ECO 335 Economics of Regulation and Antitrust

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ECO 335 Economics of Regulation and Antitrust

• Dr. David Loomis
• Department of Economics
• Illinois State University

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Introductions Who am I?

• Professional Background
• Teaching Philosophy
• Personal Life

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Introductions- Who are You?

• Name
• Major
• When you had ECO 240
• Wall Street Journal

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Introductions- Syllabus

• Readings
• E-reserves

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Graduate Students

• Regulatory Sequence 335, 435, 436 and
  internship
• Internships arranged through Institute / 5-6
  internships
• IRPS What is it?
• Placement of Students

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Acceptance into Sequence

• November Application
• Committee decision based on
• Grades
• GA work
• Language Skills
• Attitude

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Undergraduate Students

• Who is taking ECO 300 jointly w/ this course?
• ECO 300 Syllabus

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Lecture 1

• Government Vs. Markets

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Types of Regulation

• Antitrust Policy - seeks to protect consumers
  from anticompetitive behavior through the
  judicial system
• Direct Regulation or Economic Regulation -
  controls pricing and/or output due to the belief
  that the industry is inherently monopolistic

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Types of Regulation

• Social Regulation - controls undesirable
  consequences of firm behavior to obtain various
  social goods such as clean air and water, safe
  products and workplaces.

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Perfect Competition- Assumptions

• Large number of buyers and sellers, each acting
  independently
• No buyer or seller is so large that it can affect
  price
• Homogeneous product
• No barriers to entry or exit

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Perfect Competition - Assumptions

• No artificial restraint on prices
• Perfect information
• Profit maximizing firms
• Perfect mobility of factors of production

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Perfect Competition - Short Run Behavior

• Market Demand is downward sloping

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Perfect Competition - Short Run Behavior

• Each seller is a price taker - sells none if
  prices above market-clearing price

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Perfect Competition - Short Run Behavior

• Maximize Profit
• Marginal profit marginal revenue - marginal
  cost
• Marginal revenue marginal cost

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Perfect Competition - Short Run Behavior

• Firm supply at MC above AVC sum of these curves
  is market demand
• curve

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Perfect Competition - Long Run Behavior

• Firms enter Supply curve shifts to right until
  all economic profits disappear

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Perfect Competition - Social Welfare

• Efficiency in Production - incentive to produce
  at lowest possible cost
• Efficiency in Allocation - right amount of good
  is produced since MC to produce equals marginal
  willingness to pay equals price

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Perfect Competition - Social Welfare

• Social surplus Consumer and Producer surplus

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Monopoly
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Monopoly

• higher price lower output than perfect
  competition
• misallocation of society resources
• X-inefficiency - firm doesnt work hard to cut
  costs

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Theories of Regulation

• Public Interest Theory - Regulation is supplied
  in response to the demand of the public for the
  correction of inefficient or inequitable market
  practices.
• Regulation would be highest in highly
  concentrated industries - it is not.

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Theories of Regulation

• Capture Theory - Regulation is supplied in
  response to the demands of interest groups
  struggling among themselves to maximize the
  incomes of their members. Regulators are
  captured by the industries that they serve
• No linkage or mechanism by which a perception of
  the public interest is translated into
  legislative action.
• Regulators dont always behave as captives

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Theories of Regulation

• Stiglers regulation as an economic good
• Refined by Peltzman
• Regulation is a commodity or good
• Like any good, it has an equilibrium price and
  output depending on supply and demand
• Demanders - consumers wanting protection from
  monopoly or producers wanting protection from
  each other
• Suppliers political representatives
• Conclusion special interests succeed in
  political marketplace

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Theories of Regulation

• Public Choice - Voting /Rent seeking
• Public Choice political actors maximize THEIR
  well-being subject to the rules and constraints
  they face in the political arena.
• Voting must worry about getting a majority and
  about the intensity of voters preferences
• Rent-Seeking spending to acquire or maintain a
  market position in which rents may be earned
• Wasteful
• Non-productive
• Can dissipate all monopoly profits.
• For more information - review Posner and
  Peltzman articles