Analyze what type of market structure was in existence at the time of the anti-trust measures or is in currently.

For Week 8 you will find two topics. Select one topic, then post and concisely defend your view. You may post to both topics, but are required to only select one for your initial post. Be careful to identify the positive reasons for your normative position. Read and respond to your fellow student’s postings at will. The topics to choose from are: I choose topic 2.2: Anti-trust Measures – Identify a particular market that has experienced government anti-trust efforts or you think should have antitrust efforts. Analyze what type of market structure was in existence at the time of the anti-trust measures or is in currently. Then justify whether the market justified(s) the intervention.
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Chapter 27
Regulation and Antitrust Policy
in a Globalized Economy
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Overview
This chapter is concerned with the issues of economic and social regulation and antitrust policy. Of
special interest is the regulation of natural monopoly. Another important objective of this chapter is to
point out that antitrust is geared toward preventing the formation of monopolies or monopolistic power.
Economic regulation is a procedure by which specific firms that either have monopoly power because
of the technical nature of the production function or are granted monopoly power by government are
“controlled.” Presumably, both antitrust policy and regulation are attempts to defeat the more obvious
abuses of economic power. A natural monopoly is defined, and the monopolist’s profit-maximizing price
and output decision are discussed. Various methods of regulating monopolies (and their attendant problems)
are discussed, as are recent trends in regulatory economics. Social regulation is discussed as a means of
improving the quality of life. Economic regulation of nonmonopolistic industries is usually based on a
perceived need of dealing with asymmetric information and the resulting lemons problem. Finally, there
is a brief historical account of U.S. antitrust policy and its enforcement.
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Learning Objectives
After studying this chapter, students should be able to:
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27.1 Distinguish between economic regulation and social regulation
27.2 Recognize the practical difficulties in regulating the prices charged by natural monopolies
27.3 Explain the main rationales for regulation of industries that are not inherently monopolistic
27.4 Identify alternative theories aimed at explaining the behavior of regulators
27.5 Understand the foundations of antitrust laws and regulations
27.6 Discuss basic issues in enforcing antitrust laws
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I.
Outline
Forms of Industry Regulation: There are two basic types of government regulation: (1) economic
regulation and (2) social regulation. (See Figure 27-1.)
A. Economic Regulation: Initially, this was regulation to control prices that natural monopolies
were allowed to charge. Over time, federal and state governments have sought to regulate the
characteristics of products or processes in industries without monopolistic characteristics.
1. Regulation of Natural Monopolies: The regulation of natural monopolies has emphasized
regulation of product prices to prevent monopoly profits, which is also called rate
regulation.
©2016 Pearson Education, Inc.
394
Miller • Economics Today, Eighteenth Edition
2. Regulation of Nonmonopolistic Industries: All state governments regulate prices that the
insurance companies can charge. Most other government regulation establishes rules that
pertain to production, product features, and entry and exit within a number of specific
nonmonopolistic industries.
B. Social Regulation: The aim of social regulation is to improve the quality of life through
improved products, a less polluted environment, and better working conditions. Social
regulation affects all firms in the economy and not just certain industries. (See Table 27-1.)
II.
Regulating Natural Monopolies
A. The Theory of Natural Monopoly Regulation: Whenever a single firm has the ability to
produce all of the industry’s output at a lower per-unit cost than any other firm, a natural
monopoly arises. The long-run average costs are falling over such a large range of production
rates (relative to demand) that only one firm can survive in such an industry. (See Figure 27-1.)
1. The Unregulated Natural Monopoly: The natural monopolist will produce to the point
where marginal cost equals marginal revenue and set price on the demand curve. Price will
be greater than marginal cost. (See Figure 27-2 (a).)
2. The Impracticality of Marginal Cost Pricing: The government determines the price that
the natural monopolist can charge. If regulation forces a natural monopolist to set price
equal to marginal cost, then the monopolist would incur losses because price would be less
than average cost. (See Figure 27-2 (b).)
3. Average Cost Pricing: Because regulators cannot force a natural monopolist to charge a
price equal to marginal cost and make it stay in business, regulation has often taken the
form of average cost pricing. This can take the form of only allowing prices equal to the
actual cost of service, called cost-of-service pricing. Rate-of-return regulation allows the
firm to set a price equal to average cost where average cost includes what regulators deem a
normal or competitive rate of return on investment. (See Figure 27-1.)
B. Natural Monopolies No More? For years, the electricity, natural gas, and telecommunications
industries were subject to economic regulation because they were viewed as natural
monopolies.
1. Electricity and Natural Gas: Separating Production from Delivery: Regulators decided
the function of producing electricity or natural gas could be separated from the delivery of
the product. This could be done because the significant economies of scale were in the
distribution networks—pipelines and wire. The distribution networks are still regulated as
natural monopolies, but the various producers of natural gas and electricity compete now in
nearly half of the states.
2. Telecommunication Services Meet the Internet: The same principles have been applied
to telecommunications. The network over which telephone service is delivered is still
regulated, and AT&T was required to grant access to its long distance network to competing
providers of long-distance service. Local telephone companies began providing access to
their networks as well. Also, the development of cell phones and Web-based telephone
services began to compete with traditional wire-based services.
3. Are Natural Monopolies Relics of the Past? Natural monopoly appears more and more
confined to the networks for distributing telephones as services and natural gas and electricity
than in actually producing the good or service.
III. Regulating Nonmonopolistic Industries: Protecting consumer interests has been the main
rationale for government regulatory functions.
A. Rationales for Consumer Protection in Nonmonopolistic Industries: At one time, the rule
of “caveat emptor,” or “let the buyer beware” was the rule in market transactions. Today,
©2016 Pearson Education, Inc.
Chapter 27
Regulation and Antitrust Policy in a Globalized Economy
395
federal regulations require sellers to meet certain minimum standards in their dealings with their
customers.
1. Reasons for Government-Orchestrated Consumer Protection: There are two major
reasons:
a. Market Failures
b. Asymmetric Information
2. Asymmetric Information and Product Quality: In extreme cases, asymmetric
information can lead to a situation where most of the products are of low quality. This is
called the lemons problem with used cars.
a. An Example: A commonly cited example is the market for used automobiles. In this
market, half of all used cars are high-quality autos and the other half are “lemons.”
b. Willingness to Pay: Only owners of lemons are willing to sell at the price that a
consumer is willing to pay.
3. The Lemons Problem: The possibility that asymmetric information will lead to a general
reduction in quality in an industry. This is particularly a potential problem with credence
goods.
4. Market Solutions to the Lemons Problem: Market solutions to the lemons problem are
sellers offering warranties, setting industry standards, and seeking external product
certification.
B. Implementing Consumer Protection Regulation: Governments implement legal remedies for
consumers, licensing, and have a regulatory apparatus for overseeing all aspects of an
industry’s operations when they consider private market solutions insufficient for the lemons
problem and asymmetric information.
1. Liability Laws and Government Licensing: Some liability laws specify penalties for
product failures that provide consumers with protections similar to warranties.
Governments also issue licenses that grant only qualifying firms the legal right to produce
and sell certain products.
2. Direct Economic and Social Regulation: A government may determine that the lemons
problem is so severe in a given industry, such as banking, that it establishes a regulatory
apparatus to maintain public confidence in that industry.
IV.
Incentives and Costs of Regulation: Because abiding by regulation is costly for firms, they
engage in activities that are intended to avoid the intent of regulations or to change established
regulations.
A. Creative Response and Feedback Effects: Results of Regulation: This is a firm’s behavioral
modification that allows it to comply with the letter of the law but violate the spirit of the law,
significantly lessening the law’s effects. Sometimes there is a feedback effect in which the
individual’s behavior changes in undesirable ways after the regulation is implemented.
B. Explaining Regulators’ Behavior: The two best-known explanations of regulator behavior are
the capture hypothesis and the “share the gains, share the pains” theory.
1. The Capture Hypothesis: A theory of regulatory behavior that predicts that the regulators
will eventually be captured by the special interests of the industry that is being regulated.
2. “Share the Gains, Share the Pains”: A theory of regulatory behavior in which the
regulators must take into account the demands of three groups: legislators who established
and who oversee the regulatory agency, those in the regulated industry, and consumers of the
regulated industry.
©2016 Pearson Education, Inc.
396
Miller • Economics Today, Eighteenth Edition
C. The Benefits and Costs of Regulation: Although there are many potential benefits of
regulation, it is difficult to measure the actual benefits of regulation.
1. The Direct Costs of Regulation to Taxpayers: Currently, the federal government spends
nearly $55 billion per year to fund the staff and activities of federal regulatory agencies. In
addition, businesses spend money complying with the regulations, developing creative
response to regulations, and funding lobbying efforts directed at legislators and regulatory
officials. (See Figure 27-3.)
2. The Total Social Cost of Regulation: The estimated total social cost of complying with
federal regulations is estimated at $1 trillion per year. When the costs of complying with state
regulation are added, the estimates exceed $1.75 trillion per year.
V.
Antitrust Policy: The logic behind antitrust legislation is that if the courts can prevent collusion
among sellers of a product, monopoly prices will not result, and there will be no restriction of
output. There will be no economic profits in the long run.
A. Antitrust Policy in the United States: Congress has enacted four key antitrust laws.
(See Table 27-2.)
1. The Sherman Antitrust Act of 1890: This act was the first attempt by the federal
government to control the growth of monopoly in the United States. The most important
provisions of the act are as follows:
a. Section 1 prohibits every contract, combination in the form of trust or otherwise or
conspiracy, in the restraint of trade or commerce among the several states, or with
foreign nations.
b. Section 2 makes it illegal to monopolize, or attempt to monopolize, or combine or
conspire with any other person or persons to monopolize any part of trade or commerce.
2. Other Important Antitrust Legislation: The Sherman Act was so vague that in 1914 a
new law was passed called the Clayton Act. It legally prohibited a number of very specific
business practices.
a. Federal Trade Commission Act of 1914 and Its 1938 Amendment: The Federal Trade
Commission Act was designed to stipulate acceptable competitive behavior. It was
supposed to prevent overly aggressive competition. The Federal Trade Commission is
charged with the power to investigate unfair trade practices. In 1938, the Federal Trade
Commission Act was amended to allow the FTC to regulate advertising and marketing
practices.
b. Robinson-Patman Act of 1936: The act was designed to protect independent retailers
from specified unfair competitive acts by chain stores.
3. Exemptions from Antitrust Laws
? Labor unions
? Public utilities—electric, gas, and telephone companies
? Professional baseball
? Cooperative activities among U.S. exporters
? Hospitals
? Public transit and water systems
? Suppliers of military equipment
? Joint publishing arrangements in a single city by two or more newspapers
B. International Discord in Antitrust Policy: Differing antitrust laws in the United States and
the European Union (EU).are a major issue . Under the antitrust laws of the EU, any business
combination that “creates or strengthens a dominant position” that significantly reduces or
©2016 Pearson Education, Inc.
Chapter 27
Regulation and Antitrust Policy in a Globalized Economy
397
impedes competition is prohibited. It does not matter how or why competition is significantly
reduced. In the United States, it does matter.
VI.
Antitrust Enforcement: Most antitrust enforcement today is based on the Sherman Act. The
Supreme Court has defined the offense of monopolization as “(1) possession of monopoly power in
the relevant market and (2) the willful acquisition or maintenance of the power as distinguished
from growth, or the development as a consequence of a superior product, business acumen, or
historic accident.”
A. The Relevant Market: To assess whether a monopolistic capability exists, antitrust authorities
first seek to define a market. The relevant market consists of (1) a relevant product market and
(2) a relevant geographic market.
B. Measuring Concentration in the Relevant Market to Assess Mergers: Federal antitrust
enforcement agencies utilize the Herfindahl-Hirschman Index, or HHI, to assess the degree of
competition in the relevant market.
1. HHI Limits for Merger Evaluations: Either a combined HHI change greater than 100 and
postmerger HHI in excess of 1,000 or a combined HHI change exceeding 50 and a
postmerger HHI above 1,800 raise antitrust concerns.
2. Merger Enforcement Actions: If the antitrust enforcement authority views that a proposed
merger would lead to a substantial output reduction and price increase, then the authority
files a lawsuit to block the merger.
C. Product Packaging and Antitrust Enforcement: In U.S. antitrust enforcement, it is important
to determine whether a firm has engaged in “willful acquisition or maintenance” of market
power. Two actions, versioning and bundling, are presented.
1. Product Versioning: Versioning is selling an item in slightly altered forms to different
groups of consumers at different prices.
a. The Mechanics of Versioning: Firms sell such products as office productivity
software programs as both a “professional” version with a full range of features and a
“standard” version with only basic functions.
b. Price Discrimination versus Versioning: In the United States, versioning is not
viewed as illegal price discrimination.
2. Product Bundling: The joint sale of two or more products as a set. If it is only offered as a
set and not individually, then U.S. antitrust authorities view it as a form of price
discrimination known as tie-in sales. Tie-in sales require consumers who wish to buy one of
a company’s products to purchase another item the firm sells as well.
a. A Hypothetical Example of Product Bundling to Engage in Price Discrimination:
A software firm sells an operating system and an app-maintenance system.
b. Real-World Allegations of Bundling Intended to Attain a Monopoly: Product
bundling might assist a firm to extend a monopoly position.
©2016 Pearson Education, Inc.

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