Chapter 7 Regulation and Deregulation

1. Chapter 7Regulation and Deregulation Section 4 pp. 180-184

2. Economics and You • As a consumer, the government makes sure you have choices. The government promotes competition because this usually leads to lower prices. • Give two examples of choices you have and how the prices are affected.

3. Market Power • Market power is the ability of a firm to control prices and total market output. • Usually markets that are dominated by 1 or a few firms (Monopoly or Oligopoly) have lower output and higher prices. • To control prices, firms can merge, form a cartel, or set the market prices below their costs for a short term to drive out competitors (Predatory Pricing).

4. Government and Competition • The Government has many policies to keep firms from controlling the price and supply of important goods. • The Federal Trade Commission and the Department of Justice’s Antitrust Division watch firms so that they don’[t unfairly eliminate competition. • These are called Antitrust Laws because a trust is a business combination similar to a cartel

5. In 1890, Sherman Antitrust Act, which outlawed mergers and monopolies that limit trade between states. • This gave government power to stop cartels from forming, break-up existing monopolies and regulate the industry.

6. Government and Competition • Regulating Business Practices: The government can regulate all of these practices if they give too much power to a company that already has few competitors (Microsoft). • Breaking Up Monopolies: • In 1911, the government used the Sherman Antitrust Act to break up old monopolies (Rockefeller’s Standard Oil Trust and the American Tobacco Company). The government split them up. In 1982, the government broke up AT&T into 7 regional phone companies.

7. Blocking Mergers: • The government has the power to prevent monopolies from forming. • The government can block mergers that could reduce competition (merger occurs when a company joins another to form a single firm). Do this because prices usually rise when the number of firms in a market fall. • Let AOL and Time Warner merge, however not glass giants Libbey and Anchor Hocking.

8. Preserving Incentives: Some mergers can benefit consumers. These will lower average costs and lead to lower prices, more reliable products and a more efficient industry. Each merger has the chance to prove that this can happen. • Deregulation • Government started to deregulate in the 1970s and 80s because they felt they were reducing competition. • Deregulation means that the government no longer decides what role each company can play in a market and how much it can charge its customers. • The government has deregulated airline, trucking, banking, railroad, natural gas and television broadcasting firms. Did this promote competition? YES.

9. Judging Deregulation • After deregulation, competition picked up but then it led to periods when firms began to disappear (this eliminated some of the weaker firms). • Airlines: A Complicated Deregulation • Many new airlines started operating in 1978. In most cases, prices decreased. In the early 2000s for several factors, several major airlines filed for bankruptcy. The future of the airline industry is still uncertain.