Question

The government has considered the following market phenomena to be "bad" and has taken steps to correct them:

1. The first wave of antitrust legislation was aimed at breaking up monopolies (single sellers of unique products) and outlawing monopoly practices (price "gouging" and price discrimination). Diagram and explain why monopolies and monopoly behavior are "bad."
2. The second wave of antitrust legislation was aimed at preventing the growth of monopolizes (horizontal integration of firms selling the same product) and outlawing behavior that sought to either drive out competitors or prevent their entry (discounting, entry-level pricing, and dumping). Explain why excessive competition with intent to monopolize is "bad."

Answer 1

Definition: Monopoly is when there is a single seller in the market or market is controlled by a single seller.

Or the exclusive possession or control of the supply of or trade in a commodity or service.

Diagram and explain why monopolies and monopoly behavior are "bad."

a. Monopoly is accused that they charge abnormal profits. They either charge higher prices or produce less than market demand to continue having a market power.

Example- Let us say I am owner of organization that runs railway in My country then it is clear that My firm is monopoly as it is very difficult to entter for any new firm. I am free to decide pricing and there is no perfect information in the market. I can charge higher profits. A competitive market does not allow firms to charge prices that they want and also entry is easy and firms do not have to spend high on advertisements.

They should charge normal profits. In the diagram below, generally firms should a price which is equal to Average total cost, but firm charges higher price(Pe) than that.They should actually charge a price where Average total cost is minimum. They maximize profit at quantity Q^_.

Hence it is clear that monopoly exploits customers by charging higher prices. It is also difficult to enter and even at higher prices there is no threat of new entrants. Hence it is 'bad'.

b. When a market is controlled by a few sellers it is called as oligopoly. It has 2-10 sellers. When they compete it is found that they end up having price wars and ultimately lead to mutual losses. Eg. Telecom market in India. Jio company offered data at a cheaper cost and other companies followed. This led to price wars and all companies are suffering. Now, many of these companies are merging with each other. If they merge or decide to make a cartel then like a monopoly they can control prices or output and hence can act as monopoly. Hence excessive competition with intent to monopolize is "bad." competition

Hence govt. has laws not allow these companies to have excess market power either through merging or a kind of collusion/cartel.