Industrial Organization
Theory and practice
3th edition
Don E. Waldman Colage university
Elizabuth J. Jensen Hamilton collage
BRIEF CONTENTS
PART I
THE BASICS OF INDUSTRIAL ORGANIZATION
CHAPTER 1 Introduction 1
CHAPTER 2 The Firm and Its Costs 17
CHAPTER 3 Competition and Monopoly 51
CHAPTER 4 Market Structure 88
CHAPTER 5 Monopoly Practices 143
CHAPTER 6 Market Power and Performance: The Empirical Evidence 161
PART II
MODERN INDUSTRIAL ORGANIZATION:
GAME THEORY AND STRATEGIC BEHAVIOR
CHAPTER 7 Game Theory: A Framework for Understanding Oligopolistic Beha
CHAPTER 8 The Development of Oligopoly Theory 230
CHAPTER 9 Collusion: The Great Prisoner's Dilemma 266
CHAPTER 10 Cartels in Action 303
CHAPTER 11 Oligopoly Behavior: Entry and Pricing to Deter Entry 335
CHAPTER 12 Oligopoly Behavior: Entry and Nonpricing Strategies to Deter Entry
PART III
BUSINESS PRACTICES
CHAPTER 13 Product Differentiation and Advertising 416
CHAPTER 14 Technological Change and Research and Development 469
CHAPTER 15 Price Discrimination 515
CHAPTER 16 Vertical Integration and Vertical Relationships 562
CHAPTER 17 Regulation and Deregulation 606
Glossary 639
Answere to Odd-Numbered Problems 652 Index 678 Credits 712
CONTENTS
PART 1 THE BASICS OF INDUSTRIAL ORGANIZATION
CHAPTER 1 Introduction
1.1 Two Approaches to the Study of Industrial Organization 3
1.1.1 THE STRUCTURE-CONDUCT-PERFORMANCE (SCP) APPROACH 3
1.1.2 THE CHICAGO SCHOOL APPROACH 6
1.2 Static versus Dynamic Models 7
1.3 Theory and Empiricism 7
1.4 Government and Industrial Organization 8
1.4.1 THE CONTENT OF THE ANTITRUST LAWS 8
1.4.2 ENFORCEMENT PROCEDURES 11
1.5 The Global Economy and Industrial Organization 12
1.6 General Approach of This Book 13
SUMMARY 14
CHAPTER 2 The Firm and Its Costs
2.1 The Neoclassical Firm 17
2.2 The Theory of the Firm 18 2.2.1 A FIRM'S BOUNDARIES 18
2.3 The Structure of Modern Firms 21
2.3.1 SEPARATION OF OWNERSHIP AND CONTROL 22
2.3.2 MANAGERIAL OBJECTIVES 23
APPLICATION 2:1 Executive Compensation: Pay for Performance? 23
APPLICATION 2.2 X-Inefficiency Goes Extreme: Putting Masseuses, Christmas Trees, Renoirs, and Monets on the Company
Payroll 25
2.3.3 FEASIBILITY OF PROFIT MAXIMIZATION 26 APPLICATION 2?3 How Do Firms Use Rule-of-Thumb Pricing? 26
2.3.4 CONSTRAINTS ON MANAGERS 28
APPLICATION 2.4s Stockholder Revolt at the Happiest Place on Earth: The Disney Stockholders versus Michael Eisner 28
2.4 The Profit-Maximizing Output Level 31
2.5 Cost Concepts: Single-Product Firms 32
2.5.1 ACCOUNTING COSTS VERSUS ECONOMIC COSTS 32
2.5.2 SHORT-RUN COSTS OF PRODUCTION 33
APPLICATION 2.5 When Do Sunk Costs Matter to a Firm? 33
2.5.3 LONG-RUN COSTS OF PRODUCTION AND ECONOMIES OF SCALE 37
APPLICATION 2.6 A Measure of Economies of Scale 39
2.6 Cost Concepts. Multiproduct Finns 42
APPLICATION 2.7 A Measure of Economies of Scope 42
APPLICATION 2.8 Are There Economies of Scope in Institutions of Higher Education? 43
SUMMARY 45
CHAPTER 3 Competition and Monopoly
3.1 The Economics of Perfect Competition 51
3.1.1 THE ASSUMPTIONS OF PERFECT COMPETITION 52
3.1.2 THE FIRM'S SUPPLY CURVE 54
APPLICATION 3.1 Short-Run Losses in the Airline Industry 56
3.1.3 THE MARKET SUPPLY CURVE AND EQUILIBRIUM 57
3.1.4 PROPERTIES OF COMPETITIVE EQUILIBRIUM 58
3.2 Introduction to Welfare Economics 59
APPLICATION 3.2 Consumer and Producer Surplus and the Basic Theory of the Gains from Trade 59
3.3 The Economics of Monopoly 62
3.3.1 THE RELATIONSHIP BETWEEN MARGINAL REVENUE AND PRICE <
3.3.2 ELASTICITIES, THE DEGREE OF MARKET POWER, AND THE LERNER INDEX 64
3.4 Welfare Comparison 65
3.4.1 MEASUREMENT OF THE COSTS OF MARKET POWER 67
APPLICATION 3.3 Monopoly Rent-Seeking in the Pharmaceutical Industry 68
3.4.2 CAUTIONS 70
3.5 Present Value and Discounting 71
3.6 Antitrust Policy Toward Monopolization 73
3.6.1 EARLY CASES 74
APPLICATION 3.4 American Tobacco's "Attempt to Monopolize* 74
3.6.2 THE ALCOA ERA 76
3.6.3 RECENT TRENDS IN SECTION 2 CASES 77
SUMMARY 81
CHAPTER 4 Market Structure 88
4.1 Concentration in Individual Markets 89
4.1.1 STRUCTURE-BASED MEASURES 89
APPLICATION 4.1 Aggregate Concentration 90
4.1.2 DEFINITION OF THE RELEVANT MARKET 94
4.2 Entry and Exit 96
4.2.1 PATTERNS OF ENTRY AND EXIT 96
4.2.2 ENTRY 97
4.2.3 STATIC OR STRUCTURAL BARRIERS TO ENTRY 98
APPLICATION 4.2 How Do Economists Estimate Economies of Scale? 100
APPLICATION 4.3 What Does the Evidence Say About Barriers to Entry? 109
4.2.4 INCENTIVES TO ENTER 110
4.2.5 EXIT 111
4.2.6 THE INTERACTION OF ENTRY AND EXIT 112
4.3 Mergers 113
4.3.1 MERGER HISTORY 114
4.3.2 MOTIVES FOR MERGER 116
APPLICATION 4.4 Can Pixar Save Disney? 119
4.3.3 THE EFFECTS OF MERGERS ON COMPETITION AND WELFARE 120
4.3.4 EMPIRICAL EVIDENCE ON THE EFFECTS OF MERGERS 123
4.3.5 PUBLIC POLICY TOWARD MERGERS 125
4.3.6 MERGER GUIDELINES AND THE HART-SCOTT-RODINO ACT 132
SUMMARY 135
CHAPTER 5 Monopoly Practices 143
5.1 Dominant-Firm Price Leadership Model 143
5.1.1 SOURCES OF DOMINANCE 144
5.1.2 PRICING BY A DOMINANT FIRM 144
APPLICATION 5.1 Banks and Credit Unions: Dominant Firms and Fringe Suppliers? 149
5.1.3 EMPIRICAL EVIDENCE OF THE DECLINE OF DOMWANT-FIRM PRICE LEADERS 149
5.2 Contestable Markets: A Check on Market Power? 150
5.3 Network Economics 153
5.3.1 COMPLEMENTARITY, COMPATIBILITY, AND STANDARDS 153
5.3.2 EXTERNALITIES 154
5.3.3 SWITCHING COSTS AND LOCK-IN 155
5.3.4 SIGNIFICANT ECONOMIES OF SCALE 155
5.3.5 SUMMARY OF NETWORK EFFECTS 155
APPLICATION 5.2 Microsoft and Network Effects 156
SUMMARY 157
CHAPTER 6 Market Power and Performance:
The Empirical Evidence 161
6.1 Stiuctuu:e-Condutf-Performance 162
6.2 Statistical Tools Used to Test the SCP Paradigm 163
6.2.1 EXOGENOUS AND ENDOGENOUS VARIABLES 166
6.3 Measurement Issues 167
6.3.1 MEASURES OF PERFORMANCE 168
APPLICATION 6.1 Does the Method of Calculating Profit Rates Matter? 171
6.3.2 CORRELATIONS AMONG MEASURES OF PERFORMANCE 174
6.3.3 SUMMARY OF MEASURES OF PROFITABILITY 175
6.4 Measures of Market Structure 176
6.4.1 MEASURES OF CONCENTRATION 176
6.4.2 BARRIERS TO ENTRY 176
6.4.3 OTHER VARIABLES 177
6.5 Early Structure-Conduct-Performance Studies 177
6.6 Econometric Studies 178
6.6.1 CONCENTRATION AND PROFITABILITY: EVIDENCE FROM INDUSTRY-LEVEL STUDIES 179
6.6.2 SUMMARY OF INDUSTRY-LEVEL RESULTS 180
6.7 Effects of Other Elements of Market Power on Profits 181
6.8 Conceptual Problems with SCP Studies 182
6.8.1 COLLUSION VERSUS EFFICIENCY 182
6.8.2 ASSUMPTION OF LINEARITY 184
6.8.3 VARIATIONS OVER TIME 185
6.8.4 ENDOGENEITY PROBLEM 187
6.9 Prices and Concentration 187
6.10 An Alternative Approach: Sunk Costs and Market Concentration 188
6.10.1 MARKETS WITH EXOGENOUS SUNK COSTS 189
6.10.2 MARKETS WITH ENDOGENOUS SUNK COSTS 189
6.10.3 SUTTON'S EMPIRICAL TESTS 191
APPLICATION 6.2 Applying Sutton's Theory in the Supermarket Industry 193
6.11 The New Empirical Industrial Organization 195
APPLICATION 6.3 Price-Cost Margins in the RTE Cereal Industry 197
SUMMARY 198
PART 2
MODERN INDUSTRIAL ORGANIZATION: GAME THEORY AND STRATEGIC BEHAVIOR
CHAPTER 7 Game Theory: A Framework for Understanding Oligopolistic Behavior 207
7.1 What Is Game Theory? 207
7.2 Simple Zero-Sum Games 208
APPLICATION 7.1 University Rankings and Merit-Based Financial Aid as a Zero-Sum Game 210
7.3 The Information Structure of Games 210
7.4 Prisoner's Dilemma Games 211
APPLICATION 7.2 A Prisoner's Dilemma—Doctors and HMOs 212
7.5 Repeated Games 214
7.6 Games of Mixed Strategies 215
7.7 Sequential Games 218
7.7.1 CREDIBLE VERSUS NONCREDIBLE THREATS AND SUBGAME PERFECT NASH EQUILIBRIA 219
APPLICATION 7.3 Dr. Strangelove and Credible Threats Gone Wrong 221
SUMMARY 223
CHAPTER 8 The Development of Oligopoly Theory 230
8.1 Models Based on Quantity Determination 230
8.1.1 THE COURNOT MODEL 230
8.1.2 THE COURNOT-NASH EQUILIBRIUM 236
8.1.3 COURNOT-NASH MODEL WITH MORE THAN TWO FIRMS 238
APPLICATION 8.1 Empirical Evidence of Cournot-Nash Behavior-Experimental Games with Varying Numbers of Players 240
APPLICATION 8.2 The Paradox of Mergers in a Cournot-Nash Market 242
APPLICATION 8.3 Examples of Cournot-Nash Pricing in Real Markets 242
8.1.4 USING THE COURNOT-NASH MODEL IN THE CONTEXT OF INTERNATIONAL TRADE 243
APPLICATION 8.4 The Effectiveness of Industrial Policy: UK Subsidies and Tariffs 248
APPLICATION 8.S The Effectiveness of Industrial Policy: The Commercial Aircraft Industry 250
8.2 The Stackelberg Model 251
8.2.1 FIRMS WITH IDENTICAL COSTS AND DEMAND 251
8.2.2 THE STACKELBERG MODEL: FIRMS WITH DIFFERENT COSTS 253
APPLICATION 8.6 Empirical Examples of Stackelberg Equilibrium 255
8.3 The Bertrand Model 256
APPLICATION 8.7 Bertrand Pricing in the Airline Industry 260
APPLICATION 8.8 Bounded Rationality, Sluggish Consumers, Internet Pricing, and the Failure to Achieve a Bertrand
Equilibrium 260
SUMMARY 262
CHAPTER 9 Collusion: The Great Prisoner's Dilemma 266
9.1 The Prisoner's Dilemma Revisited 266
APPLICATION 9.1 Tit-for-Tat in Baseball 268
APPLICATION 9.2 A Real-World Example of "Nice" Behaviorin Response to Random or "Accidental" Defections Automobiles 273
9.2 Another Strategy for Maintaining Effective Collusion: Trigger Price Strategies 274
9.3 Collusive Agreements as Viewed by One Firm in a Cartel 275
9.4 Factors Affecting the Ease or Difficulty of Effective Collusion 282
9.4.1 THE EXISTENCE OF MARKET POWER 283
9.4.2 THE COSTS OF REACHING AND MAINTAINING AN AGREEMENT 284
APPLICATION 9.3 Factors Facilitating Global Cartels: Evidence from Lysine, Citric Acid, and Vitamins A and E 287
9.5 Antitrust Policy Toward Collusion 289
9.5.1 PUBLIC POLICY TOWARD DIRECT PRICE-FIXING AGREEMENTS 291
9.5.2 PRICE-EXCHANGE AGREEMENTS 292
9.5.3 OLIGOPOLISTIC BEHAVIOR—CONSCIOUS PARALLELISM 293
9.5.4 TRADE ASSOCIATIONS 295
9.5.5 NONPROFIT ORGANIZATIONS: CASES INVOLVING COLLEGES AND UNIVERSITIES 296
SUMMARY 298
CHAPTER 10 Cartels in Action
10.1 Attempted Methods of Achieving Effective Collusion 303
10.1.1 DOMINANT-FIRM PRICE LEADER AND BENEFACTOR 303
10.1.2 PRICE LEADERSHIP 306
APPLICATION 10.1 A Sweet Case of Price Leadership: . Dole and Del Monte in the Canned Pineapple Industry 310
10.1.3 MOST FAVORED CUSTOMER CLAUSES AND " LOW-PRICE" GUARANTEES 311
APPLICATION 10.2 Most Favored Customer Clauses for Medicaid, But What About Everyone Else? 313
10.1.4 BASING POINT PRICING SYSTEMS 315
10.1.5 TRADE AND PROFESSIONAL ASSOCIATIONS 317
APPLICATION 10.3 "Something Is Rotten in the State of Denmark The Danish Government Promotes Tacit Price Fixing 319
10.1.6 SCHEMES TO DIVIDE MARKETS 321
10.1.7 PATENT CARTELS 323
10.2 How Successful Are the Solutions? 325
10.2.1 EXCESS CAPACITY PROBLEMS 325
10.2.2 ENCROACHMENT OF SUBSTITUTE PRODUCTS 326
10.2.3 MORE EFFECTIVE ANTITRUST STRATEGIES: THE DEPARTMENT OF JUSTICE CORPORATE LENIENCY PROGRAM 326
SUMMARY 329
CHAPTER 11 Oligopoly Behavior: Entry and Pricing to Deter Entry
11.1 limit Pricing 335
11.1.1 LIMIT PRICING WITH A COST ADVANTAGE FOR THE MONOPOLIST FIRM 335
11.1.2 LIMIT PRICING IN THE ABSENCE OF A COST ADVANTAGE FOR THE MONOPOLIST FIRM 338
11.1.3 THE CRITIQUE OF GAME THEORISTS 339
11.1.4 LIMIT PRICING WITH ASYMMETRIC INFORMATION 344
11.1.5 EMPIRICAL EVIDENCE OF LIMIT PRICING 347
APPLICATION II.I Limit Pricing in the Antihistamine Market 350
11.2 Predatory Pricing 351
11.2.1 PREDATORY PRICING WITH PERFECT, CERTAIN, COMPLETE,AND SYMMETRIC INFORMATION 352
11.2.2 PREDATORY PRICING WITH IMPERFECT, CERTAIN, INCOMPLETE, AND ASYMMETRIC INFORMATION 353
11.2.3 THE KREPS AND WILSON PREDATORY PRICING GAME 354
11.2.4 EMPIRICAL EVIDENCE: PREDATORY PRICING AND BUILDING A TOUGH REPUTATION 355
APPLICATION 11.2 Does Wal-Mart Use Predatory Pricing? 358
APPLICATION 11.3 Don't Mess with Bill: Netscape versus Microsoft in the Internet Browser Market 359
SUMMARY 361
Appendix: Details of the Kreps and Wilson Predatory Pricing Modef 367
CHAPTER 12 Oligopoly Behavior: Entry and Nonpricing
Strategies to Deter Entry 372
12.1 Excess Capacity 372
12.1.1 INVESTING IN RESEARCH AND DEVELOPMENT TO LOWER COSTS 376
12.1.2 EMPIRICAL EVIDENCE 376
12.2 Raising Rivals'Costs 380
12.2.1 LOBBYING TO INCREASE BARRIERS TO ENTRY 381
12.2.2 INCREASING ADVERTISING 381
12.2.3 PROVIDING COMPLEMENTARY GOODS AND SERVICES 382
12.2.4 SABOTAGING CORPORATE COMPETITORS 382
12.2.5 EMPIRICAL EVIDENCE ON RAISING RIVALS' COSTS 382
APPLICATION 12.1 Detergent Wars and the Battle of Good versus Evil: Amway v. Proctor & Gamble 385
12.3 Learning by Doing 386
12.3.1 EMPIRICAL EVIDENCE ON LEARNING BY DOING 388
APPLICATION 12.2 Qualitative Learning by Doing
in the Motion Picture Industry: The Case of the "Talkies" 392
12.4 Product Proliferation 394
12.4.1 EMPIRICAL EVIDENCE ON THE USE OF PRODUCT PROLIFERATION 394
12.5 Empirical Evidence on the Use of Price and Nonprice Strategies to Deter Entry 399
SUMMARY 402
Appendix: Product Proliferation Revisited 408
PART 3
BUSINESS PRACTICES
CHAPTER 13 Product Differentiation and Advertising 416
13.1 Forms of Product Differentiation 416
13.2 Theoretical Analysis of Product Differentiation 417
13.2.1 THE POTENTIAL IMPACT OF PRODUCT DIFFERENTIATION ON PRICE: THE BERTRAND MODEL REVISITED 418
13.2.2 THE ECONOMICS OF MONOPOLISTIC COMPETITION AND THE OPTIMAL AMOUNT OF VARIETY 420
13.2.3 PRODUCT DIFFERENTIATION WITH ASYMMETRIC INFORMATION 428
APPLICATION 13.1 What Do the Markets for Thoroughbred Racehorses and Baseball Players Have in Common? Product
Differentiation, Asymmetric Information, and Adverse Selection 433
13.3 The Social Benefits and Costs of Advertising 435
13.3.1 THE SOCIAL BENEFITS OF ADVERTISING 435
13.3.2 THE SOCIAL COSTS OF ADVERTISING 436
13.4 Advertising and Market Structure 439
13.4.1 WELFARE EFFECTS OF ADVERTISING 439
13.4.2 THE DORFMAN-STEINER MODEL 441
13.4.3 ADVERTISING AND OLIGOPOLY BEHAVIOR 443
APPLICATION 13.2 The Variability of Advertising-to-Sales Ratios Across Industries 447
13.4.4 THE PRODUCT DIFFERENTIATION ADVANTAGES OF FIRST MOVERS 451
13.5 Advertising as a Barrier to Entry 455
13.6 Strategic Advantages of Heavily Advertised Brands 456
13.7 Product Differentiation and Increased Competition 457
13.8 Empirical Evidence 457
13.8.1 TRADITIONAL STUDIES OF THE RELATIONSHIP BETWEEN ADVERTISING AND PERFORMANCE ACROSS INDUSTRIES 458
13.8.2 NEW EMPIRICAL INDUSTRIAL ORGANIZATION STUDIES 461
SUMMARY 462
CHAPTER 14 Technological Change and Research and Development 469
14.1 Schumpeter and the Process of "Creative Destruction" 469
APPLICATION 14.1 Examples of Creative Destruction 471
14.2 The Process of Technological Change 472
14.3 The Relationship Between Market Structure, Firm Size, and Technological Advance 473
14.3.1 THE IMPACT OF OLIGOPOLY 475
14.3.2 DOMINANT FIRMS AS FAST-SECOND INNOVATORS 480
14.3.3 A CONTRIBUTION OF GAME THEORY 481
14.3.4 THE THEORETICAL IMPACT OF A PATENT SYSTEM 483
14.4 The Impact of Firm Size 486
14.5 Empirical Evidence 489
14.5.1 MEASUREMENT ISSUES 489
14.5.2 TESTING SCHUMPETER'S HYPOTHESES 489
14.6 The Economics of the Patent System 493
14.6.1 EMPIRICAL EVIDENCE ON THE IMPACT OF PATENTS 496
14.6.2 INTELLECTUAL PROPERTY RIGHTS AND COPYRIGHTS 499
APPLICATION 14.2 Why Bother with Intellectual Property Rights? The Case of China 500
14.7 Patents, Intellectual Property Rights, and the Law 503
SUMMARY 505
Appendix: Game Theory and Patent Races 511
CHAPTER 15 Price Discrimination
15.1 Types of Price Discrimination 515
15.1.1 FIRST-DEGREE PRICE DISCRIMINATION 516
APPLICATION 15.1 Microsoft's Attempt to Use First-Degree Price Discrimination 517
15.1.2 SECOND-DEGREE PRICE DISCRIMINATION 518
APPLICATION 15.2 The Use of Coupons and Second-Degree Price Discrimination 520
15.1.3 THE WELFARE EFFECTS OF SECOND-DEGREE PRICE DISCRIMINATION 522
15.1.4 THIRD-DEGREE PRICE DISCRIMINATION 523
15.1.5 WELFARE IMPLICATIONS OF THIRD-DEGREE PRICE DISCRIMINATION 523
APPLICATION 15.3 Third-Degree Price Discrimination at Disney World 527
15.2 Two-Part Tariffs, Tying, and Bundling 528
15.2.1 TWO-PART TARIFFS 528
15.2.2 THE WELFARE EFFECTS OF A TWO-PART TARIFF 530
APPLICATION 15.4 Changing Pricing Strategies at Disneyland and Disney World 532
15.2.3 BUNDLING 532
15.2.4 MIXED BUNDLING 533
15.2.5 REQUIREMENTS TIE-IN SALES 538
Distribution Effects of Price Discrimination 539
Effect on Competition 540
Antitrust: Price Discrimination and the Robinson-Patman Act 542
15.5.1 SECONDARY-LINE CASES 543
15.5.2 PRIMARY-LINE CASES 548
15.5.3 ILLEGALLY INDUCED PRICE DISCRIMINATION 551
SUMMARY 552
Appendix: The Welfare Implications of Price Discrimination with Nonlinear Demand 560
CHAPTER 16 Vertical Integration and Vertical Relationships 562
16.1 Vertical Relationships as a Solution to Economic Problems 562
16.1.1 THE PROBLEM OF DOUBLE MARGINALIZATION 564
16.2 Alternative Methods of Achieving Joint Profit Maximization 566
16.2.1 THE PROBLEM OF INSUFFICIENT PROMOTIONAL SERVICES 567
APPLICATION 16.1 Vertical Integration, Exclusive Dealing, and the Value of an Upscale Pub's Amenities in Australia 569
APPLICATION 16.2 The Welfare Effects of Exclusive Dealing in the U.S. Beer Industry 573
16.2.2 SOLVING THE PROBLEM OF INPUT SUBSTITUTION 574
16.3 The Competitive Effects of Vertical Relationships 575
16.3.1 RESALE PRICE MAINTENANCE AGREEMENTS 575
APPLICATION 16.3 Toys "R" Us as the Facilitaor of Toy Manufacturer Collusion 577
16.3.2 STRATEGIC USES OF VERTICAL RESTRAINTS AND INTEGRATION 579
16.3.3 RAISING THE CAPITAL BARRIER TO ENTRY 581
16.3.4 COLLUSION AND VERTICAL INTEGRATION 581
APPLICATION 16.4 The Possible Negative Welfare Impacts of Increasing Vertical Integration: The Case of the Southern
California Gasoline Retailing Market 582
16.3.5 FORECLOSURE 584
16.4 Antitrust: Public Policy Toward Vertical Restraints of Trade and Group Boycotts 585
16.4.1 TYING AGREEMENTS 585
16.4.2 CASES DEALING WITH FRANCHISING AGREEMENTS 588
16.4.3 EXCLUSIVE DEALING AGREEMENTS 588
16.4.4 TERRITORIAL AND CUSTOMER RESTRICTIONS 591
16.4.5 RESALE PRICE MAINTENANCE AGREEMENTS 593
SUMMARY 596
Appendix: The Problem of Input Substitution 601
CHAPTER 17
Regulation and Deregulation
17.1 The Rationale for Regulation: Traditional Public Utility Regulation 606
17.2 The Workings of American Regulation 608
17.2.1 SETTING THE PERMITTED RATE OF RETURN 609
17.3 Efficiency Problems Associated with Rate of Return Regulation 611
17.3.1 X-INEFFICIENCY 611
17.3.2 THE AVERCH-JOHNSON EFFECT 611
17.3.3 SETTING THE PRICE STRUCTURE 614
17.4 The Spread of Regulation into Other Markets 616
17.4.1 THE CAPTURE THEORY OF REGULATION 616
APPLICATION 17.1 It's More Than Peanuts 618
17.5 The Movement from Regulation to Deregulation 619
17.5.1 SURFACE TRANSPORTATION 619
17.5.2 AIRLINE REGULATION AND DEREGULATION 620
APPLICATION 17.2 Airline Regulation: Where Did All the Profits Go? 622
17.5.3 REGULATION OF TELECOMMUNICATIONS AND BROADCASTING 625
17.5.4 ELECTRICITY 629
APPLICATION 17.3 Electricity Restructuring: Lights Out in California 630
17.5.5 NATURAL GAS INDUSTRY 631
SUMMARY 632
GLOSSARY 639
ANSWERS TO ODD-NUMBERED PROBLEMS 652 INDEX 678
CREDITS 712