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16. Antitrust Regulation. Regulation Antitrust Law & Cases. Public Interest Theory. regulate to achieve an efficient use of resources monopolies are inefficient oligopolies may be inefficient. Regulating a monopoly. Natural Monopoly Distribution of electricity. P, cost. ATC. $10. MC.

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16 antitrust regulation
16. Antitrust Regulation

  • Regulation

  • Antitrust Law & Cases


Public interest theory
Public Interest Theory

  • regulate to achieve an efficient use of resources

    • monopolies are inefficient

    • oligopolies may be inefficient


Regulating a monopoly
Regulating a monopoly

  • Natural Monopoly

    • Distribution of electricity


P, cost

ATC

$10

MC

D

Q (households)


P, cost

consumer

surplus

deadweight loss

$20

ATC

$10

MC

MR

D

Q (households)

4 million

economic profit


Public interest
public interest

  • P = MC

  • maximize consumer surplus

  • but involves a loss for firm

    • set P = ATC


P, cost

consumer

surplus

deadweight loss

ATC

$15

$10

MC

D

Q (households)

6

8 million



Antitrust laws
Antitrust Laws

  • Sherman Antitrust Act 1890

    • collusion in restraint of trade illegal

      -- price fixing illegal

    • monopolizing or colluding is felony


Clayton act 1914 amendments
Clayton Act, 1914 & amendments

  • prohibits

    • price discrimination

    • tying, exclusion contracts

    • mergers

      that substantially lessen competition


Celler kefauver act 1950
Celler-Kefauver Act, 1950

  • Further restrictions on mergers

    • Horizontal

    • Vertical

    • Conglomerate

  • U.S. govt. has become more permissive about mergers over time


Some cases price fixing
Some cases: price fixing

  • 1927 Trenton Potteries

    • all price fixing illegal

  • 1961 GE

    • executives fined & jailed

  • 1996 ADM

    • fines to company


Attempts to monopolize
Attempts to monopolize

  • 1911 Standard Oil

    • ordered to sell of holdings

  • 1920 U.S. Steel

    • not guilty: big not bad

  • 1945 Alcoa

    • guilty: too big


Merger rules
Merger rules

  • Justice Dept. uses HHI index to evaluate mergers

  • if 1000 <HHI < 1800

    • increase of > 100 challenged

  • if HHI > 1800

    • increase of > 50 challenged


Example soda mergers 1986
Example: soda mergers, 1986

  • Coca-cola & Dr. Pepper

  • market for carbonated soft drinks

    • HHI 2430

    • mergers increase HHI by 800

  • merger blocked


Example united usair 2003
Example: United & USAir, 2003

  • Justice Dept. also opposed to merger

    • merger plans dropped

  • TWA & American merger allowed


Other large mergers allowed
Other large mergers allowed:

  • Exxon and Mobil (1998)

  • AOL and Time Warner (2000)

  • Chrysler and American Motors (1987)

  • Chrysler and Daimler (1998)


U s vs microsoft
U.S. vs. Microsoft

  • The Case

    • Microsoft monopoly in PC operating systems

    • used predatory pricing with web browsers

    • other anticompetitive practices

      -- tying, exclusionary contracts


  • Microsoft response

    • innovation too fast for monopolies

    • browser worked w/ operated system, not separate

    • penalized for making superior product


  • The ruling

    • 1999 judge ordered breakup

      -- Windows vs. other software

      -- Microsoft appealed 2000

    • settlement 11/2001

      -- no breakup

      -- Microsoft agree to code of conduct &

      to reveal some source code

    • European courts still pursuing their case


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