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

Social Regulation

Government regulation at improving health and safety (Occupational Safety Health Administration)

Economic Regulation

Government regulation of natural monopoly, where, because of economies of scale, average production cost 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 "capture" 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 (1890)

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

Clayton Act of 1914

Outlawed certain anticompetitive practices not prohibited by the Sherman Act, including price discrimination, trying 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 Directorate

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

Horizontal Merger

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

Vertical Merger

A merger in which on 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 to not 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 on 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

farm commodities

Agricultural products such as cattle, grains, milk, fruits, and vegeteables that are usually sold to poscessorswho use products as inputs in creating food
-sold at the grocery stores

Farm stuff extra info

· Farming is generally profitable due to government subsidies
· Consumers allocate 9% of their spending on food
· Farmers and ranchers collectively receive about $400 billion of cash revenue annually from crop and livestock sales
· Farm Share of the US GDP had fallen from 7% in 1950 to less than 1% today
· Inelastic Demand for Agricultural Products
o The elasticity coefficient for farm good is between .20 and .25
o Farm products would have to fall by 40-50% for consumers to increase their purchases by 10%
o Fluctuations in output
o Farm output fluctuates from year to year
o Tech has increased the supply of agricultural product
o Amount of capital per farm worker has increased by a factor of 15 between 1930 and 1980
o Government sponsored programs lead to innovations in farming
o USDA united states dept of agriculture
o Drones and in ground sensors
o Lagging demand
o Demand for agricultural products hasn't kept pace with increased supply
o Consequences: Small farms will not be able to cover their average total costs
o Small farm consolidation
o 1960 there were 4 million us farms, 2020 there are 2 million us farms
o 9.4% of us labor force, today its only 1.4% of us labor force
o 2017 farm household income 113,495 and some farmers hold other jobs in town

· The federal government has subsidized agriculture since the 1930 with a farm program that included the following

o Support for agricultural prices and output
o Agricultural research
o Soil and water conservation
o Farm credit
o Crop insurance
o Subsidized sale of farm products in the world market

· Rationale

1. Farmers have lower incomes. Government should help them receive higher prices/incomes
2. Family farms should be nurutred
3. Farmers subject to extreme weather: floods, droughts, tornadoes, and insects (locust)
4. They face purely competitive markets for their outputs; they buy inputs that have considerable market power

Recent Farm Policies

Parity has been a guiding principle throughout farming history
Freedom to Farm Act of 1996

Freedom to Farm Act of 1996

-Ended price supports and acreage allotments for wheat corn, barley, oats, sorghum, rye cotton, and rice
-Farmers could now respond to the changing crop prices by planting as much or as little of these crops as they chose
-They were now free to plant the crops of their choice
-Markets would now determine the types of crops grown
-The Act granted "transitional payments" through 2002

The Agricultural Act of 2014

-Ended direct payments and countercyclical payments because it was difficult to justify paying farmers for crops they didn't grow
-Established "dairy margin protection program" which makes payments if the price of milk fall too low or the cost of feed rises to high

Two crop Insurance programs also established

1. Price loss coverage: farmers who pay the insurance premium are guaranteed and insurance payment if the price of their crop fall below a specified value
2. Agricultural risk coverage: depends on the total revenue generated by all of the farmers in a given county who plant the same crop in a given year. The program make payments to participating farmers if the total revenue collectively received by farmers in the county falls below a specific value
3.Under the 2014 Act, farmers interested in these crop insurance programs had to make a one-time decision (binding for the rest of their lives) about which one they wanted to use

Agricultural Act of 2018

Change: farmers could now select which insurance program they wanted to use each year