Market Structures Regulation and Deregulation

How firms increase Market Power  Controlling prices - leading firms can form a cartel, merge, or practice:  Predatory pricing by setting prices below market price (short-term) to put competitors out of business

Government and Competition  Policies that prevent firms from controlling price and supply of important goods.  Anti-trust laws  Trust – similar to cartel  Passed by Congress – First in 1890  Monitored by FTC and Dept. of Justice  To ensure competition

Government and Competition  Use of anti-trust legislation to break up trusts:  John D. Rockefeller’s Standard Oil Trust (1911)  American Telephone and Telegraph (AT&T) (1981)  Microsoft (1999)

Government and Competition  Government has power to prevent monopolies  Has power to block mergers that might reduce competition  A merger occurs when a company joins with another company or companies form a single firm.  Government also monitors past mergers

Government and Competition  Some mergers can benefit consumers  The Justice Department and FTC now allow potential mergers a chance to prove that the merger would lower costs and consumer prices or lead to a better product.

Deregulation  Deregulation means that the government no longer decides what role each company can play in a market and how much it can charge its customers.  Eliminates entry barriers and price controls.  Deregulated airline, trucking, banking, railroad, natural gas, and TV broadcasting industries.

Deregulation  Problems:  Airlines – deregulated by Pres. Carter in 1978 – promoted competition but allowed larger firms to compete aggressively for routes.  Generally lower prices, but most airports are dominated by a single airline which often means higher fares  Current problems