The cost of inflated prices and reduced output

imperfect competitors reduce outputs and

raise prices-most vividly seen in monopoly
market.
A monopolist is not a wicked firm-it does not
rob people or force its goods down consumers
throats.
It is the sole seller and raises its price above
marginal cost that is P>MC this also happens
in oligopoly and monopolistic
Economic costs of imperfect competition
Consumer surplus- The gap between the
total utility of a good and its total market
value is called consumer surplus.

Deadweight Loss- The loss in real
income or consumer and producer surplus
that arises because of monopoly, tariffs
and quotas, or distortions.
Some Related Terms
MONOPOLISTS CAUSE ECONOMIC
WASTE BY RESTRICTING OUTPUT
Three approaches to reduce the harmful effects of
monopolistic practices

Economic regulation- used by governments to control
monopolistic practice that allows specialized regulatory
agencies to oversee the prices, outputs, entry and exit of
firms in regulated industries. For example public utilities
and transportation.
Antitrust policies- laws that prohibit certain kinds of
behavior (firms joining together to fix prices) or curb
certain market structures (pure monopolies and highly
concentrated oligopolies)
Encouraging Competition- to avoid anticompetitive
abuses

PUBLIC POLICIES ON
IMPERFECT COMPETITION
Economic regulation involves

Price control
Entry and exit condition
Standard of services
This is most important in industries that are
natural monopolies

REGULATING ECONOMIC ACTIVITY
Prominent examples of industries regulated
are:
Public utilities- electricity, natural gas
and water.
Telecommunications- Telephone, radio,
cable TV and electromagnetic spectrum.
Financial industries- Banks, brokerage
firms and insurance companies.

To prevent abuse of market power by
monopolies and oligopolies.

To remedy informational failures such as
those which occur when consumers have
inadequate information.

To correct externalities like pollution.

WHY REGULATE INDUSTRY ?


Why do governments sometimes
regulates natural monopolies?
CONTAINING MARKET POWER
They do so because a natural monopolist,
enjoying a large cost advantages over its
potential competitors and facing price
inelastic demand, can jack up its price
sharply, get huge monopoly profits and
create major economic inefficiencies.
Hence regulations allow society to enjoy
the benefits of a natural monopoly
preventing the super high prices. For
example, local water distribution.
CONTAINING MARKET POWER (Contd)
Purpose :

The purpose of antitrust policy is to provide
consumers with the economic benefits of
vigorous Competition. Antitrust laws attack
anticompetitive abuses in two different ways.

Business conduct they prohibit certain kinds of business
conduct. For example price fixing, that restrain competitive
forces.

Market structures They restrict some market structures.
For example monopolies, that are considered most likely to
restrain trade and abuse there economic power in other ways.
ANTITRUST LAW AND ECONOMICS



Sherman Act (1890):
Monopolies had long been illegal under the common law based
on custom and past judicial decisions. But the body of laws
proved ineffective against the mergers, cartels and trusts that
swept through American economy,1880.

Merger: The acquisition of one corporation by another, which usually
occurs when one firm buys the stock of another firm.
Cartel: An organization of independent firms producing similar
products that work together to raise prices and restrict output.
Trust: In which the shareholders turns their shares over to trustees
who would be able to operate the industry.

[sec-1:Every contract, combination in the form of trade or commerce
among the several states, or with foreign nations, is declared to be
illegal.]
[sec-2:Every person who shall monopolize, or combine or conspire with
any other person or persons, to monopolize any part of the trade or
commerce among the several States, or with foreign nations, shall be
guilty of a felony.]


ANTITRUST LAW AND ECONOMICS



Clayton Act(1914):

The act was passed to clarify and strengthen the Sherman
Act. It out- lawed tying contracts ,it ruled price
discrimination and exclusive dealings illegal. It also banned
interlocking directorates and mergers.


Tying Contracts: A contract in which a customer is forced to
buy produce B if she product A.

Interlocking Directories: Where some people would be
directors of more than one firm in the same industry.

ANTITRUST LAW AND ECONOMICS
[sec-2: It shall be unlawful to discriminate in price between
different purchasers of commodities of like grade and quality
where the effect of such discrimination may be substantially
to lessen competition or tend to create a monopoly in any line
of commerce provided, that nothing herein contained shall
prevent differentials which make only due allowance for
differences in the Cost]

[sec-3: That it shall be unlawful for any person to lease or
make a sale or contract on the condition, agreement, or
understanding that the lessee or purchaser thereof shall not
use or deal in the commodities of a competitor where the
effect may be to substantially lessen competition or tend to
create a monopoly in any line of commerce]

[sec-7: No (corporation) shall acquire. the whole or any
part. of another corporation where the effect of such an
acquisition may be substantially to lessen competition or to
tend to create an monopoly.]

ANTITRUST LAW AND ECONOMICS




Federal Trade Commission Act(1914):

It was established to prohibit unfair methods of competition
and to warn against anticompetitive mergers.

In 1938,FTC was also empowered to ban false and deceptive
advertising.



[sec-5: Unfair methods of competition and unfair or deceptive
acts or practices are declared unlawful]



ANTITRUST LAW AND ECONOMICS




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