Chapter 7 Section 4

Price War – When competitors cut their prices very low to win business. This is legal only as it is done for a short period of time (i.e. 1 day) and thus does not hurt consumers or decrease competition

Illegal Business Activities: Collusion – Any agreement among firms or business leaders to do anything illegal such to set prices and production levels. Price Fixing – An agreement among firms to sell at the same or very similar prices .

-Cartel – An agreement by formal organization of producers to coordinate prices and production. -Cartels can only work if every member keeps to its agreed output levels and no more , when this happens price will fall and firms will lose profit .

Antitrust Laws- Laws that encourage competition in the marketplace Predatory pricing- Selling a product below cost in order to drive competitors out of the market Antitrust Laws- Laws that encourage competition in the marketplace Trust- Like a cartel, an illegal grouping of companies that discourage competition

Merger- Combination of two or more companies into a single firm

Monopolies are less fair than competitive markets. Monopolies and oligopolies can sometimes be bad for the consumers and economy as a whole Markets dominated by a few large firms generally have higher prices and lower outputs then markets with many sellers.

Economists are skeptical about most claims of predatory pricing because the predator looses money each time it drives an endless series of rivals out of business

The government has a number of policies that keep firms from controlling the price and supply of important goods If a firm controls a large share of a market the Federal Trade Commission and Department of Justices Antitrust Division will watch the firm closely

In 1890, Congress passed the Sherman Antitrust Act, which outlawed mergers and monopolies that limit trade between states Despite the antitrust laws, companies have used many strategies to gain control over their market

Some firms require a costumer who buys one product to buy other products from the same company. The government has the power to regulate these practices if they give too much power to a company that already has few competitors.

In 1997, The Department of Justice accused Microsoft of using a monopoly in operating systems. They were also accused of predatory pricing because they gave away their browser for free, which could ruin Netscape, the other browser company.

In 1999, the federal judge ruled that Microsoft was a monopoly and started working to reduce the companies power.

The Government often blocks rising monopolies by preventing company mergers that might reduce competition and lead to higher prices.

Deregulation is the removal of some government controls over a market. In the late 1970’s-1980’s Congress passed laws to deregulate several industries. Over several years, the government deregulated the airlines, trucking, banking, railroad, natural gas, and television broadcasting industries .

Deregulation weakens government control Depending on the degree of deregulation, the governments action allowed –or forced- firms in some industries to compete in markets by eliminating many entry barriers and price controls. Deregulation weakens government control

What is the purpose of anti-trust laws? To help prevent monopolies from controlling the market and causing a rise in price and decrease in output.

Under what conditions will the government approve a merger? When they want to increase competition, lower prices, and save companies

How does predatory pricing hurt competition? It creates a blockade for competition in markets.

How does deregulation change the banking and air travel industries? Created more efficient markets.

Why did government once regulate the banking, trucking, and airline industries? To eliminate entry barriers and price controls

Why does the government feel it has to right to intervene in markets to promote competition? If the government didn’t intervene then everything would have extremely high prices and extremely low outputs because companies could do whatever they wanted in order to beat out its competition.

What is a trust? An illegal grouping of companies that discourages competition.

How are trust and cartels similar? They are both illegal groupings of companies that hurt competition.

What are some examples of the government using antitrust legislation to breakup existing monopolies? The American Tobacco Company and John D. Rockefeller’s Standard Oil Trust in 1911

What strengthens government control ? Antitrust laws strengthen government control