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Antitrust Policy and Regulations

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Jarnin Fang

on 20 November 2013

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Transcript of Antitrust Policy and Regulations

Industrial Regulation
Natural Monopolies
-exists when a single firm can supply the entire market at a lower average cost than multiple competing firms

- having competition would lower efficiency

- prices would rise

-PG&E is an example
Antitrust Policy and Regulation
Social Regulations
The Antitrust Laws
Sherman Act of 1890
Outlawed restraints of trade (collusive price-fixing & dividing up market & monopolization)

Section 1: Any contract that will create a trust is illegal

Section 2: Guilty of felony if attempt to monopolize or conspire with any person or people, the monopolize any part of the trade or commerce among states or foreign nations
Supporters of Social Regulation
-Supporters argue that social regulation has achieved notable successes and has greatly enhanced society's well-being
-"The costs for social regulation are simply what we must pay to create a hospitable, sustainable, and just society"
-"If not for social regulation, there would be a 40% larger number of fatalities on the highway due to the absence of auto safety features mandated through regulation"

Criticisms of Social Regulation
-Laws are poorly written and make objectives and standards difficult to understand leading to regulators that pursue goals well beyond the original intent of the legislation.
-Decisions are often made based on inadequate information. i.e.-establishing high pollution costs to battle global-warming without knowing for certain whether pollution is the main cause of the problem.
-Some agencies may attract overzealous workers who are biased against large corporations leading to to endless needs for regulations.
Optimal Status of Social Regulation
-If mb > Mc, the activity should be expanded
-if mb < mc, the activity should be suspended
*If MB exceeds mc, then there is too little social regulation
*If MB is smaller than Mc, then there is a insufficient amount of social regulation
-MC and MB of social regulation is hard to measure so it is hard to determine the optimal amount of social regulation
Elements of Social Regulation
-Public policies, standards, and expectations that must be fulfilled
-a process of being licensed to produce or provide certain services
-reoccurring inspections by officials to check for compliance
-a cease-and-desist when a firm is judged to not have met standards
Social regulation differs from that of industrial regulation.
-Industrial regulation focuses primarily on rates, costs, and profits
-Social regulation focuses on the design of products, conditions of employment, and the nature of the production process
Distinguishing Features
-"Regulatory Economics." Wikipedia. Wikimedia Foundation, 11 Nov. 2013. Web. 11 Nov. 2013.
-McConnell, Campbell R., Stanley L. Brue, and Sean Masaki. Flynn. Economics: Principles, Problems, and Policies. New York: McGraw-Hill/Irwin, 2012. Print.
Historical Background
Improved transportation facilities, mechanized production methods, and sophisticated corporate structures

1870s-1880s, trust were formed

Farmers and owners of small business became vulnerable

Regulatory agencies and antitrust laws formed
Section 2 : Outlaws price discrimination when it is not justified and reduces competition

Section 3 : No tying contract ( require a buyer to purchase another product as a condition to obtaining the desired one)

SEction 7 : prohibits acquisition of stocks of competing corporations when the outcome would be less competition

Section 8 : No interlocking directorates - director of one firm is also a board member of a competing firm
Celler-Kefauver Act of 1950
Amended section 7 of the clayton act

Prohibits one firm to obtain the physical assets of another firm when effect would be reduced competition
Clayton Act of 1914

What is industrial regulation?
Federal Trade Commission Act of 1914
Created the five member Federal trade commission

Protect Consumer and maintain competition

Wheeler lea act 1938: gave additional responsibility
-est. ftc as independent antitrust agency
- made unfair deceptive sales practices illegal

Antitrust policy: issues & impacts
Issues of interpretation



public interest theory
legal cartel theory
Public Interest Theory
-government is necessary to keep natural monopoly from becoming an actually monopoly

- society benefits from the low natural monopoly prices

-price is set so firm earns only a fair return

-price equals average total costs
Flaws With the System
- since firms always faced with fair return, no incentive to find more efficient, least costly ways of production

-can end up using high costs methods of production, leaves consumers with burden of paying for it

-also keeps dead firms alive
Legal Cartel Theory
-politicians and regulators "supply" firms with regulations

-similar to special interest groups and pork-barreling

- natural monopolies can then operate like a cartel


Buchanan, J. (1986, December 8). Prize Lecture. Nobel Prize. Retrieved November 11, 2013, from http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1986/buchanan-lecture.html#

McConnell, C. R., Brue, S. L., & Flynn, S. M. (2012). Economics: principles, problems, and policies (19th ed.). New York: McGraw-Hill/Irwin.

Posner, R. (n.d.). Theories of Economic Regulation. The National Bureau of Economic Research. Retrieved November 11, 2013, from http://www.nber.org/papers/w0041

Stigler, G. (n.d.). George Stigler's Theory of Regulation. George Stigler's Theory of Regulation. Retrieved November 11, 2013, from http://www.sjsu.edu/faculty/watkins/stigler.htm

Skeptical Regulator. (n.d.). "Public Choice: Is There A Public Interest?," The Skeptical Regulator, Mar. 2004. The Progress and Freedom Foundation. Retrieved November 11, 2013, from http://www.pff.org/irle/skepticalregulator/skepticalregulator2.2.html

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APA formatting by BibMe.org.
Monopoly behavior vs monopoly structure
How broadly should markets be defined
Standard oil case
anticompetitive monopolizing
us steel case
rule of reason - not illegal
alcoa case
90% of market - guilty, even though legal
Structuralists vs behavioralists (more popular with contemporary economists)
Dupont cellophane case - cellophane market vs "flexible wrapping materials" market
Issue of Enforcement
last years and are expensive
vary between presidents
Active antitrust perspective - strict enforcement

laissez-faire perspective - allow long-run competitive process to occur
creative destruction
effectiveness of antitrust
laws: monopolies
lenient if natural
issue of remedy
AT&T case - lost possession of 22 regional phone companies
microsoft case - prohibited from anticompetitive practices. later fined by eu.
Effectiveness of antitrust laws: mergers
horizontal - similar products, same geographic market
vertical - different stages of product development
conglomerate - different industries

horizontal - herfindahl index
vertical - most aren't blocked, unless both are large firms
conglomerate - generally permitted
effectiveness of antitrust laws
price fixing - per se violation
price discrimination - rarely challenged

tying contracts - strictly prohibited
-McConnell, Campbell R., Stanley L. Brue, and Sean Masaki. Flynn. Economics: Principles, Problems, and Policies. New York: McGraw-Hill/Irwin, 2012. Print.

Antitrust Resource Manual 8. Identifying Sherman Act Violations. (n.d.). Antitrust Resource Manual 8. Identifying Sherman Act Violations. Retrieved November 16, 2013, from http://www.justice.gov/usao/eousa/foia_reading_room/usam/title7/ant00008.htm

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Menu Navigation. (n.d.). Clayton Act. Retrieved November 16, 2013, from http://www.antitrustlaws.org/Clayton-Act.html

Federal Trade Commission Protecting America's Consumers. (n.d.). Federal Trade Commission. Retrieved November 16, 2013, from http://www.ftc.gov/ftc/about.shtm


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Basic Gist
Deregulation is essentially the opposite of regulation
the government reduces or removes regulations on a particular firm or industry
increases competition and productivity
Cases of Deregulation
in 1970, a lot of inefficiencies were found in regulated industries and markets.
Congress and other state legislatures decided to deregulate numerous industries
Airline, banking, trucking, railroads, electricity, television, and natural gas.
Positive Effects of Deregulation
Produces more net benefits to society. More efficient
Prices fall such as airfare and trains due to competition
Competition means more incentive for quality
technological advances such as fax machine, cellphones, microwaves communications, and the internet
airfare safety improved
Negative Effects of Deregulation
Without regulations, cable TV and landlines providers can drop routes that are unprofitable such as the rural/country side. Farmer become out of luck
companies can own multiple radio stations and broadcasters can own tv channels which limit the variety of information and music we experience.
companies can cut costs anywhere they want.
Airlines stopped giving out food which let passenger s starve
The overwhelming competition can led to companies going bankrupt
Deregulation in Electricity
Deregulation is advanced at the wholesale level
firms can generate facilities and sell to local electricity providers at unregulated prices.
deregulation of retail prices and wholesale prices
increase in Competition which increased allocative efficiency and decreased electricity rates
Deregulation of wholesale prices and not retail prices
prices surged when experiencing electric shortages like in California and caused major financial losses to electric companies because they could not carry the costs to the consumer due to regulation of retail prices.
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