Chapter 18 - Antitrust policy and regulation. In this chapter, students will be able to understand: List and explain the core elements of the major antitrust (antimonopoly) laws in the United States, describe some of the key issues relating to the interpretation and application of antitrust laws, identify and explain the economic principles and difficulties relating to the setting of prices (rates) charged by so-called natural monopolies, discuss the nature of social regulation, its benefits and costs, and its optimal level.
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 18-2 Antitrust Laws • The purpose: – Prevent monopoly – Promote competition – Achieve allocative efficiency • Historical background – Regulatory agencies – Antitrust laws 18-3 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 18-4 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 18-5 Effectiveness of Antitrust Laws • Monopoly – Microsoft Case • Mergers – Horizontal merger – Vertical merger – Conglomerate merger 18-6 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 18-7 Effectiveness of Antitrust Laws • Merger guidelines – The Herfindahl Index • Price fixing • Price discrimination • Tying contracts 18-8 Natural Monopoly • Economies of scale • Public utilities – Electricity, water, gas, phone • Solutions for better outcomes – Public ownership – Public regulation – Public interest theory of regulation 18-9 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 18-10 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 18-11 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 18-12 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 18-13 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 18-14 regulation • Standard Oil case • per se violations • natural monopoly Next Chapter Preview… Agriculture: Economics and Policy 18-15 ... 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 1 8- 14 regulation... Case • Issues of enforcement 1 8- 5 Effectiveness of Antitrust Laws • Monopoly – Microsoft Case • Mergers – Horizontal merger – Vertical merger – Conglomerate merger 1 8- 6 Types of Mergers Automobiles... Denim Fabric Vertical Merger 1 8- 7 Effectiveness of Antitrust Laws • Merger guidelines – The Herfindahl Index • Price fixing • Price discrimination • Tying contracts 1 8- 8 Natural Monopoly • Economies