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

2. Introduction
Price fixing can occur in any industry when it is possible for firms to collude.
Fashion-modeling agencies have become the subject of an antitrust investigation by the U.S. Department of Justice for possible price-fixing.

3. Learning Objectives
Distinguish between economic regulation and social regulation
Recognize practical difficulties that arise when regulating the prices charged by natural monopolies
Explain the main rationales for government regulation of industries that are not inherently monopolistic

4. Learning Objectives
Identify alternative theories aimed at explaining the behavior of regulators
Understand the foundations of antitrust laws and regulations
Discuss basic issues that arise in efforts to enforce antitrust laws

5. Chapter Outline Forms of Industry Regulation
Regulating Natural Monopolies
Regulating Nonmonopolistic Industries
Incentives and Costs of Regulation

6. Chapter Outline
Antitrust Policy
Antitrust Enforcement

7. Did You Know That...
Among other things, the USDA regulates the size of holes in Swiss cheese?
Government oversight of business is generally designed to promote efficiency, but that it can have unintended effects?

8. Forms of Industry Regulation
Economic regulation governs the pricing and provision of goods and services
Social regulation is concerned with the occupational, health, and safety aspects of industry.

9. Forms of Industry Regulation
The focus of economic regulation:
Natural monopolies
Rate regulation is used to prevent electric utilities from earning monopoly profits

10. Forms of Industry Regulation
The focus of economic regulation:
In nonmonopolistic industries, there are regulations covering financial markets, transportation firms, and communications networks

11. Regulating Natural Monopolies
Recall
Natural monopolies result when a single firm has the ability to produce the industry’s output at a lower per-unit cost than other firms attempting to produce less than total industry output.
Network effects can produce natural monopolies

12. Profit Maximization and Regulation Through Marginal Cost Pricing
Panel (a) D
LAC MR F Q m P
Dollars per unit
LMC A
Quantity per Time Period
Figure 28-2, Panel (a)

13. Profit Maximization and Regulation Through Marginal Cost Pricing
Panel (b) D
LAC
Dollars per unit
LMC B C
Losses Q 1 AC P 1
Quantity per Time Period
Figure 28-2, Panel (b)

14. 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
Dollars per Unit
LMC
LAC
P1 = AC1 D Q2
Quantity per Time Period

15. Regulating Natural Monopolies
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

16. Policy Example: Power Outages as an Outcome of Regulation
Some forms of regulation give electric utilities an incentive to freeze current rates.
To do so, they may skimp on maintenance measures.
Deferred maintenance of equipment and trimming of trees contributed to the widespread power blackout of August 2003.

17. Regulating Nonmonopolistic Industries
Rationales for government oversight in nonmonopolistic industries:
Market failure arising from externalities
The need for consumer protection arising from asymmetric information

18. Regulating Nonmonopolistic Industries
The Lemons Problem
The possibility that asymmetric information can result in low product quality for an entire industry
Used Cars
Credence Goods

19. Regulating Nonmonopolistic Industries
Implementing consumer protection regulation:
Liability laws
Direct mandates on business behavior, such as safety regulations in transportation and pharmaceuticals

20. Incentives and Costs of Regulation
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

21. Incentives and Costs of Regulation
Creative response and feedback effects: results of regulation
Feedback Effect
Changing behavior after the regulation that offset the regulation
Example
Parents allowing their children to eat candy in cities where the water is fluoridated

22. Incentives and Costs of Regulation
Capture Hypothesis
Predicts that the regulators will eventually be captured by the special interests of the industry being regulated

23. Example: A Cigarette Manufacturer Who Wants to Be Regulated
The Food and Drug Administration has sought to gain regulative authority over the tobacco industry.
One company, Philip Morris, has encouraged Congress to grant the FDA this oversight, thinking that it would improve the public image of cigarettes.

24. Incentives and Costs of Regulation
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

25. Incentives and Costs of Regulation
The total explicit cost of federal regulation compliance in the U.S. is estimated to be between $500 billion and $600 billion per year.

26. Antitrust Policy
Using regulation to maintain relatively competitive markets
The Sherman Antitrust Act of 1890
The Clayton Act of 1914
The Federal Trade Commission Act of 1914 and 1938 Amendment
The Robinson-Patman Act of 1936

27. Antitrust Policy 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.

28. Antitrust Policy 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.

29. Antitrust Policy Clayton Act of 1914
Passed to remove the vagueness of the Sherman Act

30. Antitrust Policy 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

31. Antitrust Policy Exemptions from antitrust laws All labor unions
Public utilities
Professional baseball
Cooperative activities among American exporters

32. Antitrust Policy Exemptions from antitrust laws Hospitals
Public transit and water systems
Suppliers of military equipment
Joint publishing arrangement in a single city with two or more newspapers

33. Antitrust Policy
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.

34. 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

35. Antitrust Enforcement
Monopoly power
Market Share Test
The percentage of a market that a particular firm controls

36. Antitrust Enforcement
The relevant market
The relevant product market
The relevant geographic market

37. Antitrust Enforcement
Determining when a firm has sought to acquire or to maintain market power:
Versioning
Bundling

38. Antitrust Enforcement
Product Versioning
Selling a product in slightly altered forms to different groups of consumers
An example is selling software in “professional” and “standard” versions

39. Antitrust Enforcement
Product bundling
Offering two or more products for sale as a set
Some types of bundling are tie-in sales, which require a consumer to purchase one product in order to obtain another

40. Issues and Applications: A Model Case of Collusive Price Fixing?
Fashion-modeling agencies negotiate and arrange the relationships between models and photography studios.
For years, all agencies had used identical terms regarding the premiums paid by photographers and the percentages paid to models.
The U.S. Department of Justice is investigating these price-fixing agreements.

41. Summary Discussion of Learning Objectives
Government Regulation of Business
Either Economic or Social
Practical Difficulties in Regulating the Prices Charged by Natural Monopolies
Marginal cost pricing results in losses
Regulation aims to provide zero economic profit

42. Summary Discussion of Learning Objectives
Rationales for Regulating Nonmonopolistic Industries:
Market Failure
Asymmetric Information

43. Summary Discussion of Learning Objectives
Regulators’ Incentives and the Costs of Regulation
Capture hypothesis
Share-the gains; share the pains

44. Summary Discussion of Learning Objectives
Foundations of antitrust:
Sherman Act (1890)
Clayton Act (1914)
Federal Trade Commission Act (1914)
Robinson-Patman Act (1936)

45. Summary Discussion of Learning Objectives
Issues in Enforcing Antitrust Laws
Enforcement is through Supreme Court interpretations
Market share test and relevant market

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