Term Paper on "Con of the Role of Big Business in Microeconomics"

Term Paper 4 pages (1218 words) Sources: 1+

[EXCERPT] . . . .

Big Business

George Stigler (the case against big business) is anti-big business. He defines big businesses as businesses that are large in size and also large relative to the industries in which they operate. He effectively argues that these types of businesses behave as monopolies to control prices and output and to encourage large government and labor unions. Further, he questions the commonly-held notion that big businesses are more operationally efficient that smaller ones.

With regards to monopoly behavior, Stigler points out that big business control profits though cooperation rather than by competing and use patent licenses to fix prices and limit the output of other companies. In a perfectly competitive market, price is determined by the true forces of market supply and demand; the seller can only control the quantity of goods it produces (Micro). In the long run, the firm maximizes profit or minimizes loss by producing the output where marginal revenue equals marginal cost. A competitive firm's marginal revenue is the given market price. However, barriers to entry (i.e. legal, sociological, natural, technology factors) prevent perfect competition. Barriers to entry create the potential for long-run economic profit and prevent competitive pressures from pushing price down to average total cost.

There are various flavors of imperfect competition (Micro). At the extreme end of the market structure is a monopoly or a single supplier in the market. Facing a downward sloping demand curve, a monopolist will charge the maximum price that consumers are willing to pay for the quantity it produces. It produces where the marginal cost curve equals the marginal revenue curve, and not where MC equals price. Because price exceeds marginal cost, people's choices aren't determined in the way they would be if the market was competitive; they choose to consume less of the monopolist's output and more of some other output. Thus, the marginal cost of increasing output is lower than the marginal benefit of increasing output, creating a welfare loss. At least in an oligopoly, there are a few competing firms. An oligopolist's price will be somewhere between the competitive price and the monopolistic price. These types of firms face at prisoner's dilemma. If one firm lowers its prices, competitors are likely to follow and everyone will see less profits. or, a competitor might hold its price to gain market share. They all stand to gain only by setting prices where everyone earns profits and has a stable market share. In the real world, most firms are monopolistic competitors. There are several competing firms who supply goods, but, unlike perfect competition, they face a downward-sloping demand curve for their differentiated products. The perfect competitor in long-run equilibrium produces at a point where MC - P - ATC. At that point, ATC is at its minimum. On the other hand, a monopolistic competitor produces at the point, MC - MR. Increasing output will lower average cost. Therefore, monopolistic competitors make great efforts to increase their market share.

But, as Stigler explains, big business isn't any more efficient than small and medium-sized businesses as they engage in mass production. True, big businesses may have economies of scale in their manufacturing processes which lowers their average total costs of production. However, this is countered by their use of buying power to demand lower prices from their suppliers and their operations which do not appear to increase output per worker more than many independent competitors would. Further, big businesses have shown themselves to be inflexible in adapting to changing economic conditions (Corporations in the United States). For example, in the 1970s, U.S. auto manufacturers were slow to respond to changes in consumer demand for smaller, fuel-efficient cars. As… READ MORE

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