Question

Reflect on the following questions:

How important to economic growth is the constraint of market power through antitrust legislation? How much market power is too much for a firm to enjoy? How is market power best measured?

Explain your answer with adding real examples, from other business, to enrich answer quality and to connect theory with practice.

Answer 1

Antitrust legislations are those laws that are being prepared and enforced by the government of a nation with a view to protecting the customers from the profit oriented strategies of the manufacturers. Such profit oriented strategies can be unlawful mergers which lead to a reduction in the welfare of the customers.

Market power gets concentrated in few hands if such unlawful mergers are not restricted through anti-trust legislations. In those situations, monopolies exist in industries where inducing competition could bring more welfare from consumer's side. This limits the economic growth and hence, bringing anti-trust legislations can induce more economic growth in the nation.

Market power is basically, the concentration of consumers for the item provided by a certain producer. It gets too much if the service provision costs or manufacturing costs become unbearable high or the governemnt imposesmandatory tax on value addition. In such situation, the firm cannot easily exit the market and hence, faces adversity.

Herfindahl-Hirschman Index and Lerner Index are the tools for measuring market power.