Chapter 28IntroductionLearning ObjectivesLearning Objectives (cont'd)Chapter OutlineDid You Know That...Forms of Industry RegulationFigure 28-1 Regulation on the RiseForms of Industry Regulation (cont'd)Slide 10Slide 11Slide 12Table 28-1 Federal Agencies Engaged in Social RegulationRegulating Natural MonopoliesRegulating Natural Monopolies (cont'd)Figure 28-2 Profit Maximization and Regulation Through Marginal Cost Pricing, Panel (a)Figure 28-2 Profit Maximization and Regulation Through Marginal Cost Pricing, Panel (b)Profit Maximization and Regulation Through Marginal Cost PricingSlide 19Slide 20International Policy Example: Time to Break Up the Irish Cellphone Duopoly?Regulating Nonmonopolistic IndustriesRegulating Nonmonopolistic Industries (cont'd)Slide 24Slide 25Incentives and Costs of RegulationIncentives and Costs of Regulation (cont'd)Slide 28Example: How Dare You Get Ahead of Me in that HOV Lane!Slide 30Slide 31Slide 32Slide 33Figure 28-3 The Distribution of Federal Regulatory SpendingSlide 35Antitrust PolicyTable 28-2 Key U.S. Antitrust LawsAntitrust Policy (cont'd)Slide 39Slide 40Slide 41Slide 42Slide 43Slide 44Antitrust EnforcementAntitrust Enforcement (cont'd)E-Commerce Example: Microsoft’s Market SharesSlide 48Slide 49Slide 50Slide 51Slide 52Issues and Applications: Identifying the Relevant Telecommunications MarketTable 28-3 Shares of Industry Sales in Alternative Markets for Broadband Internet AccessSummary Discussion of Learning ObjectivesSummary Discussion of Learning Objectives (cont'd)Slide 57Slide 58Slide 59End of Chapter 28Chapter 28Regulation and Antitrust Policyin a Globalized EconomyCopyright © 2008 Pearson Addison Wesley. All rights reserved.28-2IntroductionIn 1997, the U.S. government ruled out a proposed merger between two companies.Only eight years later, the two companies, AT&T and SBC, were allowed to merge. To understand this shift in the government’s view, you will have to learn more about antitrust policy.Copyright © 2008 Pearson Addison Wesley. All rights reserved.28-3Learning Objectives•Distinguish between economic regulation and social regulation•Recognize practical difficulties that arise when regulating the prices charged by natural monopolies•Explain the main rationales for government regulation of industries that are not inherently monopolisticCopyright © 2008 Pearson Addison Wesley. All rights reserved.28-4Learning Objectives (cont'd)•Identify alternative theories aimed at explaining the behavior of regulators•Understand the foundations of antitrust laws and regulations•Discuss basic issues that arise in efforts to enforce antitrust lawsCopyright © 2008 Pearson Addison Wesley. All rights reserved.28-5Chapter Outline•Forms of Industry Regulation•Regulating Natural Monopolies •Regulating Nonmonopolistic Industries•Incentives and Costs of Regulation•Antitrust Policy•Antitrust EnforcementCopyright © 2008 Pearson Addison Wesley. All rights reserved.28-6Did You Know That...•The twenty-five member nations of the European Union (EU) are in a transition toward a “regulatory regime” known as REACH—an acronym that stands for “registration, evaluation, and restriction of chemicals?”•Many European companies are contemplating withdrawing a wide variety of chemicals from the market—not because they are dangerous, but because the costs of compliance will exceed the revenues from halting sales.Copyright © 2008 Pearson Addison Wesley. All rights reserved.28-7Forms of Industry Regulation•The U.S. government began regulating social and economic activity early in the nation’s history.•The amount of government regulation began increasing in the twentieth century.Copyright © 2008 Pearson Addison Wesley. All rights reserved.28-8Figure 28-1 Regulation on the RiseCopyright © 2008 Pearson Addison Wesley. All rights reserved.28-9Forms of Industry Regulation (cont'd)•There are two basic types of government regulation.1. Economic regulation of natural monopolies and nonmonopolistic industries2. Social regulation which covers all industriesCopyright © 2008 Pearson Addison Wesley. All rights reserved.28-10Forms of Industry Regulation (cont'd)•Economic regulation of natural monopoliesInitially, most economic regulation in the United States was aimed at controlling prices in industries considered natural monopolies.Over time, federal and state governments have sought to influence products and processes of firms in a variety of industries.Copyright © 2008 Pearson Addison Wesley. All rights reserved.28-11Forms of Industry Regulation (cont'd)•Economic regulation of nonmonopolistic industriesSecurities (SEC)Banking (Fed, FDIC, Comptroller)Transportation (FAA)Communications (FCC)Copyright © 2008 Pearson Addison Wesley. All rights reserved.28-12Forms of Industry Regulation (cont'd)•Social regulationThe aim is better quality of lifeImproved productsLess pollutionBetter working conditionsCopyright © 2008 Pearson Addison Wesley. All rights reserved.28-13Table 28-1 Federal Agencies Engaged in Social RegulationCopyright © 2008 Pearson Addison Wesley. All rights reserved.28-14Regulating Natural Monopolies•Theory of natural monopoly regulation includes our understandingUnregulated natural monopolyImpracticality of marginal cost pricingAverage cost pricingCopyright © 2008 Pearson Addison Wesley. All rights reserved.28-15Regulating Natural Monopolies (cont'd)•RecallNatural monopoly is a monopoly arising from the peculiar production characteristics in an industry.It usually arises when there are large economies of scale relative to the industry’s demand.One firm can produce at a lower average cost than can be achieved by multiple firms.Copyright © 2008 Pearson Addison Wesley. All rights reserved.28-16Figure 28-2 Profit Maximization and Regulation Through Marginal Cost Pricing, Panel (a)Max profits at point A where marginal cost equals marginal revenueCopyright © 2008 Pearson Addison Wesley. All rights reserved.28-17Figure 28-2 Profit Maximization and Regulation Through Marginal Cost Pricing, Panel (b)Losses eventually drive the natural monopolist out of businessCopyright © 2008 Pearson Addison Wesley. All rights reserved.28-18Profit Maximization and Regulation Through Marginal Cost PricingAverage Cost PricingRegulatory goal: P = ATC•Set price at P1 where ATC = D•Output = Q2•P = ATC•Normal rate of returnCopyright © 2008 Pearson Addison Wesley.