They use the term market monopoly to refer to

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Unformatted text preview: h they may choose not to do so. Some economists use the term government monopoly to refer to monopolies that are legally protected from competition. They use the term market monopoly to refer to monopolies that are not legally protected from competition. Antitrust and Monopoly One of the stated objectives of government is to encourage competition so that monopolists do not have substantial control over the prices they charge. Let’s look briefly at some of the issues involved in maintaining competition. Antitrust Laws The government tries to meet its objectives through its a ntitrust laws , laws meant to control monopoly power and to preserve and promote competition. Following are descriptions of some of the major antitrust laws. Exhibit 8-2 provides a quick look at a time line for the implementation of these laws. The Sherman Antitrust Act The Sherman Antitrust Act (or, simply, the Sherman Act) was passed in 1890, a time when there were numerous mergers between companies. A merger occurs when one company buys more than half the stock in another company, putting two companies under one top management. At the time of the Sherman Act, the organization that two companies formed by combining to act as a monopolist was called a trust, which in turn gave us the word antitrust. Research companies often obtain patents on their products, which prevent other companies from entering the market for a specified time period. Do you think such barriers to entry are necessary? Explain. antitrust law Legislation passed for the stated purpose of controlling monopoly power and preserving and promoting competition. Section 2 A Monopolistic Market 199 08 (186-221) EMC Chap 08 EXH I BIT 8-2 11/17/05 Page 200 Antitrust Acts Antitrust Acts Sherman Act (1890) 1880 5:27 PM 1890 Clayton Act (1914) 1900 1910 1920 Federal Trade Commission Act (1914) Major antitrust acts in U.S. history include the Sherman Act, the Clayton Act, the Federal Trade Commission Act, the Robinson-Patman Act, and the Wheeler-Lea Act. Robinson-Patman Act (1936) 1930 1940 Wheeler-Lea Act (1938) The Sherman Act contains two major provisions: 1. “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce . . . is hereby declared to be illegal.” 2. “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons to monopolize any part of the trade or commerce . . . shall be deemed guilty of a misdemeanor.” Together, these two provisions state that either attempting to become a monopolist or trying to restrain trade is illegal. The Clayton Act The Clayton Act of 1914 made certain business practices illegal when their effects “may be to substantially lessen competition or tend to create a monopoly.” Here are two practices that were prohibited by the act: 1. Price discrimination. Price discrimination occurs when a seller charges different buyers different prices for the same product and when the price differences are not related to cost differences. For example, if a company charges you $10 for a product and charges your friend $6 for the same product, and there is no cost difference for the company in providing the two of you with this product, then the company is practicing price discrimination. (You will learn more about price discrimination near the end of the chapter.) 2. Tying contracts. A tying contract is an arrangement whereby the sale of one 200 Chapter 8 Competition and Markets product depends on the purchase of some other product or products. For example, suppose the owner of a company that sells personal computers and computer supplies agrees to sell computers to a store only if the store owner agrees to buy paper, desk furniture, and some other products, too. This agreement is a tying contract, and it is illegal under the Clayton Act. The Federal Trade Commission Act The Federal Trade Commission Act, passed in 1914, declared that “unfair methods of competition in commerce” were illegal. In particular, the act was designed to prohibit aggressive price-cutting acts, sometimes referred to as cutthroat pricing. Suppose you own a business that produces and sells tires. A competitor begins to drastically lower the prices of the tires it sells. From your viewpoint, your competitor may be engaged in cutthroat pricing. From the viewpoint of the consumer, your competitor is simply offering a good deal. The FTC officials, who enforce the Federal Trade Commission Act, will have to decide. If they believe your competitor is cutting its prices so low that you will have to go out of business and that it intends to raise its prices later, when you’re gone, they may decide that your competitor is violating the act. EXAMPLE: Some economists have noted that the Federal Trade Commission Act, like other antitrust acts, contains vague terms. For instance, the act does not precisely define what “unfair methods of competition” consist of. Suppose a hotel chain puts up a big, beautiful hotel across the str...
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