Monopoly and Antitrust Policy

Imperfect Competition and Market Power An imperfectly competitive industry is an industry in which single firms have some control over the price of their output. An imperfectly competitive industry is an industry in which single firms have some control over the price of their output. Market power is the imperfectly competitive firm’s ability to raise price without losing all demand for its product. Market power is the imperfectly competitive firm’s ability to raise price without losing all demand for its product.

Pure Monopoly A pure monopoly is an industry with a single firm that produces a product for which there are no close substitutes and in which significant barriers to entry prevent other firms from entering the industry to compete for profits. A pure monopoly is an industry with a single firm that produces a product for which there are no close substitutes and in which significant barriers to entry prevent other firms from entering the industry to compete for profits.

Collusion and Monopoly Compared Collusion is the act of working with other producers in an effort to limit competition and increase joint profits. Collusion is the act of working with other producers in an effort to limit competition and increase joint profits.  When firms collude, the outcome would be exactly the same as the outcome of a monopoly in the industry.

Public Choice Theory The idea of government failure is at the center of public choice theory, which holds that public officials who set economic policies and regulate the players act in their own self- interest, just as firms do. The idea of government failure is at the center of public choice theory, which holds that public officials who set economic policies and regulate the players act in their own self- interest, just as firms do.

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

Landmark Antitrust Legislation Congress began to formulate antitrust legislation in 1887, when it created the Interstate Commerce Commission (ICC) to oversee and correct abuses in the railroad industry. Congress began to formulate antitrust legislation in 1887, when it created the Interstate Commerce Commission (ICC) to oversee and correct abuses in the railroad industry. In 1890, Congress passed the Sherman Act, which declared every contract or conspiracy to restrain trade among states or nations illegal; and any attempt at monopoly, successful or not, a misdemeanor. In 1890, Congress passed the Sherman Act, which declared every contract or conspiracy to restrain trade among states or nations illegal; and any attempt at monopoly, successful or not, a misdemeanor.

Landmark Antitrust Legislation The rule of reason is a criterion introduced by the Supreme Court in 1911 to determine whether a particular action was illegal (“unreasonable”) or legal (“reasonable”) within the terms of the Sherman Act. The rule of reason is a criterion introduced by the Supreme Court in 1911 to determine whether a particular action was illegal (“unreasonable”) or legal (“reasonable”) within the terms of the Sherman Act.

Landmark Antitrust Legislation The Clayton Act, passed by Congress in 1914, strengthened the Sherman Act and clarified the rule of reason. The act outlawed specific monopolistic behaviors such as tying contracts, price discrimination, and unlimited mergers. The Clayton Act, passed by Congress in 1914, strengthened the Sherman Act and clarified the rule of reason. The act outlawed specific monopolistic behaviors such as tying contracts, price discrimination, and unlimited mergers.

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

The Enforcement of Antitrust Law The Wheeler-Lea Act (1938) extended the language of the Federal Trade Commission Act to include “deceptive” as well as “unfair” methods of competition. The Wheeler-Lea Act (1938) extended the language of the Federal Trade Commission Act to include “deceptive” as well as “unfair” methods of competition. The Antirust Division (of the Department of Justice) is one of two federal agencies empowered to act against those in violation of antitrust laws. It initiates action against those who violate antitrust laws and decides which cases to prosecute and against whom to bring criminal charges. The Antirust Division (of the Department of Justice) is one of two federal agencies empowered to act against those in violation of antitrust laws. It initiates action against those who violate antitrust laws and decides which cases to prosecute and against whom to bring criminal charges.

The Enforcement of Antitrust Law The courts are empowered to impose a number of remedies if they find that antitrust law has been violated. The courts are empowered to impose a number of remedies if they find that antitrust law has been violated. Consent decrees are formal agreements on remedies between all the parties to an antitrust case that must be approved by the courts. Consent decrees can be signed before, during, or after a trial. Consent decrees are formal agreements on remedies between all the parties to an antitrust case that must be approved by the courts. Consent decrees can be signed before, during, or after a trial.