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Antitrust Policy

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 production inefficient.

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 decision:

"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.

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