Unit 12: Economic Regulation and Antitrust Policy

Question 1

Market Power

Answer 1

The ability of a firm to raise its price without losing all its customers to rival firms

Question 2

Social Regulation

Answer 2

Government regulation aimed at improving health and safety

Question 3

Economic Regulation

Answer 3

Government regulation of natural monopoly, where, because of economies of scale, average production cost is lowest when a single firm supplies the market

PUCO – Public Utilities Commission of Ohio

Question 4

Antitrust Policy

Answer 4

Government regulation aimed at preventing monopoly and fostering competition in markets where competition is desirable

Question 5

Public Utilities

Answer 5

Government-owned or government-regulated monopolies
JFK Jr. Fluoride

Question 6

Capture Theory of Regulation

Answer 6

Producers’ political power and strong stake in the regulatory outcome lead them, in effect, to “capture”

Question 7

Trust

Answer 7

Any firm or group of firms that tries to monopolize a market

Question 8

Sherman Antitrust Act of 1890

Answer 8

First national legislation in the world against monopolies; prohibited trusts, restraint of trade, and monopolization, but the law was vague and by itself, ineffective

Question 9

Clayton Act of 1914

Answer 9

Outlawed certain anticompetitive practices not prohibited by the Sherman Act, including price discrimination, tying contracts, exclusive dealing, interlocking directorates, and buying the corporate stock of a competitor

Question 10

Tying Contract

Answer 10

A seller of one good requires a buyer to purchase other goods as part of the deal

Question 11

Interlocking Directorate

Answer 11

A person serves on the boards of directors of two or more competing firms

Question 12

Federal Trade Commission (FTC) of 1914

Answer 12

Established a federal body to help enforce antitrust laws; run by commissioners assisted by economists and lawyers
Justice Department

Question 13

Horizontal Merger

Answer 13

A merger in which one firm combines with another that produces the same type of product

Question 14

Vertical Merger

Answer 14

A merger in which on firm combines with another from which it had purchased inputs or to which it had sold outputs

Question 15

Consent Decree

Answer 15

The accused party, without admitting guilt, agrees not to do whatever it was charged with if the government drops the charges

Question 16

Per se Illegal

Answer 16

In antitrust law, business practices deemed illegal, regardless of their economic rationale or their consequences

Question 17

Rule of Reason

Answer 17

Before ruling on the legality of a business practice, a court examines why it was undertaken and what effect it has on competition

Question 18

Predatory Pricing

Answer 18

Pricing tactics employed by a dominant firm to drive competitors out of business, such as temporarily selling below marginal costs or dropping the price only in certain markets

Question 19

Herfindahl-Hirschman Index, (HHI)

Answer 19

A measure of market concentration that squares each firm’s percentage share of the market then sums these squares

Question 20

Conglomerate Merger

Answer 20

A merger of firms in different industries