AP Economics Mr. Bernstein Module 77: Public Policy to Promote Competition December 4, 2014

AP Economics Mr. Bernstein Promoting Competition and Efficiency Monopolies tend to be less efficient, produce less and charge more than competitive markets Dep’t of Justice Antitrust Division goals: Protect Competition Ensuring Lower Prices Promote Development of New and Better Products Price Regulation When Natural Monopolies emerge from Economies of Scale, it is efficient to have regulated monopoly 2

AP Economics Mr. Bernstein Antitrust Laws Sherman Antitrust Law of 1890 Illegal to create a contract, combination, or conspiracy that unreasonably restrains interstate trade Outlaws monopolization of any part of interstate commerce Clayton Antitrust Act of 1914 Prohibits most types of Price Discrimination Bans anticompetitive exclusive or tying arrangements Bans anticompetitive mergers or acquisitions Bans interlocking Boards of Directors 3

AP Economics Mr. Bernstein Antitrust Laws, cont. Federal Trade Commission Act of 1914 Creates the FTC Outlaws “unfair and deceptive” acts Outlaws price fixing Outlaws output restrictions Outlaws actions that restrict entry of new firms 4

AP Economics Mr. Bernstein Price Regulation Average-Cost Pricing Firm must operate where P=ATC Insures the firm will earn normal economic profit…will not be at the most efficient level of output…(some deadweight loss will exist) but less than unregulated Marginal-Cost Pricing Firm must operate where P=MC Consistent with perfect competition and zero deadweight loss…but might create economic losses for the firm…government would need to subsidize these losses at taxpayer expense 5

AP Economics Mr. Bernstein Price Regulation vs. Unregulated Monopoly Unregulated Monopoly P M, Q M (Q M is where MR=MC) Average-Cost Pricing P T, Q T (Q T is where D=ATC) …normal profit …D = monopolist’s P Marginal-Cost Pricing P C, Q C (Q C is where D=MC)…may be losses…D = monopolist’s P 6