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Ch018EndOfChapterQuestions - Antitrust Policy and...

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Antitrust Policy and Regulation ANSWERS TO END-OF-CHAPTER QUESTIONS 30-1 Both antitrust policy and industrial regulation deal with monopoly. What distinguishes the two approaches? How does government decide to use one form of regulation rather than the other? One of the goals of government in a market economy is to promote competition as a way of achieving efficiency. One approach is to maintain competition by using antitrust laws to discourage the creation of excess monopoly power such as through mergers or by taking action against a firm that is abusing its monopoly power. The other approach, particularly in cases where there is a natural monopoly, is for the government to regulate the firm. The government will choose an approach by analyzing the structure of the industry, the cost structure of the firm, the impact of the firm’s actions on its competitors and customers, industry technology, and the likelihood of new competitors entering the industry. 30-2 ( Key Question ) 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? Sherman Act: Section 1 prohibits conspiracies to restrain trade; Section 2 outlaws monopolization. Clayton Act (as amended by Celler-Kefauver Act of 1950): Section 2 outlaws price discrimination; Section 3 forbids tying contracts; Section 7 prohibits mergers which substantially lessen competition; Section 8 prohibits interlocking directorates. The acts are enforced by the Department of Justice, Federal Trade Commission, and state attorneys general. Private firms can bring suit against other firms under these laws. 30-3 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? In the Standard Oil case the government ruled that Standard Oil has monopolized the petroleum industry through abusive and anticompetitive actions. Standard Oil was divided into several competing firms, but the court decision did not resolve the issue of whether every monopoly was illegal, or just those formed by anticompetitive practices. The U.S. Steel case determined that not every monopoly violated the Sherman Act. U.S. Steel, though large and possessing monopoly power, had not obtained its monopoly power illegally, and therefore had not violated the law. The issue in the DuPont cellophane case was the size of the relevant market. Because it was ruled to be operating in the “flexible wrapping materials” market and only held a 20 percent market share (versus 100 percent in the cellophane market), DuPont was not considered to be a monopoly.
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