201hl3.f13 - Professor C.L. Ballard Fall Semester, 2013...

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Professor C.L. BallardFall Semester, 2013ECONOMICS 201KEY CONCEPTS FROM THE FINAL PART OF THE COURSEI. Regulation and AntitrustA. An industry is a natural monopolyif a single firm can produce all of the relevant output at a loweraverage total cost than could any combination of two or more firms.This will occur where averagetotal cost is declining throughout the relevant range of output.It was once thought that electric-power utilities are natural monopolies, although there is evidence that this may not be the case.Infact, there are probably few natural monopolies, if any.B.If a natural monopoly does exist, marginal-cost pricing is problematic.Since average total cost isalways declining, marginal cost has to be less than average total cost.Thus the firm would suffereconomic losses if it were to charge a price equal to marginal cost.However, monopoly profitmaximization is also unattractive.As a result of these problems, governments have sometimesresponded by regulating industries they believe may be natural monopolies. Often, there is an attemptto guarantee a “normal” rate of return, which will mean that the firm earns zero economic profit.This would mean that the firm would be required to charge a price equal to average total cost.Theproblem with this is that it may reduce the incentives to control costs.If a regulated industry is infact not a natural monopoly, the best strategy is probably to allow new firms to enter the industry, sothat competition can take hold.C. Much of the regulation in the United States has not dealt with natural monopolies, but rather withindustries that could be very competitive.Here, the regulation has come about partly as a result ofthe political power of the industries themselves.In many cases, regulatiom stifled competition andled to higher prices.Starting in the late 1970s, deregulationsucceeded in getting lower prices inrailroads, trucking, airlines, and other industries.D. The antitrustlaws began with the Sherman Act in 1890, and were expanded by the Clayton Act in1914.The antitrust laws prohibit monopoly, price fixing, certain types of price discrimination, tiedsales, predatory pricing, and interlocking directorates.The most spectacular uses of these laws havebeen the breakups of large companies, such as Standard Oil and American Tobacco in 1911, ALCOAin 1945, and AT&T in 1984.E. Other important antitrust cases include the electrical-equipment conspiracy, in which GeneralElectric, Westinghouse, and other firms were found guilty of having fixed prices in the late 1950s.More recently, Archer, Daniels, Midland was fined for price fixing in the market for lysine in 1998.F. Not every antitrust action leads to fines or the breakup of a company.Both IBM and Microsoftwere the subject of antitrust cases, but they both managed to avoid having to break up.

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