Managerial Economics and Strategy, 2/e

16.2 Regulation of Imperfectly Competitive Markets

Some government policies create market power, such as monopolies (Chapter 9). However, other government policies reduce market power. A government can take one of three approaches to eliminating a market failure caused by non-competitive pricing, such as by a monopoly. The most direct approach is for the government to own the monopoly and set relatively low prices. For example, many governments own and operate electric power and water utilities.

A second approach is to change the market structure, as when the U.S. government increased the number of aluminum manufacturers during World War II, ending Alcoa’s monopoly. We address other attempts to change the nature of competition in a market using ...