Ethics in Oligopoly & public policy

ETHICS IN OLIGOPOLY ANDPUBLIC POLICIES

PRESENTED BY-NEHA

PREETIKAVARSHA PANDEY

OLIGOPOLY• Characteristics of an Oligopoly Market-

– Few sellers offering similar or identical products– Interdependent firms– Best off cooperating and acting like a monopolist by producing a small

quantity of output and charging a price above marginal cost.– Strategic interactions between firms.

• Ex: Mobile networks like airtel, Vodafone, Docomo etc.• Ex: Cement companies like: Jaypee, ultra tech cement, ambuja cement etc are the

identical product manufactured by producers. All the producers come together to take a decision about price of the product, and about the subsidiaries from govt.

MARKETS WITH ONLY A FEW SELLERS

• Duopoly– Oligopoly with only two firms.– Decide quantity to sell– It is the simplest type of oligopoly.– Price determined on the market.

PUBLIC POLICY TOWARD OLIGOPOLIES

• Cooperation among oligopolists is undesirable from the standpoint of society as a whole because it leads to – production that is too low and – prices that are too high.

Restraint of Trade and the Antitrust Laws

• Antitrust laws make it illegal to restrain trade or attempt to monopolize a market.Sherman Antitrust Act of 1890 Elevated agreements among oligopolists from an

unenforceable contract to a criminal conspiracy.Clayton Act of 1914 Further strengthened the antitrust laws.PROS:Used to prevent mergersUsed to prevent oligopolists from colluding.

Antitrust: Sherman Antitrust Act

• Section 1: Every contract, combination in the form of

trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states or with foreign nations, is hereby declared illegal.

• Section 2: Every person who shall monopolize, or

conspire with any other person or persons to monopolize any part of the trade or commerce among the several states, or with foreign nations, shall be guilty of a misdemeanor.

Controversies over Antitrust Policy

• Antitrust policies sometimes may not allow business practices that have potentially positive effects:– Resale price maintenance – Predatory pricing– Tying

Controversies over Antitrust Policy

• Resale Price Maintenance (or fair trade) – occurs when suppliers (like wholesalers) require retailers

to charge a specific amount ,Might seem anticompetitive.• Predatory Pricing– occurs when a large firm begins to cut the price of its

product(s) with the intent of driving its competitor(s) out of the market

• Tying– when a firm offers two (or more) of its products together

at a single price, rather than separately, Form of price discrimination.

• What should society do in the face of the high degree of market concentration in oligopolistic industries? There are three main points of view.

• MAIN VIEWS OF OLIGOPOLY POWER: There are three main points of view-

Do-Nothing ViewAnti trust ViewRegulation View

• First, the Do Nothing view, claims that the power of oligopolies is not as large as it appears.

• Though competition within industries has declined, they maintain that competition between industries with substitutable products has replaced it.

• Finally, they argue that bigger is better, especially in the current age of global competition. Economies of scale, produced by high concentration, actually lower prices for consumers.

• Second, the Antitrust view argues that prices and profits in highly concentrated industries are higher than they should be.

• By breaking up large corporation into smaller units, they claim, higher levels of competition will emerge in those industries.

• The result will be a decrease in collusion, greater innovation, and lower prices.

• The third view is the Regulation view, which can be seen as a middle ground between the other two. Those who advocate regulation do not wish to lose the economies of scale offered by large corporations, but they also wish to ensure that consumers are not harmed by large firms.

• They argue that subdivision of Big industries is not favourable. They as a giant company may produce other good benefits for the masses.

• But they also encourage regulated market and even suggest nationalization in case of non-compliance of market regulations.

• But they also suggest the ill effects of nationalization at the same time.

• Therefore, they suggest setting up regulatory agencies and legislation to control the activities of large corporations. Some even suggest that the government should take over the operation of firms where only public ownership can guarantee that they operate in the public interest.

Conclusion

• Whichever view we take, clearly the social benefits of free markets cannot be guaranteed, and the markets themselves cannot be morally justified, unless firms remain competitive.

Example-Destroyer/Predatory Pricing

• Deliberate price cutting or offer of ‘free gifts/products’ to force rivals (normally smaller and weaker) out of business or prevent new entrants

• Anti-competitive and illegal if it can be proved

• Typical of oligopoly with collusion

Microsoft – have been accused of predatory pricing strategies in offering ‘free’ software as part of their operating system – Internet Explorer and Windows Media Player - forcing competitors like Netscape and Real Player out of the market

Microsoft Antitrust WMV.3gp