Lecture Issues in economics today - Chapter 38

The objectives of this chapter are to introduce the international trade. Learning objectives of this chapter include: Specialization and trade, domestic exchange equations, absolute advantage and comparative advantage, tariffs or quotas.

Chapter 38 Antitrust McGrawưHill/Irwin â2002TheMcGrawưHillCompanies,Inc.,AllRightsReserved Chapter Outline WHAT’S WRONG WITH MONOPOLY • NATURAL MONOPOLY AND NECESSARY MONOPOLY • MONOPOLIES AND THE LAW • EXAMPLES OF ANTITRUST ACTION McGrawưHill/Irwin â2002TheMcGrawưHillCompanies,Inc.,AllRightsReserved Monopolies in Everyday Life Most people have only one provider of local telephone service, natural gas, electricity and cable television These monopolies are not illegal • Other monopolies are prevented from forming, or prevented from exerting their power to get other business because that threatens consumer welfare     McGraw­Hill/Irwin © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved What’s Wrong With Monopoly P A SPC=MCMonop B Pmonop C PPC E MR D F Qmonop QPC Q Deadweight Loss from Monopoly = EBC McGrawưHill/Irwin â2002TheMcGrawưHillCompanies,Inc.,AllRightsReserved Reduced Innovation with Monopoly A monopolist earns economic profit and there is no mechanism for that economic profit to be diminished • Because a monopolist need not innovate to survive, monopolies also tend not to innovate McGrawưHill/Irwin â2002TheMcGrawưHillCompanies,Inc.,AllRightsReserved Necessary Monopolies Natural Monopolies – A natural monopoly typically results from substantial barriers to entry (a legal or economic mechanism that prevents firms from competing in an industry) – This often happens in the utility industry where fixed costs are very high,   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved Modeling a Natural Monopoly P Pmonopoly D Pregulated MR Qmonopoly   McGraw­Hill/Irwin   Qregulated ATC MCMonopoly Q © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved Other Necessary Monopolies: Patents and Copyrights • Patents and Copyrights protect the creators of inventions, books, music, etc so that they are motivated to produce Without that protection their work’s economic value could be taken   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved Anti-Trust Law • The Sherman Anti-Trust Act – This law and other antitrust legislation that followed it makes it illegal to • use the monopoly power in one market to gain market power in another market (e.g a local telephone company cannot require use of their cellular system.) • become a monopoly by merging with a competitor (without government approval.)   McGrawưHill/Irwin â2002TheMcGrawưHillCompanies,Inc.,AllRightsReserved What Constitutes a Monopoly How many competitors are necessary for a market to be described as competitive? – There are many airlines but at most airports there is a dominant airline – Microsoft has competition from Apple and Linux for operating systems and from WordPerfect for office suites but dominates these industries • The Contestable Markets Hypothesis – one firm is all that is necessary for competitive prices to exist as long as that firm is threatened by hit-and-run entry   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved Examples of Antitrust Action: Standard Oil • The company owned all stages of production from crude oil drilling to retail outlets • The company used its monopoly in one area (refining and distribution) to force its way into the retail market • Much of the Sherman Act makes illegal what Standard Oil did • The company was broken into several regional oil companies   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved Examples of Antitrust Action: IBM • The company was the dominant firm in mainframe computers • The company was accused of using that power to dominate other industries – mainframe software – personal computers • The suit was ultimately dropped   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved Examples of Antitrust Action: Microsoft • Microsoft dominated the operating system business • It was shown in court that it used their monopoly in the operating system business to generate market power in office suites and internet navigation • The remedy offered by the trial court was that the company be broken into two parts • The Appeals Court overturned the remedy and the case was settled   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved  ... competing in an industry) – This often happens in the utility industry where fixed costs are very high,   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved Modeling... airlines but at most airports there is a dominant airline – Microsoft has competition from Apple and Linux for operating systems and from WordPerfect for office suites but dominates these industries... â2002TheMcGrawưHillCompanies,Inc.,AllRightsReserved Examples of Antitrust Action: Microsoft Microsoft dominated the operating system business • It was shown in court that it used their monopoly in the operating system