had the dominant product in a given market, exclusive dealing could allow it to gain
monopoly power in other markets. For example, a company that sells an extremely
popular felt-tip marker—the only one of its kind—could set a condition that customers
who want to purchase the marker must purchase all of their office supplies from the
company. This would allow the marker company to expand its existing market power
into the market for other office supplies.
The Clayton Act outlaws tying arrangements because, otherwise, a firm could ex-
pand its monopoly power for a dominant product by “tying” the purchase of one
product to the purchase of a dominant product in another market. Tying arrange-
ments occur when a firm stipulates that it will sell you a specific product, say a
printer, only if you buy something else, such as printer paper, at the same time. In
this case, tying the printer and paper together expands the firm’s printer market
power into the market for paper. In this way, as with exclusive dealing, tying
arrangements can lessen competition by allowing a firm to expand its market power
from one market into another.
Mergers and acquisitions happen fairly often in the U.S. economy; most are not il-
legal despite the Clayton Act stipulations. The Justice Department regularly reviews
proposed mergers between companies in the same industry and, under the Clayton
Act, bars any that they determine would significantly reduce competition. To evalu-
ate proposed mergers, they often use the measures we discussed in the oligopoly
modules:concentration ratiosand the Herfindahl-Hirschman Index. But the Justice De-
partment is not the only agency responsible for enforcing antitrust laws. Another of
our major antitrust laws created and empowers the Federal Trade Commission to en-
force antitrust laws.The Federal Trade Commission Act of 1914
Passed in 1914, the Federal Trade Commission Act prohibits unfair methods of compe-
tition in interstate commerce and created the Federal Trade Commission (FTC) to en-
force the Act. The FTC Act outlaws unfair competition, including “unfair or deceptive
acts.” The FTC Act also outlaws some of the same practices included in the
Sherman and Clayton Acts. In addition, it specifically outlaws price fixing (in-
cluding the setting of minimum resale prices), output restrictions, and ac-
tions that prevent the entry of new firms. The FTC’s goal is to promote lower
prices, higher output, and free entry—all characteristics of competitive mar-
kets (as opposed to monopolies and oligopolies).Dealing with Natural Monopoly
Antitrust laws are designed to promote competition by preventing business
behaviors that concentrate market power. But what if a market is a natural
monopoly? As you will recall, a natural monopoly occurs when economies of
scale make it efficient to have only one firm in a market. Now we turn from
promoting competition to establishing a monopoly, but seeking a public pol-
icy to prevent the relatively high prices and low quantities that result when
there is only one firm.
Breaking up a monopoly that isn’t natural is clearly a good idea: the gains to con-
sumers outweigh the loss to the firm. But what about the situation in which a large
firm has a lower average total cost than many small firms—the case of natural monop-
oly we discussed in Section 9? The goal in these circumstances is to retain the advan-
tage of lower average total cost that results from a single producer and still curb the
inefficiency associated with a monopoly. In Module 62, we presented two ways to do
this—public ownership and price regulation.
While there are a few examples of public ownership in the United States, such as
Amtrak, a provider of passenger rail service, the more common answer has been to
leave the industry in private hands but subject it to regulation.756 section 14 Market Failure and the Role of Government
The Federal Trade Commission promotes
fair practices, free entry by firms, and the
virtues of competitive markets.© Sandra Baker/Alamy