Discuss the role of government in regulating oligopoly.
The government of the United States of America plays a very prominent role in regulating the activities of oligopolies, mainly through the enforcement of antitrust laws. These laws largely began with the Sherman Antitrust Act of 1890. The opening sentence of this law, which was passed by Congress to restrict the ability of large corporations to monopolize markets either independently or collectively (in the case of an oligopoly), reads as follows:
“Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.”
While the Sherman Antitrust Act represented a major expansion of the government’s role in regulating businesses and it remains the core U.S. antitrust law in the United States Code, its application to subsequent questionable business practices required the passage of additional statutes intended to close loopholes and improve the government’s ability to enforce antitrust laws. The next major government effort along these lines was passage of the Federal Trade Commission Act of 1914, which created, as the title suggests, the Federal Trade Commission (FTC). The FTC was established for the purpose of investigating possible violations of the Sherman Antitrust Act, and the commission was given authority to both prevent the creation of monopolies and oligopolies and to file civil suits against those businesses found to be violation of the law.
The next important law to be passed was the Clayton Act, also in 1914, which further attempted to close loopholes in the original Sherman Antitrust Act. Because the authors of legislation cannot anticipate all future scenarios intended to skirt or evade existing laws, Congress will typically revisit the issue to address activities that did not exist and were not envisioned but which have the effect of violating the law. The Clayton Act was one such case, and it expanded the scope of the Sherman Antitrust Act to better protect against monopolization of markets that can occur through mergers and acquisitions. The Clayton Act was amended and strengthened with passage of the Hart-Scott-Rodino Antitrust Improvements Act of 1976. This latter effort established a requirement that competing businesses planning to merge must notify the government in advance of any such merger. This gives the government an opportunity to study the ramifications of any such merger, mainly with regard to any potential limits on competition the merger in question might create.
Oligopoly is a market structure in which a very few large firms control the great majority of the market. This market structure is one in which collusion can easily occur between the firms that are big players in the market. Government regulation is useful to the extent that it prevents collusion from occurring.
For example, the airline industry, especially in past decades, was an oligopoly. The government believed that it was important to regulate that market so as to prevent the airlines from colluding to keep prices high. Government must ensure that competition will happen even in an oligopoly. Of course, the government must take care so as not to overregulate. In the case of the airline industry, the government seems to have made this mistake because deregulation of the industry actually led to more competition and lower prices.
In short, then, governments should ensure that oligopolies remain competitive, but should not engage in excessive regulation that ends up stifling competition.
In an oligopoly, decisions made by one firm affect or influence actions made by the other firms coexisting within the market structure. The situation creates an environment for possible collusion since important decisions (such as pricing) have to be agreed upon collectively. Thus, firms within an oligopoly structure are predominantly price setters, which provides them with an opportunity to push for unfair profit margins to the detriment of consumers.
Some governments play an important role in maintaining a level playing field by establishing and enforcing laws against price fixing. Oligopolies are also known to prevent new entrants from accessing the market and to acquire smaller firms to maintain the status quo. Through antitrust laws/ competition laws, governments are endowed with the capability to reign in errant firms for the benefit of the market and the customers. The government plays a role in protecting smaller firms and in ensuring that large firms extend opportunity to these small firms.
Another role the government can play is to foster an environment in which an oligopoly loses its power for collusion through the entry of others into the market, providing more competition. Historically, utilities have gone from being monopolies to being oligopolies. Is the next step for the government to provide more help for others to enter this market, for example, in the alternative energy industry, through subsidies and/or tax breaks? These can be phased out once a company gets on its feet. Certainly, other countries do this routinely today. This is a politicized issue, but there is certainly something to be said for moving an oligopoly along closer to pure competition, which would mean less government intervention in the long run.