I. Introduction and Overview
A. The Law and Economics of Antitrust
1. Introduction: Antitrust promotes competition out of the belief that competition presses producers to satisfy consumer wants at the lowest price while using the fewest resources. Producer rivalry lets consumers bid for goods and services, thus matching their desires with society’s opportunity costs.
2. Some Basic Explanations and Behavioral Assumptions: Antitrust tries to assure that the gap between the ideal of competition and the reality of some forms of private rule does not grow dangerously wide.
a. The Demand Schedule: When economists refer to “demand,” they are identifying a demand schedule—a statement of the different quantities of a good or service that a consumer would buy at each of several different price levels. Because the amount of an item that a person will purchase cannot be determined without also considering its price, demand cannot be identified as a set, specific quantity. Rather, the demand for a product consists of a range of alternative quantities. The basic rule is that the value a consumer will attach to successive units of a commodity diminishes as her total consumption of that commodity increases. In other words, the quantity demanded varies inversely with price; the demand curve is negatively or downwardly sloped.
b. Profit-Maximizing Behavior by Firms: In making production decisions, the firm will adhere to the principle of substitution—that for a given set of technical possibilities, efficient (profit-maximizing) production will substitute cheaper factors for more expensive ones. Efficient production generally means that a firm will seek the lowest possible costs for a particular rate of output. A profit-maximizing firm will increase production when the additional revenue exceeds the additional costs. That is, the firm will expand its output as long as the marginal, or last, unit add more to revenues than it does to costs—namely, as long as the marginal revenue exceeds or equals marginal cost.
MC (marginal cost)
MR (marginal revenue)
p E (Profit Maximization)
3. Basic Economic Models: Economic theory traditionally concludes that the structure of an industry affects its behavior and, ultimately, its performance.
in order to raise her price and maximize her profits. Not only does this transfer output and may relieve the producer of pressure to innovate or otherwise be efficient. Monopoly markets are often described by three structural and functional factors: (1) one seller occupies the entire market; (2) the seller’s product is unique (i.e. there are no substitutes); (3) substantial barriers bar entry by other firms into the industry, exit is difficult. For a competitive seller marginal revenue is the same at all output levels; the monopolist, on the other hand, finds marginal revenue always less than price because her demand curve slopes downward. As a result, the monopolist faces a choice on production and price: either sell at a higher price (with fewer unit sales) or sell at a lower price (with greater unit sales). In making this choice, the monopolist will maximize profits at less than the competitive output level—namely, where marginal revenue equals marginal cost. Thus, contrary to the competitive result, the