regulatory policy

 Government and competition

• Govt can take steps to promote competition

  • Limits can be tested in court

Market power: company’s ability to control prices above competitive levels. It can also refer to a company’s ability to restrict output or quality

• Monopolies + oligopolies have market powers

• Higher prices and lowe output 

• Reduced competition

• Leading firms can merge w/eo to form a cartel (set the market price below their cost for a short term to drive competitors out of biz

  • Helps to control prices and output

predatory pricing: selling a product below cost for a short period of time to drive competitors out of the market

• Predator loses money when it drives rivals out of business

Antitrust laws: laws that encourage competition in the marketplace

• Federal Trade Commission + Dept of Justice’s Antitrust Division

• Keeps firms from controlling price and supply of important goods

Trust: illegal grouping of companies that discourages competition

• similar to a cartel

• 1890: Sherman Antitrust Act- outlawed mergers and monopolies that limit trade between states

  • Govt has the power to regulate industry to stop firms from forming cartels/monopolies OR to break them up

  • 1911: used to break up Standard Oil Company + American Tobacco Company

• Companies still try to control firms require a customer who buys one product to buy other products from another company

  • Ex: tennis shoe brand demands that a chain buy + resell its brand t shirts and pants if it wants to sell its shoes

  • Buys out competitors 

• Govt can block mergers that might reduce competition and lead to higher prices

Merger: occurs when a company joins w/another company or companies to a single firm

• Prices rise when the # of firms in a market decreases

• Prices fall when # of firms in a market increases

• Corporate mergers will lower overall average costs + lead to lower prices

  • More reliable products/service + more efficient industry

• 1992: Justice Department + FTC - guidelines for proposed mergers

  • Mergers should not be permitted to create or enhance market power

  • 1997: Give companies the chance to prove the efficiency of merging (lower costs + prices)

Deregulation

Deregulation: the government no longer decides what role each company can play in a market and how much it can charge its customers

• Deregulation loosens govt ctrl; antitrust strengthens govt

Regulation: A policy designed to promote economic stability, economic efficiency, reduce negative externalities, and improve the functioning of markets 

• Spill-over costs exists in many industries (these are also known as social costs/negative externalities)

• Taxes, fines, incentives and subsidies can be used as tools for regulating markets

• Marginal benefits/costs (“cost-benefit analysis”) should be used in creating regulations

• US Regulatory Agencies are political in nature →  agency rule-making is influenced by iron triangle, capture theory, and revolving door relationships

.Interstate Commerce Commission (1887)

• Pure Food and Drug Act (1906) → led to the creation of the FDA (Food and Drug Administration)

• Federal Reserve (1913)

• Federal Trade Commission (1914)

• Securities and Exchange Commission (1934)

• Fair Labor Standards Act (1936)

• Environmental Protection Agency (1970) and Clean Air and Clean Water Acts (1972)

• Consumer Product Safety Act (1973)

• Consumer Financial Protection Bureau (2010)

• An “Independent Regulatory Agency”

  • Congress granted the Fed authority to regulate the nation’s money supply (using it’s monetary policy tools) to maintain “price stability” and “full employment”

  • Fed can also serve as “lender of last resort” to help banks on the verge of failure

  • Fed also monitors/regulates private bank practices and can order “corrective actions”

    • EX: If a Fed Bank Examiner found a bank under the Reserve Requirement the Fed could make it to call in loans to “recapitalize”

Because Regulatory Policy involves “costs”, its closely monitored by business and lobbyists

The case for deregulation

• Deregulation: to reduce government rules, remove barriers to entry, and/or eliminate price controls (NOTE: Privatization = full deregulation)

• Increased in the US (and abroad) in late 1970s

  • Goal was to promote competition, lower prices, and establish new companies 

  • EX: Thatcher in the U.K. privatized British Telecom, coal mining, buses, etc.

  • EX: Pres. Carter deregulated airlines, Pres. Reagan deregulated transportation, agriculture, finance

→ The goal of both regulatory and deregulatory policy is the same → to make markets work better!

Deregulation: 1978-2000

• Advocated by Austrian economist Friedrich von Hayek (1940s-1970s) and “Chicago School” economists like Milton Friedman

• Began under Carter in 1977 with Airlines and accelerated in the 1980s under Reagan 

  • Deregulation was most prominent in airlines, trucking, telephone industry, banking, etc.

  • Many of these were initially seen as “natural monopolies”, but innovations challenged this assumption

• Bill Clinton continued de-regulation in the 1990s in the areas of Telecommunications and Banking (repealed Glass-Steagall) 

• Deregulation associated with Adam Smith’s “invisible hand”

  • competition and self interest would serve as natural “regulators” 

  • Gov’t regulations stifle competition and innovation, and raise consumer prices

Advocates of deregulation say:

• Increased competition in deregulated industries leads to a drop in prices as new companies compete for consumers

• Improved services/quality as businesses strive to capture new markets leading to higher output, and consumer satisfaction/marginal utility.

  • Ex: Because computer technology is not heavily regulated by the government, Microsoft and Apple can compete for the money of consumers.

• Initiated macroeconomics, where gov’t regulations promoted high levels of consumer demand and full employment

  • EX: Safety net programs promote consumption (Social Security) and certain price + wage controls (like min. wage laws) keep consumer income levels high and employment levels high

  • Can we graph this? What’s the effect on AD?

• Without regulatory controls, economies can get “stuck” 

Critics of deregulation say:

• Deregulation leads to monopolies and mergers, which ultimately eliminating competitive pricing

  •  “Too Big to Fail” critique of banking industry during/after Financial crisis

• Deregulation allows consumers and workers to be exploited 

  • “Predatory” lending practices by banks after banking deregulation, Mining accidents due to mine safety deregulation, consumer sickness due to food/drug de-regulation, etc.

• Deregulation adds to “boom” and “bust” cycles, creating more macroeconomic instability

A 3rd Way? Market Based Regulations

• The use of prices, taxes, fines,  subsidies, etc. to provide incentives to producers and consumers

  • EX: Higher gas taxes incentives customers to purchase of fuel-efficient vehicles (higher gas taxes in Europe = more electric cars sold there)

  • EX: Obamacare’s health insurance mandate - designed to increase the number of healthy people in insurance pools, thus driving down insurance costs over-time (w/a fine or “tax” to incentivize market participation); Obamacare also provided subsidies to lower-income Americans - mostly younger and healthier - to strengthen these insurance pools

  • EX: California’s 2012 “Cap and Trade” initiative – Will businesses respond to “market incentives” to reduce greenhouse gas emissions? (next slide)
    

• “Capture theory”: view that regulators serve the regulated industries instead of serving the public; Many agency leaders also move from executive positions in the private sector to the public sector (revolving door)

  • EX: Scott Pruitt EPA Director under Trump

  • Many U.S. Treasury Secretaries were once executives in big Wall St. investment banks like Goldman Sachs (Rich Rubin, Henry Paulson, etc.)

  • FAA run by former Airline executives