Ch. 25: Government and Product
Markets:
Antitrust and Regulation
Del Mar College
John Daly
©2003 South-Western Publishing, A Division of Thomson Learning
Antitrust
• Antitrust Law is
legislation passed for the
stated purpose of
controlling monopoly
power and preserving and
promoting competition.
• Trust: A combination of
firms that come together
to act as a monopolist
The Sherman Act (1890)
• Every contract, combination in the form of trust or
otherwise, or conspiracy, in restraint of trade or
commerce among the several states, or with
foreign nations, is hereby declared to be illegal.
• Every person who shall monopolize, or attempt to
monopolize, or combine or conspire with any
other person or persons to monopolize any part of
the trade or commerce…shall be guilty of a
misdemeanor.
The Clayton Act (1914)
The Following were made illegal by
this act:
• Price Discrimination
• Exclusive Dealing
• Tying Contracts
• Acquisition of competing
companies stock if the
acquisition reduces competition.
• Interlocking directorates – an
arrangement whereby the
directors of one company sit on
the board of directors of another
company in the same industry
Other Antitrust Acts
• Federal Trade Commission Act: unfair methods of
competition in commerce declared illegal (1914)
• Robinson-Patman Act: prohibits suppliers from offering
special discounts to large chain stores unless they also offer
the discounts to everyone else.(1936)
• Wheeler-Lea Act: empowers the Federal Trade
Commission to deal with false and deceptive acts or
practices.(1938)
• Celler-Kefauver Antimerger Act: designed to close the
merger loophole that remained in the Clayton Act. It bans
anticompetitive mergers that occur as a result of one
company acquiring the physical assets of another company.
(1950)
Unsettled Points in Antitrust Policy
• Does the Definition of the Market Matter?
• Concentration Ratios: measured with the
Herfindahl Index – measures the degree of
concentration in an industry. It is equal to the sum
of the squares of the market shares of each firm in
the industry
• Concentration Ratios: Don’t take into account
foreign competition; ratio can remain stable over
time even though there is competition within the
industry.
A Comparison
of the Four
Firm
concentration
ratio and the
Herfindahl
Index
Using the old method (in this case, the four-firm
concentration ratio), the top four firms in the industry have a
48% market share. The Justice Department would likely
frown on a proposed merger between any of the top four firms
and any other firm. However, the Herfindahl Index of 932 is
representative of unconcentrated industry.
Antitrust and Mergers
The reason government
looks most carefully at
proposed horizontal
mergers is they are more
likely to change the
degree of concentration
or competition in an
industry
Mergers
• Horizontal Merger is a
merger between firms that
are selling similar products
in the same market
• Vertical Merger is a merger
between companies in the
same industry, but at
different stages of the
production process.
• Conglomerate Merger is a
merger between companies
in different industries.
Nine Antitrust Cases And Actions
•
•
•
•
•
•
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Von’s Grocery
Utah Pie
Continental Airlines
IBM
Universities
Microsoft and Intuit
Lockheed Martin and
Northrup Grumman
• Boeing and McDonnell
Douglas
• Genetech and Roche
Antitrust and Network Monopolies
• A network good is a good whose value
increases as the expected number of units
sold increases.
• Currently, the antitrust authorities do not
move against a network monopoly because
of what it is, but because of how it behaves.
United States of America V.
Microsoft: Civil Action No. 98-1232
• MS Windows is used on more than 80
percent of Intel-based PCs.
• There are high barriers to entry in the
market for PC operating systems
essentially because MS Windows is a
network good that is the industry
standard.
• Justice Department claimed
Microsoft was using the dominance
in the Operating System market not
only to maintain a monopoly, but to
gain dominance in the Internet
browser market.
Q&A
• Why does it matter whether a market is defined
broadly or narrowly for purposes of antitrust
policy?
• There are 20 firms in an industry and each firm
has a 5% market share. What is the four-firm
concentration ration and the Herfindahl index for
this industry?
• What is the advantage of the Herfindahl index
over the four-firm and eight-firm concentration
ratios? Explain your answer.
The Case of the Natural
Monopoly
• If economies of scale are so pronounced or large
in an industry that only one firm can survive, that
firm is a natural monopoly.
• Examples of this are local electricity suppliers,
gas, and water service.
• Natural monopoly exists where one firm can
supply the entire output demanded at lower cost
than two or more firms can. It is a natural
monopoly because a monopoly situation will
naturally evolve over time as the low-cost
producer undercuts its competitors.
The Natural Monopoly Situation
The only existing firm produces
Q1 at an average total cost of
ATC1. Resource allocative
efficiency exists at Q2. There
are two ways to obtain this
output level: the only existing
firm can increase its production
to Q2 or a new firm can enter
the market and produce Q3
which is the difference between
Q2 and Q1. The first way
minimizes total cost, the second
way does not. This is a natural
monopoly situation: One firm
can supply the entire output
demanded at a lower cost than
two or more firms can.
The Profit-Maximizing Natural
Monopoly
The natural
monopoly that
seeks to
maximize profits
will produce the
quantity of
output at which
MR = MC and
charge the
monopoly price
P1.
Regulating the Natural Monopoly
• Price Regulation
• Profit Regulation
• Output Regulation
Regulation of a natural monopoly does not always turn out
the way it was intended.
Each type of regulation requires information, and each
type of regulation can suffer from regulatory lag – the
time period between when a natural monopoly’s costs
change and when the regulatory agency adjusts prices of
the natural monopoly.
Regulating a Natural Monopoly
The government can
regulate a natural monopoly
through (1) price regulation,
(2) profit regulation, or
(3)output regulation. Price
regulation usually means
marginal cost pricing and
profit regulation usually
means average cost pricing.
Theories of Regulation
Capture Theory: no matter the motive for the initial
regulation and the establishment of the regulatory agency,
eventually the agency will be controlled by the special
interests of the industry that is being regulated. Reasons
sited include:
• Persons who have been in the industry are asked to regulate
the industry because they know the most about it.
• At regulatory hearings, members of the industry attend in
greater force than taxpayers or consumers.
• Members of the regulated industry make a point of getting
to know the members of the regulatory agency.
• After they retire or quit their jobs, regulators often go to
work for the industry they once regulated.
Theories of Regulation (II)
• Public Interest Theory: regulators are seeking to
do, and will do through regulation, what is in the
best interest of the public or society at large.
• Public Choice Theory: regulators are seeking to
do, and will do through regulation, what is in their
best interest (specifically, to enhance their power
and the size and budget of their regulatory
agencies.
Social Regulation
• Is concerned with the
conditions under which goods
and services are produced
and the safety of these items
to the consumer.
• Not everyone agrees on the
worth of social regulation:
some say it is too expensive
and too invasive; others say
government regulation of
businesses is important
because of atrocious things
can happen without it.
Costs and Benefits of Regulation
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•
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Benefits can be made to improve society.
Regulations come with costs as well as benefits.
There are also unintended effects of regulation.
A regulation requiring car companies to produce
cars that get better fuel mileage may have a side
effect: people purchase and burn more gasoline
and thus produce more air pollution, not less as the
government intended.
Deregulation
• Many economists, basing their arguments on the
capture and public choice theories of regulation,
argued that regulation was actually promoting and
protecting market power instead of reducing it.
• Deregulation has led to a decline in costs in
various institutions.
• Example: The Telecommunications Act of 1996
may give consumers one stop shopping for their
cable TV, telephone (local and long distance),
internet, and wireless needs.
Q&A
• What is a criticism of average cost pricing?
• State the essence of the capture theory of
regulation.
• What is the difference between the capture
theory and the public choice theory of
regulation?
• Are economists for or against social
regulation?