Transcript Chapter 15
Chapter 15 Economic Regulation and Antitrust Policy © 2006 Thomson/South-Western 1 Government Regulation Three kinds of government policies designed to alter or control firm behavior Social regulation Consists of measures designed to improve health and safety Economic regulation Controls the price, the output, the entry of new firms, and the quality of service in industries in which monopoly appears inevitable natural monopolies Antitrust activity Attempts to prohibit firm behavior that tries to monopolize markets 2 Price Equal to Marginal Cost The government can subsidize the firm so it earns a normal profit Drawback is that to provide the subsidy the government must raise taxes or forgo public spending in some other area – there is an opportunity cost to the subsidy approach 3 Regulating a Natural Monopoly Setting price equal to average cost provides a normal profit for a monopolist. This occurs at point h Monopolist can stay in business without a subsidy 4 Regulatory Dilemma Regulators usually face a fuzzier picture of things Demand and cost curves can only be estimated and the regulated firm may not always be completely forthcoming with this information For example, a utility may overstate its costs so it can charge a higher price and earn more than a normal profit 5 Alternative Theories One view is that economic regulation is in the public interest Competing view is that economic regulation is not in the public interest, but rather in the special interest of producers 6 Antitrust Law and Enforcement Attempts to curb the normal anticompetitive tendencies by: Promoting the sort of market structure that will lead to greater competition Reducing anticompetitive behavior Promoting socially desirable market performance 7 Sherman Antitrust Act of 1890 Prohibited the creation of trusts and monopolization Its vague language failed to define what constituted such activities and hampered its enforcement 8 Clayton Act of 1914 Prohibits Price discrimination Tying contracts Exclusive dealing Interlocking directorates Mergers 9 Other Acts Federal Trade Commission Act of 1914 a federal body was established to help enforce antitrust laws Celler-Kefauver Anti-Merger Act passed in 1950 prevents one firm from buying the assets of another firm if the effect is to reduce competition Horizontal mergers the merging of firms that produce the same product Vertical mergers the merging of firms where one supplies inputs to the other or demand output from the other 10 Per Se Illegal The courts have interpreted antitrust laws in essentially two ways One set of practices has been declared per se illegal Another set of practices falls under the rule of reason Per se illegal: illegal regardless of the economic rationale or consequences Government need only show that the offending practice took place need only examine the firm’s behavior 11 Rule of Reason Set forth in 1911 when the Supreme Court held that Standard Oil had illegally monopolized the petroleum refining industry and engaged in predatory pricing Predatory pricing is the practice of temporarily selling below marginal cost or dropping the price only in certain markets in the hope of driving rivals out of business Court focused on both the company’s behavior and the market structure that resulted from that behavior 12 Mergers and Public Policy The measure of sales concentration used is the Herfindahl index found by squaring the percent market share of each firm in the market and then summing those squares For example, if the industry consists of 100 firms of equal size, the index is 100 [(100 x (1)2] 13 HHI Based on Market Share in Three Industries 14 Mergers and Public Policy The Justice Department sorts all mergers into two categories: Horizontal mergers Nonhorizontal mergers Any merger in an industry where two conditions are met is challenged: The post-merger Herfindahl index would exceed 1800 The merger would increase the index by more than 100 points 15 Merger Waves 16 Competitive Trends Shepherd sorted industries into four groups: Pure monopoly: a single firm controlled the entire market and was able to block entry Dominant firm: a single firm had over half the market share and had no close real rival Tight oligopoly: the top four firms supplied more than 60 percent of market output, with stable market shares and evidence of cooperation Effective competition: firms in the industry exhibited low concentration, low entry barriers, and little or no collusion 17 Competitive Trends Increase in competitiveness of economy stems from: Growth in imports accounted for one-sixth of the overall increase in competition Deregulation accounted for one-fifth of the increase in competition Antitrust activity accounted for two-fifths of the growth in competition 18 Exhibit 4: Competitive Trends in the U.S. Economy 19 Problems with Antitrust Legislation Too much emphasis on the competitive model Joseph Schumpeter argued half a century ago that competition should be viewed as a dynamic process, one of creative destruction Firms may grow large because they are more efficient than rivals at offering what the consumers want firm size should not be the primary concern Market experiments have shown that most of the desirable properties of perfect competition can be achieved with a relatively small number of firms 20 Problems with Antitrust Legislation Abuse of antitrust Parties that can show injury from firms violating antitrust laws can sue the offending company and recover treble damages Growing importance of international markets A standard approach to measuring the market power of a firm is its share of the market With growth of international trade, local – or even national – market share becomes less relevant 21