Why care about industry concentration?
Context for Use
Course: Principles of Microeconomics
Prior knowledge: Students will be familiar with various market models and the characteristics of each (e.g., competition, oligopoly, monopoly, anti-trust law basics, market share, market power)
No class size limitations
Time needed: 30 minutes: 15 minutes to read article (unless assigned outside of class) and 15 minutes to discuss/formulate arguments
Students will read a 2019 article from The Atlantic about market concentration in the US. They will determine which passages from the article may best convince a roommate whether they should care about increasing market concentration.
Students often misuse the word "competition" in microeconomics. For example, students believe the soft drink industry is "highly competitive" even though 2 firms have a combined 75% market share. This exercise may help students better understand the characteristics of a competitive, "free" market.
Expected Student Learning Outcomes
Students will be able to explain how increasing industry concentration directly impacts them.
Information Given to Students
Article link: Europe, Not America, Is the Home of the Free Market - The Atlantic
Full text Word file also in SP activity folder. (Anyone can get a few free articles per month from The Atlantic)
Suppose you are trying to explain to a roommate why they should care that many industries in the US are controlled by a few large firms. Which point or passage from the article would best help you?
A. "Internet service, cellphone plans, and plane tickets are now much cheaper in Europe and Asia than in the United States, and the price differences are staggering."
B. European households have far more choices when it comes to things like internet-service providers. For example "French households typically choose among five or more internet-service providers; American households are lucky if they have a choice between two, and many have only one."
C. "Free markets are supposed to punish private companies that take their customers for granted, but today many American companies have grown so dominant that they can get away with offering bad service, charging high prices, and collecting, exploiting, and inadequately guarding their customers' private data."
D. "Creeping monopoly power has slowly but surely suffocated the middle class....the basket of goods and services consumed by a typical household in 2018 cost 5 to 10 percent more than it would have had competition remained as healthy as it was in 2000. Competitive prices would directly save at least $300 a month per household..."
Article from The Atlantic (Microsoft Word 2007 (.docx) 18kB Aug11 22)
Teaching Notes and Tips
Poll the students to determine if they think the various industries mentioned in the article (cell phone service providers, airlines, etc.) are competitive? (the most common response will likely be "yes"?)
1. Remind them of meaning of competition as used in microeconomics: if an industry is competitive, it means there are many firms each with a relatively small market share that act independently
2. Does the US have "free" markets? What is your definition of "free" market? (Is it just lack of government involvement? Or does it mean highly competitive?)
3. Might also probe regarding comparisons to Europe (e.g., does Western Europe have more competitive or less competitive markets than US?)
Follow up questions:
1. What was the reasoning behind your selection?
2. Were you surprised by the information presented by Thomas Phillipon? What was most/least surprising?
3. Is industry concentration just a normal by-product of capitalism? What are some of the reasons for increasing industry concentration, according to this piece?
4. What happens to the "invisible hand" of the market as industries become more concentrated?
5. Suppose you are the owner/CEO of a Verizon (way to go!) and you know that your biggest competitor (AT&T) has started adding an "economic adjustment charge" to all of their customers' bills...what do you think you would do?
Short answer/essay question:
The effectiveness of any law depends on 2 things: how the law is interpreted and how it is enforced. After reading this article, how would you characterize the enforcement of antitrust law in the United States since 1999? Provide at least one piece of evidence from the article.
How are industry concentration and competition related?:
A. There is a direct relationship between the amount of concentration in and industry and the level of competition.
B. There is an inverse relationship between the two.
C. Industry concentration and competition are independent of each other.
D. Increasing industry concentration benefits consumers while increased competition harms consumers.