1 C H A P T E R 14 1 © 2001 Prentice Hall Business PublishingEconomics: Principles and Tools, 2/eO’Sullivan & Sheffrin Market Power and Public Policy:

1

1

C

H A

P T

E R

14

© 2001 Prentice Hall Business Publishing© 2001 Prentice Hall Business Publishing Economics: Principles and Tools, 2/eEconomics: Principles and Tools, 2/e O’Sullivan & SheffrinO’Sullivan & Sheffrin

Market Power and Public Policy: Antitrust Policy

and Deregulation

2


Antitrust Policy

The purpose of antitrust policy is to promote competition among firms. Competition leads to lower prices and better products.

3


Antitrust Policy

Break up of monopolies into several smaller companies.

Prevent corporate mergers that would reduce competition.

Regulate business practices.

Under federal antitrust rules, the government can:

4


Brief History of Antitrust Legislation

1890 Sherman Act: made it illegal to monopolize a market or to engage in practices that resulted in a restraint of trade.

1914 Clayton Act: outlawed specific practices that discourage competition, including tying contracts, price discrimination for the purpose of reducing competition, and stock-purchase mergers that would substantially reduce competition.

1914 Federal Trade Commission: established to enforce antitrust laws.

1936 Robinson-Patman Act: prohibited selling products at “unreasonably low prices” with the intent of reducing competition.

1950 Celler-Kefauver Act: outlawed asset-purchase mergers that would substantially reduce competition.

1980 Hart-Scott-Rodino Act: extended antitrust legislation to proprietorships and partnerships.

5


Breaking Up Monopolies

A trust is an arrangement under which the owners of several companies transfer their decision-making powers to a small group of trustees. Firms in a trust act as a single firm.

The label “antitrust” comes from early cases involving the breakup of trusts.

6


Blocking Mergers

A merger occurs when two firms combine their operations.

Because a merger decreases the number of firms in a market, it is likely to lead to higher prices.

A possible benefit from a merger is that the new firm could combine production, marketing, or administrative operations, and thus produce its products at a lower average cost.

7


Blocking Mergers

New guidelines developed by the Justice Department and the Federal Trade Commission allow companies involved in a proposed merger to present evidence that the merger would reduce costs and lead to lower prices, better products, or better service.

The analysis of proposed mergers today focuses less on counting the number of firms in a market, and more on how a merger would affect price.

8


The Impact of Mergers on Price and Profits

Suppose that initially there are two separate firms in the bread market. Each firm serves half of the market demand, and faces the same structure of costs as the other.

When firms act independently, the profit of each firm equals $250.

9



An increase in the price of Interstate bread will decrease quantity sold, and profit from the sale of Interstate decreases by $10, from $250 to $240.

Suppose that after a merger, the firm will keep the price of Wonder bread constant at $1.50, but increase the price of Interstate bread to $1.60.

10



Profit from the sale of Wonder bread increases by $30, from $250 to $280.

The increase in the price of Interstate bread will increase the demand for Wonder bread.

11



In this case, the good news (more profit on Wonder bread) outweighs the bad news (less profit on Interstate bread), thus it is possible for a merger of two firms selling close substitutes to lead to higher prices and have a net increase in profit.

Conclusion:

12


Competition and Pricing in Different Cities

A 1997 study by the Federal Trade Commission found that the prices charged by Staples, an office supply chain, were lower in cities where its competitor, Office Depot, also had a store.

13



The profit-maximizing price is higher in the city without competition.

14



The Federal Trade Commission used this logic to convince the court that the proposed merger of Staples and Office Depot would lead to higher prices.

15


Regulating Business Practices

The government may intervene when specific business practices increase market concentration.

Among those practices are: Price fixing Tying, or forcing consumers of one product

to purchase another Price discrimination that reduces competition

16


Predatory Pricing

Predatory pricing is the selling of products at “unreasonably low prices” with the intent of reducing competition.

Predatory pricing is a profitable strategy if the firm can charge the monopoly price long enough to offset the losses from driving its rival out of business.

17


The Microsoft Case

In the case of the United States versus Microsoft Corporation, the government alleged that Microsoft stifled competition in several ways.

18


The Microsoft Case

Microsoft threatened Compaq Corporation, a computer manufacturer, with the loss of the license to install the Microsoft operating system in their computers after Compact announced plans to substitute Netscape’s Navigator for Explorer.

19


The Microsoft Case

Microsoft prohibited computer manufacturers from altering the Windows desktop by removing Microsoft’s desktop links to the Internet.

20


The Microsoft Case

Microsoft’s bundling of Explorer with Windows 95 and its inclusion as part of Windows 98 involves tying the operating system with the browser.

21


The Microsoft Case

The government claimed that Microsoft used its virtual monopoly in operating systems to gain a monopoly in the browser market.

22


The Microsoft Case

The government also claimed that Microsoft used illegal practices to protect its monopoly in the market for operating systems.

23


Deregulation of Airlines and Telecommunications

The purpose of deregulation in the airlines and telecommunications industries was to increase competition and decrease prices.

In the airline industry, deregulation caused some firms to go out of business and others to merge.

24



Some mergers resulted in lower production costs and prices, but others reduced competition and led to higher fares.

The consensus among economists is that deregulation generated net benefits for consumers. On average, fares decreased about 33% in real terms.

25



The Telecommunications Act of 1996 established new rules for the transmission of video, voice and data.

The basic idea was to promote competition in the markets for telecommunication services.

26



To open local telephone service to new firms that would compete with the Baby Bells

To eliminate price controls for cable TV and allow the phone companies to enter the cable market

To allow the Baby Bells to enter the market for long-distance service once there is sufficient competition in local telephone service

Among the provisions of the act were:

Documents

1 C H A P T E R 14 1 © 2001 Prentice Hall Business PublishingEconomics: Principles and Tools, 2/eO’Sullivan & Sheffrin Market Power and Public Policy: