Chapter 28 Regulation and Antitrust Policy in a Globalized Economy

Chapter 28

Regulation and Antitrust Policyin a Globalized Economy

Slide 28-2

Price fixing can occur in any industry when it is possible for firms to collude.

Fashion-modeling agencies have become the subject of an antitrust

investigation by the U.S. Department of Justice for possible price-fixing.

Introduction

Slide 28-3

Distinguish between economic regulation and social regulation

Recognize practical difficulties that arise when regulating the prices charged by natural monopolies

Explain the main rationales for government regulation of industries that are not inherently monopolistic

Learning Objectives

Slide 28-4

Identify alternative theories aimed at explaining the behavior of regulators

Understand the foundations of antitrust laws and regulations

Discuss basic issues that arise in efforts to enforce antitrust laws

Learning Objectives

Slide 28-5

Forms of Industry Regulation

Regulating Natural Monopolies

Regulating Nonmonopolistic Industries

Incentives and Costs of Regulation

Chapter Outline

Slide 28-6

Chapter Outline

Antitrust Policy

Antitrust Enforcement

Slide 28-7

Among other things, the USDA regulates the size of holes in Swiss cheese?

Government oversight of business is generally designed to promote efficiency, but that it can have unintended effects?

Did You Know That...

Slide 28-8


Economic regulation governs the pricing and provision of goods and services

Social regulation is concerned with the occupational, health, and safety aspects of industry.

Slide 28-9


The focus of economic regulation:

– Natural monopolies• Rate regulation is used to prevent electric

utilities from earning monopoly profits

Slide 28-10


The focus of economic regulation:

– In nonmonopolistic industries, there are regulations covering financial markets, transportation firms, and communications networks

Slide 28-11

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 28-12

Profit Maximization and Regulation Through Marginal Cost Pricing

Figure 28-2, Panel (a)

LACLMC

MR

D

F

Qm

Pm

Panel (a)

Quantity per Time Period

A

Dol

lars

per

uni

t

Slide 28-13


Figure 28-2, Panel (b)

LACLosses

LMC

DQ1

AC1

Panel (b)

Quantity per Time Period

P1B

C

Dol

lars

per

uni

t

Slide 28-14 Quantity per Time Period

Do

llars

per

Un

it

LACLMC

D

Average Cost PricingRegulatory Goal: P = ATC

• Set price at P1 where ATC = D• Output = Q2

• P = ATC• Normal rate of return

P1 = AC1

Q2


Slide 28-15

Methods of rate regulation

– Cost-of-service regulation• Regulation based on allowing prices to reflect

only the actual cost of production and no monopoly profits

– 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 28-16

Policy Example: Power Outages as an Outcome of Regulation

Some forms of regulation give electric utilities an incentive to freeze current rates.

To do so, they may skimp on maintenance measures.

Deferred maintenance of equipment and trimming of trees contributed to the widespread power blackout of August 2003.

Slide 28-17


Rationales for government oversight in nonmonopolistic industries:

– Market failure arising from externalities

– The need for consumer protection arising from asymmetric information

Slide 28-18


The Lemons Problem

– The possibility that asymmetric information can result in low product quality for an entire industry• Used Cars• Credence Goods

Slide 28-19


Implementing consumer protection regulation:

– Liability laws

– Direct mandates on business behavior, such as safety regulations in transportation and pharmaceuticals

Slide 28-20

Creative response and feedback effects: results of regulation

– Creative Response• 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


Slide 28-21

Creative response and feedback effects: results of regulation

– Feedback Effect• 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 28-22

Capture Hypothesis

– Predicts that the regulators will eventually be captured by the special interests of the industry being regulated


Slide 28-23

Example: A Cigarette Manufacturer Who Wants to Be Regulated

The Food and Drug Administration has sought to gain regulative authority over the tobacco industry.

One company, Philip Morris, has encouraged Congress to grant the FDA this oversight, thinking that it would improve the public image of cigarettes.

Slide 28-24

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


Slide 28-25

The total explicit cost of federal regulation compliance in the U.S. is estimated to be between $500 billion and $600 billion per year.


Slide 28-26

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

– The Robinson-Patman Act of 1936

Antitrust Policy

Slide 28-27

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.

Antitrust Policy

Slide 28-28

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 28-29

Clayton Act of 1914

– Passed to remove the vagueness of the Sherman Act

Antitrust Policy

Slide 28-30

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

Antitrust Policy

Slide 28-31

Exemptions from antitrust laws

– All labor unions

– Public utilities

– Professional baseball

– Cooperative activities among American exporters

Antitrust Policy

Slide 28-32

Exemptions from antitrust laws

– Hospitals

– Public transit and water systems

– Suppliers of military equipment

– Joint publishing arrangement in a single city with two or more newspapers

Antitrust Policy

Slide 28-33

Antitrust Policy

As more U.S. firms seek to merge with companies in other countries, the international dimensions of antitrust policy become more important.

In the European Union, there are restrictions against any business combination that would enhance the market dominance of one firm.

Slide 28-34


Monopolization

– 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

Slide 28-35

Monopoly power

– Market Share Test• The percentage of a market that a particular

firm controls


Slide 28-36

The relevant market

– The relevant product market

– The relevant geographic market


Slide 28-37


Determining when a firm has sought to acquire or to maintain market power:

– Versioning

– Bundling

Slide 28-38


Product Versioning

– Selling a product in slightly altered forms to different groups of consumers

– An example is selling software in “professional” and “standard” versions

Slide 28-39


Product bundling

– Offering two or more products for sale as a set

– Some types of bundling are tie-in sales, which require a consumer to purchase one product in order to obtain another

Slide 28-40

Fashion-modeling agencies negotiate and arrange the relationships between models and photography studios.

For years, all agencies had used identical terms regarding the premiums paid by photographers and the percentages paid to models.

The U.S. Department of Justice is investigating these price-fixing agreements.

Issues and Applications:A Model Case of Collusive Price Fixing?

Slide 28-41

Summary Discussion of Learning Objectives

Government Regulation of Business– Either Economic or Social

Practical Difficulties in Regulating the Prices Charged by Natural Monopolies– Marginal cost pricing results in losses

– Regulation aims to provide zero economic profit

Slide 28-42


Rationales for Regulating Nonmonopolistic Industries:

– Market Failure

– Asymmetric Information

Slide 28-43


Regulators’ Incentives and the Costs of Regulation

– Capture hypothesis

– Share-the gains; share the pains

Slide 28-44


Foundations of antitrust:

– Sherman Act (1890)

– Clayton Act (1914)

– Federal Trade Commission Act (1914)

– Robinson-Patman Act (1936)

Slide 28-45


Issues in Enforcing Antitrust Laws

– Enforcement is through Supreme Court interpretations

– Market share test and relevant market

End of Chapter 28Regulation and Antitrust Policyin a Globalized Economy

Documents

Chapter 28 Regulation and Antitrust Policy in a Globalized Economy