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CHAPTER 15
ECONOMIC REGULATION AND ANTITRUST POLICY
In this chapter, you will find:
Learning Outcomes
Chapter Outline with PowerPoint Script
Chapter Summary
Teaching Points (as on Prep Card)
Solutions to Problems Appendix
Experiential Assignments
INTRODUCTION
This chapter examines the role of government intervention in a market economy. Perhaps the most
fundamental issue in this chapter is the rationale for government intervention in business: Is government
intervention in the public interest, or is it in the special interest of producers? The regulation and
deregulation of airlines and antitrust actions against Microsoft are examined in two case studies. Antitrust
legislation and the competitive trends in the economy are also examined.
LEARNING OUTCOMES
15-1 Describe three types of government regulation of business.
Government attempts to control business behavior with (1) social regulations, such as those aimed at
15-2 Evaluate alternative ways government can regulate a natural monopoly.
Governments regulate natural monopolies so that output is greater and prices lower than if the
15-3 Describe two alternative theories of economic regulation.
There are two views of economic regulation, which tries to reduce the harmful consequences of
15-4 Summarize the driving causes behind each of the four U.S. merger waves.
See the table below, which describes the stimulus behind each merger wave.
Chapter 15 Economic Regulation and Antitrust Policy 210
15-5 Evaluate whether the U.S. economy has become more competitive or less competitive since
1958, and explain why.
As shown by the bar graph below, competition in U.S. industries has been increasing since 1939 and
CHAPTER OUTLINE WITH POWERPOINT SCRIPT
USE POWERPOINT SLIDES 2-5 FOR THE FOLLOWING SECTION
Types of Government Regulation: Market power is the ability of a firm to raise the price without
losing all its sales to rivals.
Government Regulation of Business
• Social regulation: Government regulations trying to improve health and safety.
Chapter 15 Economic Regulation and Antitrust Policy 211
USE POWERPOINT SLIDES 6-13 FOR THE FOLLOWING SECTION
Regulating a Natural Monopoly
Unregulated Profit Maximization: An unregulated monopolist maximizes profit at the output rate where
marginal cost equals marginal revenue. The problem is the resulting price-output combination is
inefficient in terms of social welfare.
USE POWERPOINT SLIDES 14-16 FOR THE FOLLOWING SECTION
Alternative Theories of Economic Regulation
Is economic regulation in the public interest or have well-organized producer groups persuaded public
USE POWERPOINT SLIDES 17-25 FOR THE FOLLOWING SECTION
Antitrust Law and Enforcement: U.S. antitrust policy tries to promote socially desirable market
performance.
Origins of Antitrust Policy: In the last half of the 19th century, economies of scale and cheaper transport
costs extended the geographical size of markets, so firms grew larger. Due to economic turmoil in the late
1800s, competing firms formed trusts. Trusts represented any firm or group of firms that tried to
monopolize a market.
USE POWERPOINT SLIDES 26-27 FOR THE FOLLOWING SECTION
Per Se Illegality and the Rule of Reason
• Per se illegal: Business practices that are illegal regardless of their economic rationale or their
consequences. Government needs only to examine a firm’s behavior.
USE POWERPOINT SLIDES 28-32 FOR THE FOLLOWING SECTION
Chapter 15 Economic Regulation and Antitrust Policy 212
Mergers and Public Policy: If a few firms account for a relatively large share of sales, the industry is said
to be concentrated. To measure the level of sales concentration in an industry, the Justice Department uses
USE POWERPOINT SLIDES 33-36 FOR THE FOLLOWING SECTION
Competitive Trends in the U.S. Economy
USE POWERPOINT SLIDES 37-38 FOR THE FOLLOWING SECTION
Recent Competitive Trends: Growing world trade and technological change are boosting competition in
many markets, especially the market for media.
USE POWERPOINT SLIDES 39-42 FOR THE FOLLOWING SECTION
Problems with Antitrust Policy
Competition May Not Require That Many Firms: Some firms grow large because they are better
than rivals at offering what consumers want. Therefore, firm size should not be the primary concern.
CHAPTER SUMMARY
In this chapter, we examined two forms of government regulation of business: (a) economic regulation,
such as the regulation of natural monopolies, and (b) antitrust policy, which promotes competition and
prohibits efforts to monopolize, or to cartelize, an industry.
There are two views of economic regulation. The first is that economic regulation is in the public, or
consumer, interest because it controls natural monopolies where production by one or just a few firms is
most efficient. A second view is that regulation is more in the special interest of producers who use
regulations to fix the price, block entry, and increase profits.
Regulations in effect for 50 years in the airline industry restricted entry and fixed prices. Deregulation in
1978 stimulated new entry, unleashed price competition, and reduced prices overall. Price wars in the
industry are now common, and consumers benefit.
Chapter 15 Economic Regulation and Antitrust Policy 213
Competition in U.S. industries has been increasing since World War II. Four sources of increased
competition are greater international trade, deregulation, antitrust policy, and technological change.
TEACHING POINTS
1. This chapter is divided into three parts: a review of economic regulation and deregulation, an
analysis of antitrust laws, and a survey of recent trends in U.S. competitiveness.
2. Regulation of natural monopoly is reviewed early in the chapter. This introduces the central
problem with marginal-cost-pricing regulation of a natural monopoly—that is, how to control market
3. One important point to stress in discussing regulation and deregulation is that there are always
4. The text considers three pieces of antitrust legislation: the Sherman Act of 1890, the Clayton Act of
1914, and the Federal Trade Commission Act of 1914.
SOLUTIONS TO PROBLEMS APPENDIX
1. (Government Regulations) Describe the three types of government regulation of business.
Which two are discussed at length in this chapter?
Government attempts to control business behavior with (1) social regulations, such as those
2. (Business Behavior and Public Policy) Define market power, and then discuss the rationale for
government regulation of firms with market power.
A monopoly or firms acting together as a monopoly have market power—the ability to raise
price without losing all sales to rivals. If output is restricted, the marginal benefit of the last unit
Chapter 15 Economic Regulation and Antitrust Policy 214
3. (Regulating Natural Monopolies) The following graph represents a natural monopoly:
a. Why is this firm considered a natural monopoly?
b. If the firm is unregulated, what price and output would maximize its profit? What would be
its profit or loss?
c. If a regulatory commission establishes a price with the goal of achieving allocative
efficiency, what would be the price and output? What would be the firm’s profit or loss?
d. If a regulatory commission establishes a price with the goal of allowing the firm a “fair
return,” what would be the price and output? What would be the firm’s profit or loss?
e. Which of the prices in parts b, c, and d maximizes consumer surplus? What problem, if any,
occurs at this price?
a. This firm is a natural monopoly because its long-run average cost curve slopes downward
4. (Theories of Regulation) Why do producers have more interest in government regulations than
consumers do?
a. Compare and contrast the public-interest and special-interest theories of economic
regulation. What is the “capture theory” of regulation?
b. Which of these theories best describes the case of airline deregulation? Which best explains
the government’s case against Microsoft?
Producers have more interest in government regulations because it affects their livelihood,
Chapter 15 Economic Regulation and Antitrust Policy 215
a. The public-interest theory of regulation holds that regulation protects the public. According
to the special-interest theory of economic regulation, an industry may prefer to be regulated
5. (Origins of Antitrust Policy) Identify the type of anticompetitive behavior illustrated by each of
the following:
a. A university requires buyers of season tickets for its basketball games to buy season tickets
for its football games as well.
b. Dairies that bid on contracts to supply milk to school districts collude to increase what they
charge.
c. The same individual serves on the boards of directors of General Motors and Ford.
d. A large retailer sells merchandise below cost in certain regions to drive competitors out of
business.
e. A producer of soft drinks sells to a retailer only if the retailer agrees not to buy from the
producer’s major competitor.
6. (U.S. Merger Waves) Identify the four U.S. merger waves and explain the driving force
behind each.
See Exhibit 3 below—specifically the last column:
7. (Mergers and Public Policy) Calculate the Herfindahl-Hirschman Index (HHI) for each of the
following industries. Which industry is the most concentrated?
Chapter 15 Economic Regulation and Antitrust Policy 216
a. An industry with five firms that have the following market shares: 50 percent, 30 percent,
10 percent, 5 percent, and 5 percent
b. An industry with five firms that have the following market shares: 60 percent, 20 percent,
10 percent, 5 percent, and 5 percent
c. An industry with five firms, each of which has a 20 percent market share
a. Herfindahl-Hirschman Index = 3,550 = (50 2)+(30 2)+(10 2)+(5 2)+(5 2)
8. (Competitive Trends in the U.S. Economy) William Shepherd’s study of U.S. industries showed
a clear increase in competition in the U.S. economy between 1958 and 2000. How did Shepherd
explain this trend?
Shepherd attributes the increased competition to three sources: competition from imports,
Experiential Assignments
1. Find the Department of Justice and Federal Trade Commision merger guidelines at
Do these guidelines indicate that the Justice Department is using the per se illegality or rule-of-reason
approach to antitrust enforcement?
2. Microsoft’s legal issues have been ongoing since 2000. The latest information on the Justice
