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One type of violation of the antitrust laws is the abuse of [#permalink]
22 Sep 2009, 11:57
This post received KUDOS
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.
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—consumers 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.
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.
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 consumer unless that customer also buys its computer systems, which are competing with other firms’ computer systems. 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.
1. Which one of the following distinctions between monopoly power and the abuse of monopoly power would the author say underlies the antitrust laws discussed in the passage? (A) Monopoly power is assessed in term of market share, whereas abuse of monopoly power is assessed in term of market control. (B) Monopoly power is easy to demonstrate, whereas abuse of monopoly power is difficult to demonstrate. (C) Monopoly power involves only one market, whereas abuse of monopoly power involves at least two or more related markets. (D) Monopoly power is the ability to charge supracompetitive prices, whereas abuse of monopoly power is the use of that ability. (E) Monopoly power does not necessarily hurt consumer welfare, whereas abuse of monopoly power does.
2. Would the use of leverage meet the criteria for abuse of monopoly power outlined in the first paragraph? (A) No, because leverage involves a nonmonopolized market. (B) No, unless the leverage involves a tying arrangement. (C) Yes, because leverage is a characteristic of monopoly power. (D) Yes, unless the firm using leverage is charging competitive prices. (E) Yes, because leverage is used to eliminate competition in a related market.
3. What is the main purpose of the third paragraph (lines 28—47)? (A) to distinguish between supracompetitive prices and supracompetitive profits (B) to describe the positive use of monopoly power (C) to introduce the concept of economies of scale (D) to distinguish what is not covered by the antitrust law under discussion from what is covered (E) to remind the reader of the issue of consumers welfare
4. Given only the information in the passage, with which one of the following statements about competition would those responsible for the antitrust laws most likely agree? (A) Competition is essential to consumers’ welfare. (B) There are acceptable and unacceptable ways for firms to reduce their competition. (C) The preservation of competition is the principal aim of the antitrust laws. (D) Supracompetitive prices lead to reductions in competition. (E) Competition is necessary to ensure high-quality products at low prices.
5. Which one of the following sentences would best complete the last paragraph of the passage? (A) By limiting consumers’ choices, abuse of monopoly power reduces consumers’ welfare, but monopoly alone can sometimes actually operate in the consumers’ best interest. (B) What is needed now is a set of related laws to deal with the negative impacts that monopoly itself has on consumers’ ability to purchase products at reasonable cost. (C) Over time, the antitrust laws have been very effective in ensuring competition and, consequently, consumers’ welfare in the volatile communications and computer systems industries. (D) By controlling supracompetitive prices and corresponding supracompetitive profits, the antitrust laws have, indeed, gone a long way toward meeting that objective. (E) As noted above, the necessary restraints on monopoly itself have been left to the market, where competitive prices and economies of scale are rewarded through increased market share.
Re: One type of violation of the antitrust laws is the abuse of [#permalink]
14 Mar 2013, 01:04
16. (E) Paragraph 5 says that antitrust laws focus on abuse of monopoly power rather than possession of it in order to protect consumers’ welfare. So we can infer (E): that the abuse of monopoly power is prohibited because it impairs consumer welfare, whereas possession doesn’t necessarily hurt consumers. (A) The author doesn’t make a legal distinction between market share and market control. (B) The author never suggests that monopoly power is easier to demonstrate than abuse. (C) In the first paragraph, abuse of monopoly power is defined as the exclusion of competition “in the monopolized market or related markets,” so it needn’t involve more than one market. (D) Paragraph 3 says that charging supracompetitive prices doesn’t by itself constitute an abuse of monopoly power. • Watch out for categorical choices like (C), which says abuse of monopoly power must involve more than one market. Compare this choice with correct choice (E), which says that monopoly power “doesn’t necessarily” hurt consumer welfare.
17. (E) At the beginning of paragraph 4, leverage is described as “the use of power in one market to reduce competition in another,” a strategy which is clearly characterized as abuse in paragraphs 1 and 4. (A) Au contraire. We’re told that the manipulation of related markets constitutes abuse, even though these secondary markets aren’t monopolized. (B) “Tying arrangements” are presented as an example of leverage strategy, and all leverage strategies are considered abuses by the author. (C) Au contraire aussi. The use of monopoly power in itself doesn’t constitute abuse. (D) A company using leverage would still violate antitrust laws, even if it was charging competitive prices.
18. (D) The passage as a whole revolves around the distinction between possession of monopoly power and its abuse. In the third paragraph, the author brings up a number of cases where companies that possess monopoly power use it legally. The author is clarifying how far companies can legally exercise monopoly power. As (D) puts it, the author is distinguishing what is covered by the antitrust laws from what isn’t. (A) is outside the scope. There’s no mention of supracompetitive profits in the passage, if indeed such profits exist. (B) distorts the passage. We’re told how far companies can exercise monopoly power without breaking the law, a quite different thing from describing positive uses of monopoly power. (C) focuses on a detail, not the main purpose of the paragraph. (E) doesn’t really emerge until paragraph 5; it’s by no means the central idea of paragraph
19. (B) Essentially the lawmakers’ attitude toward monopoly is that some methods of reducing competition are legitimate, and some aren’t.The point of the passage, after all, is to distinguish between legal and illegal forms of monopoly. Paragraphs 2 and 3 center around the extent to which companies can exercise monopoly power without violating antitrust laws. Paragraphs 4 and 5, on the other hand, focus on uses of monopoly power that are prohibited by antitrust laws. (A) Au contraire. At the end of paragraph 3, we’re told that monopolist companies can be allowed to grow at the expense of competition in the interests of consumers’ welfare. (C) The author says that consumer welfare is the principle aim of the antitrust laws. (D) Au contraire aussi. According to paragraph 2, when close substitutes for a product are available, competition benefits from a company that charges supracompetitive prices. (E) Since the existence of monopolies is considered better for consumer welfare under certain circumstances, lawmakers presumably wouldn’t agree that competition is necessary to supply high-quality products at low prices.
20. (A) The author’s point in the final paragraph is that the legal distinction between possession of monopoly power and its abuse is based on a desire to promote consumer welfare. We want a choice that’s relevant to this idea. (A) fits the bill by picking up the consumer-welfare- based distinction between abuse and possession of monopoly power, and explaining that monopoly power can sometimes be in the consumers’ best interests. (B) goes against the gist of the last paragraph. The author believes that antitrust laws have been effective in securing the consumers’ best interests. (C) is outside the scope. It focuses on two particular industries that haven’t been mentioned anywhere. (D) dredges up the idea of “supracompetitive” profits, which aren’t mentioned anywhere in the passage. (E) also goes against the gist of the paragraph. Restraints on monopoly haven’t been left to the market, but rather have been enforced by antitrust laws.
Re: One type of violation of the antitrust laws is the abuse of [#permalink]
14 Mar 2013, 09:55
Got the 4th question wrong... Can some one help me understand the gap in my reasoning? To be honest I am not able to eliminate option for this question.
Given only the information in the passage, with which one of the following statements about competition would those responsible for the antitrust laws most likely agree?
(A) Competition is essential to consumers’ welfare. - Is this not mentioned in the last lines and is this not what the drafters of the law would agree with? On what basis can this option be eliminated?
(B) There are acceptable and unacceptable ways for firms to reduce their competition. True, but "A" sounded more likely to be the answer. This would have been my 2nd answer.
(C) The preservation of competition is the principal aim of the antitrust laws. The primary aim is to prevent abuse of monopoly power. (Rejected on this line of reasoning)
(D) Supracompetitive prices lead to reductions in competition. True, but not if they are achieved through legitimate means. Hence rejected.
(E) Competition is necessary to ensure high-quality products at low prices. Again true, have no reason to exclude this option either!