PUBLIC POLICY AND COMPETITION
 Government Anti-Trust Policy
Schizophrenic government policy toward monopolistic
practices
Most true monopolies are created or sanctioned by government—
public franchises, government licenses, patents, and copyrights, for
example—and many government regulations limit competition in the
marketplace.
At the same time, other government policies—the antitrust laws
prohibit sellers from engaging in certain business practices if those
practices have the effect of limiting competition or creating
monopoly.
Monopolistic Competition and
Oligopoly
1
PUBLIC POLICY AND COMPETITION
 Anti-Competitive Practices
Examples of possibly anti-competitive practices
 Tying arrangements (or tie-in sales): Requirements that products
be purchased together; separate purchases are not permitted.
 Mergers: Consolidation of one or more businesses into a single
business.
 Predatory pricing: Selling below cost to drive a competitor from
the market.
Monopolistic Competition and
Oligopoly
2
PUBLIC POLICY AND COMPETITION
 Anti-Competitive Practices
Tying arrangements (tie-in sales)
The anti-competitive argument
By tying the purchase of a product with a relatively elastic demand to
another product with a relatively inelastic demand, the seller’s ability
to raise price in the market with the more elastic demand is increased
and competition in that market is reduced.
Monopolistic Competition and
Oligopoly
3
PUBLIC POLICY AND COMPETITION
 Anti-Competitive Practices
The counter-arguments: but . . .
Tie-in sales are a convenience to consumers and may lower prices by
reducing transaction costs or by ensuring that two products that are
typically used together are compatible.
Moreover, consumers will not pay a price for the two products
together that exceeds the sum of their willingness to pay for the
products separately.
Consumers’ value or marginal benefit is the same either way. The
seller obtains the same total price whether the products are sold
separately or bundled together.
Monopolistic Competition and
Oligopoly
4
PUBLIC POLICY AND COMPETITION
 Anti-Competitive Practices
Mergers
The anti-competitive argument
Mergers are often prohibited because they increase concentration in a
market.
The counter-argument: but . . .
Even when mergers increase concentration, they may enhance
competition if the merger strengthens weaker sellers and makes them
more competitive with a larger, dominant seller or if the merger
enables smaller sellers to take advantage of economies of scale.
Monopolistic Competition and
Oligopoly
5
PUBLIC POLICY AND COMPETITION
 Anti-Competitive Practices
Predatory pricing
The anti-competitive argument
Low prices by an existing seller deter new competition, if the prices
are indeed below cost, by inflicting losses on the new competitor.
Monopolistic Competition and
Oligopoly
6
PUBLIC POLICY AND COMPETITION
 Anti-Competitive Practices
The counter-arguments: but . . .
Claims of predatory pricing are common, but economists are usually
skeptical about the effectiveness of predatory pricing as an anticompetitive strategy and about the government’s ability to enforce
laws against predatory pricing without harming consumers.
This skepticism arises for several reasons.
• Low prices by an existing seller may be a result of the existing
seller’s lower cost and greater efficiency and have nothing to do
with an attempt by the seller to drive competitors from the
market.
Monopolistic Competition and
Oligopoly
7
PUBLIC POLICY AND COMPETITION
 Anti-Competitive Practices
• Government can only observe one seller charging lower prices
than its competitor. Government does not know the seller’s cost.
Therefore, government cannot be sure whether the low prices are
truly predatory or a result of lower cost and greater efficiency.
• True predatory pricing inflicts losses on all sellers—on both the
predator and the prey—not just on new competitors.
• Careful economic analysis has been able to identify few if any
true examples of successful predatory pricing. The argument
sounds good but the evidence doesn’t support it.
• Even if predatory pricing occurred, the government’s remedy
would mean higher prices for consumers!
Monopolistic Competition and
Oligopoly
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