Antitrust Practices and Market Power
The Justice Department began investigating whether large U.S. telecommunications companies, for instance AT&T Inc. and Verizon Communications Inc., were exploiting the market in 2009, majorly in order to affirm the role of the government in curbing monopolistic and anti-competitive tendencies by such powerful firms. The companies were investigated in order to find out if they are frustrating new entrants by locking up popular phones or by making exclusive agreements with phone makers to make them enjoy monopoly or oligopoly market structures. In addition, they were looked into for the undue restriction of the types of services other companies can provide on their networks, for instance, limiting Skype services (Sharma, 2009).
The Sherman Antitrust Act is the law that was employed and has been used in the numerous cases in the past against the companies as big as Standard Oil. Telecom, healthcare, and agriculture industries are a few among several sectors under investigations. A few companies and individuals, called trusts at the time, monopolized much of tobacco, railroad, and steel industries in the United States in the 1800’s (Putnam, 2006). As a consequence, antitrust laws, such as the Sherman Antitrust Act, were drafted and passed along with other laws, such as the Clayton Act, followed by the creation of the Federal Trade Commission. These laws implied that civil and criminal penalties were being brought against the violators, who fix prices, allocate themselves market territories, organize boycotts as well as any form of conspiracy and monopolistic behavior amongst companies that in one way or another hinders free trade or encourages monopoly pricing. These violations can take the form of behaviors of single individuals, and not necessarily formal agreements between the high ranked organization’s executives (FTC, 2006).
Antitrust tends to harm consumers and stifle any competition that might come from the new entrants. This is as a result of homogenous products being offered by all sellers in the same industry, numerous sellers, who can insignificantly influence prices individually (price makers), possession of perfect knowledge pertaining all relevant information by the market participants, lack of barriers to entry or exit the market, the fact that investment and disinvestment are eased via equalized and cost-free market entry and departure, no cooperation of firms (also known as collusion), no fear of any form of counter attacks by the rival firms in response to a company’s actions, no need for advertising, since sellers and products are always the same, and, finally, economic profits tend towards zero.
Monopolies and oligopolies, which are forms of imperfect competition, are bad for the society. Monopoly is said to exist in the cases, where a specific individual or firm has significant control over a product or service, and determines sufficiently the conditions, on which other individuals or firms shall gain access to it. It is, thus, often characterized by a lack of economic competition for goods and services that such firms provide. There is also the lack of viable substitute goods and services. This is to say that firms become less efficient and innovative as time goes. At times, monopoly can be used to refer to the process, by which a company possesses a greater market share that is persistent than what is expected under the perfect competition, especially in the theory of monopolistic competition or natural monopoly. Oligopoly, on the other hand, has effects such as prevention of entry of new producers into the market. In cases such as this, incumbent producers will come together against potential new entrants into the market by influencing price fixation resulting to the creation of huge losses of income and marginal revenues for the new producers. However, in some oligopoly market structures, producers share markets, which often leads to the inflation of the price level in general. Although this might seem a great deal for the seller as the economies of scale factor in, it is quite a nightmare for a consumer. Also the phenomenon of constant and assured market and sales slows and sometimes halts research and development, which goes without saying, that it eventually leads to the production of sub-standard goods and services. In general, monopoly and oligopoly result to under-achievement of technical efficiency due to the lack of competitive pressure, a phenomenon referred to as X-Inefficiency (Krattenmaker, Lande & Salop, 1987).
Sometimes, this loss of efficiency due to the rent-seeking behaviors of monopoly and oligopoly can raise a competitors’ value high enough to subdue the set barriers to market entry. At times, it may provide new incentives for research and investment into alternatives. According to the theory of contestable markets, in some circumstances, monopolies and oligopolies are forced to behave as if there was a form of competition majorly due to the presence of risks of losing their market share to the new entrants, if market barriers are particularly low; for instance, low marginal costs, or because of the presence of the longer term of substitutes in other markets. A perfect example being the canal monopoly that was worth a great deal to the government of the United Kingdom in the late eighteenth century. The same was worth a lot less in the late nineteenth century due to the downward sloping demand curve, probably, as a result of introduction of railways as a substitute to the canal.
A director, owner, or CEO of an oligopolistic business should put into consideration the reactions of his/her competitors when making decisions. As a policy maker, it is prudent to know how oligopolies tend to behave in a competitive manner, and when they do act in a more monopolistic manner. Oligopolies offer a very conducive overall economic well-being and the latter causes deadweight losses, also known as economic damage. Take, for instance, the case, when there is collusion among the oligopolistic firms. This leads them to act like a monopolist resulting in high prices. If at all oligopolies cause deadweight losses, they can be prevented or otherwise reduced by formation of monopolies, breaking up of the existing oligopolies, and illegalizing or the regulating collusions.