Introduction to Monopoly and Antitrust Policy

Figure 1. Oligopoly versus Competitors in the Marketplace. A shift in major cargo shipping companies could mean higher prices for goods in Hawaii. Horizon Lines announced Tuesday it is selling its Hawaii shipping operation to The Pasha Group for roughly $141.5 million. Professor Sumner La Croix explained: “As a result of this merger, Hawaii’s market is reduced from three to two players. That’s always a concern with small firms.”
Horizon Lines to sell off Hawaii operation, merge with Matson

The transaction is expected to close in 2015, subject to regulatory approval, satisfaction of the closing conditions to the merger of Horizon and Matson and other customary closing conditions.

All three companies say the change will greatly expand the opportunities for shipping between the mainland and Hawaii, but an economist KHON2 spoke to has concerns, because it would mean having one less option. Pasha and Matson already service Hawaii.

As an economics professor at the University of Hawaii at Manoa, Sumner La Croix studies the current state of economies in the Asia-Pacific region. He says he’s skeptical of this multi-million dollar merger.

“Matson and Horizon are two big competitors in Hawaii. Clearly the antitrust authorities wouldn’t allow this merger, so Matson essentially had to not buy Horizon’s Hawaii service. Instead, they sold it to Pasha. They’re a third player in Hawaii’s market,” La Croix explained. “As a result of this merger, Hawaii’s market is reduced from three to two players. That’s always a concern with small firms.”

Could this affect prices on goods like food and clothing?

“It’s possible the everyday person would see some increase in goods, but mergers also take place because firms expect to see cost savings, and cost-savings can also push prices down,” La Croix said. “At this point, it is too early to tell.”

That brings us to the central question this chapter poses: What should the balance be between corporate size and a larger number of competitors in a marketplace? We will also consider what role the government should play in this balancing act.

Chapter Objectives

Introduction to Monopoly and Antitrust Policy

In this chapter, you will learn about:

  • Corporate Mergers
  • Regulating Anticompetitive Behavior
  • Regulating Natural Monopolies
  • The Great Deregulation Experiment

The previous chapters on the theory of the firm identified three important lessons: First, that competition, by providing consumers with lower prices and a variety of innovative products, is a good thing; second, that large-scale production can dramatically lower average costs; and third, that markets in the real world are rarely perfectly competitive. As a consequence, government policymakers must determine how much to intervene to balance the potential benefits of large-scale production against the potential loss of competition that can occur when businesses grow in size, especially through mergers.

For example, in 2011, AT&T and T-Mobile proposed a merger. At the time, there were only four major mobile phone service providers. The proposal was blocked by both the Justice Department and the FCC.

The two companies argued that the merger would benefit consumers, who would be able to purchase better telecommunications services at a cheaper price because the newly created firm would be able to produce more efficiently by taking advantage of economies of scale and eliminating duplicate investments. However, a number of activist groups like the Consumer Federation of America and Public Knowledge expressed fears that the merger would reduce competition and lead to higher prices for consumers for decades to come. In December 2006, the federal government allowed the merger to proceed. By 2009, the new post-merger AT&T was the eighth largest company by revenues in the United States, and by that measure the largest telecommunications company in the world. Economists have spent – and will still spend – years trying to determine whether the merger of AT&T and BellSouth, as well as other smaller mergers of telecommunications companies at about this same time, helped consumers, hurt them, or did not make much difference.

This chapter discusses public policy issues about competition. How can economists and governments determine when mergers of large companies like AT&T and BellSouth should be allowed and when they should be blocked? The government also plays a role in policing anticompetitive behavior other than mergers, like prohibiting certain kinds of contracts that might restrict competition. In the case of natural monopoly, however, trying to preserve competition probably will not work very well, and so government will often resort to regulation of price and/or quantity of output. In recent decades, there has been a global trend toward less government intervention in the price and output decisions of businesses.

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Principles of Microeconomics - Hawaii Edition by John Lynham is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.

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