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Antitrust Policy and Regulation

30. Antitrust Policy and Regulation. Chapter Objectives. The Core Elements of the Major Antitrust (Antimonopoly) Laws in the United States Some of the Key Issues Relating to the Interpretation and Application of Antitrust Laws

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Antitrust Policy and Regulation

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  1. 30 Antitrust Policy and Regulation

  2. Chapter Objectives • The Core Elements of the Major Antitrust (Antimonopoly) Laws in the United States • Some of the Key Issues Relating to the Interpretation and Application of Antitrust Laws • The Economic Principles and Difficulties Related to the Setting of Prices (Rates) Charged by So-Called “Natural Monopolies” • The Nature of “Social Regulation,” Its Benefits and Costs, and Its Optimal Level

  3. Antitrust Policy • The Antitrust Laws • Historical Background • Regulatory Agencies • Sherman Act of 1890 • Clayton Act of 1914 • Price Discrimination • Tying Contracts • Interlocking Directorates

  4. Historical Background • Trusts begin to form after U.S. Civil War • Questionable tactics, less output and higher prices (underallocation of resources) • In late 1800s and early 1900s, two means of control: • 1. regulatory agencies – for natural monopoly • 2. antitrust laws

  5. Sherman Act of 1890 • Cornerstone of antitrust legislation • Monopolization a felony, outlawed restraints of trade

  6. Other Antitrust Legislation • Clayton Act of 1914 – strengthened the Sherman Act by outlawing techniques that firms may use to develop monopoly power • Outlaws price discrimination, prohibits tying contracts, and forming of interlocking directorates

  7. Antitrust Policy • The Antitrust Laws • Federal Trade Commission Act of 1914 – created FTC as an independent antitrust agency • Cease and Desist Orders • Wheeler-Lea Act 1938 • Deceptive Acts or Practices – made unfair and deceptive sales practices illegal • Celler-Kefauver Act 1950 • Merger Regulation

  8. Policy Issues and Impacts • Issues of Interpretation • Focus on Monopoly Behavior or Structure • 1911 Standard Oil Case – Standard Oil found guilty of monopolizing industry and was forced to break up • 1920 U.S. Steel Case • Rule of Reason –not every monopoly illegal • 1945 Alcoa Case – found guilty of monopolizing aluminum ignot market • How Broadly Should Markets be Defined? • 1956 DuPont Cellophane Case – controlled 100% of cellophane market but only 20% of packaging materials market – not guilty • Issues of Enforcement

  9. O 30.1 Effectiveness of Antitrust Laws • Monopoly • Microsoft Case – found guilty of violating Sherman Act in 2000 • Mergers • Merger Types • Horizontal Merger – merger between two competitors producing similar products (Ex. Nextel and Sprint) • Vertical Merger – merger b/w firms involved in different steps of the productive process • Conglomerate Merger – combination of firms in different industries (Ex. Disney and ABC)

  10. Effectiveness of Antitrust Laws Types of Mergers Blue Jeans Automobiles Conglomerate Merger Blue Jeans Autos E F B D C A Z Y X W U V T Glass Denim Fabric Vertical Merger Horizontal Merger

  11. Effectiveness of Antitrust Laws • Merger Guidelines • The HerfindahlIndex – Chapter 23 • Price Fixing – Examples on p. 587 • Per Se Violations – “in and of themselves” illegal • Price Discrimination – only challenged when it reduces competition • Tying Contracts – strictly prohibited

  12. Industrial Regulation • Natural Monopoly – economies of scale so extensive that single firm produces at lower cost than could competing firms • Public Ownership • Public Regulation • Public Interest Theory of Regulation • Problems With Industrial Regulation • Costs and Inefficiency • Perpetuating Monopoly • Legal Cartel Theory • Deregulation

  13. Social Regulation • Distinguishing Features • Food and Drug Administration 1906 • Equal Employment Opportunity Commission 1964 • Occupational Safety and Health Administration 1971 • Environmental Protection Agency 1972 • Consumer Product Safety Commission 1972

  14. Social Regulation • Optimal Level of Social Regulation • In Support of Social Regulation • Criticisms of Social Regulation • Two Reminders • There is No Free Lunch • Less Government is Not Always Better than More

  15. United States v. Microsoft Last Word • Charges May 1998 • Windows Monopoly • District Court Findings • 95% of Intel PCs • Restrictive Contracts • District Court Remedy • Appeals Court Ruling • Final Settlement • No Break Up

  16. 32 Income Inequality and Poverty

  17. 8.7 6.7 12.9 11.9 14.8 18.3 11.0 15.7 100.0 Facts About Income Inequality • Average Household Income $60,258 in 2004 - Among the Highest in the World Distribution of U.S. Income by Households, 2004 (1) Personal Income Category (2) Percentage of All Households in this Category Under $10,000 $10,000 - $14,999 $15,000 - $24,999 $25,000 - $34,999 $35,000 - $49,999 $50,000 - $74,999 $75,000 - $99,999 $100,000 and Above Source: Bureau of the Census

  18. Facts About Income Inequality • Division Into 5 Equal Groups Distribution by Quintiles, 2004 (2) Percentage of Total Income (3) Upper Income Limit (1) Quintile Lowest 20% Second 20% Third 20% Fourth 20% Highest 20% Total 3.4 8.7 14.7 22.2 50.1 100.0 $18,500 34,738 55,331 88,029 No Limit Source: Bureau of the Census Income Mobility: The Time Dimension

  19. 100 80 W 32.1 60 G 32.1 Percentage of Income 40 20 0 20 40 60 80 100 Percentage of Households Area A Gini Ratio = Area A + Area B Facts About Income Inequality • Lorenz Curve and Gini Ratio The Lorenz Curve e Lorenz Curve (Actual Distribution) Perfect Equality d A B c Complete Inequality b a f

  20. 100 80 60 Percentage of Income 40 20 0 20 40 60 80 100 Percentage of Households Facts About Income Inequality • Effect of Government Redistribution Lorenz Curve After Taxes and Transfers Lorenz Curve Before Taxes and Transfers Impact of Government Taxes and Transfers

  21. The Economics of Poverty Poverty Rates Among Selected Population Groups,2004 0 10 20 30 Female-Householders African-Americans Hispanics Foreign-Born (Not Citizens) Children Under 18 Women Total Population Men Whites Asian Persons 65 or Older Married-Couple Families Full-Time Workers 28.4 24.7 21.9 21.4 17.8 13.9 12.7 11.5 10.8 9.8 9.8 5.5 2.8

  22. U.S. Income-Maintenance System • Entitlement Programs • Social Insurance Programs • Social Security • Medicare • Unemployment Compensation • Public Assistance “Welfare” • Supplemental Security Income (SSI) Program • Temporary Assistance for Needy Families (TANF) • Food-Stamp Program

  23. I am going to miss taking notes in Econ omics class!!!!! The End

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