1. Chapter 13 Antitrust and Regulation
Lecture Slides
Economics for Today Irvin B. Tucker
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2. What will I learn in this chapter?
You will explore and form opinions on the Microsoft case, the Standard Oil case, and other major antitrust cases
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3. © 2011 South-Western, a part of Cengage Learning
What is a trust?
A combination or cartel consisting of firms that place their assets in the custody of a board of trustees
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4. What is predatory pricing?
The practice of one or more firms temporarily reducing prices in order to eliminate competition and then raising prices
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5. When was the age of the robber barons?
In the later part of the 1800’s
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6. What was done to limit the power of trusts?
Congress passed laws aimed at preventing firms from engaging in anticompetitive activities
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7. © 2011 South-Western, a part of Cengage Learning
What is the Sherman Act?
The federal antitrust law enacted in 1890 that prohibits monopolization and conspiracies to restrain trade
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8. © 2011 South-Western, a part of Cengage Learning
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
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9. What business practices were declared illegal under the Clayton Act?
Price discrimination
Exclusive dealing
Tying contracts
Stock acquisition of competing companies
Interlocking directorates
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10. Was the Clayton Act an improvement over the Sherman Act?
Although more specific than the Sherman Act, the Clayton Act is also vague
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11. What is the Federal Trade Commission Act?
The federal act that in 1914 established the Federal Trade Commission (FTC) to investigate unfair competition
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12. What is the Robinson-Patman Act?
A 1936 amendment to the Clayton Act that strengthens the Clayton Act against price discrimination
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13. 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
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14. 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
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15. © 2011 South-Western, a part of Cengage Learning
Exhibit 1 Summary of Major Antitrust Laws
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16. 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 2001
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17. What was the outcome of the Standard Oil Case?
The rule of reason
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18. 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
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19. What was the outcome of the Alcoa case?
The per se rule
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20. © 2011 South-Western, a part of Cengage Learning
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
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21. What was the result of the IBM case (1982)?
A switch back to the rule of reason
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22. What was the result of the AT&T case (1982)?
Technology made this government-regulated natural monopoly obsolete, and AT&T was found guilty of anticompetitive pricing
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23. What was the result of the MIT case (1992)?
Eight Ivy League schools agreed to stop colluding to fix prices, and MIT was found guilty of price fixing
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24. What was the Microsoft case of 2001?
This case charged Microsoft with predatory pricing by tying its monopoly in Windows to its Internet Explorer browser
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25. © 2011 South-Western, a part of Cengage Learning
Exhibit 2 Summary of Major Antitrust Cases
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26. How can firms avoid charges of price fixing?
They can merge into one company
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27. When did a lot of mergers begin taking place?
In the 1980’s
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28. What are the different types of mergers?
Horizontal
Vertical
Conglomerate
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29. What is a horizontal merger?
A merger of firms that competes in the same market
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30. What is a vertical merger?
A merger of a firm with its suppliers
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31. What is a conglomerate merger?
A merger between firms in unregulated markets
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32. What can be said about conglomerate mergers?
They are generally allowed because they do not significantly decrease competition
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33. What can be said about antitrust laws in other countries?
They are weak in comparison to U.S. antitrust laws
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34. 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 toward deregulation
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35. © 2011 South-Western, a part of Cengage Learning
Exhibit 3 Federal Regulatory Agencies
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36. What is the basic argument in favor of government regulation?
Market failure
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37. In what ways does the market fail?
Natural monopoly
Externalities
Imperfect information
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38. What is a natural monopoly?
An industry in which long-run average cost is minimized when only one firm serves the market
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39. What is marginal cost pricing?
A system of pricing in which the price charged equals the marginal cost of the last unit produced
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40. D A B C Exhibit 4 A Regulated Monopoly 200 180 150 120 90 60 30 MR
Fair return price
150
efficient price
Price and Costs (dollars per month)
120 B 90
LRAC 60 C
LRMC 30 D MR
Quantity of Subscribers (thousands) 40
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41. © 2011 South-Western, a part of Cengage Learning
What is the conclusion?
Government regulators can achieve efficiency for a natural monopoly by setting a price ceiling equal to the intersection of the demand and MC curves
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42. © 2011 South-Western, a part of Cengage Learning
What is the downside ?
The policy results in losses, so an alternative is to set a price ceiling, called the fair-return price, that yields a normal profit but is somewhat inefficient
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43. What kind of profit is made at the fair return price?
Normal Profit
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44. © 2011 South-Western, a part of Cengage Learning
What is a normal profit?
The accounting profit required to induce a firm’s owners to employ their resources in the firm
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45. Do production costs include normal profit?
Yes, because normal profit is considered a necessary expense of a business
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46. What is a negative externality?
An undesirable byproduct of the economic system
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47. What happens when the negative externality of pollution is present?
Pollution causes polluting firms to overproduce, while causing firms that pay the cost of cleaning up the pollution to underproduce
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48. What can be done when pollution is present?
The government can regulate the industry to minimize the pollution
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49. What happens with imperfect information?
Deficient information on unsafe products can cause consumers to overconsume a product
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50. Decrease in quantity supplied
Decrease in Demand
Consumers informed of defect
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51. Exhibit 5 The Impact of Imperfect Information on the Market for TM Trucks40 E1 30 E2
Price per TM Truck (thousands of dollars) 20 D1 10 D2 75
Quantity of TM Trucks (thousands per year)
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52. END