Self-Check Questions

unregulated monopoly to raise price and reduce output, the government may wish to regulate price and/or output. Common examples of regulation are public utilities, the regulated firms that often provide electricity and water service. Cost-plus regulation refers to government regulating a firm which sets the price that a firm can charge over a period of time by looking at the firm’s accounting costs and then adding a normal rate of profit. Price cap regulation refers to government regulation of a firm where the government sets a price level several years in advance. In this case, the firm can either earn high profits if it manages to produce at lower costs or sell a higher quantity than expected or suffer low profits or losses if costs are high or it sells less than expected.

11.4 The Great Deregulation Experiment

The U.S. economy experienced a wave of deregulation in the late 1970s and early 1980s, when the government eliminated a number of regulations that had set prices and quantities produced in a number of industries. Major accounting scandals in the early 2000s and, more recently, the Great Recession have spurred new regulation to prevent similar occurrences in the future. Regulatory capture occurs when the regulated industries end up having a strong influence over what regulations exist.

Self-Check Questions

1 . Is it true that a merger between two firms that are not already in the top four by size can affect both the four-firm concentration ratio and the Herfindahl-Hirschman Index? Explain briefly. 2 . Is it true that the four-firm concentration ratio puts more emphasis on one or two very large firms, while the Herfindahl-Hirschman Index puts more emphasis on all the firms in the entire market? Explain briefly. 3 . Some years ago, two intercity bus companies, Greyhound Lines, Inc. and Trailways Transportation System, wanted to merge. One possible definition of the market in this case was “the market for intercity bus service.” Another possible definition was “the market for intercity transportation, including personal cars, car rentals, passenger trains, and commuter air flights.” Which definition do you think the bus companies preferred, and why? 4 . As a result of globalization and new information and communications technology, would you expect that the definitions of markets that antitrust authorities use will become broader or narrower? 5 . Why would a firm choose to use one or more of the anticompetitive practices described in Regulating Anticompetitive Behavior? 6 . Urban transit systems, especially those with rail systems, typically experience significant economies of scale in operation. Consider the transit system data in Table 11.4. Note that the quantity is in millions of riders. Demand: Quantity 1 2 3 4 5 6 7 8 9 10 Price 10 9 8 7 6 5 4 3 2 1 Marginal Revenue 10 8 6 4 2 0 –2 –4 –6 –8 Costs: Marginal Cost 9 6 5 3 2 3 4 5 7 10 Average Cost 9 7.5 6.7 5.8 5 4.7 4.6 4.6 4.9 5.4 TABLE 11.4 Draw the demand, marginal revenue, marginal cost, and average cost curves. Do they have the normal shapes? 7 . From the graph you drew to answer Exercise 11.6, would you say this transit system is a natural monopoly? Justify. Use the following information to answer the next three questions. In the years before wireless phones, when telephone technology required having a wire running to every home, it seemed plausible that telephone service had diminishing average costs and might require regulation like a natural monopoly. For most of the twentieth century, the national U.S. phone company was AT&T, and the company functioned as a regulated monopoly. Think about the deregulation of the U.S. telecommunications industry that has occurred over the last few decades. (This is not a research assignment, but a thought assignment based on what you have learned in this chapter.) 8 . What real-world changes made the deregulation possible? 9 . What are some of the benefits of the deregulation? 10 . What might some of the negatives of deregulation be?

Review Questions

11 . What is a corporate merger? What is an acquisition? 12 . What is the goal of antitrust policies? 13 . How do we measure a four-firm concentration ratio? What does a high measure mean about the extent of competition? 14 . How do we measure a Herfindahl-Hirschman Index? What does a low measure mean about the extent of competition? 15 . Why can it be difficult to decide what a “market” is for purposes of measuring competition? 16 . What is a minimum resale price maintenance agreement? How might it reduce competition and when might it be acceptable? 17 . What is exclusive dealing? How might it reduce competition and when might it be acceptable? 18 . What is a tie-in sale? How might it reduce competition and when might it be acceptable? 19 . What is predatory pricing? How might it reduce competition, and why might it be difficult to tell when it should be illegal? 20 . If public utilities are a natural monopoly, what would be the danger in deregulating them? 21 . If public utilities are a natural monopoly, what would be the danger in splitting them into a number of separate competing firms? 22 . What is cost-plus regulation? 23 . What is price cap regulation? 24 . What is deregulation? Name some industries that have been deregulated in the United States. 25 . What is regulatory capture? 26 . Why does regulatory capture reduce the persuasiveness of the case for regulating industries for the benefit of consumers?

Critical Thinking Questions

27 . Does either the four-firm concentration ratio or the HHI directly measure the amount of competition in an