McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 38 Antitrust

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter Outline WHAT’S WRONG WITH MONOPOLY NATURAL MONOPOLY AND NECESSARY MONOPOLY MONOPOLIES AND THE LAW EXAMPLES OF ANTITRUST ACTION

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Monopolies in Everyday Life Most people have only one provider of local telephone service, natural gas, electricity and cable television. These monopolies are not illegal. Other monopolies are prevented from forming, or prevented from exerting their power to get other business because that threatens consumer welfare.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. What’s Wrong With Monopoly MR Q monop P monop D P Q S PC =MC Monop Q PC P PC A B C E F Deadweight Loss from Monopoly = EBC

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Reduced Innovation with Monopoly A monopolist earns economic profit and there is no mechanism for that economic profit to be diminished. Because a monopolist need not innovate to survive, monopolies also tend not to innovate.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Necessary Monopolies Natural Monopolies –A natural monopoly typically results from substantial barriers to entry (a legal or economic mechanism that prevents firms from competing in an industry) –This often happens in the utility industry where fixed costs are very high,

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Modeling a Natural Monopoly P Q D MR Q monopoly P monopoly MC Monopoly ATC P regulated Q regulated

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Other Necessary Monopolies: Patents and Copyrights Patents and Copyrights protect the creators of inventions, books, music, etc. so that they are motivated to produce. Without that protection their work’s economic value could be taken.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Anti-Trust Law The Sherman Anti-Trust Act –This law and other antitrust legislation that followed it makes it illegal to use the monopoly power in one market to gain market power in another market. (e.g. a local telephone company cannot require use of their cellular system.) become a monopoly by merging with a competitor (without government approval.)

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. What Constitutes a Monopoly How many competitors are necessary for a market to be described as competitive? –There are many airlines but at most airports there is a dominant airline. –Microsoft has competition from Apple and Linux for operating systems and from WordPerfect for office suites but dominates these industries. The Contestable Markets Hypothesis –one firm is all that is necessary for competitive prices to exist as long as that firm is threatened by hit-and-run entry

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Examples of Antitrust Action: Standard Oil The company owned all stages of production from crude oil drilling to retail outlets. The company used its monopoly in one area (refining and distribution) to force its way into the retail market. Much of the Sherman Act makes illegal what Standard Oil did. The company was broken into several regional oil companies.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Examples of Antitrust Action: IBM The company was the dominant firm in mainframe computers. The company was accused of using that power to dominate other industries –mainframe software –personal computers. The suit was ultimately dropped.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Examples of Antitrust Action: Microsoft Microsoft dominated the operating system business. It was shown in court that it used their monopoly in the operating system business to generate market power in office suites and internet navigation. The remedy offered by the trial court was that the company be broken into two parts. The Appeals Court overturned the remedy and the case was settled.