Legal Monopolies

Although monopolies are generally illegal in this country, the law does provide for a variety of legal monopolies such as: public utilities, patents, copyrights and trademarks.

Public Utilities are privately owned firms that provide an essential public service. They are granted a monopoly because it is felt that competition would be harmful to the public interest. Your local electric, gas and water companies are public utilities. Utilities are subject to extensive government regulation and supervision.

Imagine the complications that one electric company served your community. Each would have its own power lines, maintenance organization and generating plant.

Competition, however, provides businesses with the incentive to keep prices down and improve services. In place of competition, government protects the public by regulating the activities of the utilities. Government supervision is carried out by regulatory commissions which determine the services the utilities provide and how much they are permitted to charge for them.

Patents as Monopolies. How would you like to come up with a new idea – something that could be turned into a new product or service that would make you rich and famous? To encourage you, the federal government grants patents to cover new products and processes. In a sense, a patent is a monopoly. It gives the inventor exclusive use of a product or idea for 17 years. You may sell your idea or give it away, but it is yours to do with as you wish. Eventually, someone will develop a product or service that will be acceptable alternative to yours. It, too, might qualify for a patent and perhaps compete with yours.

Copyright and Trademarks as Monopolies.

Though the Federal Copyright Office, the government gives the authors of original writing and artistic work a copyright – the exclusive right to sell or reproduce their works. That copyright is a special monopoly for the lifetime of the author plus fifty years.

Trademarks are special designs, names or symbols that identify a product, service or company. “Coke” is a trademark of the Coca-Cola Company. Competitors are forbidden from using registered trademarks or ones that look so much like trademarks consumers will confuse them with the originals.

How Competition Benefit Us All

In a competitive market, producers constantly strive to reduce their production costs as a way to increase profits. The increased efficiency that allows them to reduce their costs also enables producers to sell their goods at a lower price. Thus, by promoting efficiency, competition leads to lower prices.

Competition also motivates producers to improve the quality and increase the variety of goods and services. Consumers soon learn which brand offers the best value, and that firm will earn greater profits than its competitors. Similarly, producers in a competitive market must constantly look for new and attracting goods and services to win a larger share of the market.

As firms compete for the consumer’s dollar in a market, their efforts lead to the production of a variety of better-quality products at the lowest possible prices. And since we are all consumers, it follows that competition benefits us all.

Federal Regulation: The Antitrust Laws.

The American free enterprise system is based on the belief that competition is in the best interest of everyone. When competitors agree to fix prices, rig bids or divide the market, the public loses the benefits of competition. The prices that result are artificially high. This is unfair to consumers who must pay more for the things they buy. It is damaging to an economy that looks to the price system to signal what goods and services are in demand and the most cost-effective way of producing them.

For that reason, the federal governments and many state governments have enacted legislation known as antitrust laws – laws designed to safeguard competition. The major federal antitrust laws are The Sherman Antitrust Act, the Clayton Act, the Federal Trade Commission Act, and the Celler Antimerger Act. Nevertheless, many businesses are naturally interested in growing and controlling as much of a market – or several markets – as possible. One way to accomplish this goal is through merger.

Do Antitrust Laws Help or Hurt?

Many of those who favor competition, however, also feel that government interference in the marketplace is inappropriate. They are especially concerned about the effect of antitrust laws on the ability of corporations to compete with their foreign coun­terparts. They argue that many foreign companies operating in countries that have no antitrust laws have an unfair advan­tage. For example, Japanese computer firms can assist each other in developing and marketing new software. Such cooperation by American companies might violate antitrust laws. While the intent of the law is to protect American consumers against price-fixing and other conspira­cies, its effect in this situation may limit the American compa­nies' ability to compete.

Those favoring strict enforcement of the antitrust laws say that the foreign competition argument is simply a smoke screen by firms looking to eliminate their competition. The key to outperforming foreign competitors, they say, lies in a more efficient operation rather than ever-increasing size.

Characteristics of Economic Markets
Number of firms	Many independent firms. None able to control the market.	Many firms providing similar goods and services.	A few large firms providing similar goods and services.	A single large firm.
Control over price	None. Market determines price.	Influence limited by the availability of substitutes.	Often influenced by a “price leader.”	Much control.
Product different-tiation	None. Products uniform and of equal quality.	Products and services differentiated to meet the needs of specific markets.	Significant for some products like automobiles. Little for standardized products like gasoline.	None.
Ease of entry	Relatively easy to enter or leave the market.	Relatively easy to enter or leave the market.	Difficult. Often requires large capital investments	Very difficult.

Exercise 1. Listening from Guide to Economics, unit 6”Market structures” – track 17

Write out definitions for the following terms: imperfect competition, monopoly, monopsony, oligopoly.

Exercise 2. Match up these words with the definitions below:

barriers to entry

monopolistic competition

oligopoly

dominant-firm oligopoly

monopoly

natural monopoly

cartel

economies of scale

perfect competition

monopsony

1…………. exists when products are homogeneous, and there are a great many firms too small to have any influence on the market price, and firms can easily enter and exit the industry.

2. A …………. is a market in a particular product in which a single producer can fix an artificial price.

3. ………. is the situation in which there is only one buyer.

4. A………. is an industry in which the efficient existence of more than one producer is impossible; examples include public utilities such as water, gas and electricity, where it would be inefficient to have several competing companies laying their own networks of pipes or cables.

5. ………. exists when many producers of slightly differentiated products are able to sell them at well above their marginal cost.

6. An………. is a concentrated market dominated by a few large suppliers. This is very frequent in manufacturing because of economies of scale and the cost barriers of entering an industry.

7. ………. are factors which cause the average cost of producing something to fall as output increases.

8. ………… are economic or technical factors that make it difficult or impossible for firms to enter a market or compete with existing suppliers.

9. A ……… is one in which a market leader can indicate its preferred price to smaller competitors.

10. A ……… is a group of producers or sellers who fix prices and quantities in order to avoid competition and increase profits. This is illegal in many countries, most notably the USA.

Exercise 3.

Rearrange the following sentences and part-sentences to make-up a short text about market concentration like this:

• begin with a paragraph containing arguments both against and in favour of monopoly

• continue with a paragraph defending or justifying market concentration

• end with a paragraph arguing that monopolies are always short-lived, and so not a problem.

1. According to this position, the government only needs to ensure that there is no monopoly over important inputs, because there will never be a monopoly of scientific or artistic genius or business ideas.

2. According to this view, market concentration arises naturally from a few successful firms growing larger as a result of increased efficiency, innovation, and economies of scale in production, distribution, R & D, capital financing, and so on.

3. a counter argument is that erecting barriers – for example, by process innovation, product differentiation, persuasive advertising, or pricing policy – in order to be successful and to make competitors less successful, is a normal part of rivalry and competition.

4. Although some people argue that any barrier to competition will inevitably lead to inefficiency,

5. An example here would be telecommunications.

6. and businesses facing no competition have no incentive to find ways to reduce costs.

7. Even the profits made by a natural monopoly will be temporary, because they are an incentive for entrepreneurs to discover and implement new low-cost technologies.

8. For example, although entrepreneurs introduce new products and techniques and open up new markets, their profits are soon competed away by rivals.

9. it is right that inventors should be granted a temporary monopoly as a reward for innovation or discovery.

10. monopolists are always able to make excessive profits,

11. Some people even argue that monopolies are always temporary and consequently not a problem.

12. The arguments against market concentration, or at least against monopoly, are obvious:

13. The only common argument in favour of monopoly concerns patents:

Discussion:

Which of these arguments (or sets of arguments) do you find the most persuasive?

Exercise 4. Listening from Guide to Economics, unit 6”Market structures” – track 18

What dangers might monopolies face?

Exercise 5. Translate into English:

1. Сговор – соглашение между несколькими фирмами о разделе рынка и ценах, превращающее ситуацию на рынке в близкую к натуральной монополии. Выделяют открытый сговор, который в настоящее время является незаконным в большинстве стран, и тайный или молчаливый сговор, когда несколько крупных компаний, защищенных барьерами от конкуренции, не организовывая встречу, ориентируются на определенный уровень цен.

2. Олигополия доминирующей фирмы – организация рынка, при которой на нем господствует крупная фирма, цены которой являются базовыми для всех остальных продавцов, действующих на рынке.

3. Ограничения на вхождение в отрасль – правительственные решения, связанные с регулированием цен и деятельности корпораций, затрудняющие прибыльную деятельность вновь входящих в отрасль предприятий.

4. В условиях натуральной монополии любое проникновение на рынок еще одного производителя приведет к падению эффективности за счет исчезновения эффекта масштаба.

Exercise 6.

Translate into English and a make a detailed summary, incorporating information from the texts.