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The United States has a variety of regulations to address the economic harm resulting from monopoly power in an industry. This includes the Sherman Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914. These acts were aimed at restricting the formation of cartels and monopolies to protect consumers and ensure competition. The article The Oligopoly Problem argued that oligopolies fall through the cracks of these regulations and leave consumers unprotected from harmful business practices where industries are highly concentrated. Read the article and respond to the following in your initial post:

• What are examples of firms in an oligopolistic market that abuse their power? Explain how they abuse their power and describe the impact on consumers.
• Do you agree with the author's feelings about increased government oversight of such industries? Why or why not?

Answer 1

(1) An oligopoly market structure is where there are small number of large firms selling slightly differentiated or homogeneous goods with strong barriers to entry and exit of firms. Due to small number of firms operating in the market, the firms posses market power, due to which they are able to charge prices higher than the good's marginal cost and earn abnormal profits in short as well as long run. The demand curve is kinked for the oligopoly firms, which shows that any price cuts by one firm are followed by other firms while the price rises are not and hence, the firms in an oligopoly market are dependent on each other. Hence, a small number of firms dominate the market. Few examples of firms in the oligopoly market structure which abuse their market power are computer software companies apple and windows, Delta airways and US airways, Procter and Gamble and Colgate - Palmolive etc. Oligopoly are commonly seen in airplane industry, software industry, mobile industry, etc. They abuse their power, by taking advantage of the fact that there are less number of competitors, and because of this they have large share of market power. Even though they might not explicitly engage in the practice of price fixing, but by essentially following any price cuts by other firms, the prices offered by the different firms are almost identical. Once the firms make sure the consumer knows there is not much competition and the prices are same with the few remaining firms as well, the firms often start to exploit the consumers by charging higher prices or giving lower quality of product or putting hidden fees etc.

(2) Yes, I agree with authors feeling about increased government's oversight about these industries. In the traditional sense, only monopolies have been associated with incomparable power, and their ability to drive down competition as well as consumer benefit is widely known and accepted. Strong steps have been taken against the monopoly firms, but when there are 2-3 firms , the government is content with the fact that there is healthy competition among them. What the government fails to take notice is that these firms offer almost identical prices and often take advantage of being in power. Even in the given article, once T-mobile dropped its hidden charges, overage charges and other unfriendly practices, still Verizon was not ready to change it's practice and government should have looked into the matter long ago and it is still overseeing this fact now, which is against the public interest.