Economics of Regulation and

Antitrust
Dr. David Loomis
Lecture 2
Antitrust Overview / Monopolization
Antitrust laws
- another government control of the market
Sherman Act (1890)
Section 1 : Prohibits contracts, combinations,
or conspiracies in restraint of trade (e.g.
collusion among rivals regarding prices or
territories)
Section 2: Prohibits monopolization or
attempts to monopolize a market

Antitrust laws
Clayton Act (1914)
Section 2: Prohibits anticompetitive price
discrimination
Section 3 Prohibits anticompetitive exclusive
dealing and tie-in sales
Section 7: Limits mergers that may lessen
competition
Private suits under Clayton act bring treble
(3X) damages


Antitrust laws
FTC Act (1914)
Section 5: Outlaws unfair methods of
competition (leaving it up to the FTC to define
what is unfair in specific contexts).


Monopolization
Structure-Conduct-Performance Paradigm
Structure (number and size of firms, their cost and
demand conditions, the nature of their products,
condition of entry and degree of regulation)
Conduct (decision about pricing and output, investment,
marketing, and product design)
Performance (allocative efficiency, profitability, equity,
employment effects and rate of innovation)

Monopolization
Market Structure Measurements
Concentration Ratio -the percentage of total
sales in an industry made by the n largest firms in
that industry. (Can be different if measured by
assets or employment - see AT&T market share)
Herfindahl Index

=
|
.
|

\
|
=
N
i
i
T
x
H
1
2
Monopolization
Market Structure Measurements
Where N is the number of firms, x
i
is the amount of
industry sales made by firm i, and T is the total
industry sales.
Ranges from 0 to 1 (or if market shares are
expressed in percents, 0 to 10,000.)
If H is over 1800, highly concentrated.
If 1000-1800, moderately concentrated.
Under 1000, unconcentrated.
Monopolization
Market Structure Measurements
WHAT IS THE RELEVANT MARKET?
Product Market - own elasticity of demand (% change
in quantity over % change in price) more elastic more
substitutes
Cross elasticity of demand (% change in quantity of
good x over % change in price of good y) positive for
goods that are substitutes. Negative for goods that are
complements
Geographic market - local, state, national,
international. Transportation costs play a part.
Monopolization
Conduct Measures
Predatory pricing - cutting prices below its and its
competitors costs in order to drive out the rivals
from the market. Areeda-Turner Rule - pricing
below AVC.
Limit pricing - setting a price low enough to
discourage entry, to guarantee getting lower
profits for a longer time.
Monopolization
Performance Measures
Lerner Index
The greater the L (with a limit of 1), the greater the
divergence from its perfectly competitive level.
(MC is hard to measure)
Bain index - tries to measure economic profits

P
MC P
L

=
Monopolization
Is structural evidence enough to prove monopolization?
(Williamson article)
No, could be caused by business acumen or historical
accident and victor deserves the spoils
Yes, managerial skills are in great supply and can be
transferable and an accident should be self-correcting
over time and victor shouldnt get spoils forever.
Williamson p. 1524, [S]ection 2 of the Sherman Act should
be interpreted by the courts to require a finding that
persistent dominance is presumptively unlawful,
provided only that the industry can be judged to have
reached an advanced stage of development.