I.
Anti-trust policy and regulation
1. What is the purpose of Anti-trust laws?
a. Look at Monopolistic firms graph (see attached)
b. What the negative effects of monopolies?
c. What is one purpose of government intervention in the economy?
i. Maintain competition
2. Anti-trust laws
a. History – use video
b. Combat questionable tactics of “trusts” or monopolies
i. Regulation was introduced to control “natural” monopolies
ii. Anti-trust legislation passed to inhibit or prevent the growth of monopolies in
other industries
c. Sherman Act of 1890
i. Restraint of trade is illegal
ii. People who monopolize, try to monopolize, or restrain trade shall be guilty of a
misdemeanor
iii. Enforced by US Dept of Justice, Federal Trade Commission, state attorney
generals
iv. Firms in violation
1. Can be ordered dissolved by courts
2. Prohibited from engaging in unlawful practices
3. Fines
4. Imprisonment of firm executives
5. Lawsuits with triple damages
d. Clayton Act of 1914
i. Outlaws anticompetitive price discrimination among purchasers when the price
difference is not based on cost and if it lessens competition
ii. Forbids exclusive or tying contracts in which a producer forces purchasers of
one of its products to acquire other products from the same seller or producer
iii. Acquisition of stock in competing corporation is forbidden if it lessens
competition
iv. Directors of one firm cannot be on the board of directors of a competing firm
e. Federal Trade Commission Act of 1914
i. FTC investigates unfair competitive practices and issues cease and desist orders
ii. FTC polices “deceptive acts or practices in commerce”
3. How to tell if a monopoly exists
a. Controversy – Should industries be judged by their behavior or structure
i. Structuralists – monopolists will behave like monopolists and this economic
performance is undesirable
ii. Behavioralists – relationship between structure and performance is unclear
b. Definition of a monopoly
c. Courts = 90-60-30 rule
i. 90% market share = monopoly
ii. 60 % = probably a monopoly
iii. 30% = probably not a monopoly
d. Market share – can be viewed broadly (= smaller market share) or narrowly (=large
market share)
4. Mergers
a. Types
i. Horizontal mergers – mergers with firms selling similar products in the same
market
ii. Vertical mergers – mergers of firms at different stages of the production process
in the same industry
iii. Conglomerate mergers – mergers of firms in unrelated industries
b. Herfindahl index
i. Sum of the squared market shares of the firms in the industry
ii. 10,000 would be a pure monopoly (100 squared)
iii. Post merger index has to be above 1800 for the government to challenge the
merger
c. Price fixing
i. Price fixing violations also fall under anti-trust laws
II.
Industrial Regulation
a. Natural Monopoly (economies of scale are so extensive that a single firm can supply the
entire market at a lower cost than would be achieved by a number of smaller,
competing firms. Ex: Public utilities
b. Alternatives
i. Public ownership (USPS)
ii. Public regulation (Regulatory commissions)
c. Regulation
i. Public interest – monopoly power can be abused
1. Goal – public to benefit from the lower costs of a natural monopoly
while avoiding the reduction in output associated with an unregulated
monopoly
2. Regulators seek to establish rates which will yield a fair return to the
enterprise (price = ATC)
d. Problems with regulation
i. Unregulated firm – incentive to reduce its production cost
1. Regulated firm lowers operating costs, increases profit, which will result
in lowered rates
ii. Higher production costs are passed onto the consumer
iii. Increases X-inefficiency
iv. Continuing monopoly power after the conditions of natural monopoly are gone
1. Technological changes create competition
III.
2. Regulation blocks entry to the market (not able to meet the regulation
as it is too specific)
Social Regulation
a. Characteristics
i. Applied to many or all industries and affects many people
ii. Involved government in the details of production
iii. Effects design of product, conditions of employment (anti-discrimination laws),
and the nature of the production process
b. Optimal level
i. Cost Benefit analysis needed to determine optimal level – hard to measure MB
and MC accurately
ii. Pro
1. Cost is high, but if benefit exceeds cost, should be carried out
2. Benefits are sometimes only measurable after a considerable amountof
time
3. Continuing problems are best addressed through additional social
regulation
iii. Cons
1. Many regulations are uneconomic as MC exceeds MB
2. Many regulations are poorly written – regulation beyond the original
intent
3. Many rules have unintended side effects
4. Overzealous, anti-market bureaucrats often work for the regulatory
agencies
c. Costs
i. Can produce higher prices, stifle competition, and reduce competition
ii. Can increase economic efficiency and society’s well-being by improving working
conditions, removing unsafe products, and reducing pollution