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16. Antitrust Regulation

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

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  1. 16. Antitrust Regulation • Regulation • Antitrust Law & Cases

  2. Public Interest Theory • regulate to achieve an efficient use of resources • monopolies are inefficient • oligopolies may be inefficient

  3. Regulating a monopoly • Natural Monopoly • Distribution of electricity

  4. P, cost ATC $10 MC D Q (households)

  5. P, cost consumer surplus deadweight loss $20 ATC $10 MC MR D Q (households) 4 million economic profit

  6. public interest • P = MC • maximize consumer surplus • but involves a loss for firm • set P = ATC

  7. P, cost consumer surplus deadweight loss ATC $15 $10 MC D Q (households) 6 8 million

  8. allow firm to earn set rate of return • P = ATC • firm may exaggerate costs to earn monopoly profit

  9. Antitrust Laws • Sherman Antitrust Act 1890 • collusion in restraint of trade illegal -- price fixing illegal • monopolizing or colluding is felony

  10. Clayton Act, 1914 & amendments • prohibits • price discrimination • tying, exclusion contracts • mergers that substantially lessen competition

  11. Celler-Kefauver Act, 1950 • Further restrictions on mergers • Horizontal • Vertical • Conglomerate • U.S. govt. has become more permissive about mergers over time

  12. Some cases: price fixing • 1927 Trenton Potteries • all price fixing illegal • 1961 GE • executives fined & jailed • 1996 ADM • fines to company

  13. 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

  14. 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

  15. Example: soda mergers, 1986 • Coca-cola & Dr. Pepper • market for carbonated soft drinks • HHI 2430 • mergers increase HHI by 800 • merger blocked

  16. Example: United & USAir, 2003 • Justice Dept. also opposed to merger • merger plans dropped • TWA & American merger allowed

  17. Other large mergers allowed: • Exxon and Mobil (1998) • AOL and Time Warner (2000) • Chrysler and American Motors (1987) • Chrysler and Daimler (1998)

  18. U.S. vs. Microsoft • The Case • Microsoft monopoly in PC operating systems • used predatory pricing with web browsers • other anticompetitive practices -- tying, exclusionary contracts

  19. Microsoft response • innovation too fast for monopolies • browser worked w/ operated system, not separate • penalized for making superior product

  20. 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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