Enforcement of Antitrust The Enforcement of Antitrust LawLaw

The courts are empowered to impose The courts are empowered to impose a number of remedies if they find that a number of remedies if they find that antitrust law has been violated.antitrust law has been violated.

Consent decreesConsent decrees are formal are formal agreements on remedies between all agreements on remedies between all the parties to an antitrust case that the parties to an antitrust case that must be approved by the courts. must be approved by the courts. Consent decrees can be signed Consent decrees can be signed before, during, or after a trial.before, during, or after a trial.