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Chapter 27: Q.10 (page 621)

Suppose that a business has developed a very high quality product and operates more efficiently in producing that product than any other potential competitor. As a consequence, at present it is the only seller of this product, for which there are few close substitutes. Is this firm in violation of U.S. antitrust laws? Explain.

Short Answer

Expert verified

This company is not breaking the Sherman Antitrust Act or any other antitrust laws in the United States.

Step by step solution

01

Introduction.

Antitrust laws, also known as competition act, are laws implemented by the US government to protect consumers from unfair business practices. They ensure that level playing field exists in an open market economy.

02

Given data.

Antitrust rules are not broken by a company that operates efficiently and effectively. If market domination is achieved through better operational operations and increased cost efficiency, the firm's conduct cannot be classified as monopolistic.

03

Explanation.

Using cost-effective technology, a company can lower the market price of its products. Other companies in the industry find it impossible to compete with this efficient company, and finally quit.

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Most popular questions from this chapter

A few years ago, the U.S. government created a "Do Not Call Registry" and forbade marketing firms from calling people who placed their names on this list. Today, an increasing number of companies are sending mail solicitations to individuals inviting them to send back an enclosed postcard for more information about the firms' products. What these solicitations fail to mention is that they are worded in such a way that someone who returns the postcard gives up protection from telephone solicitations, even if they are on the government's "Do Not Call Registry." In what type of behavior are these companies engaging? Explain your answer. (Hint: Are these firms meeting the letter of the law but violating its spirit?)

Why do you suppose that nearly all of the world's antitrust authorities agree that collusive conspiracies to restrain trade and fix prices are illegal?

The table below depicts the cost and demand structure a natural monopoly faces.

a. Calculate total revenues, marginal revenue, and marginal cost at each output level. If this firm is allowed to operate as a monopolist, what will be the quantity produced and the price charged by the firm? What will be the amount of monopoly profit? [Hint: Recall that marginal revenue equals the change in total revenues (P×Q)from each additional unit and that marginal cost equals the change in total costs from each additional unit.]

b. If regulators require the firm to practice marginal cost pricing, what quantity will it produce, and what price will it charge? What is the firm's profit under this regulatory framework? [Hint: Recall that average total cost equals total cost divided by quantity and that profits equal (P-ATC)×Q.].

c. If regulators require the firm to practice average cost pricing, what quantity will it produce, and what price will it charge? What is the firm's profit under this regulatory framework?

Consider panel (b) of Figure 27-2. The quantity Q1 is 2,000units, the price P1 is \(2per unit, the average cost AC1 is \)4per unit, and the vertical distance to point C is $6per unit. What is the dollar amount of the losses earned by this natural monopolist when its price is equal to its marginal cost of producing Q1 units?

Suppose that a firm's self-interested owners or managers have no moral or ethical qualms and do not anticipate being caught if they agree to participate in a collusive conspiracy. Why might they still decide not to do so if only a moderate revenue gain would result? (Hint: How would engaging in the collusion techniques listed in Figure 27-4affect a conspiring firm's total costs?)
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