Market Structures

1. Market Structures Regulation & Deregulation Chapter 7 Section 4

2. Market Structures • Monopoly and Oligopoly can sometimes be bad for the consumer and the economy as a whole. • Markets dominated by a few large firms tend to have higher prices and lower output than markets with many sellers.

3. Market Structures • Predatory Pricing – selling a product below cost to drive competitors out of the market. • Economists are skeptical about claims of predatory pricing because the predator losses money each time it drives an endless series of rivals out of business.

4. Market Structures • The federal government has a number of policies that keep firms from controlling the price and supply of important goods. • If a firm controls a large share of a market, the FTC (Federal Trade Commission) and the Department of Justice’s Antitrust Division will watch that firm closely to ensure that it does not unfairly force out its competitors.

5. Market Structures • Antitrust laws – are laws that encourage competition in the market place. • 1890 – Sherman Antitrust Act – outlawed mergers and monopolies that limit trade between states. • Fed. Gov’t. has the power to regulate industries, to stop firms from forming cartels or monopolies.

6. Market Structures • 1997 – Microsoft who owns a operating system that tells a computer how to run – Department of Justice accused Microsoft of using a monopoly in operating systems to illegally extend its control over the market for a program known as a browser that allows people to use the World Wide Web.

7. Market Structures • Microsoft insisted that computer manufacturers that sold its operating system also included the browser. • Microsoft was accused of predatory pricing – because the company gave away its browser for free, which would ruin the other browser company, Netscape. • Microsoft’s power in one market gave it a big – and possibly unfair – advantage in related markets.

8. Market Structures • The Government sued Microsoft so that other companies would have more opportunities in the market. • A Federal judge ruled that Microsoft was a monopoly and began taking steps to weaken the company.

9. Market Structures • Breaking Up Monopolies: • The Government has used antitrust legislation to break up such companies as… • American Tobacco Company {1911} • John D. Rockefeller’s Standard Oil {1911} • American Telephone & Telegraph into 7 regional phone companies.

10. Market Structures • Blocking Mergers: • The Federal Government has the power to prevent the rise of monopolies. • A merger occurs when a company joins with another company or companies to form a single firm.

11. Market Structures • The Government tries to predict the effects of a merger on price and service when it decides whether or not to approve a merger. • While some mergers hurt the consumers by reducing competition, other can actually leave the consumer better off. • Corporate mergers will lower the overall average costs and lead to lower prices, more reliable products or service, and a more efficient industry.

12. Market Structures • In 1997, the Justice Department and the FTC have put together new guidelines for proposed mergers.

13. Market Structures • Late 1970s and early 1980s – Congress passed laws to deregulate several industries. • Deregulation – the removal of some government controls over a market. • The government no longer decides what role each company can play in a market and how much it can charge its customers.

14. Market Structures • Industries that have been deregulated… • Airline {1978 by President Carter} • Trucking • Banking • Railroad • Natural Gas • Television Broadcasting

15. Market Structures • While deregulation weakens government control, antitrust laws strengthen it. • The government uses both tools as a way to promote competition. • In many cases of deregulation, many new firms have entered the deregulated industries right away. • Competition increases in the airline, trucking, and banking industries.

16. Market Structures • Typically, this period of wild growth was followed by the widespread disappearance of some firms in each industry. • This weeding out of weaker players is considered healthy for the economy.

17. Market Structures • Freed from regulatory restrictions, many of the large airline carries competed aggressively for the busiest routes. • For most travelers, the increased competition created lower prices. • The end result has been that many busy airports now have one dominant airline, and in some fares are actually higher than before deregulation.

18. Market Structures • In the early 2000s, Congress gave a $ 5 billion bail out of the airline industry. This was due to higher operating costs for the airlines, sharply rising labor costs, and loss of profits. • September 11th, even hurt the industry much more. • Some airline companies may be gone in the next 5-10 years and others will make it because of the $ 10 billion in federal loan guarantees that the government is using to help the airline industry.