Antitrust Practices and Market Power - Essay Example

? Antitrust Practices and Market Power of the Antitrust Investigation against Google Most of the contemporary economies in the modern world follow free market principles, that allow aggregate demand and supply thresholds manipulate the equilibrium price levels. Though most of the modern economies exhibit laissez faire principles, but still they abide by the norms of mixed economic system. In the mixed economies, the government checks the power of the private enterprises that may threat the social welfare of the individuals. Antitrust laws, often known as ‘competition laws’ are norms introduced by the government of U.S. to prevent the consumers from the negativities of rapacious pricing introduced by the potential business giants in market and thereby help in promoting free trading activities in the open economies. This essay will concentrate in the recent antitrust investigation against the giant web searcher Google. The Federal Trading Commission had introduced the antitrust inquiry against Google in October 2012 and recommended the government to completely sue the business giant. Such laws are generally incorporated over firms that exhibit monopolistic or oligopolistic characteristic features. In short, the imperfectly competitive market structures encourage the malpractices and bureaucracies of potential firms in almost all industrial segments. Antitrust investigation is the best combat against such ill practices. The issue of antitrust investigation against Google encompasses the online business industry (Lohr, 2012). Reason for Antitrust investigation against Google The Federal Trading Commission (FTC) augmented pressure in Google for an antitrust investigation and decided to sue the giant web searcher. The company was claimed to manipulate its search results in a way that would facilitate its own products and make the same difficult for its potential rivals in the industry. However, the officials of the company had announced to answer and prove its innocence against any charges imposed by the regulators. FTC has equipped itself with a team which would drag Google to the court if required. Beth A. Wilkinson was the legislator appointed by FTC to fight against Google in the court. The European Union Commissioner have also claimed that Google is monopolizing the online industry and forcing other specialized search engines and advertizes to foreclose their businesses. Google has also been accused for manipulating its e-commerce services results. It is also found that Google introduces lobbying affairs with smart phone makers and force them not to remove the Google android operating systems from their manufactured phones. The American Antitrust Institute (AAI) has also agreed to the claims of FTC made against Google. This case is a typical case of antitrust exploration that has been prerequisite because the firm concerned (Google) simply enjoys oligopolistic or monopolistic power in the digital market places (Cleland, 2013). Pecuniary and Non Pecuniary Cost due to Imperfect Competition The monopolistic and oligopolistic firms exist in markets where perfect competition does not exist. The firms in this type of a market structure are not ‘price takers’ but are ‘price makers’. There are a large number of buyers but only few sellers in such market structures. Thus, the existing producers in an imperfect market have power to discriminate the buyers both in social and economic grounds. The demand curve faced by these types of firms is downward sloping in nature (W. Shepherd & J. Shepherd, 2003). Figure 1: AR and MR Curve of a Monopoly or Oligopoly Producer AR, MR Price or Average Revenue Curve (P or AR) Quantity Marginal Revenue Curve (MR) Antitrust behavior of the firms causes many economic and noneconomic costs. Imperfect competition in the market is responsible for inefficient allocation of resources, the monopolistic and the oligopolistic sellers often hoard their products to artificially increase the prices. Price discrimination is also one of the mal practices introduced by these sellers. The cost associated with legal formalities in the antitrust investigation is also high for the state. Moreover, the monopolists often influence the decisions of the government in their favor and reduce the welfare prevailing in the society. Example, soaring prices of medicines have made medical treatment expensive and unaffordable for many sick patients. Laws against Anticompetitive Practices The set of antitrust laws introduced by the government of U.S. is an amalgamation of state and federal government laws. It has been empirically observed that the perfect competitive market structure exhibit the maximum social welfare for the individuals in the society. The antitrust laws in U.S. control the corporate business organizations and try to promote fair competition in the market to benefit the consumers in the economy. The Sherman Act in 1980, Clayton Act in 1914and the Federal Trade Commission Act in 1914 are the primary Acts passed by the government of U.S. to reduce the avaricious powers of the monopolistic and oligopolistic firms in the market. These laws strictly prohibit the formulation of cartels (giant firms in the market fixing the prices, marketing and production decisions) or any kind of collusion in the oligopolistic market structure that restricts the free trading affairs in the economy. The Clayton Act imposes restrictions in the three-level enforcements schemes, remedial measures and exemptions, etc. FTC did not charge Google for its unfair monopolizing practices under the traditional laws of antitrust (Section 5 of the FTC Act). Jon Leibowitz the chairman of FTC along with Tom Rosch the Republican Commissioner both declared to litigate the case of Google under the “pure” Section 5 case of Antitrust. This norm did not include an origin of action under the Sherman Act (Manne, 2012). Detrimental Impact of Imperfect Competition Economists and analysts have found very few situations where imperfect market structures have generated social well being. The monopolist and oligopolistic producers are price makes in the market; they set the prices of their own products by themselves. These firms often discriminate among the buyers in terms of the prices charged on the products. Figure2: Second Degree Price Discrimination (Source: Stole, 2003) The above diagram shows a situation where the monopolist producer charges price p1 to market s1 and p2 to market s2 as the aggregate demand in the two markets are different. Moreover, in the world where human wants are unlimited and resources are scare, imperfect competition in the market does not allocate the resources efficiently in varied productive purposes. Thus, oligopolies and monopolies are always bad for the society. The competitive industrial sector in North America and Europe now shows features of monopolistic market structures. Iron and steel, rail roads, chemical, ship-building and machine making segments are exhibiting high level producer power concentration. Atlantic Steel, A.K. Steel holding etc. are the giant influential manufactures in the core industry in U.S. Monopolistic and oligopolistic producers not only set high prices for their products but also creates barriers for other firms to enter in the market. These influential firms often use the norm of dumping, to threat the potential entrants in the market. Benefits of Monopoly or Oligopoly Strategic behavior and cut throat competition among the oligopolistic firms often make them behave like perfectly competitive producers. Oligopolistic sellers in the market often provide products or services of excellent quality at lowest possible prices. The gross social welfare achieved during such situations may be close to what could have been attained if the market was perfectly competitive in nature. Only in rare situations, the market conditions exhibit natural monopolistic characteristic features. Natural monopolists enjoy the benefits of economies of scale by producing bulk output and hence enjoy low average costs. The natural monopolist may not discriminate the buyers and provide them products or services at the lowest possible price (Chass, n.d.). Figure 3: Natural Monopoly (Source: Tragakes, 2011) The above diagram shows the low per unit cost of a natural monopolist. The society benefits from the monopolistic or oligopolistic market structure prevailing in the pharmaceutical industry. Famous pharmaceutical giants like Glaxo, Ranbaxy, and Novartis enjoy imperfect powers in the pharmaceutical industry. It is true that the price of medicines innovated by these firms are high but the economic surplus generated by these firms encourages them to invest bulk sums of money in research and development purposes that helps to discover many life saving drugs (Borger, n.d.). References Borger, J. (n.d.). Pharmaceutical Monopoly versus Free Market. Retrieved from http://www.progress.org/monop01.htm. Chass. (n.d.) Behavior of Monopolistic Firms. Retrieved from http://homes.chass.utoronto.ca/~reak/eco100/100_6.htm. Cleland, S. (2013). Doj & ftc antitrust report cards. The Daily Caller. Retrieved from http://dailycaller.com/2013/04/12/doj-ftc-antitrust-report-cards/. Lohr, E. (2012). Drafting antitrust case, f.t.c. raises pressure on Google. The New York Times. Retrieved from http://www.nytimes.com/2012/10/13/technology/ftc-staff-prepares-antitrust-case-against-google-over-search.html?pagewanted=all&_r=0. Manne, G. (2012). Section 5 of the Ftc Act and Monopolization Cases: A Brief Primer. Retrieved from http://truthonthemarket.com/2012/11/26/section-5-of-the-ftc-act-and-monopolization-cases-a-brief-primer/ . Shepherd, W. G. & Shepherd, J. M. (2003). The economics of industrial organization: Fifth edition. Canada: Waveland Press. Stole, L. A. (2003). Price Discrimination and Imperfect Competition. Retrieved from http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.153.2980&rep=rep1&type=pdf Tragakes, S. (2011). Economics for the IB diploma with CD-ROM. Cambridge: Cambridge University Press. Read More