1. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Antitrust Policy and Regulation Chapter 15

2. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Laugher Curve Murphy’s Law of Economic Policy “Economists have the least influence on policy where they know the most and are agreed; They have the most influence on policy where they know the least and disagree most vehemently.” Alan S. Blinder

3. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Antitrust Policy: Judgment by Performance or Structure? n Antitrust policy is the government’s policy toward the competitive process. n The two views of competition are judgment by performance and judgment by structure.

4. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Antitrust Policy: Judgment by Performance or Structure? n Judgment by performance – we should judge the competitiveness of markets by the performance (behavior) of firms in the market.

5. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Antitrust Policy: Judgment by Performance or Structure? n Judgment by structure – we should judge the competitiveness of markets by the structure of the industry.

6. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. History of U.S. Antitrust Laws n Americans generally are in favor of laissez- faire and government noninvolvement in business. n At the same time, there has been a populist sentiment that fears bigness and monopoly.

7. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. History of U.S. Antitrust Laws n Trusts and cartels burst forth in the late 1800s. n A trust or cartel is a combination of firms in which the firms have not actually merged, but act as a single entity.

8. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. History of U.S. Antitrust Laws n A trust sets common prices and governs the output of individual member firms. n A trust can, and often does act like a monopolist.

9. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Sherman Antitrust Act n Public outrage against trusts such as Standard Oil led to the passage of the Sherman Act, the Clayton Act, and the Federal Trade Commission Act.

10. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Sherman Antitrust Act n The Sherman Antitrust Act of 1890 is a law designed to regulate the competitive process.

11. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Sherman Antitrust Act n Its two main provisions are: l “Every contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade or commerce.. is declared to be illegal.”

12. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Sherman Antitrust Act n Its two main provisions are: l “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...”

13. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Sherman Antitrust Act n The Sherman Act is broad and sweeping, but vague. n Congress designed the Act that way to allow the courts to decide its meaning.

14. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Sherman Antitrust Act n In the 1890s, economists debated whether mergers reflected increased economies of scale or attempts to restrict output and generate monopoly profits.

15. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Sherman Antitrust Act n Economists with the performance viewpoint argued that competition was strong and it would ultimately limit monopolies.

16. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Sherman Antitrust Act n Economists with the structure viewpoint argued that trusts should be broken up by government.

17. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Standard Oil and American Tobacco Cases n In 1911, the U.S. Supreme Court ruled that both Standard Oil and American Tobacco were structural monopolies. n The court held that they violated the Sherman Act because of their “unfair business practices” not because of their structure.

18. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Standard Oil and American Tobacco Cases n Judgment based on performance, not structure, is often called the abuse theory. n A firm is legally considered a monopoly only if it commits monopolistic abuses.

19. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Standard Oil and American Tobacco Cases n In the 1920 U.S. Steel case, the Court ruled that while company was a structural monopoly, it was not a monopoly in performance.

20. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Clayton Act and Federal Trade Commission Act n The Clayton Antitrust Act and the Federal Trade Commission Act were enacted in 1914.

21. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Clayton Act and Federal Trade Commission Act n The Clayton Antitrust Act made four monopolistic practices illegal when their effect was to lessen competition: l Price discrimination. l Tie-in contracts. l Interlocking directorships. l Buying stock in a competitor’s company.

22. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Clayton Act and Federal Trade Commission Act n The Federal Trade Commission Act made it illegal for firms: l To use “unfair methods of competition.” l To engage in “unfair or deceptive acts or practices,” whether or not those actions had any effect on competition.

23. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Clayton Act and Federal Trade Commission Act n In 1938, Federal Trade Commission was given the job of preventing false and deceptive advertising which is one of its main functions today.

24. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The ALCOA Case n Judgment by performance governed U.S. antitrust policy until the ALCOA case of 1945. n The court ruled that the structure of the market which it dominated was unlawful.

25. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The ALCOA Case n ALCOA dominated the market in two ways: l It used its knowledge of the market to expand its capacity before any competitor had a chance to enter the market. l It kept prices low to prevent market entry.

26. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Judging Markets by Structure and Performance: The Reality n Judging by structure is practical though seemingly unfair. l The alleged wrongdoer is doing what it is supposed to be doing, producing the best product at the lowest possible price.

27. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Contextual Judgments and the Capabilities of the Courts n With judgment by performance, each action of a firm must be analyzed on a case-by-case basis. n Even though performance will ultimately be judged, courts use structure as a guideline.

28. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Determining the Relevant Market and Industry n Choosing the relevant market when evaluating competitiveness is difficult to do. l The relevant market in the ALCOA case was the aluminum market not the metals market at large.

29. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Determining the Relevant Market and Industry n The relevant market In the Du Pont case (1956), was flexible wrap not cellophane. n Du Pont was not considered a monopolist even though it sold 100 percent of cellophane.

30. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Determining the Relevant Market and Industry n Both structure and performance criteria have ambiguities. n In the real world there are no definitive criteria for judging whether a firm has violated the antitrust statutes.

31. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Recent Antitrust Enforcement n In recent years, antitrust law has worked mainly through its deterrent effect. n Many potential mergers are never even proposed because firms know the merger would not be allowed.

32. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Recent Antitrust Enforcement n Since the 1980s, the government has been more lenient in antitrust cases. l Political pressure for antitrust action waned. l Globalization of the U.S. economy. l The increasing complexity of technology.

33. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Three Recent Antitrust Cases n The modern era of antitrust policy has been marked by important cases in the computer and telecommunications market.

34. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The IBM Case n In 1967, the U.S. Department of Justice sued IBM for violation of antitrust laws. l The company was charged with unfairly bundling hardware, software, and maintenance services on a take-it-or-leave-it basis. l The government also charged that IBM constantly redesigned its hardware making it impossible for competitors to keep up.

35. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The IBM Case n In its defense, IBM argued: l The market was much larger than the government claimed l The fast-moving technology and customers’ desires forced it to constantly upgrade its equipment.

36. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The IBM Case n The government dropped its suit in 1982. l Mainframe computers were replaced by PCs. l The globalization of the computer industry made IBM's dominance in the U.S. far less important.

37. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The IBM Case n The prosecution likely led to IBM’s problems in the 1990s. l IBM didn’t buy the DOS operating system from Microsoft because of the pending litigation. l The PC market swelled while the mainframe market died.

38. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The AT&T Case n Up until 1982, AT&T controlled most long- distance and local telephone services. n It produced telephones and other communications equipment.

39. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. AT&T as a Regulated Monopoly n It was a natural monopoly regulated by law. l Natural monopoly – an industry in which significant economies of scale make the existence of more than one firm inefficient.

40. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. AT&T as a Regulated Monopoly n AT&T was required to provide universal service so that it would not engage in cream skimming. l Cream skimming – providing service to low- cost areas and avoiding high-cost areas.

41. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. AT&T as a Regulated Monopoly n Many economists argued that AT&T’s guarantee of “fair returns” gave it a strong incentive to: l Act as a lazy monopolist l Invest heavily in new equipment thereby increasing costs and subsequently, profits.

42. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Technological Change and Competition n Technological change and competition changed the natural monopoly character of the phone industry.

43. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Technological Change and Competition n Satellite transmissions and fiber-optic cable turned AT&T into a traditional monopoly. n Potential competitors sued because they felt AT&T was charging too much to gain access on their system.

44. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Technological Change and Competition n In 1978, the Justice Department sued AT&T on antitrust grounds. n The suit was settled out of court in 1982.

45. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Resolution of the AT&T Case n In 1982, AT&T agreed to divest its 22 local operating companies which merged into seven Baby Bells. n It kept its long-distance telephone service, manufacturing arm and Bell Laboratories.

46. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Resolution of the AT&T Case n This resulted in enormous upheaval in the industry. n Local telephone rates doubled and tripled. n Two major competitors, MCI and Sprint, developed.

47. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Developments Since the AT&T Case n The seven Baby Bells have continued to merge – there are only four now. n AT&T split into three companies.

48. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Developments Since the AT&T Case n Congress passed the Telecommunications Act in 1996. l The telecommunications industry was deregulated. l Long-distance carriers, local phone companies, and cable companies were allowed to enter one another’s markets.

49. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Developments Since the AT&T Case n Wireless communications and international providers have increased competition in the telecommunications market.

50. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Developments Since the AT&T Case n Technological developments will keep antitrust policy in the news.

51. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Microsoft Case n Microsoft is the dominant player in the software industry. l It controls about 50 percent of the world market for software and over 90 percent of the operating systems market worldwide.

52. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Microsoft Case n Since all software must be compatible with an operating system, Microsoft has an enormous competitive advantage for its other divisions.

53. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Microsoft Case n The U.S. Justice department charged Microsoft with an antitrust violation: l Possessing monopoly power in the market for personal computing operating systems. l Tying other Microsoft products to its Windows operating system.

54. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Microsoft Case n The U.S. Justice department charged Microsoft with an antitrust violation: l Preventing computer manufacturers that install Windows from offering software that competes with Windows software.

55. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Is Microsoft a Monopolist? n The computer software industry is characterized by network externalities and economies of scale – both significant barriers to entry.

56. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Is Microsoft a Monopolist? n Network externalities exist because as the number of applications supported by a single platform increase, the value of the platform also increases.

57. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Is Microsoft a Monopolist? n Economies of scale exist because of the cost of developing a new platform and new software is significant while the cost of producing it is minimal.

58. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Is Microsoft a Monopolist? n With its stable 90 percent market share, it certainly is a monopoly. n From a dynamic perspective, other operating systems exist. n Another potential competitive force is the merging of software and hardware.

59. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Is Microsoft a Monopolist? n With this dynamic view of the market, Microsoft’s monopoly is at best temporary.

60. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Is Microsoft a Predatory Monopolist? n By directing the development of in-house software to favor Windows, Microsoft strengthened the barrier to entry created by network externalities.

61. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Is Microsoft a Predatory Monopolist? n Microsoft also penalized computer manufacturers that installed Windows if they installed competing software.

62. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Is Microsoft a Predatory Monopolist? n Microsoft froze out Netscape Navigator by packaging Internet Explorer as part of Windows 95 at no additional cost to the buyer.

63. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Is Microsoft a Predatory Monopolist? n Sun Microsystems developed Java, a software language designed to create software applications on a variety of platforms not just Windows. n Microsoft undermined this platform neutrality of Java by altering it despite agreeing not to do so.

64. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Resolution of the Microsoft Case n In 2000, a federal judge ruled that Microsoft violated the Sherman Act by attempting to maintain its monopoly power by anti-competitive means.

65. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Resolution of the Microsoft Case n Microsoft agreed to a settlement: l It would not prohibit PC makers from using competing products. l It would release technical information about Windows improvements to software makers. l It could continue to bundle e-mail, and media player with Windows.

66. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Assessment of Antitrust Policy n Almost all economists agree that antitrust enforcement has not reduced the size of firms below the level at which they can take advantage of economies of scale.

67. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Assessment of Antitrust Policy n Performance advocates generally believe enforcement was not needed. n Structural advocates generally believe that it was.

68. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Mergers, Acquisitions, and Takeovers n During the 1990 and early 2000s, firms have been simultaneously breaking up and merging to achieve economies of scope and economies of scale.

69. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Mergers, Acquisitions, and Takeovers n The law allows firms to break up any way they like. n Mergers, on the other hand, must fall within the law's antitrust guidelines.

70. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Acquisitions and Takeovers n The term merger is a general term meaning the act of combining two firms. n Two types of mergers are takeover and acquisition.

71. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Acquisitions and Takeovers n A takeover is the purchase of one firm by a shell firm that then takes control of the purchased firm’s operations. n Takeovers change the control over the firm, but do not affect market concentration.

72. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Acquisitions and Takeovers n An acquisition is a merger in which a company buys another company. n The purchaser has the right of direct control over the resulting operation, but does not always exercise that right.

73. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Acquisitions and Takeovers n Takovers can be friendly or hostile. l A friendly takeover is one in which one corporation is willing to be acquired by the other. l A hostile takeover is a merger in which the firm being taken over does not want to be taken over.

74. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Acquisitions and Takeovers n In a hostile takeover, the shareholders ultimately decide whether to sell their shares.

75. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Mergers n There are three types of mergers: horizontal, vertical, and conglomerate.

76. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Horizontal Mergers n A horizontal merger is the merging of two companies in the same industry. n Most antitrust policy has centered on horizontal mergers.

77. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Horizontal Mergers n Since the passage of the 1950 Cellar- Kefauver Act, almost all mergers of firms with substantial market shares in the same industry have been prohibited.

78. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Horizontal Mergers n For concentrated industries, the government would challenge all mergers involving the following combinations of market share:

79. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Vertical Mergers n A vertical merger is a combination of two companies that are involved in different phases of producing a product. l If the merged firms are able to limit access of other buyers or sellers to the market, the merger would be in violation of the Clayton Act.

80. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Vertical Mergers n In the 1980s, the U.S. government challenged any vertical merger in which: l The supplying firm had a 10 percent or more market share. l The buyer company bought 6 percent or more of the market.

81. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Conglomerate Mergers n A conglomerate merger is the merging of two companies in relatively unrelated industries. l Conglomerate mergers are generally approved by antitrust laws under the assumption that they do not significantly restrict competition.

82. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Conglomerate Mergers n There are five reasons why unrelated firms would wish to merge. l To achieve economies of scope. l To get a good buy. l To diversify. l To ward off a takeover bid. l To strengthen their political-economic influence.

83. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Recent Merger Activity and Deacquisitions n Globalization, deregulation, and technological change led to a significant increase in mergers in the late 1990s into the early 2000s.

84. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Recent Merger Activity and Deacquisitions n Deacquisitions occur when a firm sells parts of another company it has bought or parts of itself.

85. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Mergers in the United States Since 1892 15,000 5,000 3,000 2,000 1,000 190019201940196019802000

86. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Assessment of Mergers and Acquisitions n Economists’ assessment of mergers and acquisitions is mixed. n Mergers have good and bad effects.

87. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. International Competition n The internationalization of competition is changing the political climate in the U.S. n Antitrust policymakers now view that the relevant market is the international market.

88. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Antitrust Policies in Other Countries n Antitrust legislation in other countries is much weaker than in the U.S. n No other country forces companies to break up for antitrust violations.

89. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Antitrust Policies in Other Countries n Other countries oppose antitrust laws for the following reasons: l Economies of scale. l Lack of a strong ideology supporting competition. l Strong cultural ties between government and business.

90. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Regulation, Government Ownership, and Industrial Policies n Governments can affect the competitive process by: l Regulating the activities of firms. l Taking direct charge of the firms and owning them directly. l Industrial policy – influencing firms with laws and taxes.

91. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Regulation n The two types of regulation are pricing regulation and social regulation.

92. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Price Regulation n Pricing regulation is regulation directed at industries that have natural monopoly elements.

93. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Price Regulation n Problems with pricing regulation include: l Regulated firms have little incentive to hold down costs. l Regulatory boards are often made up of individuals from the industry being regulated. l Industries that could very well compete desire to be declared natural monopolies.

94. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Price Regulation n All these criticisms have led to significant deregulation over the past twenty years.

95. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Social Regulation n Social regulation applies to most firms and is not designed specifically for natural monopolies.

96. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Social Regulation n Social regulation affects large aspects of all aspects of business: l Working conditions. l The quality of the products. l The production process firms are allowed to use.

97. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Social Regulation n Some economists argue that social regulation is bad: l Regulatory costs outweigh the social benefits derived from the regulation. l Regulations are poorly written and ambiguous. l Regulatory burdens are unbearable for small firms.

98. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Social Regulation n Others argue that social regulation is good: l The benefits are worth the costs. l Better regulation is needed.

99. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Government Ownership n European governments have had a history of taking over large industries and running them themselves.

100. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Government Ownership n Government-owned firms have no incentive to keep costs down and introduce new technology.

101. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Government Ownership n Workers in government-owned firms were guaranteed jobs, and used political threats to hold their wages high.

102. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Government Ownership n The economic integration of Europe has been accompanied by privatization of many of the formerly government-owned industries.

103. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Industrial Policies n Industrial policy is a formal policy that government takes toward business. l In the 1980s and early 1990s, many politicians argued that the U.S. needed an industrial policy modeled on Japan's. l The calls went away when the Japanese economy faltered in the 1990s.

104. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Industrial Policies n In a way the U.S. has always had an industrial policy. n It is embedded in the tax code, its laws, regulatory structure, and negotiations with foreign nations regarding tariffs and trade.

105. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Industrial Policies n Many close connections between and business have developed over the years: l The military-industrial complex. l Government-drug complexes. l Government-higher education complexes. l Government-high tech complexes.

106. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Antitrust Policy and Regulation End of Chapter 15