Download ECO 335 Economics of Regulation and Antitrust Dr. David Loomis Department of Economics

ECO 335 Economics of Regulation
and Antitrust
Dr. David Loomis
Department of Economics
Illinois State University
Introductions – Who am I?
 Professional Background
 Teaching Philosophy
 Personal Life
Introductions- Who are You?
 Name
 Major
 When you had ECO 240
 {Wall Street Journal}
Introductions- Syllabus
 Readings
 E-reserves
Graduate Students
 Regulatory Sequence – 335, 435, 436 and
internship
 Internships arranged through Institute / 56 internships
 IRPS – What is it?
 Placement of Students
Acceptance into Sequence
 November – Application
 Committee decision based on
•
•
•
•
Grades
GA work
Language Skills
Attitude
Undergraduate Students
 Who is taking ECO 300 jointly w/ this
course?
 ECO 300 Syllabus
Lecture 1
 Government Vs. Markets
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
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.
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
Perfect Competition - Assumptions
• No artificial restraint on prices
• Perfect information
• Profit maximizing firms
• Perfect mobility of factors of production
Perfect Competition
- Short Run Behavior

Market Demand is
downward sloping
Perfect Competition
- Short Run Behavior

Each seller is a price
taker - sells none if
prices above marketclearing price
Perfect Competition
- Short Run Behavior
Maximize Profit
 Marginal profit =
marginal revenue marginal cost
 Marginal revenue =
marginal cost

Perfect Competition
- Short Run Behavior

Firm supply at MC
above AVC; sum of
these curves is
market demand
curve
Perfect Competition
- Long Run Behavior
 Firms enter; Supply curve shifts to right
until all economic profits disappear
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
Perfect Competition
- Social Welfare

Social surplus=
Consumer and
Producer surplus
Monopoly
Monopoly
higher price lower output than perfect
competition
 misallocation of society resources
 X-inefficiency - firm doesn’t work hard to cut
costs

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.
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 don’t always behave as captives
Theories of Regulation

Stigler’s 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
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]