Question

In: Economics

1. For many years, the Justice Department has tried to break up large firms like Amazon,...

1. For many years, the Justice Department has tried to break up large firms like Amazon, Facebook, and most recently Google, on the grounds that their large market share made them essentially monopolies. In a global market, where U.S firms compete with firms from other countries, would this policy make the same sense as it might in a purely domestic context?

2. Imagine that you are managing a small firm and thinking about entering the market of a monopolist. The monopolist is currently charging a high price, and you have calculated that you can make a nice profit charging 10% less than the monopolist. Before you go ahead and challenge the monopolist, what possibility should you consider for how the monopolist might react?

Solutions

Expert Solution

1. For many years, the Justice Department has tried to break up large firms like Amazon, Facebook, and most recently Google, on the grounds that their large market share made them essentially monopolies. This policy is very much correct for the firms inside the country as in a country if there is such a huge firm which is well established for years and having almost 80-90% of the market share, it unknowingly acts as a monopolist. But, In a global market, where U.S firms compete with firms from other countries, this policy doesn't make the same sense as it might in a purely domestic context. This is because firstly these firms doesn't have this high market share in the world market, though they have comparatively higher share. The secknd thing is that in most of the countries there are some substitutes available for these firm's product/services, so if they saw any sign of monopoly that country may impose tax or limit the import or may ban the product/service fully.

2. If I am managing a small firm and thinking about entering the market of a monopolist. The monopolist is currently charging a high price, and I have calculated that I can make a nice profit charging 10% less than the monopolist. Before I go ahead and challenge the monopolist, I shall consider the possibilities related to how the monopolist will react when I enter the market. Though now the monopolist is charging a high price to earn highet profits, but as I enter the market it is very much possible that the monopolist will decrease its price. This is because as it is well established, it will have economies of scale and cost advantage, so it may decrease its price for a while making lower profits and hence eliminating me out of the market and than again it will increase its price.


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