Governments have a number of policies that affect
monopoly and market power. Two that are intended to reduce
monopoly are regulation and antitrust policy.
However, there are also policies that purposely increase
monopoly. Patent and copyright laws, for example, protect
monopoly. The belief that it is socially useful to encourage
people to develop new processes and products has led to laws
that provide monopoly rewards for those who do so. Patent
laws are a case in which there is some recognition that the
analysis of efficiency is static but the economy is dynamic.
Competition may mean price takers in a static model, but
in a dynamic model it can be striving for positions of
temporary monopoly. Joseph
Schumpeter argued that this competition for positions of
temporary monopoly was the most important type of
competition in a market economy. He argued that it provides
a "gale of creative destruction." Entrepreneurs would find
new products and ways of producing things that would make
obsolete the old products and ways of production. In turn
their positions would sooner or later be destroyed by new
entrepreneurs. For Schumpeter, the essence of market
economies was change.
Despite Schumpeter's argument, many economists have
argued that the government should take measures to attack
the efficiency loss of monopoly. Antitrust policy is
one way to do this. Antitrust policy attempts to make
companies act in a competitive manner by breaking up
companies that are monopolies, prohibiting mergers that
would increase market power, and finding and fining
companies that collude to establish higher prices.
The antitrust laws in the United States are stricter and
more comprehensive than those of other industrialized
nations. Many other industrialized nations, perhaps because
they focus on the possibility of foreign competition, have
minimal antitrust law. In the United States, the original
antitrust law was the Sherman Act of 1890, with important
extensions added in 1914. Two government agencies have
authority to enforce antitrust laws, the Antitrust Division
of the Justice Department and the Federal Trade Commission.
In addition, the laws allow companies, organizations, or
persons who are adversely affected by actions that violate
the antitrust acts to sue for damages.
The economic case for antitrust policy is based on
efficiency. Monopoly can lead to an inefficient use of
resources when compared to the competitive result.
Furthermore, there are clear cases in which businesses have
tried to act as monopolists, charging high prices with
restricted outputs. Nonetheless, there are unanswered
questions about how great the net benefits of antitrust
enforcement are. There are conditions under which monopoly
may be more efficient than competition. When an industry has
increasing returns to scale, two small firms will require
more resources to produce a given amount of output than one
large firm. Trying to keep two such firms in existence by,
for example, preventing merger will keep the economy inside
its production-possibilities frontier, making the economy
Further, the argument that competition is more efficient
than monopoly relies on static equilibrium analysis that
assumes fixed production functions, demand curves, and
supply curves for resources. Some economists, following
Schumpeter, argue that the competition that matters in a
market economy is the struggle to find ways to change these
constraints and to gain temporary monopoly power.
It is possible that antitrust laws can be used to attack
behavior that is economically efficient and socially
desirable. For example, suppose that a company is extremely
well-managed and excels at producing quality products at low
prices. Such a company will be profitable and may grow to
dominate its industry. Its dominance and large profits would
appear to indicate that it was a monopoly and could trigger
antitrust action. In fact, there are actual cases similar to
this. The Alcoa case of 1945 seems to be one.
Alcoa was found innocent of monopolistic practices by the
district court, but an appeals court reversed this decision
and found it guilty. Justice Learned Hand explained in the
"It was not inevitable that it [Alcoa]
should always anticipate increases in the demand for
ingot and be prepared to supply them. Nothing compelled
it to keep doubling and redoubling its capacity before
others entered the field. It insists that it never
excluded competitors; but we can think of no more
effective exclusion than progressively to embrace each
new opportunity as it opened, and to face every newcomer
with new capacity already geared into a great
organization, having the advantage of experience, trade
connections and the elite of personnel."
Hand's decision accepts that Alcoa maintained its
position with managerial excellence. There was no evidence
that it restricted output to keep prices high, the sins of
monopoly that lead to economic inefficiency. On the contrary, it kept prices low and expanded output. Hand's reasoning, subsequently reaffirmed in other cases, is difficult to justify economically.
There are clearly cases in which antitrust laws move the
economy closer to a competitive state. There also seems to
have been times when antitrust actions were misguided, when
antitrust actions did not result in lower prices and higher
quantities for consumers. Unfortunately, economists have
traditionally been so sure that antitrust laws were
beneficial that they have not sought to measure whether the
net benefit of those laws was in fact positive. We really do
not know how much good, if any, that antitrust policy accomplishes.
Next we look at a second governmental policy, regulation.
Copyright Robert Schenk