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Chapter 27: Q.7 (page 621)
Do you think that the regulation described in Problem 27-6 is more likely an example of the capture hypothesis or the share-the-gains, share-the-pains theory? Why?
Consumer benefits must be considered by central authority, according to the share-the-gains, share-the-pains theory.
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An years past, firms around the world have secretly engaged in collusive agreements to restrain production and push prices above competitive levels.
Evidence compiled by government officials investigating such agreements has revealed that conspiring firms often utilize similar methods of establishing and enforcing collusive restraints of trade. Most agreements, for instance, assign to each firm an allowed market share, a permitted region of operations, or an approved set of customers. In addition, participating firms commonly are required to exchange sales information so that they can monitor adherence to their agreements to restrain trade. In this chapter, you will learn why firms that typically utilize these techniques to formulate and maintain collusive agreements engage in secret conspiracies: Such agreements are illegal under U.S. antitrust laws.
Identify alternative theories aimed at explaining the behavior of regulators
Recently, a food retailer called Whole Foods sought to purchase Wild Oats, a competitor in the market for organic foods. When the Federal Trade Commission (FTC) sought to block this merger on antitrust grounds, FTC officials argued that such a merger would dramatically increase concentration in the market for "premium organic foods." Whole Foods' counterargument was that it considered itself to be part of the broadly defined supermarket industry that includes retailers such as Albert sons, Kroger, and Safeway. What key issue of antitrust regulation was involved in this dispute? Explain.
As noted in the chapter, separating the production of electricity from its delivery has led to considerable deregulation of producers.
a. Briefly explain which of these two aspects of the sale of electricity remains susceptible to natural monopoly problems.
b. Suppose that the potential natural monopoly problem you identified in part (a) actually arises. Why is marginal cost pricing not a feasible solution? What makes average cost pricing a feasible solution?
c. Discuss two approaches that a regulator could use to try to implement an average-cost-pricing solution to the problem identified in part (a).
Manufacturing firms based in Columbus, Ohio, and Erie, Pennsylvania, have proposed a merger. If they were to merge, the resulting value of the Herfindahl-Hirschman Index in the nationwide market for the product they produce would rise from 1,400 to 1,800. Under current U.S. antitrust guidelines, would this proposed merger raise concerns for the U.S. Justice Department or Federal Trade Commission?
The table below depicts the cost and demand structure a natural monopoly faces.
a. Calculate total revenues, marginal revenue, and marginal cost at each output level. If this firm is allowed to operate as a monopolist, what will be the quantity produced and the price charged by the firm? What will be the amount of monopoly profit? [Hint: Recall that marginal revenue equals the change in total revenues from each additional unit and that marginal cost equals the change in total costs from each additional unit.]
b. If regulators require the firm to practice marginal cost pricing, what quantity will it produce, and what price will it charge? What is the firm's profit under this regulatory framework? [Hint: Recall that average total cost equals total cost divided by quantity and that profits equal .
c. If regulators require the firm to practice average cost pricing, what quantity will it produce, and what price will it charge? What is the firm's profit under this regulatory framework?
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