Market Power and Antitrust Practices

Antitrust Practice and Market Power

Antitrust Practices and Market Power

government promulgates antitrust law to prohibit unfair business practices in the United States and enhancing competitions within the U.S. marketplace. Several business practices are considered illegal under the antitrust law and these practices include illegal monopoly, price fixing, illegally discouraging competition, and bid rigging. For example, Sherman Antitrust Act of 1890 prohibits monopolizing the interstate commerce, bid rigging, and price fixing. Moreover, The Clayton Act of 1914 also prohibits all form of merger and acquisition that could restrict competition. Companies considered violating the antitrust law may be subjected to fines and the officials may face jail term.

Why were firm(s) being Investigated for the Antitrust Behavior?

The government can investigate firms for antitrust behaviors if the government suspects that a firm is carrying out the antitrust business behaviors that could violate antitrust law. An issue of Microsoft vs. Department of Justice was a special case of antitrust violation. Microsoft is the largest producer of computer software with highest valuation in the world. The company produces application software such as Microsoft Word, Excel, PowerPoint, Outlook and Access. In 1990s, the Department of Justice investigated Microsoft for various antitrust allegations, and the government accused the Microsoft of using its monopoly power of its PC (personal computer) operating system to harm competitors and exclude rivals. (Stucke, 2013).

The antitrust discourages monopoly because monopoly practice discourages competition. Typically, monopoly is a form of business operation where there is a single seller of product or services in the market. Since monopoly is the only producer of goods or services, a monopoly can set any price as it pleases if there is not government intervention. One of the negative effects of monopoly is that it discourages consumers to make a choice from wide variety of products thereby reducing the aggregate welfare of consumers. (Stigler, 2013). The harmful effect of monopoly leads to birth of antitrust laws aimed to discourage monopolistic practice.

On the other hand, oligopoly refers to a business practice where there are few sellers in the market thereby leading to competition among firms. Unlike monopoly that restricts the free choice consumer, Oligopoly allows a free consumer's choice of goods and services. Meanwhile, oligopoly is still considered better that monopoly because it allows free competition and its practice may not violate antitrust law.

Despite the benefits of the antitrust law, some economics have lost enthusiasm for the antitrust policy. For example, antitrust policy has discouraged many useful merger especially vertical mergers.

"Antitrust laws have prevented many useful mergers, especially vertical mergers. A favorite tool of legal buccaneers is the private antitrust suit in which successful plaintiffs are awarded triple damages." (Stigler, 2013 p8).

The alleged antitrust suit against Microsoft for violating the antitrust law on the ground that the company bundled the IE (Internet Explorer) with Microsoft Window operating system thereby requiring computer manufacturers to integrate and distribute IE in the Window 95 was unjust. The ruling of the court barred Microsoft from bundling the IE with Windows on the ground that the Microsoft action attempted to eliminate the Netscape from competitive landscape. (Lenard, 2000). Although, the Appeal Court overruled the ruling of the District Court, overview of the Microsoft's integration of IE in the Window showed that Microsoft increased consumer's welfare because the company allowed consumer to use IE free of charge while the Netscape charge $20 to use the browser. Moreover, the Microsoft charges computer manufacturers the average of $40 for integrating its operating system in their computers. The price was ridiculously low compared to a static monopoly price.