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32
ANTITRUST
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DISCUSSION QUESTIONS
1. Compare a monopoly to a competitive industry with regard to price, output, producer and consumer surplus,
and dead-weight loss.
2. Why do economists worry about monopolies?
3. Why are monopolies less likely to innovate? Give an example.
4. Some monopolies are called necessary monopolies. Discuss. Why are these monopolies regulated?
5. Give examples of how technology and a revised legal structure are changing the competitive nature of
utilities.
6. Why do you think creative people require copyrights?
7. How does the contestable markets hypothesis answer the question of how many firms it takes to have
competitive prices?
8. What did the dismissal of the IBM suit reveal about the durability of monopolies?
9. What aspects of the Sherman Anti-Trust Act did Standard Oil violate?
10. How has the Sherman Anti-Trust Act been applied to Microsoft?
THE WEB-BASED QUESTIONS --- kick it up a notch
Part I.
Microsoft was the most recent very large antitrust case handled by the Justice Department. A summary of the
case is on the following Web Site:
http://www.pbs.org/newshour/bb/cyberspace/july-dec99/microsoft_index.html
There are, however, other antitrust cases pending with the Office of the Attorney General. Visit the Web Site
http://www.atg.wa.gov/trust/cases.shtml.
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Briefly discuss any of the current cases.
Part II.
Maybe you would like to write a novel or produce a play or a movie someday. In this case, you would want to
have your work protected by a copyright. What are the benefits of having a copyright?
The following Web site discusses copyrights and answers a number of frequently asked questions.
http://www.loc.gov/copyright/ and
http://www.copyright.gov/help/faq/faq-protect.html
Part III.
The following Web site has a collection of actual cases in the audio, visual, and digital areas that present
practical insight into relevant copyright information.
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http://www.benedict.com/audio/audio.asp
http://www.pbs.org/newshour/bb/cyberspace/july-dec99/microsoft_index.html
Choose any one of these cases and discuss the case.
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Consider the court’s decision.

Was an economic amount involved?
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ANSWERS TO STUDY QUESTIONS
SUGGESTED ANSWERS TO THE DISCUSSION QUESTIONS
1. The following diagram compares a monopolist with a competitive industry with regard to price, output,
producer and consumer surpluses, and dead-weight loss.
$
PM
A
B
MC = S
C
PPC
E
F
MR
Demand
QM
QPC
Q/t
Comparing Monopoly and Perfect Competition
If the industry were governed by perfect competition, the price would be PPC and the quantity would be QPC,
where demand equal supply. Barriers to entry, however, would give a firm monopoly power. In this case, the
price would be PM and the quantity would be QM. The monopolist firm charges a higher price and sells a
smaller quantity.
Consumer surplus is reduced from ACPPC under perfect competition to ABPM under monopoly. Producer
surplus changes from PPCCF to PMBEF. The combined consumer and producer surplus is smaller under
monopoly than under perfect competition. Furthermore, in monopoly, there is a dead-weight loss equal to the
area, BEC.
2. Economists worry about monopolies because they impose a dead-weight loss on society.
3. Monopolies, whether they are private firms or government-owned monopolies such as the post office, are less
likely to innovate because there is no competition to keep the business on its toes. The post office, for
example, is a government-held monopoly for letters. They did not consider over-night delivery important until
Fedex and UPS developed the business.
4. Some monopolies, such as natural gas or electric utilities, have very high fixed costs and diminishing
marginal costs, so that both the average total cost and marginal total cost curves slope downward. They have
large fixed costs that present a potentially insurmountable economic barrier to entry. Having more than one
firm bearing these fixed costs is not cost efficient. Therefore, these types of firms are considered “necessary
monopolies.”
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These monopolies are regulated because there would be a tendency for the firms to want to exploit the power
they have by charging very high prices and producing too little output. Regulation ensures that the firms make
normal profits. This benefits consumers and ensures a profit that is consistent with what a similar investment
would get them in another industry.
5. Technology and a revised legal structure are changing the competitive nature of some monopolies. As an
example, satellite dishes are making cable companies more competitive in price. Cable companies are now
selling telephone and Internet access that was once provided only by a monopoly telephone company.
6. Copyrights are legalized monopolies that give creative people, such as authors, singers, or moviemakers an
exclusive right to sell their work. If unauthorized copies of these works are sold, someone other than the
creator makes profits. If these people do not make enough money, they may not be inspired to create works
and this will be a net loss to society. In order for the profits to accrue to the creator, copyrights should be
granted for these works.
7. A new area of economic research asks: How many firms does it take to ensure competition? Under the
Contestable Markets Hypothesis, one firm is all that is necessary if that one entity that is a monopoly is afraid
of potential competition and prices its goods low enough that so that no other firms decide to enter the market.
8. The dismissal of the IBM suit reveals that a monopoly can remain a monopoly only as long as its product has
a technological advantage over another. When IBM’s product, mainframe computers, was no longer unique, it
lost its monopoly power in the computer industry.
9. Standard Oil violated the following aspects of the Sherman Anti-Trust Act:

The act forbids a company from controlling the entire production-to-sales process for a particular
good. The company, under John D. Rockefeller, became a kind of monopoly called a trust, by
owning all the stages of production in the petroleum industry, from oilfields to retail outlets.

The company also violated the section that forbids a company to use its monopoly pressure to limit
competition. Rockefeller, who refused to sell his products to stations that he did not license, pushed
out the competition. He also bought pipelines at low prices and sold his products to stations at high
prices.
10. The judge used the Sherman Anti-Trust Act in the Microsoft case by accusing the company of violating the
following:

The company was accused of using the tactics of Rockefeller to drive out other competitors and
monopolizing a variety of areas of software.
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The company was also accused of harming consumers in the process.

For example, Microsoft was accused of using its preeminence in the industry to pressure software
companies to write exclusively for its Windows 95 version. In addition, it pressured vendors of
different hardware to not provide software for OS/2.
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In addition, when Netscape Navigator and Sun’s Java came out, in reaction, Microsoft created
Internet Explorer and integrated it into its operating system. Microsoft was also accused of not
selling Windows to PC makers if they also bundled their PC with Netscape of Corel, the producer
of WordPerfect Suite.
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SUGGESTED ANSWER TO THE WEB-BASED QUESTION
Part I.
There are several current cases (as of early 2006):
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Remeron Settlement
Taxol Settlement
Cardizem Settlement
Students answers will vary depending on the case selected.
Source: http://www.atg.wa.gov/trust/cases.shtml
Part II.
In the Frequently Asked Questions selection of the Web Site, there are explanations as to why it is wise for
creative people to obtain copyrights for their work. Copyrights are examples of monopolies that are permitted
by the government. The only way that creative people make money on their creative work is through their
exclusive right to sell them. They can also retain all or most of the profits.
Source: http://www.copyright.gov/help/faq/faq-protect.html
Part III.
There are many examples of copyright cases at the Web site, http://www.benedict.com/.
One example of copyright infringement is the case between Vanilla Ice and David Bowie and Queen. Vanilla
Ice sampled Queen’s song “Under Pressure” for his hit, “Ice Ice Baby,” on his 1990 album To the Extreme.
Vanilla Ice did not license or credit “Under Pressure,” and his song is generally the same. Rap artists, such as
Ice-T, MC Hammer, and Public Enemy, and 2 Live Crew were thanked, but there was no mention of David
Bowie and Queen.
This case never went to trial, but a suit was threatened. Vanilla Ice most likely would have lost in court
because the song competed directly in the same market as the original. Vanilla Ice settled out of court for an
undisclosed sum.