Q19

[youmin.moon]

Hello.
Could anyone explain this question to me? I chose (A) at first, and I don't understand why (B) is right. I originally understood abuse of monopoly power is the only one that can reduce the competition, not the monopoly itself. Could anybody go through this question and answer choices?

Thank you.

[christine.defenbaugh]

Excellent question! This is a very difficult passage to untangle, in part because it is quite complex, and in part because we already have our own pre-existing ideas about what antitrust/monopoly/consumer welfare really mean. It's critical to check those ideas at the door, and rely only on the definitions provided by the passage in our approach.

This synthesis question demands that we understand how competition fits into the overall framework and purpose of the antitrust laws. This purpose is framed neatly in Paragraph 5: to promote consumer's welfare (via ensured product quality and quantity).

So how does this relate to competition? The idea of competition shows up in a number of places:

1) reduced competition can allow a firm to have a monopoly (ln 19-22)
2) a firm with a monopoly has the ability to charge prices higher than the 'competitive rate' (which would exist in a competitive market) (ln 22-25)
3) a firm may charge low, but profitable, prices for the purpose of driving out its competition (which may result in a monopoly) (ln 36-41)
4) a firm with monopoly power may use that monopoly power to exclude competition or leverage their power into control of another (competitive) market (ln 48-52)

Numbers 1 - 3 in the list above are not considered violations of antitrust laws, necessarily. Since the purpose of the antitrust laws is to promote consumer welfare (by ensuring quality/quantity of available products), allowing these three things must be better for that consumer welfare than restricting them would be.

Number 4, however, is the focus of antitrust laws prohibitions. So, the restriction of such abuses must be better for consumer welfare than allowing such things.

Restrictions on competition, therefore, sometimes fall under permitted activities (driving out your competitors by charging low, low prices) and sometimes fall under restricted activities (use of monopoly power to exclude competition). This matches up perfectly with (B) - there are acceptable and unacceptable ways for firms to reduce their competition.


The Unsupported
(A) If competition were essential to consumer welfare, then presumably the antitrust laws would prohibit all attempts to reduce competition. Lines 36-41 give a clear example of an acceptable attempt to reduce competition.

(C) The principle aim of the antitrust laws is to promote consumer welfare. (ln 63-65) And just as in (A), if the principle aim were to preserve competition, the example in lines 36-41 would likely have been unacceptable.

(D) This is the opposite of what is stated in lines 16-19. In a competitive market, supracompetitive prices drive consumers to the competition.

(E) Just as in (A), and (C), if competition were necessary for the ensured quality/quantity of available products, presumably the example in lines 36-41 would be unacceptable.



This question requires us to deploy multiple reading comprehension skills at once:
1) Identification, to scan for references to competition and understand what is explicitly stated about it
2) Inference, to understand how those specific references relate to the paragraph or larger point they are associated with
and
3) Synthesis, to relate the various references together and come to an understanding of how the concept of 'competition' relates to the antitrust laws overall

Please let me know if this answers your question completely!

[leroyjenkins]

Why is A unsupported?

The logic in answer A does not imply that "antitrust laws would prohibit all attempts to reduce competition," which christine describes above.

For something to be essential, the implication is that it merely has to exist. For example, "reproduction is essential for the survival of a species" does not imply that all members of the species need to reproduce for the species to survive (although some members have to).

The logic in A says nothing about how much competition has to exist; it merely implies "at least some." If the purpose of antitrust laws is to "promote consumers' welfare" (lines 63-64), and one of the two essential conditions for violating the antitrust laws is "excluding competition" (lines 12-13), then how is it the case that competition is not essential to consumers' welfare?

Can someone help explain?

[christine.defenbaugh]

Wonderful question leoangelakos!

You have a point that if "competition were essential" that the antitrust laws might still permit some reductions in competition, but surely it would only do so if those reductions left some competition still in existence.

No such restrictions are indicated here. Lines 36-41 outline a permitted scenario of a firm killing off competition. Nothing suggests that this is only permitted as long as they have at least one competitor left when the dust settles. In fact, lines 44-45 suggest that this competition-killing activity may lead to the firm gaining monopoly power - and that's okay.

So, in the discussion of permitted activities, there are no safeguards to ensure the permitted activities still preserve some minimal amount of competition, which you might expect if 'competition were essential'.

But let's also look to the restricted activities: you point out that one of the conditions for violations is 'excluding competition'. All violations must 'exclude competition' in some manner, but not all exclusions of competition are violations. Note that that condition is only referring to excluding competition done by monopolies using their monopoly power. Excluding competition through other means, not using monopoly power, would be outside the boundaries of the antitrust laws.

Finally, let's take a step back and think about the big picture. If competition were truly essential, then true monopolies, who have no competition, would not be permitted to exist! The passage clearly indicates that the existence of a monopoly by itself is not a violation.

Competition is only one piece of the puzzle. Only certain competition reductions are violations, and only certain zero-competition environments are impermissible.

Please let me know if that helps clear up this issue!

[leroyjenkins]

Ah, that makes sense. It would be consistent with antitrust laws to completely eliminate competition if the monopoly did not harm consumers.

So instead of: "If competition were essential to consumer welfare, then presumably the antitrust laws would prohibit all attempts to reduce competition," it's more like:

If competition were essential to consumer welfare, then presumably the antitrust laws would prohibit attempts to reduce all competition (which the laws do not do).