Introduction
Roger LeRoy Miller
Economics Today
Twelfth Edition
To sell their products in the European Union,
U.S. food processing companies must avoid
using genetically altered corn.
Chapter 27
Regulation and Antitrust Policy
in a Globalized Economy
One consequence of this is that more of U.S.
crops are lost each year to insects.
Copyright © 2004 Pearson Addison Wesley. All rights reserved.
Slide 27-2
Learning Objectives
Learning Objectives
Recognize practical difficulties
that arise when regulating the prices
charged by natural monopolies
Describe the short-run and long-run
economic effects of deregulation
Understand the foundations
of antitrust laws and regulations
Explain the main rationales for
government regulation of business
Identify alternative theories aimed at
explaining the behavior of regulators
Slide 27-3
Discuss basic issues that arise
in efforts to enforce antitrust laws
Slide 27-4
1
Chapter Outline
Chapter Outline
Natural Monopolies Revisited
Deregulation
Regulation
Antitrust Policy
Explaining Regulators’ Behavior
The Enforcement of Antitrust Laws
The Costs of Regulation
Slide 27-5
Did You Know That...
Slide 27-6
Natural Monopolies Revisited
Less than 15 percent of the U.S. fiberoptic network is currently in use?
The extent to which the
telecommunications industry is
regulated will determine how quickly
firms consolidate and in turn how
rapidly the network is utilized?
Slide 27-7
Recall
– Natural monopolies result when a single
firm has the ability to produce the
industry’s output at a lower per-unit cost
than other firms attempting to produce
less than total industry output.
– Network effects can produce natural
monopolies
Slide 27-8
2
Profit Maximization and Regulation
Through Marginal Cost Pricing
Profit Maximization and Regulation
Through Marginal Cost Pricing
Panel (a)
Pm
Panel (b)
F
LMC LAC
Losses
LMC LAC
C
AC1
A
B
D
P1
D
Qm
Q1
MR
Quantity per Time Period
Quantity per Time Period
Figure 27-1, Panel (a)
Slide 27-9
Profit Maximization and Regulation
Through Marginal Cost Pricing
Dollars per Unit
Average Cost Pricing
Regulatory Goal: P = ATC
Figure 27-1, Panel (b)
Slide 27-10
Regulation
Economic regulation
• Set price at P1 where ATC = D
• Output = Q2
• P = ATC
• Normal rate of return
LMC
– Regulation of natural monopolies
– Regulation of inherently competitive
industries
Social regulation
LAC
P1 = AC1
– Regulation for public welfare across all
industries
D
Q2
Quantity per Time Period
Slide 27-11
Slide 27-12
3
Regulation
Regulation
Objective of economic regulation
Methods of rate regulation
– Prevent monopoly profits
– Cost-of-service regulation
• Regulation based on allowing prices to reflect
only the actual cost of production and no
monopoly profits
– Prevent predatory competition
– Rate-of-return regulation
• Regulation that seeks to keep the rate of
return in the industry at a competitive level by
not allowing excessive prices to be charged
Slide 27-13
Regulation
Slide 27-14
Some Federal Regulatory Agencies
Agency
Social regulation
– Reflects concern for public welfare
across all industries
– Regulation focuses on the impact of
production on the environment and
society, the working conditions under
which goods and services are produced,
and sometimes the physical attributes of
the goods
Slide 27-15
Jurisdiction
Date Formed
Major Regulatory Functions
Federal Communications
Commission (FCC)
Product markets
1934
Regulated broadcasting, telephone,
and other communication services.
Federal Trade Commission
Product markets
1914
Responsible for preventing businesses
from engaging in unfair trade practices
and in monopolistic actions, as well as
protecting consumer rights
Equal Employment Opportunity
Commission (EEOC)
Labor markets
1964
Investigates complaints of discrimination
based on race, religion, sex, or age in
hiring, promotion, firing, wages, testing,
and all other conditions of employment
Securities and Exchange
Commission (SEC)
Financial markets
1934
Regulates all public securities markets to
promote full disclosure
Environmental Protection
Agency (EPA)
Environment
1970
Develops and enforces environmental
standards for air, water, toxic, waste, and
noise
Occupational Safety and
Health Administration (OSHA)
Health and safety
1970
Regulates workplace safety and health
conditions
Slide 27-16
4
Regulation
Regulation
Creative response and feedback
effects: results of regulation
Creative response and feedback
effects: results of regulation
– Creative Response
– Feedback Effect
• Behavior on the part of a firm that allows it to
comply with the letter of the law but violates
the spirit, significantly lessening the law’s
effects
• Changing behavior after the regulation that
offset the regulation
– Example
• Parents allowing their children to eat candy in
cities where the water is fluoridated
Slide 27-17
Regulation
Slide 27-18
Explaining Regulators’ Behavior
The effectiveness of auto safety
regulation
Capture Hypothesis
– How can we explain the fact that
automobiles equipped with more safety
features have been involved in a
disproportionate number of accidents?
Slide 27-19
– Predicts that the regulators will eventually
be captured by the special interests
of the industry being regulated
Slide 27-20
5
Explaining Regulators’ Behavior
Policy Example: Airlines Request
Tougher Regulation from FAA
Some of the nation’s larger airlines have
requested that maintenance regulations be
made more stringent.
Share-the-Gains, Share-the-Pains
Theory
– The regulators must take account of the
demands of three groups: legislators,
members of the regulated industry, and
consumers of the regulated industry’s
product or service
They argued that smaller carriers were not
enforcing sufficient safety.
The smaller carriers replied that the
efficiency of their size allowed them to have
the same level of reliable maintenance at
lower cost.
Slide 27-21
The Costs of Regulation
Slide 27-22
The Costs of Regulation
Estimated cost of environmental and
safety regulation is $200 billion.
Total estimated cost of all regulation is
$700 billion or 8 percent of total
income per year.
Slide 27-23
Figure 27-2, Panels (a) and (b)
Slide 27-24
6
Deregulation
Deregulation
Deregulation
Late 70s and early 80s deregulation
occurred in:
– The elimination or phasing out of
regulations on economic activity
– Airline carriers—Air Deregulation Act of
1978
– Trucking Industry—1980
– Buses—1982
– Saving Account Interest Rates—1980
Slide 27-25
Deregulation
Slide 27-26
Deregulation
Short-run effects of deregulation
Long-run effects of deregulation
– Shakeout of high-cost producers
– Prices close to MC
– Displacement of workers
– Reduction in monopoly profits
– Reduction of service
– Increased service
– Reduction of union power
– Bankruptcies
Slide 27-27
Slide 27-28
7
Deregulation
Deregulation
Deregulation and contestable markets
– In contestable markets:
Benefits of contestable markets
– Zero economic profits
• Entry and exit is unconstrained and relatively
costless
• Long-run adjustment will eliminate economic
profits
– No cost inefficiencies in the long run
Slide 27-29
Deregulation
Slide 27-30
Deregulation
Rethinking regulation using costbenefit analysis
Rethinking regulation using costbenefit analysis
– The feasibility of a regulation is
determined by comparing the cost to the
benefit of the regulation.
Slide 27-31
– Unleaded gasoline regulations were
approved following cost-benefit analysis
• Demonstrated that the higher fuel costs would
be more than offset by reduced health care
costs
Slide 27-32
8
Antitrust Policy
Antitrust Policy
Using regulation to maintain relatively
competitive markets
– The Sherman Antitrust Act of 1890
– The Clayton Act of 1914
– The Federal Trade Commission Act of
1914 and 1938 Amendment
Sherman Antitrust Act of 1890
– Section 1
• 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.
– The Robinson-Patman Act of 1936
Slide 27-33
Slide 27-34
Policy Example: Microsoft Found in
Violation of the Sherman Act
Antitrust Policy
Sherman Antitrust Act of 1890
– Section 2
• 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.
Slide 27-35
In 2001, Microsoft was found to be in
violation of the Sherman Act by
engaging in anticompetitive conduct.
Microsoft reached a settlement with the
Justice Department that kept the
company intact on the condition that
some of its practices would change.
Slide 27-36
9
Antitrust Policy
Antitrust Policy
Clayton Act of 1914
Clayton Act of 1914
– Passed to remove the vagueness of the
Sherman Act
– Section 2
• Made it illegal to “discriminate in price between
different purchasers,” except in cases in which
the differences are due to actual differences in
selling or transportation costs
Slide 27-37
Antitrust Policy
Slide 27-38
Antitrust Policy
Clayton Act of 1914
Clayton Act of 1914
– Section 3
– Section 7
• Producers cannot sell goods “on the condition,
agreement or understanding that the …
purchaser thereof shall not use or deal in the
goods … of a competitor or competitors of the
seller.”
Slide 27-39
• Corporations cannot hold stock in another
company if the effect “may be to substantially
lessen competition.”
Slide 27-40
10
Antitrust Policy
Antitrust Policy
Federal Trade Commission Act of 1914
and its 1938 Amendment
– Designed to prevent cutthroat pricing
Robinson-Patman Act of 1936
– Amended Section 2 of the Clayton Act
– Designed to protect independent retailers
and wholesalers from “unfair
discrimination” by chain stores
– Created the FTC
– Amendment
• Prohibits “unfair or deceptive acts or practices
in commerce”
Slide 27-41
Antitrust Policy
Slide 27-42
Antitrust Policy
Exemptions from antitrust laws
Exemptions from antitrust laws
– All labor unions
– Hospitals
– Public utilities
– Public transit and water systems
– Professional baseball
– Suppliers of military equipment
– Cooperative activities among American
exporters
– Joint publishing arrangement in a single
city with two or more newspapers
Slide 27-43
Slide 27-44
11
The Enforcement of Antitrust Laws
Monopolization
The Enforcement of Antitrust Laws
Monopoly power
– The possession of monopoly power in the
relevant market and the willful acquisition
or maintenance of that power, as
distinguished from growth or development
as a consequence of a superior product,
business acumen, or historical accident
– Market Share Test
• The percentage of a market that a particular
firm controls
Slide 27-45
The Enforcement of Antitrust laws
Cross-border mergers and interpreting
the relevant market
– The U.S. interprets the automobile and
banking markets as global
Slide 27-46
The Enforcement of Antitrust Laws
The relevant market
– The relevant product market
– The relevant geographic market
– The Canadians recently defined the
relevant market for banking as Canada
only and prohibited mergers of Canadian
banks that wished to be more competitive
internationally.
Slide 27-47
Slide 27-48
12
Issues and Applications: The TransAtlantic Reach of European Regulations
U.S. companies wishing to sell their
products in Europe must meet requirements
of the European Commission, the chief
regulatory body of the European Union.
Web Links
The following Web links appear in the
margin of this chapter in the textbook:
– http://www.ftc.gov
This gives the European Commission some
oversight regarding mergers among U.S.
firms that compete in foreign markets.
– http://cse.stanford.edu/classes/cs201/projects
European regulators are more likely to
protect the interests of existing firms.
– http://www.antitrustinstitute.org
– http://www.antitrust.org
Slide 27-49
Summary Discussion
of Learning Objectives
Slide 27-50
Summary Discussion
of Learning Objectives
Practical difficulties in regulating the
prices charged by natural monopolies
– Marginal cost pricing causes the firm to
produce at a loss
Rationales for government regulation
of business
– Regulation of natural monopolies
– Regulation of inherently competitive
industries
– Social regulation aimed at ensuring public
welfare
Slide 27-51
Slide 27-52
13
Summary Discussion
of Learning Objectives
Summary Discussion
of Learning Objectives
Short- and long-run economic effects
of deregulation
Alternative theories of regulator
behavior
– Short-run effects
– Capture theory
– Share-the-gains, share-the-pains theory
• Failure of high-cost producers
• Some cutbacks in products to consumers
• Loss of jobs
– Long-run effects
• Profits fall to competitive levels
• Prices drop closer to marginal cost
Slide 27-53
Summary Discussion
of Learning Objectives
Slide 27-54
Summary Discussion
of Learning Objectives
Foundations of antitrust: four laws
Issues in enforcing antitrust laws
– Sherman Act (1890)
– Clayton Act (1914)
– Enforcement is through Supreme Court
interpretations
– Federal Trade Commission Act (1914)
– Market share test and relevant market
– Robinson-Patman Act (1936)
Slide 27-55
Slide 27-56
14
End of Chapter
Chapter 27
Regulation and Antitrust Policy
in a Globalized Economy
Copyright © 2004 Pearson Addison Wesley. All rights reserved.
15