Chapter 13
Antitrust and Regulation
• Key Concepts
• Summary
• Practice Quiz
• Internet Exercises
©2002 South-Western College Publishing
1
What is a trust?
A combination or cartel
consisting of firms
that place their
assets in the custody
of a board of trustees
2
What is
predatory pricing?
The practice of one or
more firms temporarily
reducing prices in order
to eliminate competition
and then raising prices
3
When was the age of
the robber barons?
In the later part of
the 1800’s
4
What was done to limit
the power of trusts?
Congress passed laws
aimed at preventing
firms from engaging in
anticompetitive activities
5
What is the
Sherman Act?
The federal antitrust law
enacted in 1890 that
prohibits monopolization
and conspiracies to
restrain trade
6
What is the
Clayton Act?
A 1914 amendment that
strengthens the
Sherman Act by making
it illegal for firms to
engage in certain
anticompetitive
business practices
7
What business
practices were
declared illegal under
the Clayton Act?
• Price discrimination
• Exclusive dealing
• Tying contracts
• Stock acquisition of
competing companies
• Interlocking directorates
8
Was the Clayton Act an
improvement over the
Sherman Act?
Although more specific
than the Sherman Act, the
Clayton Act is also vague
9
What is the Federal
Trade Commission Act?
The federal act that in 1914
established the Federal
Trade Commission (FTC)
to investigate unfair
competition
10
What is the
Robinson-Patman Act?
A 1936 amendment to
the Clayton Act that
strengthens the
Clayton Act against
price discrimination
11
What is the basic
purpose of the
Robinson-Patman Act?
To prevent large sellers from
offering different prices to
different buyers where the
effect is to harm even a
single small firm
12
What is the
Celler-Kefauver Act?
A 1950 amendment to the
Clayton Act that prohibits
one firm from merging
with a competitor by
purchasing its physical
assets if the effect is to
substantially lessen
competition
13
What are some key
antitrust cases?
• Standard Oil Case 1911
• Alcoa Case 1945
• IBM Case 1982
• AT&T Case 1982
• MIT Case 1992
• Microsoft Case 1995
14
What was the
outcome of the
standard oil case?
The rule of reason
15
What is the
rule of reason?
The antitrust doctrine that
the existence of
monopoly alone is not
illegal unless the
monopoly engages in
illegal business practices
16
What was the outcome
of the Alcoa case?
The per se rule
17
What is the
per se rule?
The antitrust doctrine that the
existence of monopoly
alone is illegal, regardless
of whether or not the
monopoly engages in illegal
business practices
18
What was the result
of the IBM case?
A switch back to
the rule of reason
19
What was the result
of the AT&T case?
Technology made this
government-regulated
natural monopoly
obsolete, and AT&T
was found guilty of
anticompetitive pricing
20
What was the result of
the MIT case?
Eight Ivy League schools
agreed to stop colluding
to fix prices, and MIT was
found guilty of price fixing
21
What was the result of
the Microsoft case?
Microsoft was not
allowed to purchase
Intuit Inc., a competitor
in the personal finance
software industry
22
What was the Microsoft
case of 2001?
This case charged Microsoft
with predatory pricing by
tying its monopoly in
Windows to its Internet
Explorer browser
23
How can firms
avoid charges of
price fixing?
They can merge
into one company
24
When did a lot of
mergers begin
taking place?
In the 1980’s
25
What are the different
types of mergers?
• Horizontal
• Vertical
• Conglomerate
26
What is a
horizontal merger?
A merger of firms
that competes in
the same market
27
What is a
vertical merger?
A merger of a firm
with its suppliers
28
What is a
conglomerate merger?
A merger between firms
in unregulated markets
29
What can be said about
conglomerate mergers?
They are generally
allowed because they
do not significantly
decrease competition
30
What can be said
about antitrust laws
in other countries?
They are weak in
comparison to U.S.
antitrust laws
31
What is the history of
government regulation?
From the later part of the
1800’s to the 1970’s,
there was an increase in
regulation; in the 1970’s
there was a movement
away from regulation
32
What is the basic
argument in favor of
government regulation?
Market failure
33
In what ways does
the market fail?
• Natural monopoly
• Externalities
• Imperfect information
34
What is a
natural monopoly?
An industry in which longrun average cost is
minimized when only one
firm serves the market
35
What is
marginal cost pricing?
A system of pricing in
which the price charged
equals the marginal cost
of the last unit produced
36
P
$50
$40
$30
$25
$20
$15
$10
$5
Regulated Monopoly
Fair return price efficient price
A
B
MR
C
1 2 3 4 5 6 7
LRAC
LRMC
D Q
8 9
37
What is a
normal profit?
The accounting profit
required to induce a firm’s
owners to employ their
resources in the firm
38
Do production costs
include normal profit?
Yes, because normal profit
is considered a necessary
expense of a business
39
What kind of profit is
made at the
fair return price?
Normal Profit
40
What happens when
pollution is present?
Pollution causes polluting
firms to overproduce,
while causing firms that
pay the cost of cleaning
up the pollution to
underproduce
41
What can be done
when the externality of
pollution is present?
The government can
regulate the industry to
minimize the pollution
42
What happens with
imperfect information?
Deficient information on
unsafe products can
cause consumers to
overconsume a product
43
P
$20
Impact of Imperfect Information
S
E1
$15
E2
$10
D1
$5
D2
25
50
75
100
Q
44
Decrease in
quantity
supplied
Increase in
Demand
Consumers
informed of defect
45
Key Concepts
46
Key Concepts
•
•
•
•
•
•
•
•
•
What is a trust?
What is predatory pricing?
What is the Sherman Act?
What is the Clayton Act?
What is the Federal Trade Commission Act?
What is the Robinson-Patman Act?
What is the Celler-Kefauver Act?
What is the rule of reason?
What is the per se rule?
47
Key Concepts cont.
•
•
•
•
•
What are the different types of mergers?
What is a horizontal merger?
What is a vertical merger?
What is a conglomerate merger?
What can be said about antitrust laws in other
countries?
• What is a natural monopoly?
• What happens when pollution is present?
• What happens with imperfect information?
48
Summary
49
A trust is a cartel that places the
assets of competing companies in
the custody of a board of trustees.
During the last decades of the 19th
century, trusts engaged in
anticompetitive strategies to
eliminate competition and raise
prices, such as predatory pricing.
50
The Sherman Act of 1890 and the
Clayton Act of 1914 are the two most
important antitrust laws. The
Sherman Act marked the first attempt
of the U.S. government to outlaw
monopolizing behavior. Because this
act was vague, the Clayton Act was
passed to define anticompetitive
behavior more precisely.
51
The Clayton Act prohibited (1)
price discrimination, (2)
exclusive dealing, (3) tying
contracts, (4) stock acquisition,
and (5) interlocking directorates.
52
The Robinson-Patman Act of 1936
strengthened the Clayton Act by
prohibiting certain forms of price
discrimination. This law is called
the “Chain Store Act” because it
was aimed at large retail chain
stores that were obtaining
volume discounts.
53
The Celler-Kefauver Act of 1950
strengthened the Clayton Act
declaring illegal the acquisition of
the assets of one firm by another
firm if the effect is to lessen
competition.
54
The rule of reason and the per se
rule are the two main philosophies
the courts have used in interpreting
antirust law. Under the rule of
reason, monopolist were not
subject to prosecution unless they
acted in an anticompetitive manner.
55
The Supreme Court decision in the
Alcoa case of 1945 replaced the
rule of reason with the per se rule,
which states that the mere
existence of monopoly is illegal.
Today, the trend is in favor of
dominant firms because of
international competition.
56
A horizontal merger is a merger of
two competing firms. A vertical
merger is a merger of two firms
where one produces an input used
by the other firm. A conglomerate
merger is a merger of two firms
producing unrelated products.
57
Deregulation is a movement that
began in the1980’s to eliminate
regulations primarily in the
transportation and
telecommunications industries.
Today, the current trend is toward
further deregulation resulting from
federal budget cuts.
58
Marginal cost pricing is a
competitive pricing strategy for a
regulated natural monopoly. Using
this approach, regulators set the
monopolist’s price equal to its
marginal cost. Another method is
for regulators to establish a fairreturn price equal to long-run
average cost and the monopolist
earns zero economic profit.
59
Regulation of a natural monopoly is
justified on the basis of market
failure. Two other cases based on
market failure include externalities
and imperfect information.
60
P
$50
$40
$30
$25
$20
$15
$10
$5
Regulated Monopoly
Fair return price efficient price
A
B
LRAC
MR
C
1 2 3 4 5 6 7
LRMC
D
8 9Q
61
END
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