Ch. 15 micro

Regulations in effect for 40 years in the airline industry restricted

entry and fixed prices

Governments regulate natural monopolies so that output is

greater and prices lower than if the monopolist were allowed to maximize profits.

Competition in U.S. industries has been increasing since World War II. Four sources of increased competition are

greater international trade, deregulation, antitrust policy, and technological change.

two views of economic regulation

-economic regulation is in the public, or consumer, interest because it controls natural monopolies where production by one or just a few firms is most efficient. -regulation is more in the special interest of producers who use regulations to fix the price, block entry, and increase profits.

two forms of government regulation of business:

-economic regulation, such as the regulation of natural monopolies, -antitrust policy, which promotes competition and prohibits efforts to monopolize, or to cartelize, an industry.

Herfindahl-Hirschman Index, or HHI

A measure of market concentration that squares each firm's percentage share of the market then sums these squares

vertical merger

A merger in which one firm combines with another from which it had purchased inputs or to which it had sold output

horizontal merger

A merger in which one firm combines with another that produces the same type of product

conglomerate merger

A merger of firms in different industries

Define market power, and then discuss the rationale for government regulation of firms with market power.

A monopoly or firms acting together as a monopoly have market power—the ability to raise price without losing all sales to rivals. If output is restricted, the marginal benefit of the last unit produced exceeds its marginal cost. Thus, there is an under allocation of resources to those firms' products, and social welfare is reduced. Government regulation attempts to improve social welfare in such situations

interlocking directorate

A person serves on the boards of directors of two or more competing firms

tying contract

A seller of one good requires a buyer to purchase other goods as part of the deal

exclusive dealing

A supplier prohibits its customers from buying from other suppliers of the product

Which best explains the government's case against Microsoft?

Airline deregulation is an example of special-interest regulation. The government's case against Microsoft is an example of public-interest regulation.

Which regulation for Preventing a merger that the government believes would lessen competition

Antitrust

trust

Any firm or group of firms that tries to monopolize a market

Clayton Act of 1914

Beefed up the Sherman Act; outlaws certain anticompetitive practices not prohibited by the Sherman Act, including price discrimination, tying contracts, exclusive dealing, interlocking directorates, and buying the corporate stock of a competitor

rule of reason

Before ruling on the legality of certain business practices, a court examines why they were undertaken and what effect they have on competition

Under what conditions would monopoly be a more efficient outcome for a market than would a competition?

Due to economies of scale, a natural monopoly has a long-run average cost curve that slopes downward over the range of market demand. This means that the lowest average cost is achieved when one firm serves the entire market. Subways are a perfect example.

Which regulation for Regulation of fares charged by a municipal bus company.

Economic

Federal Trade Commission (FTC) Act of 1914

Established a federal body to help enforce antitrust laws; run by commissioners assisted by economists and lawyers

anticompetitive behavior for A producer of carbonated soft drinks sells to a retailer only if the retailer agrees not to buy from the producer's major competitor.

Exclusive dealing

Sherman Antitrust Act of 1890

First national legislation in the world against monopoly; prohibited trusts, restraint of trade, and monopolization, but the law was vague and, by itself, ineffective

antitrust policy

Government regulation aimed at preventing monopoly and fostering competition in markets where competition is desirable

economic regulation

Government regulation of natural monopoly, where, because of economies of scale, average production cost is lowest when a single firm supplies the market

social regulation

Government regulations aimed at improving health and safety

public utilities

Government-owned or government-regulated monopolies

per se illegal

In antitrust law, business practices deemed illegal regardless of their economic rationale or their consequences

anticompetitive behavior for The same individual serves on the boards of directors of General Motors and Ford.

Interlocking directorate

Discuss the difference between per se illegality and the rule of reason.

Per se illegality refers to situations in which the courts have ruled that certain firm behaviors are automatically illegal—regardless of their economic rationale or consequences. Thus, even if a particular practice is beneficial to consumers, the firm can be found guilty of illegal behavior. Under the rule of reason, the courts consider the economic rationale and consequences of firm behaviors in determining whether they are illegal. Simply possessing market power is not illegal; it is illegal only if it is used "unreasonably."

anticompetitive behavior for A large retailer sells merchandise below cost in certain regions to drive competitors out of business

Predatory pricing

anticompetitive behavior for Dairies that bid on contracts to supply milk to school districts collude to increase what they charge

Price fixing

predatory pricing

Pricing tactics employed by a dominant firm to drive competitors out of business, such as temporarily selling below marginal cost or dropping the price only in certain markets

Why do producers have more interest in government regulations than consumers do?

Producers have more interest in government regulations because it affects their livelihood, whereas consumers have no special interest in the legislation so they ignore such matters.

capture theory of regulation

Producers' political power and strong stake in the regulatory outcome lead them, in effect, to "capture" the regulating agency and prevail on it to serve producer interests

William Shepherd's study of U.S. industries showed a clear increase in competition in the U.S. economy between 1958 and 2000. How did Shepherd explain this trend?

Shepherd attributes the increased competition to three sources: competition from imports, deregulation, and antitrust activity. Foreign imports significantly increased competition in more than a dozen major U.S. industries as international trade became more important. Domestic firms have to react to the high quality and lower prices of many imports. Deregulation in the trucking, airline, securities trading, banking, and telecommunications industries reduced barriers to entry and eliminated uniform pricing schedules. Existing firms were faced with increased price competition from old and new rivals. Shepherd argues that the effects of antitrust activity have been more significant and more permanent than the effects of foreign competition and deregulation.

Which regulation for Occupational safety and health regulations affecting working conditions

Social

Which regulation for The activities of the Food and Drug Administration (FDA).

Social

market power

The ability of a firm to raise its price without losing all its customers to rival firms

"The existence of only two or three big U.S. auto manufacturers is evidence that the market structure is anticompetitive and that antitrust laws are being broken." Evaluate this assertion

The fact that the United States has only a few automakers is not sufficient reason to determine that they are not competitive—or, more important, that they attempt to monopolize or restrict trade. Strong and healthy foreign suppliers compete against domestic auto producers, and the share of foreign sales in the United States has been growing steadily. Although General Motors accounts for about 40 percent of sales in the United States by domestic firms, its share drops to about 20 percent when sales by foreign firms are included.

What was the government's argument in the Microsoft trial and what was the company's defense? Which side prevailed?

The government argued that Microsoft attempted to extend its operating system monopoly into the market for Internet browsers and, instead, should have offered customers a choice of browsers. Microsoft said it was an aggressive but legal player in a fiercely competitive industry. It attributed its huge market share in operating systems to its ability to improve quality and value with each new version. Microsoft also argued that their market lead could be easily lost to a more innovative rival. The court sided with the government. After an appeal, there was eventually an out-of-court settlement.

What is the "regulatory dilemma"? That is, what trade-offs do regulators have to consider when deciding how to control a natural monopoly?

The natural monopolist's profit-maximizing output level is inefficient because not enough of the good is produced. This under allocation is indicated by the fact that price exceeds marginal cost at the profit-maximizing point. The regulatory commission therefore wants the natural monopolist to produce a larger quantity at a lower price. Setting the price equal to marginal cost is socially optimal. However, this forces the natural monopolist to operate at a loss and requires a government subsidy to maintain the firm. Setting the price equal to average cost eliminates the losses, allowing the firm to earn a normal profit. However, there is still an inefficiency because this price exceeds marginal cost. The regulatory commission must determine whether eliminating government subsidies is a sufficient reason to permit underallocation of resources

Compare and contrast the public-interest and special-interest theories of economic regulation. What is the capture theory of regulation

The public-interest theory of regulation holds that regulation protects the public. According to the special-interest theory of economic regulation, an industry may prefer to be regulated rather than face an unregulated environment for several reasons. First is a stability of business that might not be present in the absence of regulation. Under regulation, a firm need not worry that existing competition will eliminate it from the market. Restricted entry into the industry also protects a firm from new competition. Second, the firms in an industry may believe they can "capture" the regulating agency, causing it to act in accord with the producers' special interests. Third, natural monopolies may believe that they can overstate their costs and thus be permitted to charge higher prices.

anticompetitive behavior for A university requires buyers of season tickets for its basketball games to buy season tickets for its football games as well.

Tying contract

Price wars in the industry are now

common, and consumers benefit.

The Sherman, Clayton, and FTC acts provide the

legal and institutional framework for antitrust enforcement, a framework that subsequent amendments and court cases have clarified and embellished.

Deregulation in 1978 stimulated

new entry, unleashed price competition, and reduced prices overall.

One problem with regulation is that the

price that maximizes social welfare results in an economic loss, whereas the price that allows the firm to earn a normal profit does not maximize social welfare.

Antitrust laws are aimed at

promoting competition and prohibiting efforts to cartelize, or monopolize, an industry.