Transcript Antitrust and Regulation

Economics
NINTH EDITION
Chapter 28
Controlling Market
Power:
Antitrust and
Regulation
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Learning Objectives
28.1 Define a natural monopoly and explain the averagecost pricing policy.
28.2 List three features of antitrust policy.
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28.1 NATURAL MONOPOLY (1 of 4)
Picking an Output Level
MARGINAL PRINCIPLE
Increase the level of an activity as long as its marginal benefit exceeds its marginal
cost. Choose the level at which the marginal benefit equals the marginal cost.
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28.1 NATURAL MONOPOLY (2 of 4)
Picking an Output Level
Because of the indivisible input (the
pipe system), the long-run averagecost curve is negatively sloped.
The monopolist chooses point a,
where marginal revenue equals
marginal cost.
The firm sells 70 million units of water
at a price of $2.70 each (point b) and
an average cost of $2.10 (point c). The
profit per subscriber is $0.60 ($2.70 –
$2.10).
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28.1 NATURAL MONOPOLY (3 of 4)
Will a Second Firm Enter?
The entry of a second cable firm would
shift the demand curve of the typical firm
to the left.
After entry, the firm’s demand curve lies
entirely below the long-run average-cost
curve.
No matter what price the firm charges, it
will lose money. Therefore, a second
firm will not enter the market.
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28.1 NATURAL MONOPOLY (4 of 4)
Price Controls for a Natural
Monopoly
Under an average-cost pricing policy, the
government chooses the price at which
the demand curve intersects the long-run
average-cost curve—$12 per subscriber.
Regulation decreases the price and
increases the quantity.
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APPLICATION 1
PUBLIC VERSUS PRIVATE WATERWORKS
APPLYING THE CONCEPTS #1: What is the rationale for regulating a natural
monopoly?
In the early part of the nineteenth century in Great Britain, water was distributed by local
government.
• The Industrial Revolution led to rapid urban growth.
• Lacking taxing power the local governments could not keep up with the demand and water
distribution changed to private industry.
• Problems with water distribution eventually led to Parliament to change back to public
waterworks.
• Water is a natural monopoly and multiple companies could not earn enough profit to stay in
business and offer adequate services.
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APPLICATION 2
SATELLITE RADIO AS A NATURAL MONOPOLY
APPLYING THE CONCEPTS #2: When does a natural monopoly occur?
In 2008, the nation’s only two satellite radio providers, Sirius Satellite Radio and XM
Satellite Radio, announced plans to merge into a single firm. Together the two firms had 14
million subscribers, each paying $13 per month. Both firms were losing money as they
struggled to get enough subscribers to cover their substantial fixed costs.
• The proposed merger needed to be approved by the U.S. Department of Justice and the
Federal Communication Commission.
• The key question is whether the elimination of competition between the two firms would lead
to higher prices, and how large any price hike would be.
• In evaluating the merits of the proposed merger, government regulators grappled with the
trade-offs between saving costs by avoiding duplication and possible price hikes.
• The merger eventually led to greater options and lower costs to subscribers
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28.2 ANTITRUST POLICY (1 of 6)
• Trust
An arrangement under which the owners of several companies transfer their decisionmaking powers to a small group of trustees.
Breaking Up Monopolies
One form of antitrust policy is to break up a monopoly into several smaller firms. The label
“antitrust” comes from the names of the early conglomerates that the government broke up.
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28.2 ANTITRUST POLICY (2 of 6)
Blocking Mergers
• Merger
A process in which two or more firms combine their operations.
• A horizontal merger involves two firms producing a similar product, for example, two
producers of pet food.
• A vertical merger involves two firms at different stages of the production process, for
example, a sugar refiner and a candy producer.
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28.2 ANTITRUST POLICY (3 of 6)
Blocking Mergers
Using the marginal principle,
Staples picks the quantity at which
its marginal revenue equals its
marginal cost.
In a city without a competing firm,
Staples picks the monopoly price
of $14.
In a city where Staples competes
with Office Depot, the demand
facing Staples is lower, so the
profit- maximizing price is only
$12.
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28.2 ANTITRUST POLICY (4 of 6)
Merger Remedy for Wonder Bread
In some cases, the government allows a merger to happen but imposes restrictions on the
new company.
TABLE 28.1 A Merger Increases Prices
Wonder Brand
Interstate Brand
Total
1
2
3
4
5
6
Before
Merger
After
Merger
Before
Merger
After
Merger
Before
Merger
After
Merger
>0
$1.50
$1.50
$1.50
$1.50
Price
$2.00
$2.00
$2.00
$2.20
Quantity
100
110
100
70
200
180
Profit
$ 50
$ 55
$ 50
$ 49
$100
$104
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28.2 ANTITRUST POLICY (5 of 6)
Regulating Business Practices
• Tie-in sales
A business practice under which a business requires a consumer of one product to
purchase another product.
• Predatory pricing
A firm sells a product at a price below its production cost to drive a rival out of business
and then increases the price.
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28.2 ANTITRUST POLICY (6 of 6)
A Brief History of U.S. Antitrust Policy
Table 28.2 Key Antitrust Legislation
Law
Date Enacted
Regulation Enacted
Sherman Act
1890
Made it illegal to monopolize a market or to engage
in practices that result in a restraint of trade.
Clayton Act
1914
Outlawed specific practices that discourage
competition, including
tie-in sales contracts, price discrimination for the
purpose of reducing competition, and stockpurchase mergers that would substantially reduce
competition.
Federal Trade Commission Act
1914
Created a mechanism to enforce antitrust laws.
Robinson – Patman Act
1936
Prohibited selling products at “unreasonably low
prices” with the intent of reducing competition.
Celler-Kefauver Act
1950
Outlawed asset-purchase mergers that would
substantially reduce competition.
Hart-Scott-Rodino Act
1980
Extended antitrust legislation to proprietorships and
partnerships.
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APPLICATION 3
THE MERGER OF PENZOIL AND QUARTER STATE
APPLYING THE CONCEPTS #3: How does a merger affect prices?
• In 1998, Pennzoil Motor Oils purchased Quaker State Motor oils in an acquisition valued
at $1 billion. The merger brought together two of the five brands of premium motor oil,
with a combined market share of 38% (29% for Pennzoil and 9% for Quaker State).
• The antitrust agencies approved the merger without any modifications. A recent study of
the merger concludes that the new company increased the price of the Quaker State
products by roughly 5%, but did not change the price of Pennzoil products. The market
share of Pennzoil products increased, while the market shares of Quaker State products
decreased.
• The study also examines the price effects of four other mergers. In three of four cases,
the merger increased prices, with price hikes between 3 and 7 percent. The authors note
that the modest price effects might be surprising to (1) people who expect relatively
large positive price effects as firms exploit their greater market power and (2) people
who expect negative price effects as the firms become more efficient.
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APPLICATION 4
MERGER OF OFFICE DEPOT AND OFFICEMAX
APPLYING THE CONCEPTS #4: What is the role of competition in the regulation of
mergers?
In 2013 the Federal Trade Commission (FTC) approved the merger of Office Depot and
OfficeMax.
The FTC concluded that the merger of the second and third largest office supply
superstores was unlikely to substantially reduce competition in the office supplies market.
Other competition comes from general superstores such as Wal-Mart and Target and club
stores such as Costco and Sam’s Club. In addition, there is competition from Amazon and
other Internet suppliers.
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KEY TERMS
Merger
Predatory pricing
Tie-in sales
Trust
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