Download Antitrust and Deregulation

Regulation and Antitrust Law
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Principles of
Microeconomic
Theory, ECO 284
John Eastwood
CBA 247
523-7353
e-mail address:
[email protected]
1
Learning Objectives
• Define regulation and antitrust law
• Distinguish between the public interest and
capture theories of regulation
• Explain how regulation affects prices,
outputs, profits, and the distribution of the
gains from trade between consumers and
producers
2
Learning Objectives (cont.)
• Explain how antitrust law has been applied
in a number of landmark cases
• Explain how antitrust law is used today
3
Learning Objectives
• Define regulation and antitrust law
• Distinguish between the public interest and
capture theories of regulation
• Explain how regulation affects prices,
outputs, profits, and the distribution of the
gains from trade between consumers and
producers
4
Market Intervention
• Government intervention in the
monopolistic and oligopolistic markets
• Regulation
• Antitrust law
5
Market Intervention
• Regulation
• Rules administered by a government agency to
influence economic activity
• Antitrust Law
• Laws that regulate and prohibit certain kinds of
market behavior
6
Learning Objectives
• Define regulation and antitrust law
• Distinguish between the public interest and
capture theories of regulation
• Explain how regulation affects prices,
outputs, profits, and the distribution of the
gains from trade between consumers and
producers
7
Economic Theory of Regulation
• Four Factors Affecting the Demand for
Regulation
• Consumer surplus per buyer
• Number of buyers
• Producer surplus per firm
• Number of firms
8
Economic Theory of Regulation
• Three Factors Affecting the Supply of
Regulation
• Consumer surplus generated per buyer
• Producer surplus generated per firm
• The number of voters benefited
9
Economic Theory of Regulation
• Political Equilibrium
• The amount of regulation is such that no
interest group finds it worthwhile to press for
changes and no group of politicians finds it
worthwhile to offer different regulations.
10
Economic Theory of Regulation
• Political Equilibrium
• Public Interest Theory
• Regulations are supplied to satisfy the demand of
consumers and producers to maximize total surplus
• Capture Theory
• Regulations are supplied to satisfy the demand of
producers to maximize producer surplus--maximize
economic profit.
11
Regulation and Deregulation
• Numerous regulatory agencies have been
developed since 1887.
• Since 1977, industry has been going
through a gradual process of deregulation.
12
Regulation and Deregulation
• The Regulatory Process
• Bureaucrats are appointed
• Agencies adopt a set of practices and rules
• Agency grant certification to a company
• Price and Quantity Regulation
13
Regulation and Deregulation
• Natural Monopoly
• Industry in which one firm can supply the
entire market at a lower cost than two or more
firms can
14
Regulation and Deregulation
• Marginal Cost Pricing Rule
• Sets price equal to marginal cost
• If the Firm Incurs a Loss
• Price discrimination
• Two-part tariff
• Subsidy
15
Learning Objectives
• Define regulation and antitrust law
• Distinguish between the public interest and
capture theories of regulation
• Explain how regulation affects prices,
outputs, profits, and the distribution of the
gains from trade between consumers and
producers
16
Price & Cost (dollars per household per month)
Natural Monopoly:
Marginal Cost Pricing
30
25
20
15
ATC
10
MC
D
0
2
4
6
8
10
Quantity (millions of households)
17
Price & Cost (dollars per household per month)
Natural Monopoly:
Marginal Cost Pricing
30
25
20
15
Loss per
household
Total
surplus
ATC
10
MC
D
0
2
4
6
8
10
Quantity (millions of households)
18
Regulation and Deregulation
• Average Cost Pricing Rule
• Sets price equal to average total cost
• Firm Earns a Normal Profit
19
Price & Cost (dollars per household per month)
Natural Monopoly:
Average Cost Pricing
30
25
20
15
ATC
10
MC
D
0
2
4
6
8
10
Quantity (millions of households)
20
Price & Cost (dollars per household per month)
Natural Monopoly:
Average Cost Pricing
30
25
20
15
Consumer
surplus
ATC
Producer
surplus
10
MC
Deadweight
loss
0
2
4
D
6
8
10
Quantity (millions of households)
21
Regulation and Deregulation
• Capturing the Regulator
• Maximizes profit
22
Price & Cost (dollars per household per month)
Natural Monopoly
Profit Maximization
30
25
20
18
15
ATC
10
MC
MR
0
2
4
6
D
8
10
Quantity (millions of households)
23
Price & Cost (dollars per household per month)
Natural Monopoly
Profit Maximization
30
Consumer
surplus
25
20
18
15
Deadweight
loss
Economic
profit
ATC
10
MC
MR
0
2
4
6
D
8
10
Quantity (millions of households)
24
Regulation and Deregulation
• How do agencies determine a regulated
price?
• Answer: Rate of Return Regulation
25
Regulation and Deregulation
• Rate of Return Regulation
• Sets price that enables the firm to earn a
specific percent of return on its capital
• Inflating Costs
• Firms will be motivated report costs as high as
possible.
26
Price & Cost (dollars per household per month)
Natural Monopoly:
Inflating Costs
30
25
20
18
15
ATC (inflated)
10
MC
ATC
MR
0
2
4
6
D
8
10
Quantity (millions of households)
27
Price & Cost (dollars per household per month)
Natural Monopoly:
Inflating Costs
30
Profit is
maximized
25
20
18
15
ATC (inflated)
Economic
profit
ATC
10
MC
MR
0
2
4
6
D
8
10
Quantity (millions of households)
28
Regulation and Deregulation
• Incentive Regulation Schemes
• Gives a firm an incentive to operate efficiently
and keep costs under control.
• Public Interest or Capture?
• Not completely clear which one
• Both predict Price exceeds MC
• Except for local phone service…
29
Rate of Return in
Regulated Monopolies
Industry
Electricity
Years
1962–69
1970–77
3.2
6.1
Gas
3.3
8.2
Railroad
5.1
7.2
Average of above
3.9
7.2
Economy Average
6.6
5.1
30
Gains from Deregulating
Natural Monopolies
Consumer Producer Total
surplus
surplus surplus
Industry
Railroads
Telecommunications
Cable television
Total
(billions of 1990 dollars)
8.5
1.2
0.8
10.5
3.2
0.0
0.0
3.2
11.7
1.2
0.8
13.7
31
Price & Cost (dollars per trip)
Collusive Oligopoly
50
40
Producer
interest
regulation
MC
30
Public
interest
regulation
20
10
D
MR
0
100 200 300
400
500
Quantity (number of trips)
33
Rates of Return in
Regulated Oligopolies
Industry
Airlines
Trucking
Economy Average
Years
1962–69
1970–77
12.8
3.0
13.6
8.1
6.6
5.1
34
Gains from
Deregulating Oligopolies
Consumer Producer Total
surplus
surplus surplus
Industry
Airlines
Trucking
Total
(billions of 1990 dollars)
11.8
15.4
27.2
4.9
-4.8
0.1
16.7
10.6
27.3
35
Regulation and Deregulation
• Making Predictions
• Why were the transportation and
telecommunications industries deregulated?
• Economists became more confident and vocal
• We can expect to see more deregulation.
36
Learning Objectives (cont.)
• Explain how antitrust law has been applied
in a number of landmark cases
• Explain how antitrust law is used today
37
Antitrust Laws
Name of law
Year
Passed
Sherman Act
1890
Clayton Act
Robinson-Patman
Amendment
Cellar-Kefauver
Amendment
1914
1936
1950
What the law prohibits
*Combination, trust or conspiracy to restrict
interstate or international trade.
* Monopolization or attempt to monopolize
interstate or international trade
* Price discrimination if the effect is to
substantially lessen competition or create
monopoly and if such discrimination is not
justified by cost differences
* Contracts force other goods to be bought
from same firm
* Acquisition of competitors’ shares or assets
* Interlocking directorships among competing
firms
38
Antitrust Laws
Name of law
Federal Trade
Commission Act
Year
Passed
1914
What the law prohibits
* Unfair methods of competition and
unfair or deceptive business practices
39
Landmark Antitrust Cases
• Federal Trade Commission was established
in 1914 to enforce the antitrust laws.
• Rule of reason
• Monopolies arising from mergers and
agreements are not necessarily illegal.
• Vertical and Horizontal Integration were
found to be illegal
40
Landmark Antitrust Cases
Case
Year
Verdict and consequence
American Tobacco
and Standard Oil Co.
1911
Guilty: Ordered to divest themselves of
Large holdings in other companies: “rule
of reason” enunciated--only unreasonable
combinations guilty under Sherman Act.
U.S. Steel Co.
1920
Not Guilty: U.S. Steel had a very large
market share (near monopoly), mere size
alone is not an offense”; application of the
“rule of reason.”
Socony-Vacuum Oil Co. 1940
Guilty: Combination was formed for
price fixing; no consideration of
“reasonableness” applied.
41
Landmark Antitrust Cases
Case
Year
Verdict and consequence
Alcoa
1945
Guilty: Too big--had too large a share of the
market; end of “rule of reason.”
General Electric,
Westinghouse & others
1961
Guilty: Price-fixing conspiracy; executives
fined and jailed
Brown Shoe
1962
Guilty: Ownership of Kinney, a retail chain,
reduced competition; ordered to sell Kinney shoes, (Brown supplied 8 percent of
Kinney's and Kinney sold 2 percent of nations shoes)
Von’s Grocery
1965
Guilty: Merger of two supermarkets in
Los Angeles would restrain competition (themerged firm would have had 7.5
percent of the L.A. market).
42
Landmark Antitrust Cases
Case
Year
Verdict and consequence
IBM
1982
Case dismissed as being “without merit.”
AT&T
1983
Agreement between AT&T and
government that the company would
divest itself of all local telephone
operating companies --80 % of its assets.
43
Learning Objectives (cont.)
• Explain how antitrust law has been applied
in a number of landmark cases
• Explain how antitrust law is used today
44
Landmark Antitrust Cases
• Three Recent Antitrust Cases
• IBM
• AT&T
• Microsoft
45
Landmark Antitrust Cases
• Current Merger Rules
• The Department of Justice uses the HerfindahlHirschmand (HHI) to evaluate mergers.
• Less than 1,000 — competitive
• 1,000 to 1,800 — moderately concentrated
• challenged if merger would increase the index by 100
points
• above 1,800 — concentrated market
• challenged if merger would increase the index by 50
points
46
The HHI Merger Guidelines
47
Proposed Mergers (1986)
• Market definition
• Narrow: carbonated soft
drinks HHI > 2400 – highly
concentrated
•
•
•
•
•
Coke 39%
PepsiCo 28%
Dr Pepper 7%
7-Up 6%
RJR 5%
• Market definition
• Broad: carbonated soft
drinks, fruit juices and
bottle water sold by these
four companies
• HHI 120 – highly
competitive
• Dept. of Justice chose the
narrow definition &
blocked both mergers
48
Landmark Antitrust Cases
• Is the public interest served?
• Original intent was to protect and pursue the
public interest
• However, the interest of the producer
sometimes comes into play.
• Is our court system more likely to serve the
public interest than our regulators?
49