Economics of Regulation and Antitrust

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Economics of Regulation and Antitrust

• Dr. David Loomis

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Lecture 2

• Antitrust Overview / Monopolization

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Antitrust laws - another government control of
the market

• Sherman Act (1890)
• Section 1 Prohibits contracts, combinations, or
  conspiracies in restraint of trade (e.g.
  collusion among rivals regarding prices or
  territories)
• Section 2 Prohibits monopolization or attempts
  to monopolize a market

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Antitrust laws

• Clayton Act (1914)
• Section 2 Prohibits anticompetitive price
  discrimination
• Section 3 Prohibits anticompetitive exclusive
  dealing and tie-in sales
• Section 7 Limits mergers that may lessen
  competition
• Private suits under Clayton act bring treble (3X)
  damages

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Antitrust laws

• FTC Act (1914)
• Section 5 Outlaws unfair methods of competition
  (leaving it up to the FTC to define what is
  unfair in specific contexts).

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Monopolization Structure-Conduct-Performance
Paradigm

• Structure (number and size of firms, their cost
  and demand conditions, the nature of their
  products, condition of entry and degree of
  regulation)
• Conduct (decision about pricing and output,
  investment, marketing, and product design)
• Performance (allocative efficiency,
  profitability, equity, employment effects and
  rate of innovation)

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Monopolization Market Structure Measurements

• Concentration Ratio -the percentage of total
  sales in an industry made by the n largest firms
  in that industry. (Can be different if measured
  by assets or employment - see ATT market share)
• Herfindahl Index

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Monopolization Market Structure Measurements

• Where N is the number of firms, xi is the amount
  of industry sales made by firm i, and T is the
  total industry sales.
• Ranges from 0 to 1 (or if market shares are
  expressed in percents, 0 to 10,000.)
• If H is over 1800, highly concentrated.
• If 1000-1800, moderately concentrated.
• Under 1000, unconcentrated.

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Monopolization Market Structure Measurements

• WHAT IS THE RELEVANT MARKET?
• Product Market - own elasticity of demand (
  change in quantity over change in price) more
  elastic more substitutes
• Cross elasticity of demand ( change in quantity
  of good x over change in price of good y)
  positive for goods that are substitutes.
  Negative for goods that are complements
• Geographic market - local, state, national,
  international. Transportation costs play a part.

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Monopolization Conduct Measures

• Predatory pricing - cutting prices below its and
  its competitors costs in order to drive out the
  rivals from the market. Areeda-Turner Rule -
  pricing below AVC.
• Limit pricing - setting a price low enough to
  discourage entry, to guarantee getting lower
  profits for a longer time.

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Monopolization Performance Measures

• Lerner Index
• The greater the L (with a limit of 1), the
  greater the divergence from its perfectly
  competitive level. (MC is hard to measure)
• Bain index - tries to measure economic profits

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Monopoly Cases

• Standard Oil (1911)
• U.S. Steel (1920)
• Alcoa (1945)
• IBM (1982)
• ATT (1982)
• DuPont (1956)
• Microsoft
• NCAA
• Ready-To-Eat Cereals

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Monopolization Is structural evidence enough
to prove monopolization? (Williamson article)

• No, could be caused by business acumen or
  historical accident and victor deserves the
  spoils
• Yes, managerial skills are in great supply and
  can be transferable and an accident should be
  self-correcting over time and victor shouldnt
  get spoils forever.
• Williamson p. 1524, Section 2 of the Sherman
  Act should be interpreted by the courts to
  require a finding that persistent dominance is
  presumptively unlawful, provided only that the
  industry can be judged to have reached an
  advanced stage of development.