PREVENTING OR CONTROLLING MONOPOLY POWER

Natural Monopolies Public ownership Regulation Advantage: can set prices based on efficiency rather than profit maximization Disadvantages: May be less efficient than privately owned firms May not offer high quality products May serve political interests—providing contracts or jobs to those with connections Regulation Prices—price ceiling set at socially optimal price, to achieve allocative efficiency Profits—fair return price, allows normal profit Add graphs here from p. 264, Krugman for AP

Industries Which Are Not Natural Monopolies Regulate through antitrust policy: Government can attempt to prevent monopoly from arising, or break it up if it already exists. Sherman Antitrust Act of 1890 Illegal to create contract that unreasonably restrains interstate trade Outlows monopolization of any part of interstate commerce Allows Department of Justice to bring civil claims and criminal prosecutions when the law is violated.

Clayton Antitrust Act of 1914, which outlaws: Price discrimination Anticompetitive practices, like exclusive dealing and tying arrangements Anticompetitive mergers Federal Trade Commission Act of 1914 Outlaws unfair competition, including deceptive acts Created Federal Trade Commission to enforce the act Outlaws price fixing, output restrictions, actions that prevent entry of new firms

Ignore it: Another approach to monopoly power is to allow natural market forces to destroy monopoly market positions. For example: railroads destroyed the monopoly power of ships and barges in the l800s. Then trucks and planes destroyed the monopoly power of railroads.