September 17, 2009
Review of Last Week, Current Events
Case Study: DeBeers
Review of Last
“People of the same trade seldom meet
together, even for merriment and division,
but the conversation ends in a conspiracy
against the public, or in some contrivance
to raise prices.”
-- Adam Smith
“Perfectly Competitive Market”
Receive goods at lowest price possible.
Society able to choose among competing
good with maximum efficiency.
Firms that do not produce what consumers
want at a fair price are quickly eliminated.
Highly restrictive model applying ...view middle of the document...
Illegal to monopolize or to attempt to
monopolize a market and prohibits
conspiracies that result in monopolization.
Sherman Antitrust Act
“comprehensive charter of economic
liberty” aimed at preserving free and
unfettered competition as the rule of trade.
Penalties For Violation of the
Civil and criminal
Individuals and businesses that violate law
may be prosecuted by the Department of
Justice, fined, and sent to prison.
Federal Trade Commission Act
Created the FTC.
Supplements the Sherman and Clayton Acts by
fostering competition through a whole set of
prohibitions against unfair and anticompetitive
Deceptive advertising and labeling
Agreements with retailers to exclude competing brands
Original justification for antitrust laws was to help
Federal Trade Commission Act
Bans “unfair methods of competition” and
“unfair or deceptive acts or practices.”
All violations of the Sherman Act also
violate the FTC Act.
Passed in 1914.
Pinpointed the kind of practices that are likely to
Predatory pricing -- pricing designed to drive
current competitors out of business and to
discourage new entrants.
Prohibits mergers and acquisitions if they
“substantially lessen competition” or “tend to
create a monopoly.”
Protects the process of competition for the
benefit of consumers, making sure there
are strong incentives for businesses to
operate efficiently, keeping prices down
and keeping quality up.
Goals of Antitrust
Efficiency approach => consumer welfare
Competitive approach => the right for
buyers to pay no more than the competitive
Whether sellers or buyers harm potential
purchasers who could have bought at
Excessive market power also raises
problems of equity and fairness.
If a firm has significant monopoly power, it
will profit at the expense of consumers.
Why Do We Have A Government
The role of government, under the modern view is to
lower bargaining costs in the absence of unanimity.
Bargaining Costs: the costs required to come to an
acceptable agreement with the other party to the
transaction, drawing up an appropriate contract and so
Without unanimous agreement, we must have some
other method of making decisions.
Government becomes a market surrogate for obtaining
economic profit in areas where bargaining is costly.
Market vs. Structural Approaches
Antitrust represents a political and social
philosophy, and interpretations of the
support for that philosophy vary
Market (competitive) view -- current laws
should be enforced to allow the economic
system to operate closely to the free
The most dangerous sort of...