26_Econ8e_PPT_Ch26

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Antitrust and regulation : 

Antitrust and regulation Chapter 26 Economics, 8th Edition Boyes/Melvin

Government agencies : 

Government agencies 2 Copyright © Cengage Learning. All rights reserved.

Antitrust Policy : 

Antitrust Policy Monopolists can produce less than the most efficient output and charge higher prices. This transfers social surplus from the consumer to the producer. Cartels may act as monopolists, with the same outcomes. Antitrust policy is the term used to describe government policies and programs designed to control the growth of monopoly and enhance competition. 3 Copyright © Cengage Learning. All rights reserved.

Antitrust Acts : 

Antitrust Acts 4 Copyright © Cengage Learning. All rights reserved.

Procedures : 

Procedures Antitrust Lawsuits can be initiated by: the Federal Trade Commission (FTC), private plaintiffs, state attorneys general, and private individuals or firms. Since 1941, the FTC and the Justice Department have filed nearly 2,800 cases, but private suits have far outnumbered those filed by the Justice Department and the FTC combined. 5 Copyright © Cengage Learning. All rights reserved.

Interpretation : 

Interpretation Early enforcement of antitrust law was lax, based upon the rule of reason: to be illegal, an action must be unreasonable in a competitive sense and the anticompetitive affects must be demonstrated. The second phase of antitrust policy began in 1914 with the Clayton Antitrust Act and the FTC Act. Under these laws, the courts applied the per se rule to judge firms’ actions: actions that could be anticompetitive are intrinsically illegal. Under Reagan and Bush in the 1980s, there was a return to the rule of reason. Under Clinton and Obama, there have been more resources devoted to antitrust. 6 Copyright © Cengage Learning. All rights reserved.

Phases of Antitrust Interpretation : 

Phases of Antitrust Interpretation 7 Copyright © Cengage Learning. All rights reserved.

Market Concentration : 

Market Concentration The first step in enforcement is often to define market concentration. Concentration is the degree to which a few firms control the output and pricing decisions in a market. The most commonly used measure of concentration is the Herfindahl Index. It is calculated as the sum of the squares of the market shares of the firms in an industry. 8 Copyright © Cengage Learning. All rights reserved.

Herfindahl Index : 

Herfindahl Index Before the Herfindahl Index can be calculated, the market must be defined. Antitrust plaintiffs want the market defined as narrowly as possible so that the alleged monopolizer is seen to have a large market share. Conversely, defendants argue for broadly defined markets in order to give the appearance that they possess a very small market share. 9 Copyright © Cengage Learning. All rights reserved.

Intentions : 

Intentions A difficult part of any antitrust lawsuit is establishing intent: Did the actions taken by a firm intend to reduce competition? Did a firm set prices below costs in an attempt to run competitors out of business or was it simply matching competitors’ prices? Did a firm unfairly restrict access to customers by bundling products together or were these beneficial policies for the consumer? Did the combined efforts of companies benefit consumers or were they attempts to create cartels? 10 Copyright © Cengage Learning. All rights reserved.

Business Policy from a Global Perspective : 

Business Policy from a Global Perspective The International Competition Network (ICN) was formed in October 2001 and currently has 90 member competition agencies from 80 jurisdictions. The U. S. relies more on economic theory and the rule of reason approach. The European Union relies more on the per se approach. Other nations often react to be different from or more restrictive than the United States. 11 Copyright © Cengage Learning. All rights reserved.

Regulation : 

Regulation Economic regulation: the prescription of price and output for a specific industry. Social regulation: The prescribing of health, safety, performance, and environmental standards that apply across several industries. 12 Copyright © Cengage Learning. All rights reserved.

Economic Regulation : 

Economic Regulation Regulation of monopolies is based on the idea that certain industries are natural monopolies. The idea is to make the natural monopolist’s price and supply much like what a perfectly competitive industry would provide. 13 Copyright © Cengage Learning. All rights reserved.

Utilities : 

Utilities Public utilities typically acquire enough capacity to be able to provide electricity needed during peak periods. A price equal to marginal cost does not provide the revenue to pay for the high costs of maintaining capacity for peak periods. Regulatory commissions have allowed for a fair rate of return, a price corresponding to the normal profit where demand and average total costs are equal. 14 Copyright © Cengage Learning. All rights reserved.

Inefficiences of Regulation : 

Inefficiences of Regulation Attempting to make the natural monopoly look like a perfectly competitive firm in its pricing and output decisions can create incentives to be inefficient, to acquire too much capacity or incur other capital costs. 15 Copyright © Cengage Learning. All rights reserved.

Deregulation and Privatization : 

Deregulation and Privatization In recent years many regulated industries have been deregulated and allowed to compete freely: Airlines Trucking Telecommunications Increasingly, functions that were performed by the government are being privatized. Privatization: transforming a government-run enterprise into a privately-owned firm. Governments have also turned to contracting out many services—they have enlisted private firms to provide products and services. 16 Copyright © Cengage Learning. All rights reserved.

Stranded Assets : 

Stranded Assets If a decision is made to deregulate the industry, the firm may hold extensive assets that are of little value. These are stranded assets. Taking this value away from the firms, without proper compensation, may constitute an unfair taking under the U.S. Constitution. 17 Copyright © Cengage Learning. All rights reserved.

Social Regulation : 

Social Regulation Social regulation is concerned with the conditions under which goods and services are produced, and the impact of these goods on the public. Occupational Safety and Health Administration (OSHA) attempts to protect workers against injuries and illnesses associated with their jobs. The Consumer Product Safety Commission (CPSC) gives minimum standards for product safety. The Food and Drug Administration (FDA) is concerned with the safety and effectiveness of food, drugs, and cosmetics. The Equal Employment Opportunity Commission (EEOC) focuses on hiring, promotion, and discharge of employees. The Environmental Protection Agency (EPA) is concerned with air, water, and noise pollution. 18 Copyright © Cengage Learning. All rights reserved.

Determining Regulation : 

Determining Regulation A cost/benefit calculation is necessary to determine whether a regulation should be implemented. The estimated costs of regulations on the economy range from about $400 billion to over $800 billion, depending on what is included as a cost. 19 Copyright © Cengage Learning. All rights reserved.

Regulatory Costs : 

Regulatory Costs 20 Copyright © Cengage Learning. All rights reserved.

Costs and Benefits of Regulation : 

Costs and Benefits of Regulation 21 Copyright © Cengage Learning. All rights reserved.

The Cost of Regulation : 

The Cost of Regulation 22 Copyright © Cengage Learning. All rights reserved.

Economic freedom : 

Economic freedom Historically, European nations were more prone to nationalize rather than privatize. Beginning with the fall of the Soviet Union in 1991, many nations moved toward more economic freedom. Economic freedom is the degree to which individuals are able to carry out voluntary transactions independent of government. The economic recession that began in 2007 altered the momentum toward economic freedom in most parts of the world. 23 Copyright © Cengage Learning. All rights reserved.

Ten most free and least free economies : 

Ten most free and least free economies 24 Copyright © Cengage Learning. All rights reserved.

International agencies : 

International agencies The General Agreement on Tariffs and Trade (GATT) is a form of international regulation in which several nations are involved. Today, the successor to GATT is the World Trade Organization (WTO). 25 Copyright © Cengage Learning. All rights reserved.

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