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What is a trust?
•A combination or cartel consisting of firms that place their assets in the custody of a board of trustees
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What ispredatory pricing?
•The practice of one or more firms temporarily reducing prices in order to eliminate competition and then raising prices
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When was the age of the robberbarons?
in the later part of the 1800's
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What was done to limit the powerof trusts?
•Congress passed laws aimed at preventing firms from engaging in anticompetitive activities
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What is theSherman Act?
•The federal antitrust law enacted in 1890 that prohibits monopolization and conspiracies to restrain trade
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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
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What business practices weredeclared illegal under the Clayton Act?
•Price discrimination•Exclusive dealing•Tying contracts•Stock acquisition of competing companies•Interlocking directorates
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Was the Clayton Act animprovement over the Sherman Act?
•Although more specific than the Sherman Act, the Clayton Act is also vague
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What is the Federal TradeCommission Act?
•The federal act that in 1914 established the Federal Trade Commission (FTC) to investigate unfair competition
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What is theRobinson-Patman Act?
•A 1936 amendment to the Clayton Act that strengthens the Clayton Act against price discrimination
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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
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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
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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
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What was the outcome of theStandard Oil Case?
The rule of reason
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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
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What was the outcome of the Alcoacase?
The per se rule
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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
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What was the result of the IBMcase (1982)?
A switch back to the rule of reason
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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
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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
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What was the Microsoft case of2001?
•This case charged Microsoft with predatory pricing by tying its monopoly in Windows to its Internet Explorer browser
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How can firms avoid charges ofprice fixing?
•They can merge into one company
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When did a lot of mergers begin taking place
In the 1980's
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What are the different types ofmergers?
-horizontal -vertical -conglomerate
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What is ahorizontal merger?
•A merger of firms that competes in the same market
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What is avertical merger?
a merger of a firm with its suppliers
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What is aconglomerate merger?
•A merger between firms in unregulated markets
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What can be said about conglomerate mergers?
•They are generally allowed because they do not significantly decrease competition
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What can be said about antitrustlaws in other countries?
•They are weak in comparison to U.S. antitrust laws
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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
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What is the basic argument infavor of government regulation?
Market failure
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In what ways does the marketfail?
•Natural monopoly•Externalities•Imperfect information
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What is anatural monopoly?
•An industry in which long-run average cost is minimized when only one firm serves the market
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What is marginal cost pricing?
•A system of pricing in which the price charged equals the marginal cost of the last unit produced
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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
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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
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What kind of profit is made atthefair return price?
Normal Profit
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What is anormal profit?
•The accounting profit required to induce a firm’s owners to employ their resources in the firm
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Do production costs includenormal profit?
•Yes, because normal profit is considered a necessary expense of a business
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What is anegative externality?
•An undesirable byproduct of the economic system
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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
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What can be done when pollutionis present?
•The government can regulate the industry to minimize the pollution
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What happens with imperfectinformation?
•Deficient information on unsafe products can cause consumers to overconsume a product
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Consumers informed of defect--> decrease in demand--> Decrease in quantity supplied
T/F
True
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