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Daily RC Article 11

Monopoly Power

Paragraph 1

One type of violation of the antitrust laws is the abuse of monopoly power.Monopoly power is the ability of a firm to raise its prices above the competitive level—that is, above the level that would exist naturally if several firms had to compete—without driving away so many customers as to make the price increase unprofitable. In order to show that a firm has abused monopoly power, and thereby violated the antitrust laws, two essential facts must be established. First, a firm must be shown to possess monopoly power, and second, that power must have been used to exclude competition in the monopolized market or related markets.

Paragraph 2

The price a firm may charge for its product is constrained by the availability of close substitutes for the product. If a firm attempts to charge a higher price—a supracompetitive price—customers will turn to other firms able to supply substitute products at competitive prices. If a firm provides a large percentage of the products actually or potentially available, however, customers may find it difficult to buy from alternative suppliers. Consequently, a firm with a large share of the relevant market of substitutable products may be able to raise its price without losing many customers. For this reason courts often use market share as a rough indicator of monopoly power.

Paragraph 3

Supracompetitive prices are associated with a loss of consumers’ welfare because such prices force some consumers to buy a less attractive mix of products than they would ordinarily buy. Supracompetitive prices, however, do not themselves constitute an abuse of monopoly power. Antitrust laws do not attempt to counter the mere existence of monopoly power, or even the use of monopoly power to extract extraordinarily high profits. For example, a firm enjoying economies of scale—that is, low unit production costs due to high volume—does not violate the antitrust laws when it obtains a large market share by charging prices that are profitable but so low that its smaller rivals cannot survive. If the antitrust laws posed disincentives to the existence and growth of such firms, the laws could impair consumers’ welfare. Even if the firm, upon acquiring monopoly power, chose to raise prices in order to increase profits, it would not be in violation of the antitrust laws.

Paragraph 4

The antitrust prohibitions focus instead on abuses of monopoly power that exclude competition in the monopolized market or involve leverage—the use of power in one market to reduce competition in another. One such forbidden practice is a tying arrangement, in which a monopolist conditions the sale of a product in one market on the buyer’s purchase of another product in a different market. For example, a firm enjoying a monopoly in the communications systems market might not sell its products to a customer unless that customer also buys its computer systems, which are competing with other firms’ computer systems.

Paragraph 5

The focus on the abuse of monopoly power, rather than on monopoly itself, follows from the primary purpose of the antitrust laws: to promote consumers’ welfare through assurance of the quality and quantity of products available to consumers.

Topic and Scope:

Monopoly power; specifically, the difference between the possession of monopoly power, which isn’t illegal, and the abuse of monopoly power, which is.

Purpose and Main Idea:

The author’s purpose is to describe what sort of exercises of monopoly power are considered violations of federal antitrust laws. Since this is a descriptive passage, there really isn’t a specific main idea.

Paragraph Structure:

Paragraph 1 explains that the possession of monopoly power is not in itself illegal; to violate antitrust laws, a company must abuse monopoly power by using it to exclude competition.

Paragraph 2 explains how monopoly power comes about: Companies with a large market share can raise prices above competitive levels without losing customers.

Paragraph 3 explains why the mere possession of monopoly power isn’t illegal: Tighter laws might pose disincentives to the growth of monopolies and impair consumers’ welfare.

Paragraph 4 describes the types of exclusionary practices which constitute abuse.

Paragraph 5 reiterates a point made earlier—that, in the interests of consumer welfare, antitrust laws focus on the abuse rather than the possession of monopoly power.

The Big Picture:

  • Be on the lookout for passages that contrast two or more entities: the possession vs. the abuse of monopoly power, for instance. Such passages always have questions that hinge on a clear understanding of the difference between the entities being compared.
  • You don’t have to assimilate all of the details to do well on this passage. The important thing is to understand the basics of monopoly power—what’s illegal (abuse), what’s not (possession) and why (consumer welfare).

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