Reading: Lesson 1 - Regulations Maintaining Competition

6.1.A - Regulations Maintaining Competition

1. REGULATING MONOPOLIES

1. Competition is the rivalry among companies for customers’ dollars. Competition, however, does not always operate smoothly by itself. To provide for fair competition, government has passed laws and created regulations to enforce the laws. These laws and regulations grow out of a need to preserve competition, which is done, in part, by controlling monopolies and unfair business practices. Firms that cannot survive in a competitive atmosphere either go out of business or face bankruptcy.
   
2. A monopoly exists when only one company provides a product or service without competition from other companies. Without competitors, the one producer can control the supply and price of the product or service. By controlling the supply of an item, a single producer can set a price that will generate the greatest profit. In a monopoly situation, such as Deion Banks’s taxi company in the opening scenario, the prices are generally very high. Without competitors to lure customers away with lower prices, the monopolistic company can raise its price as high as it wants. If customers want the product or service, they have no choice but to pay the monopolist’s price.
   
3. In actual practice, however, few monopolies exist, because of the effectiveness of competition. To illustrate, assume a business offers a new product that no other business does. The product suddenly becomes quite popular. The prospect of profits to be made entices other companies to enter the market to help meet the demand. A temporary monopoly will exist until those competitors can produce and sell similar products. Usually, through competitive pricing, the more efficient companies will attract the greatest number of purchasers, whereas the less efficient may struggle for survival or go out of business. Even if some competitors fail, however, a monopoly will not exist as long as there are at least two or more producers.
   
4. In some situations, a natural monopoly may be better for consumers than competition because of the large cost involved in developing or supplying a product or service. A natural monopoly usually involves providing public services, such as public utilities, which have a fairly stable demand and which are costly to create. A natural gas company, for example, must build hundreds of miles of pipeline along streets and roads in order to deliver gas to homes and industries to fuel furnaces and stoves. If two or three gas companies incurred these same costs to sell gas to a relatively fixed number of customers, the price of gas would be higher than if only one company existed. Also, installing and maintaining so many pipelines would create nuisance problems along crowded streets and highways. In these types of situations, the government grants a monopoly to one company, regulates the prices that the company can charge, and influences other company policies.
   
5. A change in political and economic opinion has shifted the federal government’s approval of closely regulated monopolies, such as the postal system, utility companies, railroads, and communication firms. From the late 1970s, federal regulations have weakened or eliminated monopolies in order to encourage competition. For example, passenger fares on commercial airlines are no longer regulated. As a result, fares have generally dropped. Telephone service, the trucking industry, and railroads have been deregulated. Firms such as AT&T and Sprint offer communication services at competitive prices and compete fiercely. The result overall has been that consumers pay lower prices and have more services from which to select.
   

2. PROMOTING FAIR COMPETITION 

1. One way to promote competition is to limit the number of monopolies created and controlled by government. Monopoly conditions can also arise when businesses compete too harshly or unfairly. A large, powerful business can lower its prices deliberately to drive out competitors, thereby discouraging competition. Thus, the federal government supports business practices that encourage competition and discourage monopolies. To achieve this goal, government has passed important laws and created agencies to enforce the laws.
   
2. The first major law promoting competition was the Sherman Antitrust Act of 1890. One of its primary purposes is to discourage monopolies by outlawing business agreements among competitors that might tend to promote monopolies. For example, agreements among competitors to set selling prices on goods are unlawful. If three sellers met and agreed to set the same selling price on the same product each sold, they would all be violating the Sherman Act.
   
3. One part of the law forbids corporations from acquiring ownership rights in other corporations if the purpose is to create a monopoly or to discourage competition. Corporation A cannot, for example, buy more than half the ownership rights of its main competitor, Corporation B, if the aim is to severely reduce or eliminate competition. Another section of the Clayton Act forbids business contracts that require customers to purchase certain goods in order to get other goods. For example, a business that produces computers cannot require a buyer also to purchase supplies, such as paper and software, in order to get a computer. Microsoft Corporation was once charged with such a violation. Microsoft required computer makers that wanted to buy its dominant Windows operating system to also accept its Internet Explorer browser. The result of this action severely damaged the sales of Netscape’s Navigator browser, which was Microsoft’s dominant competitor.
   
4. The Robinson-Patman Act of 1936 amended the portion of the Clayton Act dealing with the pricing of goods. The main purpose of the pricing provisions in both of these laws is to prevent price discrimination, or setting different prices for different customers. For example, a seller cannot offer a price of $5 a unit to Buyer A and sell the same goods to Buyer B at $6 a unit. Different prices can be set, however, if the goods sold are different in quality or quantity. Buyer A is entitled to the $5 price if the quantity purchased is significantly greater or if the quality is lower. The same discounts must then be offered to all buyers purchasing the same quantity or quality as Buyer A.
   
5. In 1938, the Wheeler-Lea Act was passed to strengthen earlier laws outlawing unfair methods of competition. This law made unfair or deceptive acts or practices, including false advertising, unlawful. False advertising is advertising that is misleading in some important way, including the failure to reveal facts about possible results from using the advertised products. Under the Wheeler-Lea Act, it is unlawful for an advertiser to circulate false advertising that can lead to the purchase of foods, drugs, medical devices, or cosmetics, or to participate in any other unfair methods of competition.
   
6. The Federal Trade Commission (FTC) was created as the result of many businesses demanding protection from unfair methods of competition. The FTC administers most of the federal laws dealing with fair competition. Some of the unfair practices that the FTC protects businesses from are shown in the Figure below. 
   

   
   

7. In addition to the FTC, the federal government has created other agencies to administer laws that regulate specialized areas of business, such as transportation and communication. The Figure below lists some of the more important agencies. 
   

   
   

8. All firms face the risk of failure. The free-enterprise system permits unsuccessful businesses to file for bankruptcy as a means of protecting owners and others. Bankruptcy is a legal process that allows the selling of assets to pay off debts.
   

9. Businesses as well as individuals can file for bankruptcy. If cash is not available to pay the debts after assets are sold, the law excuses the business or individual from paying the remaining unpaid debts. In such a case, all those to whom money is owed would very likely receive less than the full amount. A bankruptcy judge can permit a company to survive bankruptcy proceedings if a survival plan can be developed that might enable the firm to recover. As a result, after starting bankruptcy proceedings, many firms do survive. However, bankruptcy carries serious consequences. The business will have a bad credit rating. A record of the unpaid debts will stay on file for ten years, and the business cannot file for bankruptcy again for eight years. As a result, the business will have difficulty obtaining credit.