Economics Terms A-Z
An antitrust policy is a law or other government regulation that limits the dominance of large firms and promotes competition in the market. In microeconomics it is assumed that firms aim to maximize profits. They can do this by reducing unit costs through economies of scale, and/or by growing big enough to push competing firms out of the market, thus reducing competitive price pressure on their revenues. Some firms seek to grow big quickly by taking over, merging, or coordinating activities with other firms. Such collaboration between firms is known as a “trust” and it can lead to a reduction in market competition with higher prices for consumers. The existence of a trust can also act as a barrier to entry, making it more difficult for smaller firms to participate in the market. Governments representing consumers and smaller firms may hence choose to intervene in the market with legislation against the trust, i.e. antitrust policies.
Antitrust policies gained prominence through the (US American) Sherman Antitrust Act of 1890. This Act outlaws the formation of monopolies and other practices that restrict trade. One of the most famous antitrust cases is that of the Standard Oil Company founded by John D. Rockefeller. By the early 1900s, Standard Oil had grown both organically (by increasing its own sales) and inorganically (by purchasing competing firms as well as client and supplier firms) to control an estimated 90% of the US market for petroleum. In 1911 the US Supreme Court ruled that Standard Oil constituted an illegal monopoly. The Court concluded that Standard Oil had restrained trade through its dominance of the market, increasing prices, lowering output, and diminishing the quality of the oil traded. The Court ordered that Standard Oil be divided into 34 separate entities.
National governments subsequently set up agencies to design and implement antitrust policies. Such agencies include the Federal Trade Commission (USA), the Competition and Markets Authority (UK) and the Federal Cartel Office (Bundeskartellamt, Germany). Antitrust policies are also enshrined in European law, through Articles 85 and 86 of the European Community Treaty of Rome and Articles 101 and 102 of the Treaty on the Functioning of the European Union.
In addition to lower output and higher prices, having one firm dominate a market and restrict competition can cause a lack of innovation for the product or service and a reduction in the choice available to consumers. Such reasoning was used in the case against Microsoft in the late 1990s and early 2000s regarding its dominance of Operating Systems for personal computers which were restricting the use of software provided by competitor firms. The European Commission won the case and Microsoft was forced to pay substantial fines and to make its source codes available to other producers of software.
The European Commission highlights cartels and the coordination of prices and sales between supposedly competing firms as “the most flagrant example of illegal conduct infringing Article 101”. A well-known case of price-fixing involved the common surcharges for fuel levied by British Airways and Virgin Atlantic for their long-haul flights between 2004 and 2006. Although both airlines profited from the scheme (through higher prices paid by passengers) the deal ultimately failed because there was an incentive for whistle-blowing: Virgin Atlantic reported the collusion to the UK Office of Fair Trading and only British Airways was fined for the illegal activity.
Occasionally, governments contradict themselves due to the national and international dimensions of antitrust policies. While a national government can be keen to stimulate competition in its domestic market through policies that deter monopolies and cartels, it may also be under pressure to represent “national champion” firms that compete in international markets. For example, the French electricity provider EDF received state aid in the form of lower corporation tax at the time the European market for electricity was being liberalised, strengthening the firm’s ability to compete against other large European suppliers. However EDF was also accused of using its dominant position in the French market to reduce output and raise the price of electricity for French consumers.
It should be noted that more competition is not always conducive to a better market for consumers. Intense price competition should lower prices but it can also reduce the quality of goods and services provided. So-called “natural” monopolies that are forced to break up in the name of antitrust simply for being big are not always substituted well. For example, a national mail firm charged with delivering mail is able to provide complete coverage of a country by compensating less profitable areas through its revenues from highly profitable areas. However if the firm is split and sold then profitable areas such as large cities with high population density will tend to see a better delivery service while remote areas can suffer due to a lack of profitability. A similar example is that of public-transport networks. Thus, in order to serve the consumer, good antitrust policies should be applied on a case-by-case basis.
Herbert Hovenkamp has written extensively on antitrust policies in the United States from both legal and economic perspectives. For an introduction and brief history of antitrust policies, see his article, “The Antitrust Movement and the Rise of Industrial Organization” (Texas Law Review, 1989).
Good to know
Antitrust policies are still very much a hot topic, particularly regarding big-tech firms such as Facebook, Alphabet (Google) and Amazon. These firms boast revenues that outstrip the Gross Domestic Product of some smaller nations and they wield political power on a global scale through their control of people’s personal data and the information that people receive. The international coordination of antitrust policies is a key challenge in today’s world.
A demand curve shows the relationship between an item’s price and the quantity of the item demanded, either by an individual or by all participants in the market. Demand curves are downward-sloping for most items as greater quantities are demanded at lower prices.
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Consumer Surplus and Producer Surplus
Consumer surplus is the gain made by consumers when they purchase an item at the competitive market price rather than the (highest) price that they would have been willing to pay for it. Analogously, producer surplus is the gain made by producers when they sell an item at the market price rather than the (lowest) price that they would also have accepted for it.