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Antitrust Practices and Market Power - Admission/Application Essay Example

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The purpose of this paper is to investigate a recent case of anti-trust investigation while applying concepts such as monopoly and oligopoly market structure. In connection to this, an article by Ian Young, “EU Plans Antitrust Crackdown on Malfunctioning Energy Markets ” was…
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Antitrust Practices and Market Power
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Antitrust Practices and Market Power Email: Content: Introduction…………………………………………………………………………………2 Benefits of monopolies and oligopolies……………………………………………………..3
Conclusion……………………………………………………………………….…………..3
References………………………………………………………………….………………..5
Antitrust Practices and Market Power: EU Plans Antitrust Crackdown on
Antitrust Practices and Market Power
Introduction
The purpose of this paper is to investigate a recent case of anti-trust investigation while applying concepts such as monopoly and oligopoly market structure. In connection to this, an article by Ian Young, “EU Plans Antitrust Crackdown on Malfunctioning Energy Markets ” was selected for the analysis.
EU Plans Antitrust Crackdown on Malfunctioning Energy Markets
The European commission wants to investigate companies in the gas and oil market for antitrust behavior because; these companies have taken advantage of their dominant position in the market to cause malfunctioning in the company (Ian, 2006). The companies’ restrictive business practices have led to high gas and electricity prices. The companies have preserved their dominant positions through vertical integration and control of distribution infrastructure (Ian, 2006). This limits the amount of wholesale trade and consequently, markets become illiquid. There is also no transparency in the pricing process. New entrants face many difficulties and, therefore; there is no competition inn the market, thus inefficiency. Antitrust behavior is associated with a cost of inefficiency. When there are few players in the market, they form collusions and control prices in the market, as have happened in the oil and gas market. Due to lack of competition, the firms have no incentive for development and this leads to inefficiency (Schmalensee, 1979). The firms, being price makers, exploit consumers by charging high prices and this discourages consumption. The dominant firms set high barriers of entry, and this discourages investment in the oil and gas business which is at the expense of development. Under perfect competition, profits are maximized at the point where the firm’s marginal costs equal its marginal revenue. There is high market power encourages rent seeking behavior that discourages investment. However, for the case of monopolies and oligopolies, there is imperfect competition and this results to supernormal profits. These economic profits attract new investors into the market, but there are barriers to entry (Washington, 2011). Under perfect competition, the market decreases as prices increase. However, monopolies and oligopolies violate this rule since their increase in prices does not affect the quantity demanded. The firms were investigated under the three antitrust laws that are: Sherman Act, Clayton Act and the Federal Trade Commission Act.
Benefits of monopolies and oligopolies
However, oligopolies and monopolies are not always bad for societies. Oligopolies and monopolies earn many profits. This enables them to be in a position to use some of the profits for development and corporate social responsibilities. They are also able to undertake research activities that contribute to the development. Monopolies and oligopolies are usually large firms. They benefit from economies of scale as their output increases, their cost of reduction decreases and, therefore, they can be able to charge lower prices than in perfect competition. Monopolies face international competition, and this makes them efficient so as to remain competitive (Waldmann, Robert, 1992). Some firms become monopolies because of their efficiency, and this motivates other firms to increase their effectiveness. For instance, Google firm has become a monopoly due to its efficiency. This has challenged other firms competing with Google to increase their efficiency. Due to its monopoly, Google has been able to earn super normal profits and participate in corporate social responsibilities such as offering scholarships to students.
Conclusion
Imperfect market competition is a result of the presence of monopolies and oligopolies, where one or few companies have supreme market power over others, and, therefore, dominates the market. They earn supernormal profits that attract investors, but these firms create high barriers of entry and prevent another investor from participating in the business to protect their power. These powers may be earned naturally or through business operations. Such firms are price makers and, therefore, change prices does not significantly affect the demand of their products. However, such business powers may use the extra profits earned in growth also as a challenge to other firms that increase growth.
References
Schmalensee, R. (1979). The control of natural monopolies. Lexington, Mass.: Lexington Books.
Washington, H. A. (2011). Deadly monopolies: the shocking corporate takeover of life itself, and the consequences for your health and our medical future. New York: Doubleday.
Waldmann, Robert J. (1992). Asymmetric Oligopolies. European University Institute
Young, I. EU Plans Antitrust Crackdown on Malfunctioning Energy Markets. (March 1. 2006). Chemical week. Read More
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