1 © ©1999 South-Western College Publishing PowerPoint Slides prepared by Ken Long Principles of Economics 2nd edition by Fred M Gottheil

2 Chapter 13 Antitrust & Regulation 9/17/2015 © ©1999 South-Western College Publishing

3 What should we do about Monopolies and Oligopolies? 1. Regulate 2. Nationalize 3. Leave alone © ©1999 South-Western College Publishing 4. Concentrate 5. Split up

4 What is the first theory concerning Monopolies? We should regulate them © ©1999 South-Western College Publishing

5 What is Regulation? Although ownership of the regulated firm remains in private hands, pricing and production decisions are monitored by government © ©1999 South-Western College Publishing

6 What should a Monopoly charge to maximize profit? MR = MC © ©1999 South-Western College Publishing

7 Ways of Regulating the Natural Monopoly  Marginal cost pricing, force the firm to set P=MC, the allocatively efficient solution  Problem, firm may incur a loss  Average cost pricing, set P=ATC, allows firm to make a normal profit

8 Natural Monopoly $ output ATC MC DMR P1 Q1Q2Q3 P2 P3

9 Graph explanation  In the graph, P1 and Q1 are the price and output the monopoly would prefer if unregulated  P3 and Q3 are the marginal cost price and output, but firm would make a loss at this price  P2 and Q2 are the average cost price and output, allows the monopoly to make a normal rate of return

10 What is a fair market price to impose on a Monopoly? The price that will enable it to make a Normal Profit © ©1999 South-Western College Publishing

11 Where does a Monopoly make a Normal Profit? P = ATC © ©1999 South-Western College Publishing

12 Can less than a Normal Profit be mandated? Yes! But only if the monopoly is subsidized © ©1999 South-Western College Publishing

13 What is one problem with Regulation? The regulators can assume the role of protectors, sometimes called capture theory

14 What are other problems with regulation? Estimating cost, regulatory lag Regulating firms that are not natural monopolies

15 What is Deregulation? The process of converting a regulated firm into an unregulated firm © ©1999 South-Western College Publishing

16 When did much deregulation take place? In the 1980’s © ©1999 South-Western College Publishing

17 What is the second theory concerning Monopolies? We should nationalize them © ©1999 South-Western College Publishing

18 What is Nationalization? Government ownership of a firm or industry © ©1999 South-Western College Publishing

19 Can you tell El Al Israel Airlines is public and British Airways private? © ©1999 South-Western College Publishing

20 Does a firm have to be private and profit motivated to be efficient? Not necessarily Some public firms can be efficient and profitable © ©1999 South-Western College Publishing

21 What are some successful public enterprises? Universities Green Bay Packers © ©1999 South-Western College Publishing

22 How are the Green Bay Packers a public company? © ©1999 South-Western College Publishing

23 What is the third theory concerning Monopolies? We should leave them alone © ©1999 South-Western College Publishing

24 What is Laissez-Faire? Government policy of nonintervention in market outcomes, translated “leave it be” © ©1999 South-Western College Publishing

25 What is one reason monopolies will behave as if it had competitors? Some markets are contestable © ©1999 South-Western College Publishing

26 What is a Contestable Market? A market in which prices in highly concentrated industries are moderated by potential firm entry © ©1999 South-Western College Publishing

27 What is Countervailing Power? Market power is ultimately counteracted by the market power of a competing bloc © ©1999 South-Western College Publishing

28 What are 4 competing market blocs? Industrial Labor Agricultural Retail © ©1999 South-Western College Publishing

29 What is the theory of Creative Destruction? Effective competition between highly concentrated industries © ©1999 South-Western College Publishing

30 What is the fourth theory concerning Monopolies? We should encourage market concentration © ©1999 South-Western College Publishing

31 Why do some economists encourage more concentration? Large size makes possible greater economies of scale © ©1999 South-Western College Publishing

32 What is another reason for monopolies? Some firms are monopolies because they are protected by patents © ©1999 South-Western College Publishing

33 What is a Patent? Exclusive right granted by government to market a product or process for 17 years © ©1999 South-Western College Publishing

34 Why does government grant Patents? To encourage inventions and innovations © ©1999 South-Western College Publishing

35 What is the fifth theory concerning Monopolies? We should split them up © ©1999 South-Western College Publishing

36 What is Antitrust Policy? Laws that foster market competition by limiting the market power of monopolies & oligopolies © ©1999 South-Western College Publishing

37 How does the government limit market power? © ©1999 South-Western College Publishing

38 The Sherman Act Section I: Section I: Declared every contract, combination, or conspiracy in restraint of trade illegal. Section II: Section II: Every person who shall monopolize, or attempt to monopolize shall be deemed guilty of a felony.

39 Rule of Reason The criterion introduced by the Supreme Court in 1911 which outlawed only those acts in restraint of trade that were deemed “unreasonable”--in other words, its not size, but conduct that mattered

40 Alcoa case, 1945 Went against the rule of reason, size alone could be basis of antitrust cases

41 The Clayton Act Clayton Act The Clayton Act Outlawed specific monopolistic behaviors such as tying contracts, exclusive dealing, price discrimination and acquiring competitors stock if these actions would reduce competition. Also made interlocking directorates illegal

42 The FTC Act Established a federal regulatory group to: Investigate the structure and behavior of firms engaging in interstate commerce. Determine what constitutes unlawful “unfair” behavior.(vague, left up to the commission) Issue cease-and-desist orders to those found in violation of antitrust laws.

43 Robinson-Patman Act, 1936 Quantity discounts illegal unless cost justified or in-line with competition “Predatory” pricing illegal

44 The Celler-Kefauver Act Celler-Kefauver Act The Celler-Kefauver Act extended the government’s authority to ban mergers and prevented firms from acquiring the physical stock of competitors.

45 Unsettled Points in Antitrust Policy  Definition of the market, broad or narrow?  What about foreign competition?  When should mergers be allowed and when shouldn’t they?

46 46 © ©1999 South-Western College Publishing arbell/main.htm 1.shtml /12.shtml /41.shtml /13.shtml

47 What is a limitation to U.S. Antitrust actions? A lack of funding © ©1999 South-Western College Publishing

48 What is our present attitude toward Monopoly? The Rule of Reason © ©1999 South-Western College Publishing

49 Using the Herfindahl index (HHI) as a merger guide  HHI less than 1000 considered unconcentrated  is the moderate concentration zone  Over 1800 is considered concentrated

50 Mergers more likely to be challenged in the moderate and high concentrated ranges of the HHI, especially if the merger raises the HHI by more than 100 points.

51 What is a Monopoly? What should we do about Monopolies? What should a Monopoly charge to maximize profit?What should a Monopoly charge to maximize profit? What is Regulation? What is Nationalization? What is Laissez-Faire?

52 Why do some economists encourage more concentration?Why do some economists encourage more concentration? What is Antitrust Policy? What is the Rule of Reason? What is a Conglomerate? What is the status of Conglomerates?

53 ENDEND © ©1999 South-Western College Publishing