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Chapter 21 – Antitrust Policy and Regulation
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DISCUSSION QUESTIONS
1. Both antitrust policy and industrial regulation deal with monopoly. What distinguishes the two
approaches? How does government decide to use one form of remedy rather than the other? LO1,
LO3
2. Describe the major provisions of the Sherman and Clayton acts. What government entities are
responsible for enforcing those laws? Are firms permitted to initiate antitrust suits on their own
against other firms? LO1
3. Contrast the outcomes of the Standard Oil and U.S. Steel cases. What was the main antitrust
issue in the DuPont cellophane case? In what major way do the Microsoft and Standard Oil cases
differ? LO2
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4. Why might one administration interpret and enforce the antitrust laws more strictly than
another? How might a change of administrations affect a major monopoly case in progress? LO2
5. Suppose a proposed merger of firms would simultaneously lessen competition and reduce unit
costs through economies of scale. Do you think such a merger should be allowed? LO2
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6. In the 1980s, PepsiCo Inc., which then had 28 percent of the soft-drink market, proposed to
acquire the Seven-Up Company. Shortly thereafter the Coca-Cola Company, with 39 percent of
the market, indicated it wanted to acquire the Dr Pepper Company. Seven-Up and Dr Pepper each
controlled about 7 percent of the market. In your judgment, was the government’s decision to
block these mergers appropriate? LO2
7. Why might a firm charged with violating the Clayton Act, Section 7, try arguing that the
products sold by the merged firms are in separate markets? Why might a firm charged with
violating Section 2 of the Sherman Act try convincing the court that none of its behavior in
achieving and maintaining its monopoly was illegal? LO2
8. “The social desirability of any particular firm should be judged not on the basis of its market
share but on the basis of its conduct and performance.” Make a counterargument, referring to the
monopoly model in your statement. LO2
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9. What types of industries, if any, should be subjected to industrial regulation? What specific
problems does industrial regulation entail? LO3
10. In view of the problems involved in regulating natural monopolies, compare socially optimal
(marginal-cost) pricing and fair-return pricing by referring again to Figure 12.9. Assuming that a
government subsidy might be used to cover any loss resulting from marginal-cost pricing, which
pricing policy would you favor? Why? What problems might such a subsidy entail? LO3
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11. How does social regulation differ from industrial regulation? What types of benefits and costs
are associated with social regulation? LO4
12. Use economic analysis to explain why the optimal amount of product safety may be less than
the amount that would totally eliminate risks of accidents and deaths. Use automobiles as an
example. LO4
13. LAST WORD On what basis were the airlines found guilty of violating antitrust laws in the
Airline Tariff Publishing case? What was the remedy? By contrast, why might it be hard to
prosecute algorithmic collusion, which also uses prices posted electronically?
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REVIEW QUESTIONS
1. True or false. Under the “rule of reason” that was established by the Supreme Court in the U.S.
Steel case, a monopoly seller should be found guilty of violating antitrust laws even if it is
charging low prices to consumers and acting the same way a competitive firm would act. LO1
Answer: False
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2. How would you expect antitrust authorities to react to: LO2
a. A proposed merger of Ford and General Motors.
b. Evidence of secret meetings by contractors to rig bids for highway construction projects.
c. A proposed merger of a large shoe manufacturer and a chain of retail shoe stores.
d. A proposed merger of a small life-insurance company and a regional candy manufacturer.
e. An automobile rental firm that charges higher rates for last-minute rentals than for rentals
reserved weeks in advance.
3. When confronted with a natural monopoly that restricts output and charges monopoly prices,
the two methods that governments have for promoting better outcomes are: LO3
a. Public ownership and public regulation.
b. Sole proprietorships and public goods.
c. Antitrust law and horizontal mergers.
d. Creative destruction and laissez-faire.
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4. Which of the following is the correct name for the idea that certain firms prefer government
regulation because regulation shields them from the pressures of competition and, in effect,
guarantees them a regulated profit? LO3
a. The public interest theory of regulation.
b. The Structuralists’ theory of monopoly.
c. The legal cartel theory of regulation.
d. The public regulation theory of natural monopoly.
5. True or false. Economists believe that social regulation is an exception to the MB = MC rule
because social regulation should in every case extend as far as possible in order to ensure safe
products, less pollution, and improved working conditions. LO4
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PROBLEMS
1. Suppose that there are only three types of fruit sold in the United States. Annual sales are 1
million tons of blueberries, 5 million tons of strawberries, and 10 million tons of bananas.
Suppose that of those total amounts, the Sunny Valley Fruit Company sells 900,000 tons of
blueberries, 900,000 tons of strawberries, and 7.9 million tons of bananas. LO2
a. What is Sunny Valley’s market share if the relevant market is blueberries? If a court applies the
“90–60–30 rule” when considering just the blueberry market, would it rule that Sunny Valley is a
monopoly?
b. What is Sunny Valley’s market share if the relevant market is all types of berries? Would the
court rule Sunny Valley to be monopolist in that market?
c. What if the relevant market is all types of fruit? What is Sunny Valley’s market share, and
would the court consider Sunny Valley to be a monopolist?
Answers: (a) Sunny Valley’s market share in blueberries is 90%; yes.
(b) If the relevant market is all berries, then Sunny Valley’s market share is 30.0%;
no.
(c) If the relevant market is all fruit, then Sunny Valley’s market share is 61%;
likely.
Feedback: Courts often decide whether or not market power exists by considering the
share of the market held by the dominant firm. They have roughly adhered to a “90–60–30
rule” in defining monopoly: If a firm has a 90 percent market share, it is definitely a
monopolist; if it has a 60 percent market share, it probably is a monopolist; if it has a 30
percent market share, it clearly is not a monopolist. The market share will depend on how
the market is defined.
Part a:
Sunny Valley’s market share is 90% of the relevant market is blueberries.
Annual sales of blueberries are 1 million tons and Sunny Valley sells 900,000 tons of
Part b:
Sunny Valley’s market share is 30% of the relevant market is all berries.
Annual sales of blueberries are 1 million tons and annual sales of strawberries are 5
million tons. Sunny Valley sells 900,000 tons of blueberries in the market and sells
900,000 tons of strawberries in the market.
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Based on the 90-60-30 rule Sunny Valley would not be ruled a monopolist.
Part c:
Sunny Valley’s market share is 61% of the relevant market is all types of fruit. Annual
sales of blueberries are 1 million tons, annual sales of strawberries are 5 million tons, and
annual sales of bananas are 10 million tons. Sunny Valley sells 900,000 tons of
blueberries in the market, sells 900,000 tons of strawberries in the market, and sells 7.9
million tons of bananas.
2. Carrot Computers and its competitors purchase touch screens for their tablet computers from
several suppliers. The six makers of touch screens have market shares of, respectively, 19
percent, 18 percent, 14 percent, 16 percent, 20 percent, and 13 percent. LO2
a. What is the Herfindahl index for the touch screen manufacturing industry?
b. By how much would a proposed merger between the two smallest touch screen makers
increase the Herfindahl index? Would the government be likely to challenge that proposed
merger?
c. If Carrot Computers horizontally merges with its competitor Blueberry
Handhelds, by how much would the Herfindahl index change for the touch screen industry?