Lecture Economics (18th edition): Chapter 18 - McConnell, Brue, Flynn''s

Chapter 18
Antitrust Policy and
Regulation

McGraw­Hill/Irwin

        Copyright © 2009 by The McGraw­Hill Companies, Inc. All rights reserved.


Chapter Objectives
• Antitrust laws in the United
States
• Interpretation and application
of antitrust laws
• Natural monopolies
• Social regulation

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Antitrust Laws
• The purpose:
– Prevent monopoly
– Promote competition
– Achieve allocative efficiency

• Historical background
– Regulatory agencies
– Antitrust laws
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Antitrust Laws
• Sherman Act 1890
• Clayton Act 1914
– Outlaw price discrimination
– Prohibit tying contracts
– No interlocking directorates

• Federal Trade Commission Act 1914
• Wheeler-Lea Act 1938
• Celler-Kefauver Act 1950
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Antitrust Policy
• Issues of interpretation
• Monopoly behavior or structure
– 1911 Standard Oil Case
– 1920 U.S. Steel Case
– 1945 Alcoa Case

• The relevant market
– 1956 DuPont Cellophane Case

• Issues of enforcement
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Effectiveness of Antitrust Laws
• Monopoly

– Microsoft Case

• Mergers
– Horizontal merger
– Vertical merger
– Conglomerate merger
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Types of Mergers
Automobiles

Blue Jeans

Conglomerate Merger
Autos

Glass

A

T

B

U

C

V

Horizontal Merger

D

E

F

W X Y Z

Blue
Jeans

Denim
Fabric

Vertical Merger
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Effectiveness of Antitrust Laws
• Merger guidelines
– The Herfindahl Index

• Price fixing
• Price discrimination
• Tying contracts

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Natural Monopoly
• Economies of scale
• Public utilities
– Electricity, water, gas, phone

• Solutions for better outcomes
– Public ownership
– Public regulation
– Public interest theory of regulation
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Industrial Regulation
• Regulators establish rates to give
natural monopoly “fair return”
• No incentive to reduce cost
• X-inefficiency
• Perpetuate monopoly
– Conditions of natural monopoly can
end
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Social Regulation

• Applies “across the board” to all
industries
• Food and Drug Administration 1906

• Equal Employment Opportunity
Commission 1964
• Occupational Safety and Health
Administration 1971
• Environmental Protection Agency 1972
• Consumer Product Safety Commission
1972
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Social Regulation
•
•
•
•

Optimal level of social regulation
In support of social regulation
Criticisms of social regulation
Two reminders
– There is no free lunch
– Less government is not always
better than more
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United States vs. Microsoft
• Charged May 1998 under the
Sherman Act
• Accused of having a “Windows”

monopoly
• District court findings:
– Used anticompetitive means

• District court remedy
• Appeals court ruling
• Final settlement
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Key Terms
• antitrust policy
• industrial regulation

• U.S. Steel case
• rule of reason

• social regulation
• Sherman Act

• Alcoa case
• DuPont cellophane case

• Clayton Act
• tying contracts

• Microsoft case
• horizontal merger

• interlocking directorates

• Federal Trade Commission
Act
• cease-and-desist order

• vertical merger
• conglomerate merger

• Wheeler-Lea Act
• Celler-Kefauver Act

• public interest theory of
regulation
• legal cartel theory of
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regulation

• Standard Oil case

• per se violations
• natural monopoly


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Agriculture:
Economics and
Policy

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