Antitrust Policy

1
Antitrust Policy and Regulation
2
(No Transcript)
3
The General Rationale for Government
Intervention Deadweight Loss from Monopoly
4
Two forms of government intervention

• Antitrust Policy
• sometimes called competition policy
• begin here in this lecture
• Price and Entry Regulation of Firms
• return to this later in the lecture
• sometimes called economic regulation
• distinct from social regulation

5
Sherman Act (1890)

• Section 1 Price fixing (ADM case)
• Section 2 Persons who monopolize or attempt
  to monopolize are guilty of a felony
• 33 breakups
• ATT is most recent
• IBM attempt, Microsoft
• predatory pricing
• Price below shutdown point and drive other firms
  from the market, then monopolize

6
Merger Policy (Clayton Act (1914))

• Federal Trade Commission (FTC)
• Antitrust Division of the Department of Justice
• Factors to consider in a proposed merger
• market power?
• Ease of entry?

7
Herfindahl-Hirschman Index HHI or the Herf

• Definition sum of squared market shares
• example a 3 firm industry (30,30,40) has HHI
  (30)2 (30)2 (40)2
  900
  900 1600 3400
• Example challenge if HHI gt 1800 and merger would
  increase HHI by 50 or more
• could two of the three firms merge?
  (60)2 (40)2 360016005200 NO WAY!!!

8
Example Intuit - Microsoft proposed merger in
1996

• The DOJ blocked the merger. Why?
• The product was financial software
• Quicken (Intuit)
• Money (Microsoft)
• market definition (two versions)
• DOJ personal finance check writing programs (70,
  22, 8)
• Microsoft should also include pencil and paper

9
Now lets consider economic regulation of firms

• Both price and entry are regulated
• Regulatory agency (CAB, ICC, PUC) sets the price
  and restricts entry of other firms
• Rationale for regulation is that the industry is
  a natural monopoly (water, wire telephone,
  electricity distribution)
• But what is a natural monopoly?

10
Natural MonopolyDecreasing Average Total Costs
11
There are three ways to regulate the price of a
natural monopoly.

• But first make sure it is a natural monopoly
• Borderline cases like Cable TV?
• How many over the air channels are there?
• What about satellite dishes?
• What about the electricity lines?

12
(1) Marginal cost pricing

• Sounds pretty good, P MC would mean efficiency
  and no deadweight loss
• But the firm will earn negative economic profits
  who would bother to produce?
• To see this, just look at a sketch

13
(2) Average Cost Pricing

• This sounds better
• profits are not negative, rather they are zero
• and P is not nearly as high as PM though P is
  greater than MC
• But ATC pricing can create bad incentives
  (corporate jets again, bad management)

14
(3) Incentive Regulation

• Set regulated price several years in advance
• for example, ATC plus an inflation factor
• Firm gets to keep extra profits (or suffer extra
  loss) without the regulator immediately changing
  the regulated price
• Thus firm has incentive to keep its costs down

15
Wrap-Up and Compare P PM P MC P ATC
16
One other problem Firm may claim a high cost to
the regulators
17
The deregulation movement

• Started in late 1970s, continued in 1980s,
• Why? Economists were right, many regulated
  industries not natural monopolies
• Examples price or entry regulations cut
• air travel
• railroads
• telecommunications
• trucking
• cable TV (re-regulated in 1992)

18
End of Lecture
19
(No Transcript)