Antitrust and

Regulation

Economics for Today’s World by Irvine Tucker, 5th edition

©2008 South-Western College Publishing
1
 What will I learn
in this chapter?
You will explore and form
opinions on the Microsoft
case, the Standard Oil
case, and other major
antitrust cases
2
 What is a trust?
A combination or cartel
consisting of firms
that place their
assets in the custody
of a board of trustees
3
 What is
predatory pricing?
The practice of one or
more firms temporarily
reducing prices in order
to eliminate competition
and then raising prices
4
When was the age of
the robber barons?
In the later part of
the 1800’s

5
What was done to limit
the power of trusts?
Congress passed laws
aimed at preventing
firms from engaging in
anticompetitive activities
6
 What is the
Sherman Act?
The federal antitrust law
enacted in 1890 that
prohibits monopolization
and conspiracies to
restrain trade
7
 What is the
Clayton Act?
A 1914 amendment that
strengthens the
Sherman Act by making
it illegal for firms to
engage in certain
anticompetitive
business practices 8
 What business
practices were
declared illegal under
the Clayton Act?
• Price discrimination
• Exclusive dealing
• Tying contracts
• Stock acquisition of
competing companies
• Interlocking directorates 9
Was the Clayton Act an
improvement over the
Sherman Act?
Although more specific
than the Sherman Act, the
Clayton Act is also vague
10
 What is the Federal
Trade Commission Act?
The federal act that in 1914
established the Federal
Trade Commission (FTC)
to investigate unfair
competition
11
 What is the
Robinson-Patman Act?
A 1936 amendment to
the Clayton Act that
strengthens the
Clayton Act against
price discrimination
12
 What is the basic
purpose of the
Robinson-Patman Act?
To prevent large sellers from
offering different prices to
different buyers where the
effect is to harm even a
single small firm
13
 What is the
Celler-Kefauver Act?
A 1950 amendment to the
Clayton Act that prohibits
one firm from merging
with a competitor by
purchasing its physical
assets if the effect is to
substantially lessen
competition 14
 What are some key
antitrust cases?
• Standard Oil Case 1911
• Alcoa Case 1945
• IBM Case 1982
• AT&T Case 1982
• MIT Case 1992
• Microsoft Case 1995 15
 What was the
outcome of the
standard oil case?
The rule of reason

16
 What is the
rule of reason?
The antitrust doctrine that
the existence of
monopoly alone is not
illegal unless the
monopoly engages in
illegal business practices
17
What was the outcome
of the Alcoa case?
The per se rule

18
 What is the
per se rule?
The antitrust doctrine that the
existence of monopoly
alone is illegal, regardless
of whether or not the
monopoly engages in illegal
business practices 19
What was the result of
the IBM case (1982)?
A switch back to
the rule of reason

20
What was the result of
the AT&T case (1982)?
Technology made this
government-regulated
natural monopoly
obsolete, and AT&T
was found guilty of
anticompetitive pricing
21
What was the result of
the MIT case (1992)?
Eight Ivy League schools
agreed to stop colluding
to fix prices, and MIT was
found guilty of price fixing
22
What was the result of the
Microsoft case (1995)?
Microsoft was not
allowed to purchase
Intuit Inc., a competitor
in the personal finance
software industry
23
What was the Microsoft
case of 2001?
This case charged Microsoft
with predatory pricing by
tying its monopoly in
Windows to its Internet
Explorer browser
24
 How can firms
avoid charges of
price fixing?
They can merge
into one company

25
When did a lot of
mergers begin
taking place?
In the 1980’s

26
What are the different
types of mergers?
• Horizontal
• Vertical
• Conglomerate

27
 What is a
horizontal merger?
A merger of firms
that competes in
the same market

28
 What is a
vertical merger?
A merger of a firm
with its suppliers

29
 What is a
conglomerate merger?
A merger between firms
in unregulated markets

30
What can be said about
conglomerate mergers?
They are generally
allowed because they
do not significantly
decrease competition
31
 What can be said
about antitrust laws
in other countries?
They are weak in
comparison to U.S.
antitrust laws

32
 What is the history of
government regulation?
From the later part of the
1800’s to the 1970’s,
there was an increase in
regulation; in the 1970’s
there was a movement
away from regulation
33
 What is the basic
argument in favor of
government regulation?
Market failure

34
In what ways does
the market fail?
• Natural monopoly
• Externalities
• Imperfect information

35
 What is a
natural monopoly?
An industry in which long-
run average cost is
minimized when only one
firm serves the market
36
 What is
marginal cost pricing?
A system of pricing in
which the price charged
equals the marginal cost
of the last unit produced
37
P Regulated Monopoly
Fair return price efficient price
$40
$30
$25
A
$20
B
$15 LRAC
$10
LRMC
$5 MR C D
1 2 3 4 5 6 7 8 9 Q
38
What is the conclusion?
Government regulators can
achieve efficiency for a
natural monopoly by setting
a price ceiling equal to the
intersection of the demand
and MC curves 39
What is the downside ?
The policy results in losses,
so an alternative is to set a
price ceiling, called the fair-
return price, that yields a
normal profit but is
somewhat inefficient
40
 What is a
normal profit?
The accounting profit
required to induce a firm’s
owners to employ their
resources in the firm
41
 Do production costs
include normal profit?
Yes, because normal profit
is considered a necessary
expense of a business

42
What kind of profit is
made at the
fair return price?
Normal Profit

43
 What is a
negative externality?
An undesirable byproduct
of the economic system

44
 What happens when the
negative externality of
pollution is present?
Pollution causes polluting
firms to overproduce, while
causing firms that pay the
cost of cleaning up the
pollution to underproduce
45
What can be done when
pollution is present?
The government can
regulate the industry to
minimize the pollution
46
 What happens with
imperfect information?
Deficient information on
unsafe products can
cause consumers to
overconsume a product
47
 P Impact of Imperfect Information

E1 S
$15
E2 D1
$10

$5 D2

25 50 75 100 Q
48
 Decrease in
quantity
supplied

Increase in
Demand

Consumers
informed of defect
49
END
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