Introduction In this paper the effects of firms with market power on economic welfare will be briefly examined. The first part outlines some of the negative effects of market power; the second exemplifies some of the benefits of market power and the case of Microsoft is used to support these arguments. In conclusion, an overview of the role of competition authorities and competition policy is carried out. Why is market power detrimental to economic welfare? Firms with market power or monopolies are often seen as detrimental for customers and economic welfare. According to the neoclassical theory, the market power of monopolies and oligopolies is potentially higher than that of firms in monopolistic or perfect competition since they have to face very limited competition, if any (Ferguson and Ferguson 1994). In monopolistic or perfect competition can make supernormal profits in the short term but eventually other firms will enter the market and offer alternative products that reduce the demand for the established firm’s products (Sloman et al., 2013 p. 177). Dissimilarly, this is not the case for dominant firms or monopolies; the lack of competition allows them to set prices and make supernormal profits increasing the perception that big companies are “bad” for consumers. As shown by the graphs in Figure 1 and 2, there are substantial differences in the competitive and monopoly markets. In a competitive environment, the equilibrium is reached where demand meets supply. In a monopolistic market, thanks to the establishment of higher prices and the production of lower quantities, monopolies or dominant firms make supernormal profits; additionally, there is a deadweight loss and some consumers who were willing to pay lower prices wil... ... middle of paper ... ...ur; in such cases, competition authorities must act to fight unlawful practices that are detrimental for the economic welfare. References ECIS (2009) Microsoft: A History of Anticompetitive Behavior and Consumer Harm http://www.ecis.eu/documents/Finalversion_Consumerchoicepaper.pdf European Union Competition Law http://ec.europa.eu/competition/antitrust/legislation/handbook_vol_1_en.pdf Ferguson, P. R., Ferguson, G. J. (1994) Industrial Economics: Issues and Perspectives, 2nd ed., Macmillan Posner, R.A., (1975) The Social Costs of Monopoly and Regulation, The Journal of Political Economy, Vol. 83, No. 4, pp. 807-828, The University of Chicago Press Sloman, J., Hinde, K. and Garratt D. (2013) Economics for Business, 6th ed., Prentice Hall / Pearson, Veljanovski, C. (2006) Economics of Cartels. Finnish Competition Law Association, Konkurrenstrattslig Arsbok
Since this debate still rages on, many people argue both sides of the story of the pros and cons. Many would argue that not breaking up monopolies actually increase the competition of companies that are attempting to break into some of the market share that the monopoly already has, more so than the free market that exists now. Proponents of the Sherman Anti-Trust act argue that “absolute power corrupts absolutely” (Martin, 1996) as originally quoted by Baron Acton. The idea that no competition within the business world establishes no risk and reward that is all part of the entrepreneur spirit of the U.S. spirit.
Deery, S. , Plowman, D. and Walsh, J. (2000), Industrial Relations, A Contemporary Analysis, McGraw Hill, Roseville.
Hocking and Waud 1992, `Oligopoly and Market Concentration' in Microeconomics 2nd Edition, Harper Educational Publishers, NSW, pp-315-342.
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Because the field of Business Law is so great, this paper will examine a single aspect of Business Law, that of antitrust action. Specifically, as it is applied to Microsoft, antitrust litigation is raising eyebrows in both the legal and business worlds.
Stucke, Maurice E. "Journal of Antitrust Enforcement." Is Competition Always Good? N.p., 4 Feb. 2013. Web. 14 Jan. 2014.
One of the main features of UK Competition Policy is that it tries to stop firms from abusing their dominant market position. Some firms become very successful and powerful within the industry that they are operating in. "European firms suspected of gaining monopoly power through creating barriers to entry, colluding over prices, or through merger activity, can be investigated under European Union law," (Lees and Lam, 2001) A dominant market position usually occurs for one of two reasons; either the firm is performing well and a natural monopoly occurs, or, the firm is behaving in an un-just manner. UK Competition Policy exists to eliminate the abuse of the position, not the fact that they are in this position, i.e. it is concerned with the second of these reasons. This is different to in the USA, where firms are "prohibited from monopolising or attempting to monopolise a market, and the growth of a dominant position is restrained at an early stage," (Lees and Lam, 2001.)
...llocation of resources closer to the social optimum, policymakers try to induce firms in an oligopoly to compete rather than cooperate through instrument of antitrust laws. Regulatory bring legal suits to enforce the antitrust laws for example to prevent mergers leading to excessive market power prevent.
Howard Davis, Managerial Economics for Business Management and Accounting, second edition, 1991
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Monopolies have a tendency to be bad for the economy. Granted, there are some that are a necessity of life such as natural and legal monopolies. However, the article I have chosen to review is “America’s Monopolies are Holding Back the Economy (Lynn, 2017)” and the name speaks for itself.
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The Effect of the Development of Large Firms on Society Many firms choose to expand in size because of the cost and market share benefits the firms can reap. However, the development of large firms may not always be of benefit to consumers, and the advantages and disadvantages will be discussed in the following essay. Because larger firms such as Shell Petrol Station are able to experience internal economies of scale through lower unit costs, many of the cost savings are then passed on to the consumers through lower prices. Hence consumers are then able to enjoy greater consumer surplus, defined as the difference between the maximum price that a buyer is willing to pay for a good or service and the actual price paid. As seen from the diagram below, the marginal cost curve shifts to the right such that the new marginal cost = marginal revenue equilibrium lowers the price and increases the output level compared with the initial equilibrium.
A monopoly is “a single firm in control of both industry output and price” (Review of Market Structure, n.d.). It has a high entry and exit barrier and a perceived heterogeneous product. The firm is the sole provider of the product, substitutes for the product are limited, and high barriers are used to dissuade competitors and leads to a single firm being able to ...
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