Microeconomics Unit 12: Economic Regulation and Antitrust Policy

Market Power

The ability of a firm to raise its price without losing all its customers to rival firms

Social Regulations

Government regulation aimed at improving health and safety. OSHA- Occupational Safety and Health Administration

Economic Regulation

Government regulation of natural monopoly, where, because of economies of scale, average production costs is lowest when a single firm supplies the market. PUCO- Public Utilities Commission of Ohio

Antitrust Policy

Government regulation aimed at preventing monopoly and fostering competition in markets where competition is desirable

Public Utilities

Government-owned or government-regulated monopolies

Capture Theory of Regulation

Producers’ political power and strong stake in the regulatory outcome lead them, in effect, to “recapture“ the regulating agency and prevail on it to serve producer interests

Trust

Any firm or group of firms that tries to monopolize a market

Sherman Antitrust Act of 1890

First national legislation in the world against monopolies; prohibited trusts, restraint of trade, and monopolization, but the law was vague and, by itself, ineffective

Clayton Act of 1914

Outlawed certain anticompetitive practices not prohibited by the Sherman Act, including price discrimination, tying contracts, exclusive dealing, interlocking directorates, and buying the corporate stock of a competitor

Tying Contract

A seller of one good requires a buyer to purchase other goods as part of the deal

Exclusive Dealing

A supplier prohibits its customers from buying from other suppliers of the product

Interlocking Directorates

A person serves on the boards of directors of two or more competing firms

Federal Trade Commission (FTC) of 1914

Established a federal body to help enforce antitrust laws; run by commissioners assisted by economists and lawyers

Celler-Kefauver Act

Made the Clayton Act’s antimerger provisions to more applicable and outlawed additional types of illegal intercorporate holdings, mergers, and acquisitions

Horizontal Merger

A merger in which one firm combines with another that produces the same type of product

Vertical Merger

A merger in which one firm combines with another from which it had purchased inputs or to which it had sold outputs

Consent Decree

The accused party; without admitting guilt, agrees not to do whatever it was charged with if the government drops the charges

Per Se Illegal

In antitrust law, business practices deemed illegal, regardless of their economic rationale, or their consequences

Rule of Reason

Before ruling on the legality of a business practice, a court examines why it was undertaken and what effect it has on competition

Predatory Pricing

Pricing tactics employed by a dominant firm to drive competitors out of business, such as temporarily selling below marginal costs or dropping the price only in certain markets

Herfindahl-Hirschman Index (HHI)

A measure of market concentration that squares each firm’s percentage share of the market then sums these squares

Conglomerate Merger

A merger of firms in different industries. - Many of them fail