Chapter 11--Government ad Product Markets...Antitrust and Regulation

Chapter 11--Government ad Product Markets...Antitrust and Regulation

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Chapter 11—Government and Product Markets: Antitrust and Regulation I. Dealing with Monopoly Power A. A monopoly produces less than a perfectly competitive firm produces (assuming the same revenue and cost conditions), charges a higher price, and causes a deadweight loss. This is the monopoly power problem, and solving it is usually put forth as a reason for antitrust laws and/or government regulatory actions. Some economists note, though, that government antitrust and regulatory actions do not always have the intended effect. In addition, they are sometimes implemented when there is no monopoly power problem to solve. II. Antitrust Laws A. Two major criticisms have been directed at the antitrust acts. 1. First, some argue that the language in the laws is vague; for example, even though the words “restraint of trade” are used in the Sherman Act, the act does not clearly explain what actions constitute a restraint of trade. 2. Second, it has been argued that some antitrust acts appear to hinder, rather than promote competition; an example of this is the Robinson-Patman Act. B. There are a few unsettled points in antitrust policy. One centers on the proper definition of a market. Should a market be defined narrowly or broadly? How this question is answered will have an impact on which firms are considered monopolies. In addition, the use of concentration ratios for identifying monopolies or deciding whether to allow two firms to enter into a merger has been called into question. Recently, concentration ratios have been largely replaced (for purposes of implementing antitrust policy) with the Herfindahl index. This index is subject to some of the same criticisms as the concentration ratios. Antitrust authorities are also beginning to consider the benefits of innovation in ruling on proposed mergers. C. The Sherman Act (1890) 1. The Sherman Act was passed when mergers of companies were common. At that time, the organization that companies formed by combining was called a trust; this in turn gave us the word antitrust . a. “Every contact, combination in the form of trust or otherwise, or conspiracy, in
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This note was uploaded on 04/16/2008 for the course ECO 1311 taught by Professor Wheaton during the Fall '07 term at SMU.

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Chapter 11--Government ad Product Markets...Antitrust and Regulation

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