1. Regulation and Antitrust Policy in a Globalized Economy
Chapter 28
Regulation and Antitrust Policy in a Globalized Economy

2. Forms of Industry Regulation
The U.S. government began regulating social and economic activity early in the nation’s history.
The amount of government regulation began increasing in the twentieth century.

3. Figure 28-1 Regulation on the Rise

4. Forms of Industry Regulation (cont'd)
There are two basic types of government regulation.
Economic regulation of natural monopolies and nonmonopolistic industries
Social regulation which covers all industries
Copyright © 2008 Pearson Addison Wesley. All rights reserved.

5. Forms of Industry Regulation (cont'd)
Economic regulation of natural monopolies
Initially, most economic regulation in the United States was aimed at controlling prices in industries considered natural monopolies.
Over time, federal and state governments have sought to influence products and processes of firms in a variety of industries.

6. Forms of Industry Regulation (cont'd)
Economic regulation of nonmonopolistic industries
Securities (SEC)
Banking (Fed, FDIC, Comptroller)
Transportation (FAA)
Communications (FCC)

7. Forms of Industry Regulation (cont'd)
Social regulation
The aim is better quality of life
Improved products
Less pollution
Better working conditions

8. Table 28-1 Federal Agencies Engaged in Social Regulation

9. Regulating Natural Monopolies
Theory of natural monopoly regulation includes our understanding
Unregulated natural monopoly
Impracticality of marginal cost pricing
Average cost pricing

10. Regulating Natural Monopolies (cont'd)
Recall
Natural monopoly is a monopoly arising from the peculiar production characteristics in an industry.
It usually arises when there are large economies of scale relative to the industry’s demand.
One firm can produce at a lower average cost than can be achieved by multiple firms.

11. Figure 28-2 Profit Maximization and Regulation Through Marginal Cost Pricing, Panel (a)
Max profits at point A where marginal cost equals marginal revenue

12. Figure 28-2 Profit Maximization and Regulation Through Marginal Cost Pricing, Panel (b)
Losses eventually drive the natural monopolist out of business

13. Profit Maximization and Regulation Through Marginal Cost Pricing
Average Cost Pricing
Regulatory goal: P = ATC
Set price at P1 where ATC = D
Output = Q2
P = ATC
Normal rate of return

14. Regulating Natural Monopolies (cont'd)
Methods of rate regulation
Cost-of-Service Regulation
Regulation based on allowing prices to reflect only the actual cost of production and no monopoly profits
Rate-of-Return Regulation
Regulation that seeks to keep the rate of return in the industry at a competitive level by not allowing excessive prices to be charged

15. Regulating Natural Monopolies (cont'd)
Question
Are natural monopolies a thing of the past?
Before answering consider
Electricity and natural gas: separating production from delivery
Telecommunications services meet the Internet

16. International Policy Example: Time to Break Up the Irish Cellphone Duopoly?
Vodafone and mm02 have accounted for more than 95% of all sales of cellphone services in Ireland.
Effectively, therefore, these two firms constitute a cellphone duopoly.
Ireland’s regulators proposed they open their networks, and their fees would be regulated to ensure a “fair” rate of return.

17. Regulating Nonmonopolistic Industries
Protecting consumer interests has been the main rationale for governmental regulatory functions.
The Latin phrase caveat emptor, “let the buyer beware,” was once the operative principle, but no more.

18. Regulating Nonmonopolistic Industries (cont'd)
Rationales for government oversight in nonmonopolistic industries
Market failure arising from externalities
The need for consumer protection arising from asymmetric information

19. Regulating Nonmonopolistic Industries (cont'd)
Lemons Problem
The potential for asymmetric information to bring about a general decline in product quality in an industry
Credence goods such as pharmaceuticals, health care, and professional services are vulnerable to the lemons problem.

20. Regulating Nonmonopolistic Industries (cont'd)
Implementing consumer protection regulation
Liability laws and government licensing
Direct economic and social regulation

21. Incentives and Costs of Regulation
Abiding by government regulations can be costly.
Businesses engage in activities avoiding true intent.
Try and change regulations agencies establish

22. Incentives and Costs of Regulation (cont'd)
Creative response and feedback effects: results of regulation
Creative Response
Behavior on the part of a firm that allows it to comply with the letter of the law but violates the spirit, significantly lessening the law’s effects

23. Incentives and Costs of Regulation (cont'd)
Creative response and feedback effects: results of regulation
Feedback effect
Changing behavior after the regulation that offset the regulation
Example
HOV lanes added to combat air pollution have higher accident rates

24. Example: How Dare You Get Ahead of Me in that HOV Lane!
High occupancy vehicle (HOV) lanes have increased nationwide in order to combat air pollution.
Drivers merging from HOV lanes often drive faster than traffic conditions warrant, however.
Those in HOV lanes also face resentment from non-HOV lane users, who may make it difficult for them to merge.

25. Incentives and Costs of Regulation (cont'd)
Capture Hypothesis
Predicts that the regulators will eventually be captured by the special interests of the industry being regulated

26. Incentives and Costs of Regulation (cont'd)
Share-the-Gains, Share-the-Pains Theory
The regulators must take account of the demands of three groups: legislators, members of the regulated industry, and consumers of the regulated industry’s product or service

27. Incentives and Costs of Regulation (cont'd)
Benefits and costs to regulation
Regulation offers many potential benefits.
Actual benefits are more difficult to measure.

28. Incentives and Costs of Regulation (cont'd)
Direct costs to taxpayers
Taxpayers pay more than $40 billion per year.
Agencies employ more than 190,000 employees.

29. Figure 28-3 The Distribution of Federal Regulatory Spending

30. Incentives and Costs of Regulation (cont'd)
The total social cost of regulation
Explicit costs of compliance in the United States is estimated to be between $500 billion and $600 billion per year.
Economists estimate the opportunity cost of complying with federal regulations may be as high as $270 billion.
Add state and municipal regulations, and consider all implicit and explicit costs, and we are over $1 trillion in total.

31. Antitrust Policy
An expressed aim of the U.S. government is to foster competition.
This is the general idea behind antitrust legislation.
Congress has enacted four key antitrust laws; the most important is the Sherman Act.

32. Table 28-2 Key U.S. Antitrust Laws

33. Antitrust Policy (cont'd)
Sherman Antitrust Act of 1890
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 hereby declared to be illegal.

34. Antitrust Policy (cont'd)
Sherman Antitrust Act of 1890
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… shall be guilty of a misdemeanor.

35. Antitrust Policy (cont'd)
Clayton Act of 1914
Passed to remove the vagueness of the Sherman Act

36. Antitrust Policy (cont'd)
Robinson-Patman Act of 1936
Amended Section 2 of the Clayton Act
Designed to protect independent retailers and wholesalers from “unfair discrimination” by chain stores

37. Antitrust Policy (cont'd)
Exemptions from antitrust laws
All labor unions
Public utilities
Professional baseball
Cooperative activities among U.S. exporters

38. Antitrust Policy (cont'd)
Exemptions from antitrust laws
Hospitals
Public transit and water systems
Suppliers of military equipment
Joint publishing arrangement in a single city by two or more newspapers

39. Antitrust Policy (cont'd)
As more U.S. firms seek to merge with companies in other countries, the international dimensions of antitrust policy become more important.
In the European Union, there are restrictions against any business combination that would enhance the market dominance of one firm.

40. Antitrust Enforcement
Monopolization
The possession of monopoly power in the relevant market and the willful acquisition or maintenance of that power
As distinguished from growth or development as a consequence of a superior product, business acumen, or historical accident

41. Antitrust Enforcement (cont'd)
Market Share Test
The percentage of a market that a particular firm supplies; used as the primary measure of monopoly power

42. E-Commerce Example: Microsoft’s Market Shares
In the market for PC software, one company stands alone.
Microsoft’s market share is over 95% for PC software.
Their market share of office productivity software is about 94%.
Why might it be argued that Microsoft is not a monopoly under the Sherman Act?

43. Antitrust Enforcement (cont'd)
The relevant market
The relevant product market
The relevant geographic market

44. Antitrust Enforcement (cont'd)
Determining when a firm has engaged in “willful acquisition or maintenance” of market power
What appears as good business to some may look like antitrust violations to others.

45. Antitrust Enforcement (cont'd)
Versioning
Selling a product in slightly altered forms to different groups of consumers
An example is selling software in “professional” and “standard” versions

46. Antitrust Enforcement (cont'd)
Bundling
Offering two or more products for sale as a set

47. Antitrust Enforcement (cont'd)
Tie-In Sales
Purchases of one product that are permitted by the seller only if the consumer buys another good or service from the same firm

48. Issues and Applications: Identifying the Relevant Telecommunications Market
In 1997, AT&T and SBC, the “Southwestern Bell,” held merger talks—an act the then FCC chief called “unthinkable.”
Eight years later the two companies merged after all, and neither the FCC nor the U.S. antitrust authorities raised objections.
What had happened? The answer is that the relevant market for SBC, AT&T, and other telecommunications companies expanded.

49. Table 28-3 Shares of Industry Sales in Alternative Markets for Broadband Internet Access

50. Summary Discussion of Learning Objectives
Government regulation of business
Includes economic and social
Practical difficulties in regulating the prices charged by natural monopolies
Marginal cost pricing results in losses.
Regulation aims at zero economic profit.
Copyright © 2008 Pearson Addison Wesley. All rights reserved.

51. Summary Discussion of Learning Objectives (cont'd)
Rationales for regulating nonmonopolistic industries
Market failure
Asymmetric information
Copyright © 2008 Pearson Addison Wesley. All rights reserved.

52. Summary Discussion of Learning Objectives (cont'd)
Regulators’ incentives and the costs of regulation
Capture hypothesis
Share-the-gains, share-the-pains
Copyright © 2008 Pearson Addison Wesley. All rights reserved.

53. Summary Discussion of Learning Objectives (cont'd)
Foundations of antitrust
Sherman Act (1890)
Clayton Act (1914)
Federal Trade Commission Act (1914)
Robinson-Patman Act (1936)
Copyright © 2008 Pearson Addison Wesley. All rights reserved.

54. Summary Discussion of Learning Objectives (cont'd)
Issues in enforcing antitrust laws
Enforcement is through Supreme Court interpretations.
Authorities use market share test and determine “relevant market.”
Copyright © 2008 Pearson Addison Wesley. All rights reserved.

55. Regulation and Antitrust Policy in a Globalized Economy
End of Chapter 28
Regulation and Antitrust Policy in a Globalized Economy