Chapter 13/Limiting Market Power: Regulation and Antitrust
CHAPTER 13
LIMITING MARKET POWER: REGULATION
AND ANTITRUST
DISCUSSION QUESTIONS
1. Why is an electric company in a city often considered to be a natural
monopoly? What would happen if two competing electric companies were
established? How about telephone companies? How can changes in technology
affect your answer?
Electric companies and telephone companies usually have declining average costs
as more customers are added and more use is made of their services. A large part of the
2. Suppose that a 20 percent cut in the price of coast-to-coast telephone calls
brings in so much new business that it permits a long-distance telephone company to
cut its charges for service from Chicago to St. Louis, but only by 2 percent. In your
opinion, is this practice equitable? Is it a good idea or a bad one?
If a cut in the price of coast-to-coast telephone calls brings in so much business
that it allows the long-distance carrier to reduce the price of Chicago to St. Louis calls,
3. In some regulated industries, regulatory agencies prevented prices from
falling, and as a result many firms opened for business in those industries. In your
opinion, is this kind of regulation competitive or anticompetitive? Is it a good idea or
a bad one?
When a regulatory agency imposes a price floor, it may encourage more firms to
enter the industry, but it does not really encourage competition. The point of having many
4. Regulators are highly concerned about the prevention of “predatory
pricing.” The U.S. Court of Appeals has noted, however, that “the term probably
does not have a well-defined meaning, but it certainly bears a sinister connotation.”
How might one distinguish “predatory” from “nonpredatory” pricing? What would
you do about it?
A court should not find a price predatory and illegal simply because it is lower
than other competitors can meet, if the low price can be sustained by the company. In
Chapter 13/Limiting Market Power: Regulation and Antitrust
5. Do you think that it is fair or unfair for rural users of telephone service to be
cross-subsidized by other telephone users?
Students will have their own criteria for fairness. But it is helpful to approach this
question by thinking of what the alternative is to having urban telephone users subsidize
6. To provide incentives for increased efficiency, several regulatory agencies
have eliminated ceilings on the profits of regulated firms but instead put caps on
their prices. Suppose that a regulated firm manages to cut its prices in half, but in
the process it doubles its profits. Should rational consumers consider this to be a
good or a bad development? Why?
Rational consumers should consider any fall in price to be a good development,
7. A shopkeeper sells his store and signs a contract that restrains him from
opening another store in competition with the new owner. The courts have decided
that this contract is a reasonable restraint of trade. Can you think of any other types
of restraint of trade that seem reasonable? Can you think of any that seem
unreasonable?
An agreement between a library and construction firms under which the firms
agree to limit their hours of work in the neighborhood would seem to be a reasonable
8. Which of the following industries do you expect to have high concentration
ratios: automobile production, aircraft manufacture, computer and electronics
production, pharmaceuticals, production of expensive jewelry? Compare your
answers with the data in Table 2.
As of 2007, aircraft manufacture had the highest concentration ratio (81.3),
9. Why do you think the specific industries you selected in Discussion Question
8 are highly concentrated?
Automobiles and aircraft are two industries that are highly mechanized and in
which huge fixed costs lead to substantial economies of scale. In these cases, therefore,
10. Do you think it is in the public interest to launch an antitrust suit that costs $1
billion? What leads you to your conclusion?
11. In Japan and a number of European countries, the antitrust laws were once much
less severe than those in the United States. Do you think that this difference helped
or harmed American industry in its efforts to compete with foreign producers?
Why?
12. Can you think of some legal rules that may discourage the use of antitrust laws to
prevent competition while at the same time not interfering with legitimate antitrust
actions?
Antitrust laws can discourage competition if they are used against a company that
has grown larger simply because it has performed better than other firms in the industry,
13. During the oil crisis in the 1970s, long lines at gas stations disappeared soon after
price controls were removed and gas prices were permitted to rise. Should this event
be interpreted as evidence that the oil companies have monopoly power? Why or
why not?
Nothing in the question indicates that oil companies have monopoly power. The
supply and demand curves might be as shown in Figure 1 below. A price ceiling of PC
Chapter 13/Limiting Market Power: Regulation and Antitrust
FIGURE 1
14. Some economists believe that firms rarely attempt predatory pricing because it
would be a very risky act even if it were legal. Why may this be so?
Predatory pricing exists when a firm temporarily reduces its price below the
profit-maximizing level, in order to force other, weaker firms to reduce their prices, in the
15. Firm X cuts its prices, and competing Firm Y soon goes out of business. How would
you judge whether this price cut was an act of legitimate and vigorous competition
or an anticompetitive act?
This is very similar to question 4 about predatory pricing. To distinguish between
an anticompetitive act and a legitimate competitive act one should identify potential