The cost of inflated prices and reduced output• imperfect competitors reduce outputs and raise prices-most vividly seen in monopoly market.• A monopolist is not a wicked firm-it does not rob people or force its goods down consumers throats.• It is the sole seller and raises its price above marginal cost that is P>MC this also happens in oligopoly and monopolistic

Economic costs of imperfect competition

• Consumer surplus- The gap between the total utility of a good and its total market value is called consumer surplus.

• Deadweight Loss- The loss in real income or consumer and producer surplus that arises because of monopoly, tariffs and quotas, or distortions.

Some Related Terms

MONOPOLISTS CAUSE ECONOMIC WASTE BY RESTRICTING OUTPUT

Three approaches to reduce the harmful effects of monopolistic practices

• Economic regulation- used by governments to control monopolistic practice that allows specialized regulatory agencies to oversee the prices, outputs, entry and exit of firms in regulated industries. For example public utilities and transportation.

• Antitrust policies- laws that prohibit certain kinds of behavior (firms joining together to fix prices) or curb certain market structures (pure monopolies and highly concentrated oligopolies)

• Encouraging Competition- to avoid anticompetitive abuses

PUBLIC POLICIES ON IMPERFECT COMPETITION

Economic regulation involves

• Price control

• Entry and exit condition

• Standard of services This is most important in industries that are

natural monopolies

REGULATING ECONOMIC ACTIVITY

Prominent examples of industries regulated are:

• Public utilities- electricity, natural gas and water.

• Telecommunications- Telephone, radio, cable TV and electromagnetic spectrum.

• Financial industries- Banks, brokerage firms and insurance companies.

• To prevent abuse of market power by monopolies and oligopolies.

• To remedy informational failures such as those which occur when consumers have inadequate information.

• To correct externalities like pollution.

WHY REGULATE INDUSTRY ?

Why do governments sometimes

regulates natural monopolies?

CONTAINING MARKET POWER

They do so because a natural monopolist, enjoying a large cost advantages over its potential competitors and facing price inelastic demand, can jack up its price sharply, get huge monopoly profits and create major economic inefficiencies. Hence regulations allow society to enjoy the benefits of a natural monopoly preventing the super high prices. For example, local water distribution.

CONTAINING MARKET POWER (Contd…)

Purpose :

The purpose of antitrust policy is to provide consumers with the economic benefits of vigorous Competition. Antitrust laws attack anticompetitive abuses in two different ways.

• Business conduct – they prohibit certain kinds of business conduct. For example price fixing, that restrain competitive forces.

• Market structures – They restrict some market structures. For example monopolies, that are considered most likely to restrain trade and abuse there economic power in other ways.

ANTITRUST LAW AND ECONOMICS

Sherman Act (1890):Monopolies had long been illegal under the common law based on custom and past judicial decisions. But the body of laws proved ineffective against the mergers, cartels and trusts that swept through American economy,1880.

Merger: The acquisition of one corporation by another, which usually occurs when one firm buys the stock of another firm. Cartel: An organization of independent firms producing similar products that work together to raise prices and restrict output.Trust: In which the shareholders turns their shares over to trustees who would be able to operate the industry.

[sec-1:Every contract, combination in the form of trade or commerce among the several states, or with foreign nations, is declared to be illegal.]

[sec-2:Every person who shall monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be guilty of a felony.]

ANTITRUST LAW AND ECONOMICS

Clayton Act(1914):

The act was passed to clarify and strengthen the Sherman Act. It out- lawed tying contracts ,it ruled price discrimination and exclusive dealings illegal. It also banned interlocking directorates and mergers.

Tying Contracts: A contract in which a customer is forced to buy produce B if she product A.

Interlocking Directories: Where some people would be directors of more than one firm in the same industry.

ANTITRUST LAW AND ECONOMICS

[sec-2: It shall be unlawful to discriminate in price between different purchasers of commodities of like grade and quality where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line of commerce provided, that nothing herein contained shall prevent differentials which make only due allowance for differences in the Cost]

[sec-3: That it shall be unlawful for any person to lease or make a sale or contract on the condition, agreement, or understanding that the lessee or purchaser thereof shall not use or deal in the commodities of a competitor where the effect may be to substantially lessen competition or tend to create a monopoly in any line of commerce]

[sec-7: No (corporation)…… shall acquire…. the whole or any part…. of another corporation where the effect of such an acquisition may be substantially to lessen competition or to tend to create an monopoly.]

ANTITRUST LAW AND ECONOMICS

Federal Trade Commission Act(1914):

It was established to prohibit “unfair methods of competition “ and to warn against anticompetitive mergers.

In 1938,FTC was also empowered to ban false and deceptive advertising.

[sec-5: Unfair methods of competition and unfair or deceptive acts or practices are declared unlawful]

ANTITRUST LAW AND ECONOMICS

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