More on Competition and Government Policy

Cartels l A cartel is an agreement among a group of sellers to regulate prices or restrict output l To be successful it must be able to restrict its members from cutting prices –How easy do you think that is? l It also must prevent outsiders from entering l The difficulties in doing so is why firms yearn for legal restrictions

What Are Some Examples of Legal restrictions? l A quota on steel imports l Restrictions on who could clean dog’s teeth l Licensing of hair stylists l Restrictions on the practice of acupuncture, mid-wives etc. l Can the government be relied on to preserve competition? l Is big business an enemy of free enterprise?

What About Predatory Pricing? l Predatory pricing means reducing prices under cost so as to drive out rivals and then increase your prices. l Do firms ever sell under cost? –To review they can sell under average cost but never marginal cost

Does Predatory Pricing Make Sense? l How long will it take? l What happens to the assets of its rivals? l What prevents competitors from reentering? l The question of Standard Oil

Antitrust l Sherman Act –outlawed contracts, combinations or conspiracies in restraint of trade and all attempts to monopolize l Clayton Act- Federal Trade Commission –prohibited mergers that lessen Competition –prohibited unfair trade practices

The Spirit of Enterprise