Chapter 13
Antitrust and Regulation
• Key Concepts
• Summary
• Practice Quiz
• Internet Exercises
©2000 South-Western College Publishing
1
In this chapter, you will
learn to solve these
economic puzzles:
Can
universities
and
Why is
marketthe
failure
doesn’t
water
colleges
improve
company
orrationale
electric
an
economic
education
by
engaging
company
compete?
for
regulation?
in price-fixing?
2
What is a Trust?
A combination or
cartel consisting of
firms that place their
assets in the custody
of a board of trustees
3
What is
Predatory Pricing?
The practice of one or
more firms temporarily
reducing prices in order to
eliminate competition and
then raising prices
4
When was the age of the
Robber Barons?
In the later part of the 1800’s
5
What was done to limit
the power of Trusts?
Congress passed laws
aimed at preventing firms
from engaging in
anticompetitive activities
6
What is the
Sherman Act?
The federal antitrust law
enacted in 1890 that
prohibits monopolization
and conspiracies to
restrain trade
7
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
8
What business practices
were declared illegal
under the Clayton Act?
• Price discrimination
• Exclusive dealing
• Tying contracts
• Stock acquisition of
competing companies
• Interlocking directorates
9
Was the Clayton Act an
improvement over the
Sherman Act?
Although more specific
than the Sherman Act, the
Clayton Act is also vague
10
What is the Federal
Trade Commission Act?
The federal act that in 1914
established the Federal
Trade Commission (FTC)
to investigate unfair
competitive practices of
firms
11
What is the
Robinson-Patman Act?
A 1936 amendment to
the Clayton Act that
strengthens the
Clayton Act against
price discrimination
12
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
13
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
14
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
15
What was the outcome of
the Standard Oil Case?
The Rule of Reason
16
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
17
What was the outcome of
the Alcoa Case?
The Per se Rule
18
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
19
What was the result of
the IBM Case?
A switch back to the
Rule of Reason
20
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
21
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
22
What was the result of
the Microsoft Case?
Microsoft was not allowed
to purchase Intuit Inc., a
competitor in the personal
finance software industry
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
LRAC
MR
C
1 2 3 4 5 6 7
LRMC
D
8 9Q
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 fair-return
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
Chapter 13 Quiz
©2000 South-Western College Publishing
62
1. Which of the following is illegal under
the Sherman Act?
a. Attempts to monopolize.
b. Price fixing.
c. Formation of cartels.
d. All of the above are illegal.
D. The Sherman Act of 1890 is the federal
antitrust law to curb trusts, but the
federal government did not win a notable
case until 1911.
63
2. Officers of five large building-materials
companies meet and agree that none of
them will submit bids on government
contracts lower than an agreed-upon level.
This is an example of
a. price fixing.
b. vertical restriction.
c. a tying contract.
d. an interlocking directorate.
A. The Sherman Act was enacted with vague
language, but price fixing is clearly a
“conspiracy in restraint of trade”.
64
3. A fabric shop cannot sell Singer sewing
machines if it also sells other brands of
sewing machines. This is an example of
a. a resale price maintenance.
b. territorial restrictions.
c. a tying agreement.
d. exclusive dealing.
D. If the effect is to “substantially lessen
competition” such as an agreement between
a manufacturer and a retailer is a violation
of the Clayton Act of 1914.
65
4. Under the Clayton Act, horizontal mergers
by stock acquisition were
a. not considered.
b. illegal if they could be shown to lessen
competition.
c. illegal under any circumstances.
d. legal if they could be shown to lessen
competition.
B. Horizontal mergers are combinations
among competitors in the same industry
which, if allowed, eliminate existing
competition.
66
5. Under the Clayton Act, which of the
following was illegal even if it was not
shown to lessen competition substantially?
a. Price discrimination.
b. Tying contracts.
c. Horizontal mergers by stock acquisition.
d. Interlocking directorates.
D. Interlocking directorates is the
situation in which a director of one
company serves on the board of
directors of a competing company.
67
6. The importance of the Federal Trade
Commission Act of 1914 is that it
a. set up an independent antitrust agency
with the power to investigate complaints.
b. strengthened the law against mergers.
c. strengthened the law against price
discrimination..
d. none of the above.
A. The FTC Act of 1914 established a fivemember commission appointed by the
president to investigate “unfair methods
of competition.”
68
7. Which of the following is concerned
primarily with price discrimination?
a. The Sherman Act.
b. The Clayton Act.
c. The Robinson -Patman Act.
d. The Celler-Kefauver Act.
C. The Robinson-Patman Act of 1936 is
an amendment to the Clayton Act that
strengthens the Clayton Act against
price discrimination.
69
8. Which of the following is concerned
primarily with mergers?
a. The Sherman Act.
b. The Clayton Act.
c. The Robinson-Patman Act.
d. The Celler-Kefauver Act.
D. The Celler-Kefauver Act is called the
“antimerger act” because it closed the
loophole in the Clayton Act by prohibiting
mergers by sale of physical assets.
70
9. The Utah Pie case was brought under
which of the following laws?
a. The Sherman Act.
b. The Federal Trade Commission Act.
c. The Robinson-Patman Act.
d. The Celler-Kefauver Act.
C. Utah Pie was a small frozen desert pie firm in
Salt Lake City that used three outside national
competitors for price discrimination. The
Supreme Court ruled in Utah Pie’s favor.
71
10. Although U.S. Steel controlled nearly
75% of the domestic iron and steel
industry, in 1920 the Supreme Court ruled
that the firm was not in violation of the
Sherman Act because there was no
evidence of abusive behavior. What
antitrust doctrine was the court applying
in this case?
a. The rule of reason.
b. The per se rule.
c. The marginal cost pricing rule.
d. The natural monopoly rule.
A. The rule of reason applied when a firm was
not engaged in anticompetitive behavior. 72
11. In which antitrust case did the Supreme
Court begin to apply the per se rule to
determine whether a firm was in violation
of the Sherman Act?
a. The Standard Oil case.
b. The Alcoa case.
c. The IBM case.
d. The MIT case.
B. 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.
73
12. The Interstate Commerce Commission
(ICC) was established in
a. 1887.
b. 1890.
c. 1929.
d. 1933.
A. The ICC was established for the original
purpose of regulating rail prices by reducing
duplicate trains, depots, and tracks.
74
13. Today, the Civil Aeronautics Board
(CAB) regulates airline
a. ticket prices.
b. routes.
c. safety.
d. all of the above.
e. none of the above; the CAB was
abolished in 1984.
E. The CAB was established in 1938 to
regulate airline fares and air routes.
75
14. Which of the following provides the
basis for regulation?
a. Natural monopoly.
b. Externalities.
c. Imperfect information.
d. All of the above.
D. In each of these cases, the argument in
favor of regulation is market failure.
76
15. Consider a regulated natural monopoly. If
the regulatory commission wants to establish
a fair-return price, then it should set a price
ceiling where the demand curve crosses the
monopoly’s long-run
a. marginal revenue curve.
b. average revenue curve.
c. marginal cost curve.
d. average cost curve.
D. One method for regulators to establish a
fair-return price is to set price equal to longrun average cost and the monopolist earns
zero economic profit
77
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END
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