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 Regulation

government regulation aimed at improving health and safety

Economic Regulation

government regulation of natural monopoly, where, because of economy of scale, average production cost is lowest when a single firm supplies the market

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

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 monopoly; prohibited trusts, restraint of trade, and monopolization, but the law was vague and ineffective

Clayton Act of 1914

strengthened Sherman Act, outlawed certain anticompetetive 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 a part of the deal

Exclusive Dealing

a supplier prohibits customers from buying from other suppliers of the product

Interlocking Directorate

a person serves on the boards of directors of two or more competing firms; someone from another firm serving on your firm's board

Federal Trade Commission (FTC) Act of 1914

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

Celler-Kefauver Antimerger Act

passed in 1950, prevents one firm from buying the physical assets of another firm if the effect is to reduce competition. This law can be block a horizontal or vertical merger

Horizontal Merger

a merger in which one firm combines with another that produces the same product

Vertical Merger

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

Consent Decree

the accused party, without admitting guilt, agrees to stop the alleged activity if the government drops the charges

Per Se Illegal

in antitrust law, business practices that are deemed illegal, regardless of their economic rationale or their consequences

Rule of Reason

before ruling on the legality of certain business practices, a court examines why they were undertaken and what effect they have on market competition

Predatory Pricing

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

Conglomerate Merger

a merger of firms in different industries