Prompt #4

Mouse Karl wiggled his tail with joy.  "It’s wonderful to have Auntie visit us," he squeaked to his mouse friend Adam.

"Yes, indeed," affirmed Adam.  "Tell us, Auntie Trust, about your work as the government's top guardian against monopoly."

"You must have your whiskers full," suggested Karl, "trying to wiggle a little competition into the marketplace."

"Not exactly,' Auntie Trust answered.  "I have more difficulty opposing sellers who want to use my authority to restrict competition."

"I don't understand," puzzled Karl.  "Don't you prevent businesses from monopolizing the marketplace?  I thought the Sherman Act, the Clayton Act and other important laws empowered your office to stop monopolists from picking the pockets of mouse consumers."

"That's what most mice suppose," replied Auntie Trust.  "But often it's the other way around.  Many mice oppose a particular merger of firms because they believe its success will encourage more mergers in the industry.  The result would then be fewer competitors in the market."

"Correct!" chortled Karl crudely.  "That would mean less competition.  Don't you outlaw monopolistic mergers?"

"Hold on," said Auntie Trust calmly.  "Neither the number nor the size of businesses in a given market is a good indicator of the degree of 'monopoly power.' A smaller number of larger firms can be more efficient, and that means lower prices for consumers.  If a merger would create a more efficient enterprise, other firms in the industry would have to become more competitive to survive.  Rather than confronting increased competition with greater efficiency of their own, the firms often try to use my authority to block the merger in the first place—and they do so in the name of protecting competition."

"But what about 'predatory' pricing?" asked Karl.  "History seems full of examples, such as John D. Rockefeller's Standard Oil Company, when big, wealthy businesses cut prices below costs and drove out competitors.  Don't you have to use government power to prevent monopolistic price wars?"

"Predatory pricing is more myth than reality," responded Auntie Trust.  "Rockefeller did not use costly price wars to drive rivals out of business.  No matter how big or wealthy, no business would long find it worthwhile to sell appreciably below its cost in an uncertain attempt to put a competitor out of business.  One company may purchase another, as Standard Oil bought other oil companies, but that strategy takes us back to evaluating the effects of mergers."

"Then why do many who complain about predatory pricing ask you to restrain price cutting in the name of competition?" asked Karl.

"Mostly because they want to prevent a more efficient company from underselling them," replied Auntie Trust.  "It may seem as though these complainants are trying to preserve competition, but actually they are trying to restrict it.  What they want is not competition, but protection from competitors.  In the world of your dear old Auntie Trust, what seemingly is, often actually isn’t."

 

Reflection for Thought and Discussion:

1.  When would consumers oppose mergers of suppliers?  Would rival producers oppose those same mergers?

2.  Would the fact that more than 90% of antitrust suits are brought by rivals tend to make you think their primary effect is to encourage or discourage competition?

3.  Why do you think trying to drive rivals out of business by selling below cost would be an unprofitable strategy?

4.  If there is little evidence of actual predatory pricing, why do firms charge others with doing it?  

AccountingQueen

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Status NEW Posted 23 Sep 2017 02:09 PM My Price 8.00

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