Samuelson's book Summary Chapter 17

Chapter 17 Summary

A. Business Regulation: Theory and Practice 1. Regulation consists of government rules commanding firms to alter their business conduct. Economic regulation involves the control of prices, production, entry and exit conditions, and standards of service in a particular industry; social regulation consists of rules aimed at correcting information failures and externalities, particularly those that impinge on health and safety and the environment. 2. The normative view of regulation is that government intervention is appropriate when there are major market failures. These include excess market power in an industry, inadequate supply of information to consumers and workers, and externalities such as pollution. Economists have developed a positive theory of regulation in which regulation often serves the purpose of actually benefitting regulated firms, whose interests are furthered by exclusion of potential rivals. 3. The strongest case for economic regulation comes in regard to natural monopolies. Natural monopoly occurs when average costs are falling for every level of output, so the most efficient organization of the industry requires production by a single firm. Few industries come close to this condition today - perhaps only local utilities like water and electricity. 4. In conditions of natural monopoly, governments regulate the price and service of private companies. Traditionally, government regulation of monopoly has required that price be set at the average cost of production. The ideal regulation would require price to be set equal to marginal cost, but this approach is impractical because it requires that government subsidize the monopolist. A new approach is performance-based regulation, such as price caps, which provides superior incentives to regulated firms to reduce costs and improve productivity. 5. Given the strength of competitive forces, particularly from the global marketplace, the case for economic regulation holds for few industries today. The deregulation movement of the 1970s reduced the extent of economic regulation markedly, producing gains in industries such as the airlines. B. Antitrust Policy 6. Antitrust policy, prohibiting anticompetitive conduct and preventing monopolistic structures, is the primary way that public policy limits abuses of market power by large firms. This policy grew out of legislation like the Sherman Act (1890) and the Clayton Act (1914). The primary purposes of antitrust are (a) to prohibit anticompetitive activities (which include agreements to fix prices or divide up territories, price discrimination, and tie-in agreements) and (b) to break up monopoly structures. In today's legal theory, such structures are those that have excessive market power (a large share of the market) and also engage in anticompetitive acts. 7. In addition to limiting the behavior of existing firms, antitrust law prevents mergers that would lessen competition. Today, horizontal mergers (between firms in the same industry) are the main source of concern, while vertical and conglomerate mergers tend to be tolerated. 8. Antitrust policy has been significantly influenced by economic thinking during the last three decades. As a result, antitrust policy now focuses almost exclusively on improving efficiency and ignores earlier populist concerns with bigness itself. Moreover, in today's economy - with intense competition from foreign producers and deregulated rivals - many believe that antitrust policy should concentrate primarily on preventing collusive agreements like price fixing.