Competition in the Market
The laws of supply and demand are best evident in a competitive market. Competition causes businesses to try new ways to attract customers by lowering prices, improving quality and developing new products and services.
Think of it like football or any other competitive team sport. The more teams there are, the harder and smarter all teams have to work to play the best game and please the audience at the same time. Competition encourages change and thereby helps to keep business exciting. Because the market is constantly changing (just like the game), entrepreneurs are constantly taking risks (like the players).
However, just like a referee enters the game to enforce rules and regulations, the federal government has its own regulatory agencies to keep business practices in check. Unfortunately, government regulations, or anything that keeps entrepreneurs from entering the market, will make it less competitive. Unfortunately, less competition inevitably leads to higher prices, poorer quality, and fewer new products and services.
One of the major functions of government in business is to help prevent against the formation of monopolies. A monopoly forms when one company or a cooperating group of companies controls the supply of a product or service for which there is no substitute. The word monopoly derives from two Greek words–monos, meaning "single," and polien, meaning "to sell."
Economists actually divide the types of monopolies into four categories:
2. pure competition
3. monopolistic competition
In a monopoly, there exists only one supplier of a product or service for which buyers cannot easily find a substitute. Monopolies are rare, but in the U.S., the U.S. Postal Service and some public utilities (electric, gas, water) are considered monopolies.
In pure competition, an industry is made up of a large number of producers that sell nearly identical products. Pure competition is also rare, but in the U.S., the sale of wheat and a few other agricultural products comes close.
In monopolistic competition, rivals businesses sell different varieties of the same product or service, as well as close substitutes of each others product or service. For example, hundreds of manufacturers sell various styles of clothing.
In an oligopoly, the industry is dominated by a few companies. Thus, the policies of each company greatly influence those of other companies. U.S. automobile and computer industries, for example, are oligopolies.
There are various causes of monopolies. In some cases, a company may find a way of achieving the same volume of production as its competitors through more efficient methods and may consequently drive competitors out of business. In some industries, obstacles, or entry barriers, can prevent new companies from entering the market. Entry barriers can include licences and patents which allow only one company the right to produce a particular item. Or, a monopoly may arise if the supply of raw material needed to make a product is controlled by one company.
Today, antitrust laws are enforced by the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice. The FTC can order a company to stop unfair methods of competition. The Antitrust Division investigates and prosecutes businesses that violate antitrust regulations.
U.S. v. Microsoft Corp.
On May 18, 1999, the Justice Department and 20 states filed a case against Microsoft Corporation, the world's largest software company, claiming that the company had violated U.S. Antitrust laws.
The court argued that Microsoft had engaged in a pattern of illegal conduct that excluded competing software and thereby raised entry barriers to the PC operating system market. As the Court put it, Microsoft "utilized its operating system monopoly to place an oppressive thumb on the scale of competitive fortune, thereby effectively guaranteeing its continued dominance in market."
As a matter of fact, the Justice Department reported that Microsoft dominates 82% of the world market for PC operating systems with revenue totaling $8.5 billion in 1999.
Also, Microsoft dominates approximately 93% of the world market in both word-processing and spreadsheet applications, totaling $11.2 billion in revenue.
Under the Sherman Antitrust Act or 1890, it is not necessarily illegal to be a monopoly, but using that power in an anti-competitive way such as withholding essential products or raising prices arbitrarily can violate antitrust law, which was the case with Microsoft.
After a federal court found Microsoft in violation of the act in April 2000, the Justice Department and 17 states submitted a recommendation to a federal judge saying that Microsoft should be divided into two companies: one company that would produce the Windows operating system and another that would make software programs such as the Microsoft Office suite of spreadsheet, word-processing and other business applications.
Microsoft reacted with an appeal which went on for months. To learn more about the Microsoft case or catch up on the latest news, visit www.washingtonpost.com or any other news publisher site.