Antitrust policy

Ch17

Government roles to support a modern domestic economy

1- maintain efficiency (prevent excessive abuse of market power.)

• 2- promote macroeconomic stability and growth,

• 3- establish a fair distribution of income.

Business Regulation: Theory and Practice 1

• Regulation protect from potential abuses of market power, particularly when a natural monopoly is under investigation.

• There are two major categories:

1.Economic regulation 2. social regulation.

Business Regulation: Theory and Practice 2

• . Economic regulation can be accomplished by controlling prices, production, standards, and exit and entry conditions.

• Social regulation is directed at correcting (negative) externalities.

several reasons to regulate industry1

• First, government may want to contain market power and encourage competition in markets.

• However, when natural monopolies exist, regulatory agencies are established to protect consumer interests while allowing the monopoly to operate.

several reasons to regulate industry2

• Second, information failures may need to be remedied.

• consumers may have insufficient information on products.

• the markets cried out, “Let the buyer beware!”

• the consumer’s responsibility to make sure that products were safe and effective.

several reasons to regulate industry3

• Third, government may want to diminish the severity of externalities.

• example: the Environmental Protection Agency is a regulator whose main activity is to design and enforce pollution control strategies.

several reasons to regulate industry4

• Finally, interest-group theories of regulation.

• government may choose to step into an industry when the regulators have been “captured” by the regulated.

• This happens when the regulators actually begin to protect the firm’s best interest rather than the consumer’s ( ex cigarette companies)

how do regulators set industrial standard?1

average-cost pricing

• Several alternative strategies exist.

• With average-cost pricing, will end up with

a solution that is similar to the long-run perfectly competitive solution that has firms producing at minimum average total costs.

how do regulators set industrial standard?2

marginal-cost pricing

• With marginal-cost pricing,

• This brings a solution that is similar to perfect competition.

Cost Curves for a Natural Monopolist

Chapter 17 Figure 17-1

How we do to fix MC pricing problem

• EX: public transportation systems exist as regulated natural monopolies. firms cannot generate enough revenues to cover costs at this price, are often subsidized.

• Electricity charge for FC and price for MC ( two-parts tariffs)

Ideal and Practical Regulation of Monopolists

Chapter 17 Figure 17-2

Degree of Natural Monopoly in Different Industries

Chapter 17 Figure 17-3

deregulation

• For the past two decades, a significant trend toward deregulation has been spreading across the economy.

• From airlines to trucking to banking to electricity, many industries have shed the burden of regulation and entered the world of free competition.

• Most of these industries have emerged stronger and more competitive than they were under regulation.

Chapter 17 Table 17-1

Antitrust Policy

• Antitrust policy exists to limit the excesses of imperfect competition.

• Unregulated monopoly power allows firms to operate at socially inefficient levels, charging too much for too little product.

• This means that the monopoly solution yields a distribution of resources that is not allocatively efficient.

Review of imperfect competition1

• Imperfect competition can emerge due to the existence of economies of scale.

• If the technology in an industry is such that output can be produced efficiently only when a single firm exists,

we have a natural monopoly.

Review of imperfect competition2

• imperfect competition has both a good and a bad side.

• The bad is: uncontrolled exploitation of market power can, depress output and generate excessive prices and profits.

• The good is: But on the other hand, there do exist economies of scale that should not be sacrificed.

So what antitrust law can do

• antitrust activity should

• (1) keep the barriers to competition low.

• (2) tolerate bigness when size is determined by technology,

• (3) be vigilant against anticompetitive practices whenever they occur.

antitrust legislation

• The three most significant pieces of antitrust legislation in the United States are

• the Sherman Antitrust Act,

• the Clayton Act,

• the Federal Trade Commission Act.

• The Sherman Antitrust Act and the Clayton Act form the backbone of antitrust policies

• the Federal Trade Commission Act established the FTC as the agency in charge of monitoring and enforcing the legislation.

Chapter 17 Table 17-2

Conduct

• Illegal conduct

the most important illegal conduct is agreement among competing firms to fix prices, restrict out put or divide market.

Other forms like Predatory pricing, tying contracts i.e. if buy x you have to buy y, and price discrimination i.e the north and the south.

structure

• Is bigness badness• ATT• Microsoft• Mergers • Horizontal,• Vertical ( economy of scope ex: oil industry, )• and conglomerate mergers (risk and

uncertainty EX: Philip Morris, a large producer of cigarettes, purchased the Kraft food chain several years ago)

The application of these antitrust laws is not an easy task1

• Thus, on the basis of conduct, it is hard to know whether or not firms are behaving illegally.

• how to define a market or how to define competitors.

•

The application of these antitrust laws is not an easy task2

• On the basis of structure, it is hard to know whether or not firms are operating in an illegal fashion

• For example, automobile industry. Is it oligopolistic, consisting of just three big firms (Ford, Chrysler, GM) in the United States, or is it perfectly competitive, consisting not only of Ford, Chrysler, and GM but also of Honda, Toyota, BMW, Mazda, etc.?

New trend

• Recent antitrust activity has, in fact, focused on promoting efficiency in business practices and not on attacking “bigness” per se.

• The notion underlying this concentration on conduct rather than structure.

• increasing competition from around the world• Large firms that can exploit decreasing costs as

they compete internationally can be a source of economic strength as long as they do indeed compete.