Review of Imperfect Competition
Chapters 9 and 10 discussed the way that imperfect competitors set their prices and quantities. Let’s begin reviewing the manor elements of the economic theory that relate to government anti monopoly policies Imperfect competitors are inefficient because they set prices above marginal cost, The consumers in the monopolistic or oligopolistic industry are consuming less of its goods than would be the case if the goods were efficiently supplied.
• Man industries have technologies that exhibit significant economies of scale and scope. It would be unrealistic to try to produce the output of such industries with perfectly competitive firms for that would require that firms be inefficiently small. In rare cases, the technology in an industry em he efficiently produced only by a single firm: we call this a “natural monopoly”
• In’the long run, most economic progress comes from technological change, According ‘to the Schumpeter hypothesis, large firms with considerable market power are responsible for much invention and technological change. Government policies should be especially careful not to harm the incentives for innovation.
• The major abuses in markets ether too high a price or poor product quality-come when all industry is effectively monopolized. A good rule of thumb is that an industry behaves like a monopolist when a single firm or colluding group of firms produces more than three-quarters of the output in an industry.
The government has taken on the responsibility of preventing monopolization from occurring and of regulating monopolies when they are inevitable. Antitrust policies attempt to prevent mernopoiization or anti competitive abuses; economic regulation is used to control the exercise of monopoly power in natural monopolies.
The framework for antitrust policy was set by a few key legislative statutes and by a century of court decisions. In recent years, under the prodding of economists, antitrust policy has been evolving away from the “big is bad” philosophy and toward the tar comic approach to antitank. Emphasizing the intrinsic rivalry of oligopolists, the economic approach holds that the most powerful incentives for large business to reduce prices and improve product quality occur in a deregulated world in which carriers to entry are low and markets are open to domestic and foreign competition. In’ this view, antitrust policy should be reserved for the worst abuses of market power.
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