Microeconomics: Chapter 15 - Economic Regulation and Antitrust Policy

rule of reason

Before ruling on the legality of a business practice, a court examines why it was undertaken and what effect it has on competition

Clayton Act of 1914

Outlawed 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

Three kinds of government policies are designed to alter or control firm behavior:

social regulation, economic regulation, and antitrust policy.

When marginal value of additional output exceeds marginal cost..

social welfare increases if output expanded.

The problem with letting the monopolist maximize profit is that...

the resulting price-output combination is inefficient in terms of social welfare.

vertical mergers

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

horizontal mergers

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

Herfindahl-Hirschman Index, or HHI

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

interlocking directorates

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

Tying contracts

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

Federal Trade Commission (FTC) Act of 1914

Established a federal body to help enforce antitrust laws; run by commissioners assisted by economists and lawyers The president appoints the five commissioners, who are assisted by a staff of economists and lawyers.

Sherman Antitrust Act of 1890

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

Social regulation

Government regulation aimed at improving health and safety such as by control of unsafe working conditions and dangerous products.

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, the average production cost is lowest when a single firm supplies the market. local electricity transmission, subway system and air travel.

public utilities

Government-owned or government-regulated monopolies

Per Se Illegal

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

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

capture theory of regulation

Producer's 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

How can regulators encourage the monopolist to stay in business yet still produce where price equals marginal cost?

Subsidize the firm for normal profit

T/F Any firm facing a downward-sloping demand curve has some control over the price and thus some market power.

TRUE

market power

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

consent decree

The accused party, without admitting guilt, agrees not to do whatever it was charged with if the government drops the charges

Forcing a natural monopolist to produce where price, or marginal benefit, equals marginal cost results in

an economic loss to this monopolist.

special interest

an organization of people with some common interest who try to influence government decisions

But entry restrictions usually reduce...

competition and increase prices.

To prove guilt under a per se rule, the government need only...

show that the offending practice took place. Thus, the government need only examine each firm's behavior.

Antitrust policy is pursued in the courts by...

government attorneys and by individual firms that charge other firms with violating antitrust laws.

Because of economies of scale, a natural monopoly has a... This means that the...

long-run average cost curve that slopes downward over the range of market demand. lowest average cost is achieved when one firm serves the entire market.

Government can increase social welfare by forcing the monopolist to

lower the price and expand output.

To achieve social regulation, government can either...

operate the monopoly itself or regulate a privately owned monopoly.

The courts have interpreted antitrust laws in essentially two different ways:

per se illegal Rule of reason

By failing to expand output to the point where marginal benefit equals marginal cost, firms with market power...

produce less of the good and charge a higher price than would be socially optimal.

One drawback with the subsidy solution is that, to provide the subsidy, the government must...

raise taxes or forgo public spending