Antitrust Practices and Market Power

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Antitrust Practices and Market Power

Introduction

Antitrust laws in a broader sense focus on promotion of fair competition and consumer protection. They restrict businesses from wrongfully acquiring or abusing monopoly power and forbid imperfect competition. Competition is encouraged in the market in line with the X-inefficiency concept. There are various statutory provisions for antitrust laws in the different federal states, the most notable being the Clayton Act and the Sherman Act (Boundless Journal).

Antitrust Investigations on Microsoft Corporation

The unmatched success experienced by Microsoft over the recent past has led to complaints by rival manufacturers that the company was monopolizing the software industry due to their prices and contractual agreements with PC manufacturers (Jenkins & Robert, 2007). The Department of Justice which conducted antitrust investigations against Microsoft alleged that Microsoft had monopolized the internet browser by contracting to the only supplier of browsers for Windows-operated computers, and that the company assumed 90% of the market (William, 1951). It was alleged that the company was working on tie-in agreements with manufacturers to only apply its Windows version. Microsoft also compels computer manufacturers to solely apply its design of screen sequence. The company was also alleged to have entered into anti-competitive contracts with almost all online service providers to solely acknowledge Microsoft’s Internet Explorer as the only browser.  The company was also alleged to have forced computer manufacturers to yield to their demands by fixing higher price consideration to the manufactures (Jenkins & Robert, 2007). This is against the Sherman Act’s prohibitions of monopoly pricing (William, 1951).

Microsoft Corporation made a successful defense against the antitrust allegations. Monopolies are not naturally illegal because firms have the capacity to legitimately grow and dominate the market. There is no violation from this basis (Boundless Journal).

Critical Analysis of Monopoly and oligopoly market structures

The Sherman Act prohibits monopoly market structure and collusion (Baker, 2000). The Act prohibits conspiracy by two firms to monopolize a line of commerce or a particular market. All these alleged moves by Microsoft are intended to cause barriers to entry into the market by rival producers. The company was also accused of violating the provisions against monopoly pricing under the Clayton Act. The Clayton Act forbids discrimination in price involving many purchasers of items of similar quality and grade. Price-fixing applies where companies in a particular market artificially keep the price of commodities at a given level in contravention with the requirements of free market.

Monopolies are bad because they raise price, restrict output, increase costs and discourage innovation (Baker, 2000). For instance, some monopolists adopt rent seeking behavior which involves manipulation of the market environment. With regards to government monopoly, the government seizes control over businesses which are subjected to natural monopoly structure. This is intended to ensure preservation of public interests. Monopolies may be allowed where there are economies of scale. In such cases, the government ensures that the monopolies conform to deadweight loss minimum requirements through price regulations.

Deadweight losses are incurred where the equilibrium is not Pareto optimal, as a result of barriers to entry into the market. An oligopoly market structure occurs where one firm behaves in a manner that affects the demand of another firm. An oligopolistic market structure is analyzed in terms of production differentiation, barriers to entry and concentration. In natural monopolies, it is efficient for a single firm to provide services or goods for the whole market. For instance, a single set of electrical lines is enough to serve a region. Natural oligopolies on the other hand are characterized with economies of scale in relation to minimum efficient size firms (Baker, 2000). In a monopoly market structure, price makers are circumstances and not supply-demand interaction. Firms under a monopoly market structure experience a downward-sloping demand curve because they are the only producers. They maximize profits by setting marginal cost equal to marginal revenue, and this may create economic loss or economic profit depending on the circumstances. Where economic profits are negative, it implies that the costs are not being met and it would be good for the firm to leave the market (Boundless Journal).

Conclusion

There are numerous anti-competitive business opportunities for firms under oligopoly and monopoly market structures. However, they should aim at not violating the Sherman Act and the Clayton Act which prohibit antitrust practices such as collusions, monopoly pricing and price fixing (Boundless Journal).

References

Baker, L. (2000). Monopoly and Antitrust. University of South Carolina [online] viewed on 29th May 2013, from: http://hadm.sph.sc.edu/courses/econ/classes/antitrust/antitrust.html

Jenkins, G, T., Robert W, B. (January 2007). “Microsoft’s Monopoly: Anti-Competitive Behavior, Predatory Tactics, And the Failure of Governmental Will”. Journal of Business & Economic Research 5 (1): 11–16. Retrieved 29th May 2013.

Monopolistic Firms Versus Competitive Firms. Boundless. Retrieved 29th May 2013, from: https://www.boundless.com/economics/monopolies/production-and-pricing-levels/monopolistic-firms-versus-competitive-firms/

William, H. (1951). The Microsoft case: anti-trust, high technology, and consumer welfare. DeVry University, viewed on 29th May 2013.

 

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