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 Sherman Act- This Act prohibits all contracts, combinations and conspiratories which unreasonably limit interstate and foreign trade. It involves deals between companies to set rates, manipulate contracts and allocate clients, which are punishable as criminal offences. The Sherman Act also made it a felony to monopolize any aspect of interstate trade. The illegitimate monopoly occurs when one business dominates the demand for a product or service and has gained the market power, not because its product or service is superior to others, but because it suppresses competition through anti-competitive behaviour.

The Clayton Act- This Act is a civil law (without criminal penalties) that forbids mergers or acquisitions that are likely to eliminate competition. Under this Act , the Government opposes any mergers that are likely to raise consumer prices. All entities proposing mergers or acquisitions in excess of a certain scale must notify both the Antitrust Division and the Federal Trade Commission. The Act also forbids other commercial practices that can damage competition under some circumstances.

The Federal Trade Commission Act- This Act bans unfair forms of competition in international commerce, but does not enforce criminal penalties. The Federal Trade Commission has since been set up to investigate violations of the Act.

The market concentration ratio calculates the total market share of all the largest firms in the industry. 'Market Share' is used as a guide in the formulas. This may be revenue, job numbers, the number of people using the services of a business, the number of outlets, etc. The value of the top firms or the top 'n' firms could be three or a maximum of five. When top companies tend to capture market share, we conclude that the industry has become highly concentrated. To understand the concentration of the market, let's first understand 'concentration.' Concentration within the industry can be defined as the degree to which a small number of firms make up the overall output on the market.When the concentration is low , it essentially means that the top 'n' companies do not control the output of the market and that the industry is deemed to be highly competitive. At the other hand, if the concentration is high, it means that the top 'n' companies have an impact at the output or services offered by the company on the market, which is considered to be oligopolistic or monopolistic.

The government may wish to control monopolies in order to protect the interests of consumers. For example, monopolies have the power to set prices higher than in competitive markets. Without government control, monopolies may bring prices above competitive balance. This will result in allocative inefficiency and a reduction in consumer welfare. If a corporation has a monopoly on the delivery of a specific service, it can have little motivation to provide a high quality service. Policy legislation will ensure that the company meets the minimum standards of operation.