Antitrust Policy and Regulation Chapter 18 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives Antitrust laws in the United States Interpretation and application of antitrust laws Natural monopolies Social regulation 18-2

Antitrust Laws The purpose: –Prevent monopoly –Promote competition –Achieve allocative efficiency Historical background –Regulatory agencies –Antitrust laws 18-3

Antitrust Laws Sherman Act 1890 Clayton Act 1914 –Outlaw price discrimination –Prohibit tying contracts –No interlocking directorates Federal Trade Commission Act 1914 Wheeler-Lea Act 1938 Celler-Kefauver Act

Antitrust Policy Issues of interpretation Monopoly behavior or structure –1911 Standard Oil Case –1920 U.S. Steel Case –1945 Alcoa Case The relevant market –1956 DuPont Cellophane Case Issues of enforcement 18-5

Effectiveness of Antitrust Laws Monopoly –Microsoft Case Mergers –Horizontal merger –Vertical merger –Conglomerate merger 18-6

Types of Mergers Automobiles Blue Jeans Autos Glass Blue Jeans Denim Fabric A C BD EF Z Y X W VU T Horizontal Merger Conglomerate Merger Vertical Merger 18-7

Merger guidelines –The Herfindahl Index Price fixing Price discrimination Tying contracts Effectiveness of Antitrust Laws 18-8

Natural Monopoly Economies of scale Public utilities –Electricity, water, gas, phone Solutions for better outcomes –Public ownership –Public regulation –Public interest theory of regulation 18-9

Industrial Regulation Regulators establish rates to give natural monopoly “fair return” No incentive to reduce cost X-inefficiency Perpetuate monopoly –Conditions of natural monopoly can end 18-10

Social Regulation Applies “across the board” to all industries Food and Drug Administration 1906 Equal Employment Opportunity Commission 1964 Occupational Safety and Health Administration 1971 Environmental Protection Agency 1972 Consumer Product Safety Commission

Social Regulation Optimal level of social regulation In support of social regulation Criticisms of social regulation Two reminders –There is no free lunch –Less government is not always better than more 18-12

United States vs. Microsoft Charged May 1998 under the Sherman Act Accused of having a “Windows” monopoly District court findings: –Used anticompetitive means District court remedy Appeals court ruling Final settlement 18-13

Key Terms antitrust policy industrial regulation social regulation Sherman Act Clayton Act tying contracts interlocking directorates Federal Trade Commission Act cease-and-desist order Wheeler-Lea Act Celler-Kefauver Act Standard Oil case U.S. Steel case rule of reason Alcoa case DuPont cellophane case Microsoft case horizontal merger vertical merger conglomerate merger per se violations natural monopoly public interest theory of regulation legal cartel theory of regulation 18-14

Next Chapter Preview… Agriculture: Economics and Policy 18-15