CHAPTER 26: GOVERNMENT AND PRODUCT MARKETS: ANTITRUST AND

REGULATION
ANTITRUST
Antitrust Law: legislation passed for the stated purpose of controlling
monopoly and preserving and promoting competition
a) Antitrust Acts:
1) Trust: a combination of firms that come together to act as a
monopolist.
A few key acts that constitute U.S antitrust policy are the
Sherman Act (1890)
Clayton Act (1914)
1. Price Discrimination
2. Exclusive dealing
3. Tying contracts
4. The acquisition of competing companies stock if the
acquisition reduces competition
5. Interlocking directories
Federal Trade Commission Act (1914)
Robinson-Patman Act (1936)
Wheeler-Lea Act (1938)
Celler-Kefauver Antimerger Act (1950)
b) Unsettled Point in Antitrust Policy
Does the Definition of Market Matter?
How a market is defined broadly or narrowly helps determine
whether a firm is considered a monopoly.
Concentration Ratios
1) Herfindahl index: an index that measures the degree of
concentration in an industry, equal to the sum of the squares of
the market shares of each firm in the industry
Herfindalh = (S1)^2 + (S2)^2 + . + (Sn)^2
Less than 1000: unconcentrated (or competitive) market
Between 1000 and 1800: moderately concentrated market
More than 1800: especially concentrated market
Innovation and Concentration Ratios
Monopoly power may yield more innovation. If it does, the lower
prices brought about through increased competition have to be
weighed against the increased innovation that may come about
through greater market concentration and monopoly power.
c) Antitrust and Mergers
1) Horizontal Merger: a merger between firms that are selling
similar products in the same market.
2) Vertical Merger: a merger between companies in the same
industry but at different stages of the production process.

3) Conglomerate Merger: a merger between companies in

different industries.
d) Common Misconceptions About Antitrust Policy
e) Network Monopolies
1) Network Good: a good whose value increases as the expected
number of units sold increases
Antitrust Policy for Network Monopolies
Authorities would not issue a complaint against a company unless it
undertook predatory or exclusionary practices to maintain its
monopoly position
Innovation in Network Monopolies
2) Lock-In Effect: the situation when a product or technology
becomes the standard and is difficult or impossible to dislodge.
REGULATION
a) The Case of Natural Monopoly
1) Natural Monopoly: economies of scale is so pronounced that
only one firm can supply. Ex: local electricity, gas, water service
b) Regulating Natural Monopoly
1. Price regulation: P = MC (marginal cost pricing), receives subsidy
for its regulation
2. Profit regulation: P = ATC (average cost pricing)
3. Output regulation: government set the quantity of output
1) Regulatory Lag: the time period between when a natural
monopolys costs change and when the regulatory agency
adjusts prices for it.
c) Theories of Regulation
1) Capture Theory of Regulation: no matter what the motive for
the initial regulation and the establishment of the regulatory
agency, eventually the agency will be captured by the interest of
the industry being regulated.
2) Public Interest Theory of Regulation: regulators are seeking
to do what is in the best interest of the public or society at large.
3) Public Choice Theory of Regulation: regulators are seeking
to do what is in their best interest
d) The Costs and Benefits of Regulation
e) Some Effects of Regulation are Unintended
f) Deregulation