CHAPTER OVERVIEW AND TEACHING TIPS Chapter 17 presents historical and theoretical portraits of regulatory and antitrust activities in the United States. Both are evolving, and your students need to understand that. It may be helpful to review both the competitive benchmark of efficiency and the various ways that markets can fall short of this ideal. Evolution can then be cast in terms of judging the social welfare implications of various types and degrees of market failure.This chapter concentrates on one of government’s primary challenges in exercising its efficiency role: performing a watchdog function to prevent excessive abuse of market power. Also, the chapter focuses your attention on the two major tools employed by the U.S. government to put some “teeth” into its careful monitoring of business activity:regulation and antitrust activity.Regulation is often employed when economies of scale are so significant in a production process that a monopoly is the only efficient solution. Government agencies are organized to monitor the behavior of the monopolist and to protect the interests of consumers. Antitrust legislation is designed to prevent monopolies from forming and to attack anticom-petitive abuses. The Sherman Antitrust Act and the Clayton Act form the backbone of antitrust policies; the Federal Trade Commission Act established the FTC as the agency in charge of monitoring and enforcing the legislation. Of course, as with any laws, the courts ultimately interpret their meaning, and a century of legal precedent defines the meaning of these statutes.LEARNING OBJECTIVES1.Distinguish between two brands of regulation: economic and social . Explain why government would use either of these types of regulation to alleviate market failure.2.Review the three major public-interest justifications of regulation.3.Provide an overview of the alternative strategies that can be used to regulate natural monopolies .Illustrate these alternatives, and use your illustration to discuss the costs of regulation.4.Explain the significance of the Sherman Antitrust Act, the Clayton Act ,and the Federal Trade Commission Act .5.Understand the differences between conduct and structure as used in the application of antitrust laws.6.Trace the evolution of antitrust activity to its modern formulation, which has focused on improving efficiency and not just on preventing bigness itself.SUGGESTED ANSWERS TO QUESTIONS IN THE TEXT 1.Consider economic regulation and antitrust policies. Some components of each are more direct and allow less flexibility. Others are more indirect and allow correspondingly more flexibility. As you consider strengths and weaknesses, state the objectives of “restraint” explicitly.2.Consult Figure 17-1; it duplicates Figure 17-2 in the text. Note P M P R P I andQ M Q R Q I .Deadweight loss falls as P M converges toP I , but profits turn negative after P R . Beyond P R , therefore, tax revenue from elsewhere is required and brings with it the effects of its own distortions. If P M is not very much different fromP I , this tax distortion might cause a larger welfare reduction. Also, different people lose and gain, so different people prefer different approaches.81C H A P T E RP r o m o t i n g M o r eE f f i c i e n t M a r k e t s17Figure 17-13.Price-cap regulation provides better incentives because firms are encouraged to lower their production costs. Theyare guaranteed a price increase; this benefits their profitability more if they are able at the same time to lower costs.Average cost pricing guarantees the long-run competitive solution, while a price-cap strategy allows firms to earn economic profits if they are efficient in their production processes.4.Microsoft is a near monopolist in the production of certain types of computer software, namely operating systems.Is Microsoft bad because it is big, or might we be interested in tolerating this bigness (a la Schumpeter) in order to benefit from the research and development that such a large firm (earning economic profits, no doubt) is able to afford?5.Consult Figure 17-2. Note that MR = MC at Q*/2; the corresponding price would be in the neighborhood of $400.Meanwhile, the ideal regulated price is about $100, supporting output Q* where MC = DD (and DD = MB,remember). Note that AC (Q *) = $175>$100 = price, so some subsidy would be required.Figure 17-26. a.Excerpts from the major antitrust laws are presented in Table 17-1. Section I of the Sherman Act is slightlytargeted at conduct; Section 2 reveals its major focus to be structure. Sections 2 and 3 of the Clayton Act speak most directly to conduct; Section 7 returns to structure. The Federal Trade Commission Act is addressed primarily to conduct.b.Structure is easier to monitor, but there are increasing returns to scale in some industries that can be captured only by one (or a few) firms. Conduct is harder to monitor, but it can allow these sorts of efficiencies to be exploited.82C HAPTER 17: P ROMOTING M ORE E FFICIENT M ARKETSC HAPTER17: P ROMOTING M ORE E FFICIENT M ARKETS83Table 17-1 The Antitrust LawsSHERMAN ANTITRUST ACT (1890, as amended)Section 1. Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.Section 2. 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 among the several States, or with foreign nations, shall be deemed guilty of a felony...CLAYTON ANTITRUST ACT (1914, as amended)Section 2. It shall be unlawful...to discriminate in price between different purchasers of commodities of like grade and quality...where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line of commerce....Provided, that nothing herein contained shall prevent differentials which make only due allowance for differences in the cost...Section 3. That it shall be unlawful for any person...to lease or make a sale or contract...on the condition, agreement, or understanding that the lessee or purchaser thereof shall not use or deal in modities of a competitor...where the effect...may be to substantially lessen competition or tend to create a monopoly in any line of commerce.Section 7. No [corporation]...shall acquire...the whole or any part...of another [corporation]...where...the effect of such an acquisition may be substantially to lessen competition, or to tend to create a monopoly.FEDERAL TRADE COMMISSION ACT (1914, as amended)Section 5. Unfair methods of competition...and unfair of deceptive acts or practices...are declared unlawful.7.Consider your experiences, here. Consult Figure 17-3 for some ideas, but add your own.Perfect CompetitionAgriculture*Oil Drilling and Mining*Industries where prices aresignificantly affected bygovernment regulationTextilesTruckingSteelAirlinesBankings*Automobile ManufactureAircraft ManufactureRailroads*Local Telephone*Electricity*Natural MonopolyFigure 17-384C HAPTER17: P ROMOTING M ORE E FFICIENT M ARKETS 8.Start with MC>0.Since profits are maximized where MR = MC, MR>0and demand is price-elastic. All thatnotwithstanding, MC and/or AC could cut demand in its inelastic region. A higher price should produce high profits in all cases (if the regulation is binding, then the monopolist wants a higher price). Revenue will, meanwhile, climb with price through the inelastic region of demand; but it will fall as price rises into the elastic region.9.The guidelines say that if the HHI is above 1800 the industry is highly concentrated. Thus, the code sharing agree-ments would be very difficult to justify if the government is trying to maintain competition in the airline industry. 10.Any firm that has control over the price of its product is not operating under perfectly competitive market condi-tions. Since they are setting the price of their product, they have some degree of monopoly power. To prove Microsoft was a monopoly, one would have to prove:1) that Microsoft has a significant amount of market share in this particular market, 2) that Microsoft’s market share is protected by barriers to entry, and 3) that as a result of its market power Microsoft has few rivals in this particular market.DISCUSSION QUESTIONS1.Trace the history of regulatory activity in the United States from its inception in 1887 through its high point in thelate 1970s and into its subsequent decline. What do you think the future has in store? Why? How might increased international competition in many industries affect our attitudes toward “bigness”?2.How does increased competition from foreign manufacturers affect the spirit of antitrust legislation in the UnitedStates? If we have more competition from abroad, and those competitors are at times working with one another and with their home governments, should our domestic firms be handcuffed by antitrust laws? Why or why not?3.Are there large American oil companies that can serve as examples of vertical or horizontal integration? Why areantitrust suits directed at horizontally integrated firms? Should vertically integrated firms also be sued?4.Do you think that the existence of monopoly power is, in and of itself, cause for public concern, or should concernbe raised only about the known abuse of power? What has been the attitude of the courts?5.Exactly what is meant by a conglomerate? Name some examples. What are the advantages of bringing unrelatedactivities under one corporate tent? Disadvantages?6.Were the Justice Department’s antitrust suits against IBM and AT&T a repudiation of the Schumpeterian idea thatinnovation is encouraged by the presence of large firms in the market? Can you give another explanation of their outcomes? two or three American industries that have been deregulated recently (over the past 10 to 15 years). Whathave been the effects of the deregulation?8.The most recent attempt at deregulation in the United States has occurred in the electric power industry.Competition is being promoted, and consumers in many areas will soon have a choice of firms from which to buy their electric power. What happened to cause this change? What sorts of new technology are now available that have changed our ideas about the generation of electric power being a natural monopoly?9.Explain what is meant by the “Bell Doctrine”. What might it mean for the software industry?That is, are thereaspects of the software industry that might be “quarantined” from other aspects of the industry, that should remain competitive?10.In the spring of 2000, the price of gasoline rose by approximately thirty percent, from around $1.30 per gallon toaround $1.80 per gallon in Connecticut. Some blamed a heavy demand for oil during a particularly cold winter, others blamed the OPEC cartel for effectively restricting supply. Whatever the cause, some people began to clamor for government regulation of the market for petroleum products. Discuss the pros and cons of regulation in this industry. Would regulation be a good idea? What sorts of monopoly power would this regulation contain? ESSAY QUESTIONS1.Outline briefly the history of antitrust policy in the United States, mentioning the important government acts thathave been milestones in its history, indicating the significance of each. How are these laws interpreted in modern case law?2.Antitrust activity can be based on structure or conduct. Review a few of the various statutes and cases in Americanantitrust law and determine whether they are directed at structure or conduct. What about guidelines for new mergers? Present the advantages and disadvantages of both approaches.3.Contrast an antitrust philosophy that concentrates on market power per se with one that attempts to use a rule ofreason against which conduct is measured.C HAPTER17: P ROMOTING M ORE E FFICIENT M ARKETS854.Consider the various models of imperfect competition that you have seen. List a few industries that seem to bedescribed by each, and investigate how they have been regulated over time. Do you see any connection between market structure and the frequency (intensity) of regulatory activity?5.What types of industries have been most successful in having regulation withdrawn? Does success in deregulationdepend at all on market structure? On production technology?6.Research two or three recent antitrust actions. What are the economic circumstances involved? What judicialphilosophy was followed in undertaking each action?pare and contrast regulation that sets price equal to average costs with that which sets price equal to marginalcost. Which approach to regulation do you prefer? What are the problems and benefits associated with each?8.List and explain three important reasons why government might regulate industry. What sorts of regulation mightthe government employ?pare price-cap regulation with marginal and average cost regulation. What are the pros and cons of price-capregulation?。