Antitrust Laws and Regulation: Understanding Monopolies and Competition, Slides of Competition Law and Policy

Download Antitrust Laws and Regulation: Understanding Monopolies and Competition and more Slides Competition Law and Policy in PDF only on Docsity! Government and Product Markets: Antitrust and Regulation iB 1 Docsity.com Antitrust • Antitrust Law: legislation passed for the purpose of controlling monopoly power and preserving and promoting competition. • Trust: A combination of firms that come together to act as a monopolist 2 Docsity.com Other Antitrust Acts • Federal Trade Commission Act: unfair methods of competition in commerce declared illegal. (1914) • Robinson-Patman Act: prohibits suppliers from offering special discounts to large chain stores unless they also offer the discounts to everyone else. (1936) 5 Docsity.com Other Antitrust Acts • Wheeler-Lea Act: empowers the Federal Trade Commission to deal with false and deceptive acts or practices.(1938) • Celler-Kefauver Antimerger Act: designed to close the merger loophole that remained in the Clayton Act. It bans anticompetitive mergers that occur as a result of one company acquiring the physical assets of another company. (1950) 6 Docsity.com Unsettled Points in Antitrust Policy • Does the Definition of the Market Matter? • Concentration Ratios (4 and 8 firm): – Do not address the issue of foreign competition. – ratio can remain stable over time even though there is competition within the industry. • Herfindahl Index – measures the degree of concentration in an industry. It is equal to the sum of the squares of the market shares of each firm in the industry 7 Docsity.com Innovation and Concentration Ratios • More than half of productivity gains from innovation and technical change. • Authorities beginning to consider benefits of both competition and innovation. • Increased competition lowers prices. • Monopoly power may yield more innovation. 10 Docsity.com Mergers • Horizontal Merger: a merger between firms that are selling similar products in the same market • Vertical Merger: a merger between companies in the same industry, but at different stages of the production process. • Conglomerate Merger: a merger between companies in different industries. 11 Docsity.com Antitrust and Mergers Government looks most carefully at proposed horizontal mergers because they are more likely to change the degree of concentration or competition in an industry 12 Docsity.com United States of America V. Microsoft: Civil Action No. 98-1232 • MS Windows is used on more than 80 percent of Intel-based PCs. • There are high barriers to entry in the market for PC operating systems. • Justice Department claimed Microsoft was using the dominance in the operating system market not only to maintain a monopoly, but to gain dominance in the internet browser market. 15 Docsity.com Self-Test • Why does it matter whether a market is defined broadly or narrowly for purposes of antitrust policy? • There are 20 firms in an industry and each firm has a 5% market share. What is the four-firm concentration ration and the Herfindahl index for this industry? • What is the advantage of the Herfindahl index over the four-firm and eight-firm concentration ratios? Explain your answer. 16 Docsity.com Exhibit 2: The Natural Monopoly Situation 0 Qs Q 4 Q5 Quantity = 17 Qs = Q5- Q 4 Docsity.com Exhibit 4: Regulating a Natural Monopoly P3 2 Pe a Py oO Q, QO) Q, Quantity Output Price Regulation Regulation (marginal cost Profit Pricing) Regulation (average cost pricing) 20 Docsity.com Theories of Regulation Capture Theory: regardless of the motive for the initial regulation and the establishment of the regulatory agency, eventually the agency will be “captured” by the special interests of the industry that is being regulated. 21 Docsity.com Theories of Regulation • Public Interest Theory: regulators are seeking to do, and will do through regulation, what is in the best interest of the public or society at large. • Public Choice Theory: regulators are seeking to do, and will do through regulation, what is in their best interest (specifically, to enhance their power and the size and budget of their regulatory agencies). 22 Docsity.com Deregulation • Many economists, basing their arguments on the capture and public choice theories of regulation, argued that regulation was actually promoting and protecting market power instead of reducing it. • Deregulation has led to a decline in costs in various institutions. 25 Docsity.com Self-Test • What is a criticism of average cost pricing? • State the essence of the capture theory of regulation. • What is the difference between the capture theory and the public choice theory of regulation? • Are economists for or against social regulation? 26 Docsity.com