Unit 3 Microeconomics: Prices and Markets Chapters 7.4 Economics Mr. Biggs

The federal government sometimes steps into the market to promote competition. Market Power Leading firms in the market can form a cartel and set the market price below their costs for a short term to drive competitors out of business. Predatory pricing - Selling goods below cost to drive competitors out of the market. This is a short term tactic that may or may not work. Regulation and Deregulation

Government and Competition The federal government has a number of antitrust laws that allow the U.S. government to: Watch and regulate industry Stop firms from forming monopolies Break up existing monopolies Antitrust laws - Laws that encourage competition in the marketplace. Trust - Is like a cartel, an illegal grouping of companies that discourages competition. The Sherman Antitrust Act was passed in 1890 to prevent mergers and monopolies that limited trade between states.

Regulating Business Practices The government has the power to regulate business practices if these practices give too much power to a company that already has few competitors. In 1999, the government sued Microsoft and ruled that it was a monopoly because they used predatory pricing and required customers to buy their browser. Breaking Up Monopolies Some monopolies that were broken up by the government using antitrust legislation were: AT&T, Standard Oil, the American Tobacco Company.

Blocking Mergers The government attempts to break up the rise of monopolies. A merger or combination of two or more companies into a single firm can be stopped by the government if it feels that the merger would hurt competition. Preserving Incentives If corporate mergers will lead to lower prices, more reliable products or service, and a more efficient industry, then the government will not oppose the merger.

Deregulation Deregulation - The removal of some government controls over the market. Government deregulated many industries in the 1970s and 1980s: Airline, trucking, banking, railroad, natural gas, and television broadcasting. Judging Deregulation Deregulation has met with mixed success. Competition increased in airline, trucking, and banking industries. In the late 2000s, the deregulated banking industry underwent a crisis leading to a surge in foreclosures.

Airlines: A Complicated Deregulation The airline industry was deregulated in 1978, and most of the new airlines failed or were acquired. Freed from regulation, the airlines then competed for the busiest routes, which drove prices down. Now, most airports have a dominant airline and the fares are actually higher than before deregulation.

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