Antitrust Practices and Market Power, Essay Example

Introduction

One of the biggest barriers to entry into the market, is to compete with the company that holds the greatest market power and gains the most economic profits. New businesses that enter a competitive market can encountered a major company that is the price maker, can block entry, and create a nonprice competition in which they can create adownslopping demand curve for products. Where there are complications in the eyes of the law, is when the major companies decides to form a monopoly market structure or oligopoly market structure to squash competition or participate in rent-seeking behavior to set the price, and block competition. Companies that participate in these practices can be charged with monopoly price fixing, or using imperfect competition practices, in which permit unfair, or unethical practices. In this type of market, companies control the prices which can create an elastic market in which force companies to have marginal costs that exceed the marginal revenue, and a decrease in economies of scales where there is no economic growth for smaller companies. More importantly when companies cannot compete it creates x-efficiency in which companies can utilized inefficient practices to stay in business.

Apple’s Antitrust Investigation

Apple, one of the largest companies in the world, has recently come under scrutiny for participating in collusion to act as a monopolistic firm. According to reports, “In a civil antitrust lawsuit, the Justice Department alleged that CEOs of the publishing companies met regularly in private dining rooms of upscale Manhattan restaurants to discuss how to respond to steep discounting of their e-books by Amazon.com Inc…” (Catan, Trachtenberg, Bray 2012) The purpose of antitrust laws is to maintain and promote competition in each market, by regulating the unethical practices of companies.“Apple is being penalized for introducing a new way of selling the printed word online, by providing the electronic marketplace for publishers and taking a fee for every unit sold.” (Fisher, 2013) Apple chose to act as monopolistic firm by increasing their prices, thus creating a high demand curve, with almost perfect elasticity, making it closer to pure competition. (McConnel, Brue, Flynn 2012) Apple colluded with publishers to considerably increase their market power, and substantially increase e-book prices,which created a deadweight loss to society where consumers pay for more than they would benefit. According to the Justice Department, “They said the scheme cost consumers more than $100 million in the past two years by adding $2 or $3, sometimes as much as $5, to the price of each e-book.” (Yost, 2012)

Monopolistic and Oligopolistic Behavior

Apple established in their stores that publishers were also not allowed to set prices lower than what Apple establish in their stores. This practice was largely criticized, and pulled the ire of the federal government, in which charged the company with keeping the prices of e-books higher, in order to decreased competition, and increase their economic profits.  In Apple’s scheme, they suffered both non-pecuniary costs and pecuniary costs, in which the former being the most substantial as they have had to pay an absorbent amount of money, as well as their tarnished reputation. In looking at the pecuniary costs, Apple would be winning because they are forcing their customers to pay more, and squash competition from Amazon. The Sherman Act and the Clayton Act, which covers the price fixing charge in section 2,prohibit these practices because it reduces competition in the market. (FTC, 2013)

Conclusion

While most monopolies and oligopolies are viewed negatively, there are few that benefits society. These are mainly natural monopolies that largely fall under the category of government monopolies such as the USPS, the primary mail delivery service in the United States. They are federally funded and hold the monopoly for the being the only regular mail service. However, Apple doesn’t fall under this category, and these types of markets are discouraged because they decrease competition and create non-pecuniary costs on consumers that are unfair.Apple used antitrust practices in order to maximize their profit. While Apple does have market power, it isn’t fair to create unfair market practices which cheat consumers, and pressures smaller companies to increase their prices. In the long run it creates difficulties in the market, and substantially shift the law of supply and demand.

References

Catan, Thomas, Trachtenberg, Jeffery A., Bray, Chad. (2012). U.S. Alleges E-Book Scheme. The Wall Street Journal. Retrieved from http://online.wsj.com/news/articles/SB10001424052702304444604577337573054615152

Federal Trade Commission. (2013). Antitrust laws. FTC. Retrieved from http://www.ftc.gov.

Fisher, D. (2013). Apple Learns The Hazards Of Innovation With E-Book Antitrust Ruling. Forbes.Com, 5.

McCornell, Campbell R., Brue, Stanely L., Flynn, Sean M. (2012). Economics: Principles, Problems, and Policies. 19^th Edition. McGraw-Hill Irwin: New York.

Yost, Pete. (2012). Apple, Hachette Hit With Antitrust Lawsuit Over eBook Pricing. The Huffington Post. Retrieved from http://www.huffingtonpost.com/2012/04/11/apple-hachette-antitrust-lawsuit_n_1417470.html