Question

Briefly describe the history of antitrust policies in the United States. What are the advantages and disadvantages of highly concentrated industries? Does market power encourage or discourage innovation? Under what circumstances should the government use its antitrust authority to limit industry concentration and market power?

Answer 1

The antitrust laws are used by the US government in order to ensure that the consumers are protected from unfair trade practices. They regulate the competition in the market ensuring that fair competition prevails. In the US, the antitrust laws are a combination of both federal and state laws that regulate the markets to ensure that the consumer interests are not marginalised. The antitrust laws promote fair competition thereby promoting economic efficiency, they essentially ensure that monopolies do not abuse their power and this is done by monitoring corporations. The US antitrust laws deal with a variety of issues such as mergers, prices which are fixed by corporations etc. The first antitrust law dates back to 1890 when the Sherman Act which prohibited monopolies was passed.

Highly concentrated industries can be understood as industries where very few firms hold significant market power. There are both advantages and disadvantages to highlt concentrated industries. The advantages of highly concentrated industries are:

i. One advantage to the firms is that they enjoy economies of scale because of lower average costs.

ii. In highly concentrated industries, the level of innovation may be higher. The efficiency of the firms would also be more because they compete to get more market power.

The disadvantages of highly concentrated industries are:

i. When there is no government regulation, the monopolies can abuse their power leading to allocative and production inefficiency.

ii. In highly concentrated industries, the firms could gain political power to protect their interests which could reduce the welfare of consumers.

Market power encourages innovation because firms bring innovation into their operations with the hope of receiving monopoly rents. Many scholars believe that there is more innovation in monopoly than there is in competition led industries. Schumpeter had said that the society must pay the price of having large firms with power to ensure there is technological progress in the society.

The government should step in and regulate when the mergers or industries where there is high concentration of power could lead to unfair pricing or exploitation of the consumers.