•A combination or cartel consisting of firms that place their assets in the custody of a board of trustees
What ispredatory pricing?
•The practice of one or more firms temporarily reducing prices in order to eliminate competition and then raising prices
When was the age of the robberbarons?
in the later part of the 1800's
What was done to limit the powerof trusts?
•Congress passed laws aimed at preventing firms from engaging in anticompetitive activities
What is theSherman Act?
•The federal antitrust law enacted in 1890 that prohibits monopolization and conspiracies to restrain trade
What is the Clayton Act?
•A 1914 amendment that strengthens the Sherman Act by making it illegal for firms to engage in certain anticompetitive business practices
What business practices weredeclared illegal under the Clayton Act?
•Price discrimination•Exclusive dealing•Tying contracts•Stock acquisition of competing companies•Interlocking directorates
Was the Clayton Act animprovement over the Sherman Act?
•Although more specific than the Sherman Act, the Clayton Act is also vague
What is the Federal TradeCommission Act?
•The federal act that in 1914 established the Federal Trade Commission (FTC) to investigate unfair competition
What is theRobinson-Patman Act?
•A 1936 amendment to the Clayton Act that strengthens the Clayton Act against price discrimination
What is the basic purpose of theRobinson-Patman Act?
•To prevent large sellers from offering different prices to different buyers where the effect is to harm even a single small firm
What is theCeller-Kefauver Act?
•A 1950 amendment to the Clayton Act that prohibits one firm from merging with a competitor by purchasing its physical assets if the effect is to substantially lessen competition
What are some key antitrustcases?
•Standard Oil Case 1911•Alcoa Case 1945•IBM Case 1982•AT&T Case 1982•MIT Case 1992•Microsoft Case 2001
What was the outcome of theStandard Oil Case?
The rule of reason
What is therule of reason?
•The antitrust doctrine that the existence of monopoly alone is not illegal unless the monopoly engages in illegal business practices
What was the outcome of the Alcoacase?
The per se rule
What is the
per se rule?
•The antitrust doctrine that the existence of monopoly alone is illegal, regardless of whether or not the monopoly engages in illegal business practices
What was the result of the IBMcase (1982)?
A switch back to the rule of reason
What was the result of theAT&T case (1982)?
•Technology made this government-regulated natural monopoly obsolete, and AT&T was found guilty of anticompetitive pricing
What was the result of the MITcase (1992)?
•Eight Ivy League schools agreed to stop colluding to fix prices, and MIT was found guilty of price fixing
What was the Microsoft case of2001?
•This case charged Microsoft with predatory pricing by tying its monopoly in Windows to its Internet Explorer browser
How can firms avoid charges ofprice fixing?
•They can merge into one company
When did a lot of mergers begin taking place
In the 1980's
What are the different types ofmergers?
-horizontal -vertical -conglomerate
What is ahorizontal merger?
•A merger of firms that competes in the same market
What is avertical merger?
a merger of a firm with its suppliers
What is aconglomerate merger?
•A merger between firms in unregulated markets
What can be said about conglomerate mergers?
•They are generally allowed because they do not significantly decrease competition
What can be said about antitrustlaws in other countries?
•They are weak in comparison to U.S. antitrust laws
What is the history of government regulation?
•From the later part of the 1800’s to the 1970’s, there was an increase in regulation; in the 1970’s there was a movement toward deregulation
What is the basic argument infavor of government regulation?
Market failure
In what ways does the marketfail?
•Natural monopoly•Externalities•Imperfect information
What is anatural monopoly?
•An industry in which long-run average cost is minimized when only one firm serves the market
What is marginal cost pricing?
•A system of pricing in which the price charged equals the marginal cost of the last unit produced
What is the conclusion?
•Government regulators can achieve efficiency for a natural monopoly by setting a price ceiling equal to the intersection of the demand and MC curves
What is the downside ?
•The policy results in losses, so an alternative is to set a price ceiling, called the fair-return price, that yields a normal profit but is somewhat inefficient
What kind of profit is made atthefair return price?
Normal Profit
What is anormal profit?
•The accounting profit required to induce a firm’s owners to employ their resources in the firm
Do production costs includenormal profit?
•Yes, because normal profit is considered a necessary expense of a business
What is anegative externality?
•An undesirable byproduct of the economic system
What happens when the negativeexternality of pollution is present?
•Pollution causes polluting firms to overproduce, while causing firms that pay the cost of cleaning up the pollution to underproduce
What can be done when pollutionis present?
•The government can regulate the industry to minimize the pollution
What happens with imperfectinformation?
•Deficient information on unsafe products can cause consumers to overconsume a product
Consumers informed of defect--> decrease in demand--> Decrease in quantity supplied
