Transcript Ch. 4: Elasticity - UCSB's Department of Economics

Ch. 18: Antitrust Policy and
Regulation
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Antitrust policy
• Main purpose: prevent monopolization,
promote competition, and achieve allocative
efficiency
• Trusts: business combinations that assign
control to a single decision group – “trustees”
– Acted as monopolies – “dominant seller”
– P > MC
– Consumer resentment
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4 Antitrust Laws
1. Sherman Act (1890): outlawed restraints of
trade (anti-competitive acts) and
monopolization.
2. Clayton Act (1914): outlawed price
discrimination, prohibited tying contracts,
prohibited acquiring stocks of competitors,
and prohibited interlocking directorates
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4 Antitrust Laws
3. Federal Trade Commission Act (1914)
a. Created the FTC
b. Gave it the power to enforce antitrust law (along
with U.S. Justice Department)
c. Amended to protect against misleading
advertising and misrepresentation of products.
4. Celler-Kefauver Act (1950)
a. Prohibits firms from merging with a competitor
through buying its physical assets (capital)
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Inconsistent Interpretation
• Should the focus be on monopoly behavior or
on monopoly structure?
– Standard Oil (1911) divided into several firms.
– U.S. Steel (1920) did not “reasonably” restrain
trade.
– Alcoa (1945) held 90% of aluminum market
– IBM (mainframes), Intel (microprocessors)
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Inconsistent Interpretation
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How broadly should markets be defined?
“90-60-30 rule”
But what is the relevant market?
DuPont cellophane (1956) controlled 100% of
cellophane market but only 20% of “flexible
wrapping material” market
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Enforcement and Effectiveness
• Active antitrust perspective vs. laissez-faire
perspective
• Effectiveness of Antitrust Law on Monopolies
– U.S. government is lenient – “rule of reason”
– Remedy: break-up firm (AT&T) or change behavior
and sue (Microsoft)
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Mergers
• Horizontal merger: two competitors that sell
similar products in the same geographic market.
– Exxon-Mobil
• Vertical merger: firms at different stages of the
production process
– Pepsi and Pizza Hut, Taco Bell, KFC; Comcast and NBC?
• Conglomerate: different industries in different
geographic areas
– ABC and Walt Disney
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Mergers
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Effectiveness of Antitrust Law on Mergers
• Herfindahl Index: sum of the squared
percentage market shares (0 – 10,000)
• U.S. Gov will likely challenge horizontal merger
if the resulting market has a Herf. Index above
1800 or if it has increased by more than 100.
– Loose rule.
– U.S. gov blocked merger between Staples and
Office Depot
– T-Mobile and AT&T?
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Effectiveness of Antitrust Law on Mergers
• Most vertical mergers are allowed because
they do not substantially lessen competition.
– Exception: Ingram Book Co. and Barnes & Noble
• Conglomerates are usually permitted
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Effectiveness of Antitrust Law
• Price-fixing
– Known as “per se” violations: “in and of
themselves” illegal.
– Examples: DRAM (Samsung, Micron); LCD sales to
Dell (by LG, Sharp, Hitachi, etc)
• Price Discrimination: rarely challenged by gov
• Tying Contracts: strictly enforced
– Movie theaters; Kodak
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Industrial Regulation
• Industrial Regulation: government regulation
of prices or rates (for a natural monopoly, e.g.)
• Solutions: public ownership or industrial
regulation
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Problems with Industrial Regulation
• Costs and Inefficiency (from Ch. 10)
– Regulation and “fair-return” price limit incentives
to keep costs low.
• Perpetuating Monopoly
– Industrial regulation may perpetuate monopoly
after the conditions for natural monopoly have
ended.
• Legal “cartels”
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Deregulation
• 1970s: wave of deregulation
• Telecommunications (AT&T): gains to
consumers and significant tech advances
• Airlines, railroads, and trucking: gains to
society
• Electricity: good except for CA and Enron.
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Social Regulation
• Social Regulation: regulation of production
conditions (safety, worker rights), physical
characteristics of goods, and the impact of
production and consumption on society
(pollution)
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The Optimal Level of Social Reg.
• MB = MC
• Pro: regulation is costly, but necessary, since
benefits (over time) are greater
– Climate change?
• Con: too much regulation → MC > MB
– Also: often inadequate info; unintended sideeffects
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Two last points
• No “free lunch” to more regulation
– Higher prices (through higher costs), less
innovation (due to uncertainty of future
regulation), and reduced competition (regulations
are more costly for smaller firms)
• Less government is not always better: the free
market doesn’t always work.
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