ch.13

•A combination or cartel consisting of firms that place their assets in the custody of a board of trustees

•The practice of one or more firms temporarily reducing prices in order to eliminate competition and then raising prices

in the later part of the 1800's

•Congress passed laws aimed at preventing firms from engaging in anticompetitive activities

•The federal antitrust law enacted in 1890 that prohibits monopolization and conspiracies to restrain trade

•A 1914 amendment that strengthens the Sherman Act by making it illegal for firms to engage in certain anticompetitive business practices

•Price discrimination•Exclusive dealing•Tying contracts•Stock acquisition of competing companies•Interlocking directorates

•Although more specific than the Sherman Act, the Clayton Act is also vague

•The federal act that in 1914 established the Federal Trade Commission (FTC) to investigate unfair competition

•A 1936 amendment to the Clayton Act that strengthens the Clayton Act against price discrimination

•To prevent large sellers from offering different prices to different buyers where the effect is to harm even a single small firm

•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

•Standard Oil Case 1911•Alcoa Case 1945•IBM Case 1982•AT&T Case 1982•MIT Case 1992•Microsoft Case 2001

The rule of reason

•The antitrust doctrine that the existence of monopoly alone is not illegal unless the monopoly engages in illegal business practices

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

A switch back to the rule of reason

•Technology made this government-regulated natural monopoly obsolete, and AT&T was found guilty of anticompetitive pricing

•Eight Ivy League schools agreed to stop colluding to fix prices, and MIT was found guilty of price fixing

•This case charged Microsoft with predatory pricing by tying its monopoly in Windows to its Internet Explorer browser

•They can merge into one company

In the 1980's

-horizontal -vertical -conglomerate

•A merger of firms that competes in the same market

a merger of a firm with its suppliers

•A merger between firms in unregulated markets

•They are generally allowed because they do not significantly decrease competition

•They are weak in comparison to U.S. antitrust laws

•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

Market failure

•Natural monopoly•Externalities•Imperfect information

•An industry in which long-run average cost is minimized when only one firm serves the market

•A system of pricing in which the price charged equals the marginal cost of the last unit produced

•Government regulators can achieve efficiency for a natural monopoly by setting a price ceiling equal to the intersection of the demand and MC curves

•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

Normal Profit

•The accounting profit required to induce a firm’s owners to employ their resources in the firm

•Yes, because normal profit is considered a necessary expense of a business

•An undesirable byproduct of the economic system

•Pollution causes polluting firms to overproduce, while causing firms that pay the cost of cleaning up the pollution to underproduce

•The government can regulate the industry to minimize the pollution

•Deficient information on unsafe products can cause consumers to overconsume a product

True