Economics of Regulation and Antitrust - 3rd Edition

by W. Kip Viscusi, John M. Vernon and Joseph E. Harrington

• ISBN13: 9780262220620
• ISBN10: 0262220628
• Edition: 3rd
• Format: Hardcover
• Copyright: 2000-08-01
• Publisher: Mit Pr

Summary

Departing from the traditional emphasis on institutions, this text emphasizes the use of economic theory and empirical analysis to understand regulatory and antitrust policies. Questions addressed include: What are the market failure rationales for, and appropriate form of, government intervention? What does theory show about competition in the presence of a market failure and the implications of government intervention to correct that failure? What do empirical analyses indicate about our regulatory experience and the direction of future intervention? The third edition addresses many issues that have recently dominated the economic and political landscape. New material reviews the government's case against Microsoft, charges of anticompetitive pricing in NASDAQ and airlines, the blocked Staples-Office Depot merger, and the Telecommunications Act of 1996. This edition also covers the deregulation of the California electric power industry as well as recent deregulatory efforts in bank branching and natural gas transmission. On the social regulatory scene, it covers in detail recent cigarette litigation and the contentious issue of the contingent valuation of natural resource damages, as exemplified in the Exxon Valdez oil spill. New empirical evidence appears throughout the book. Each part of the text can be used separately for a variety of courses including regulation and antitrust in undergraduate institutions, business schools, and schools of public policy, as well as background for doctoral courses. Exercises are included at the end of each chapter.

Table of Contents

Preface to the Third Edition	xix
Introduction	1	(12)
The Rationale for Regulation and Antitrust Policies	2	(1)
Antitrust Regulation	3	(2)
The Changing Character of Antitrust Issues	4	(1)
Reasoning behind Antitrust Regulations	4	(1)
Economic Regulation	5	(2)
Development of Economic Regulation	6	(1)
Factors in Setting Rate Regulations	6	(1)
Health, Safety, and Environmental Regulation	7	(2)
Role of the Courts	8	(1)
Criteria for Assessment	9	(1)
Questions and Problems	10	(1)
Recommended Reading	10	(1)
Appendix	11	(2)
The Making of a Regulation	13	(46)
State versus Federal Regulation: The Federalism Debate	14	(4)
Advantages of Federalism	15	(1)
Advantages of National Regulations	16	(1)
The Overlap of State and Federal Regulations	17	(1)
The Character of the Rulemaking Process	18	(4)
The Chronology of New Regulations	18	(4)
Nature of the Regulatory Oversight Process	22	(12)
The Nixon and Ford Administrations	23	(1)
The Carter Administration	24	(2)
The Reagan Administration	26	(1)
The Bush Administration	26	(1)
The Clinton Administration	27	(1)
Regulatory Reform Legislation	27	(1)
Benefit-Cost Analysis	28	(2)
Discounting Deferred Effects	30	(2)
Present Value	32	(2)
The Criteria Applied in the Oversight Process	34	(3)
Regulatory Success Stories	34	(1)
Promotion of Cost-Effective Regulation	35	(1)
Distortion of Benefit and Cost Estimates	36	(1)
The Regulatory Role of Price and Quality	37	(1)
The Impact of the Oversight Process	37	(7)
The Cost of Regulation	38	(1)
Other Measures of the Size of Regulation	38	(4)
The Character of Regulatory Oversight Actions	42	(2)
What Do Regulators Maximize?	44	(2)
The Capture Theory	44	(1)
Other Theories of Influence Patterns	45	(1)
Comprehensive Models of Regulatory Objectives	45	(1)
Conclusion	46	(1)
Questions and Problems	47	(1)
Appendix: Trends in Regulatory Agency Budgets and Staff	48	(11)
I ANTITRUST	59	(236)
Introduction to Antitrust	61	(14)
Industrial Organization Analysis	61	(4)
Concentration	63	(1)
Entry Barriers	64	(1)
Product Differentiation	64	(1)
Antitrust	65	(7)
Enforcement and Remedies	67	(4)
Exemptions from Antitrust	71	(1)
Summary and Overview of Part I	72	(1)
Appendix: Antitrust Statutes	72	(3)
Sherman Act	72	(1)
Clayton Act	73	(1)
Federal Trade Commission Act	74	(1)
Efficiency and Technical Progress	75	(22)
Economic Efficiency	75	(13)
Partial Equilibrium Welfare Tools	76	(2)
Monopoly-versus-Competition Example	78	(2)
Oil Industry Application	80	(1)
Some Complications	81	(3)
X-Inefficiency	84	(1)
Monopoly-Induced Waste	85	(1)
Estimates of the Welfare Loss from Monopoly	86	(2)
Technical Progress	88	(6)
Importance of Technological Change	89	(2)
An R & D Rivalry Model	91	(3)
Summary	94	(1)
Questions and Problems	95	(2)
Oligopoly, Collusion, and Antitrust	97	(46)
Game Theory	97	(4)
Advertising Competition	97	(2)
Compatibility of Standards	99	(1)
The Strategic Form of a Game	100	(1)
Nash Equilibrium	101	(1)
Oligopoly Theory	101	(11)
The Cournot Solution	102	(6)
Other Models of Oligopoly	108	(1)
Product Differentiation	109	(3)
Collusion	112	(13)
A Theory of Collusion	112	(5)
Cartel Problems	117	(4)
Collusion in Practice	121	(4)
Antitrust Law toward Price Fixing	125	(10)
Economic Analysis of Legal Categories	126	(1)
Per Se Rule Cases	127	(4)
Conscious Parallelism	131	(4)
Summary	135	(1)
Questions and Problems	136	(1)
Appendix A	137	(1)
Game Theory: Formal Definitions	137	(1)
Appendix B	138	(5)
The Addyston Pipe Case	138	(2)
The Opinion of the Court	140	(3)
Market Structure and Strategic Competition	143	(48)
Market Structure	143	(19)
Concentration	143	(7)
Scale Economies	150	(2)
Entry Conditions	152	(10)
Dominant Firm Theory	162	(8)
Static Analysis	162	(3)
Dynamic Analysis: Limit Pricing	165	(5)
Strategic Competition	170	(13)
Limit Pricing	171	(7)
Investment in Cost-Reducing Capital	178	(4)
Raising Rivals' Costs	182	(1)
Preemption and Brand Proliferation	183	(3)
Summary	186	(1)
Questions and Problems	186	(5)
Mergers	191	(28)
Antitrust Laws and Merger Trends	192	(3)
Reasons for Mergers	195	(3)
Monopoly	195	(1)
Economies	195	(1)
Reducing Management Inefficiencies	196	(2)
Other Motives	198	(1)
Horizontal Mergers	198	(15)
Benefits and Costs	199	(5)
Effects of Airline Mergers	204	(1)
Cases	205	(5)
The 1992 Merger Guidelines	210	(3)
Conglomerate Mergers	213	(4)
Potential Benefits	214	(1)
Anticompetitive Effects and Cases	215	(2)
Summary	217	(1)
Questions and Problems	217	(2)
Vertical Mergers and Restrictions	219	(38)
Vertical Mergers	219	(14)
Benefits	219	(4)
Anticompetitive Effects	223	(6)
Extension of Monopoly: Fixed Proportions	229	(1)
Extension of Monopoly: Variable Proportions	230	(2)
Cases	232	(1)
Vertical Restrictions	233	(20)
Resale Price Maintenance	234	(4)
Territorial Restraints	238	(2)
Exclusive Dealing	240	(1)
Tying	241	(12)
Summary	253	(1)
Questions and Problems	254	(3)
Monopolization and Price Discrimination	257	(38)
The Possession of Monopoly Power	258	(4)
Intent to Monopolize	262	(1)
Cases	263	(14)
1890--1940: Standard Oil and United States Steel	263	(5)
1940--1970: Alcoa and United Shoe Machinery	268	(4)
1970 to Present: Kodak, Cereals, IBM, and Others	272	(2)
1994--1998: Microsoft and Network Effects	274	(3)
Predatory Pricing: Proposed Legal Definitions	277	(7)
The ATC Rule	279	(1)
The Output Restriction Rule	280	(3)
Joskow-Klevorick Two-Stage Rule	283	(1)
Price Discrimination and the Robinson-Patman Act	284	(6)
Systematic Discrimination	284	(6)
Unsystematic Discrimination	290	(2)
Cases	290	(2)
Summary	292	(1)
Questions and Problems	292	(3)
II ECONOMIC REGULATION	295	(340)
Introduction to Economic Regulation	297	(40)
What Is Economic Regulation?	297	(1)
Instruments of Regulation	298	(3)
Control of Price	298	(1)
Control of Quantity	299	(1)
Control of Entry and Exit	299	(1)
Control of Other Variables	300	(1)
Brief History of Economic Regulation	301	(7)
Formative Stages	301	(1)
Trends in Regulation	302	(6)
The Regulatory Process	308	(5)
Overview of the Regulatory Process	308	(1)
Regulatory Legislation	309	(1)
Independent Regulatory Commissions	309	(2)
Regulatory Procedures	311	(2)
The Theory of Regulation	313	(21)
Normative Analysis as a Positive Theory	314	(3)
Capture Theory	317	(1)
Economic Theory of Regulation	318	(12)
Testing Theories of Regulation	330	(4)
Summary and Overview of Part II	334	(1)
Questions and Problems	335	(2)
Theory of Natural Monopoly	337	(24)
The Natural Monopoly Problem	337	(7)
Permanent and Temporary Natural Monopoly	337	(2)
Subadditivity and Multiproduct Monopoly	339	(5)
Alternative Policy Solutions	344	(14)
Ideal Pricing	344	(12)
Franchise Bidding	356	(1)
Actual Solutions	356	(2)
Summary	358	(1)
Questions and Problems	358	(3)
Natural Monopoly Regulation and Electric Power	361	(34)
The Rate Case	362	(2)
Accounting Equation	362	(1)
Regulatory Lag	363	(1)
The Rate Level	364	(10)
Rate Base Valuation	364	(2)
Cost of Equity Capital	366	(2)
The Sliding Scale Plan and Yardstick Competition	368	(1)
Price Caps and Performance Standards	369	(2)
Averch-Johnson Effect	371	(3)
Rate Structure	374	(5)
FDC Pricing	375	(2)
Undue Discrimination	377	(2)
Peak-Load Pricing	379	(7)
Costs of Power Production	379	(2)
Peak-Load Pricing Model	381	(5)
Regulation/Deregulation of Electric Power	386	(6)
Effectiveness of Price Regulation	386	(2)
Trend toward Competition	388	(4)
Summary	392	(1)
Questions and Problems	393	(2)
Franchise Bidding and Cable Television	395	(38)
Theory of Franchise Bidding	395	(14)
Competition at the Bidding Stage	397	(8)
Contractual Arrangements for the Postbidding Stage	405	(4)
Assessment of Franchise Bidding	409	(1)
Cable Television	409	(20)
Historical/Regulatory Background	410	(2)
Cable Television as a Natural Monopoly	412	(5)
Franchising Process	417	(1)
Assessment of Franchise Bidding	418	(5)
Rate Regulation	423	(4)
Is There a Role for Government Intervention?	427	(2)
Summary	429	(1)
Questions and Problems	430	(3)
Public Enterprise	433	(20)
General Background	434	(1)
Positive Theory of Public Enterprise	435	(7)
Managerial Model of a Firm	436	(1)
Managerial Model of a Private Enterprise	437	(1)
Managerial Model of a Public Enterprise	438	(3)
Comparison of Public and Private Enterprise	441	(1)
Municipal Electric Utilities	442	(5)
Pricing Behavior	442	(2)
Allocative Efficiency Comparison	444	(2)
Productive Efficiency Comparison	446	(1)
Assessment of Private versus Public Utilities	447	(1)
Airlines	447	(3)
Summary	450	(2)
Questions and Problems	452	(1)
Dynamic Issues in Natural Monopoly Regulation: Telecommunications	453	(42)
Transformation of a Natural Monopoly	453	(27)
Basis for Natural Monopoly Regulation	454	(3)
Sources of Natural Monopoly Transformation	457	(3)
Regulatory Response	460	(4)
Intercity Telecommunications Market	464	(12)
Local-Exchange Telecommunications Market	476	(4)
Separation of Regulated Monopolies and Competitive Markets	480	(7)
Benefits and Costs of Separation	481	(3)
Breakup of AT&T	484	(2)
Telecommunications and Computers	486	(1)
The Future of the Telecommunications Industry: Digital Convergence	487	(5)
Telecommunications Act of 1996	488	(1)
State of Competition	489	(3)
Summary	492	(1)
Questions and Problems	493	(2)
The Regulation of Potentially Competitive Markets: Theory and Estimation Methods	495	(34)
Theory of Price and Entry/Exit Regulation	496	(16)
Direct Effects of Price and Entry/Exit Regulation: The Competitive Model	496	(4)
Direct Effects of Price and Entry/Exit Regulation: The Imperfectly Competitive Model	500	(4)
Some Indirect Effects of Price and Entry Regulation	504	(3)
Some Indirect Effects of Price and Exit Regulation	507	(2)
Regulation and Innovation	509	(3)
Methods for Estimating the Effects of Regulation	512	(13)
Overview of Estimation Methods	512	(1)
Intertemporal Approach	512	(2)
Application: New York Stock Exchange	514	(1)
Intermarket Approach	515	(1)
Application: Advertising of Eyeglasses	516	(1)
Counterfactual Approach	517	(1)
Application: State Usury Laws	518	(4)
Measuring the Return to Price and Entry Restrictions: Taxicab Regulation	522	(3)
Summary	525	(1)
Questions and Problems	526	(3)
Economic Regulation of Transportation: Surface Freight and Airlines	529	(56)
Transportation Industry	529	(2)
Surface Freight Transportation	531	(21)
Regulatory History	531	(4)
Description of Regulatory Practices	535	(2)
Effects of Regulation	537	(13)
Recent Regulatory Policy	550	(2)
Airlines	552	(31)
Regulatory History	552	(2)
Description of Regulatory Practices	554	(1)
Effects of Regulation	555	(13)
Competition and Antitrust Policy after Deregulation	568	(14)
Lessons from Regulation and Deregulation	582	(1)
Summary	583	(1)
Questions and Problems	584	(1)
Economic Regulation of Energy: Crude Oil and Natural Gas	585	(50)
The Theory of Price Ceilings	587	(4)
Price and Quantity Regulation of the Crude Oil Industry	591	(5)
Regulatory History	594	(2)
Oil Prorationing	596	(8)
Regulatory Practices	596	(1)
Rationale for Prorationing	597	(5)
Solutions to the Common Pool Problem	602	(1)
Effects of Prorationing	603	(1)
Mandatory Oil Import Program	604	(3)
Regulatory Practices	604	(1)
Effects of Regulation	605	(2)
Crude Oil Price Controls	607	(9)
Regulatory Practices	607	(2)
Effects of Price Regulation	609	(7)
Price Regulation of the Natural Gas Industry	616	(15)
Regulatory History	618	(1)
Regulatory Practices	619	(2)
Effects of Price Regulation	621	(8)
Transition from Regulation to Markets in the Transmission of Natural Gas	629	(2)
Summary	631	(1)
Questions and Problems	632	(3)
III HEALTH, SAFETY, AND ENVIRONMENTAL REGULATION	635	(202)
Introduction: The Emergence of Health, Safety, and Environmental Regulation	637	(24)
Risk in Perspective	638	(3)
Measuring Mortality Risks	640	(1)
The Infeasibility of a No-Risk Society	641	(5)
Wealth and Risk	642	(2)
Irrationality and Biases in Risk Perception	644	(2)
Policy Evaluation	646	(4)
Regulatory Standards	647	(1)
Benefit-Cast Analysis	647	(1)
The Role of Heterogeneity	648	(2)
Uncertainty and Conservatism	650	(4)
The Role of Risk Ambiguity	652	(2)
The Role of Political Factors	654	(3)
Economic Models of Environmental Policies	654	(2)
Voting Patterns	656	(1)
Summary and Overview of Part III	657	(2)
Questions and Problems	659	(1)
Recommended Reading	660	(1)
Valuing Life and Other Nonmonetary Benefits	661	(26)
Policy Evaluation Principles	662	(2)
Willingness to Pay versus Other Approaches	664	(2)
Variations in the Value of Life	666	(3)
The Labor Market Model	669	(4)
Empirical Estimates of the Value of Life	673	(2)
Value of Life for Regulatory Policies	675	(3)
Survey Approaches to Valuing Policy Effects	678	(3)
Valuation of Air Quality	680	(1)
Exploratory Nature of the Survey Approach	681	(1)
Sensitivity Analysis and Cost Effectiveness	681	(1)
Risk-Risk Analysis	682	(1)
Establishing Prices for Health, Safety, and Environmental Regulation	683	(1)
Questions and Problems	684	(3)
Environmental Regulation	687	(38)
The Coase Theorem for Externalities	688	(9)
The Coase Theorem as a Bargaining Game	689	(1)
A Pollution Example	690	(2)
Long-Run Efficiency Concerns	692	(1)
Transactions Costs and Other Problems	692	(1)
Smoking Externalities	693	(3)
Special Features of Environmental Contexts	696	(1)
Selecting the Optimal Policy: Standards versus Fines	697	(8)
Setting the Pollution Tax	698	(2)
The Role of Heterogeneity	700	(1)
The Role of Uncertainty	701	(2)
Pollution Taxes	703	(1)
Cost Heterogeneity for Water Pollution Control	704	(1)
Current Market Trading Policies	705	(4)
The Future of Market Approaches	708	(1)
Global Warming and Irreversible Environmental Effects	709	(3)
Assessing the Merits of Global-Warming Policies	709	(2)
How Should We React to Uncertainty?	711	(1)
Multiperson Decisions and Group Externalities	712	(3)
The Prisoner's Dilemma	712	(1)
The N-Person Prisoner's Dilemma	713	(1)
Applications of the Prisoner's Dilemma	714	(1)
The Enforcement and Performance of Environmental Regulation	715	(7)
Enforcement Options and Consequences	715	(1)
Hazardous Wastes	716	(3)
Contingent Valuation for the Exxon Valdez Oil Spill	719	(2)
Evaluating Performance	721	(1)
Summary	722	(1)
Questions and Problems	723	(2)
Product Safety	725	(36)
Emergence of Product Safety Regulations	725	(1)
Current Safety Decisions	726	(2)
Changing Emphasis of Product Regulation	728	(1)
Premanufacturing Screening: The Case of Pharmaceuticals	729	(5)
Weighing the Significance of Side Effects	730	(1)
Drug Approval Strategies	730	(4)
The Behavioral Response to Product Safety Regulation	734	(5)
Consumer's Potential for Muting Safety Device Benefits	735	(4)
The Costs of Product Safety Regulation: The Automobile Industry Case	739	(5)
Trends in Motor Vehicle and Home Accident Deaths	744	(3)
Accident Rate Influences	744	(1)
The Decline of Accident Rates	745	(2)
The Rise of Product Liability	747	(6)
The Negligence Standard	748	(1)
The Strict Liability Standard	749	(1)
Events-Study Evidence on Liability Costs	749	(1)
Escalation of Damages	750	(3)
Risk Information and Hazard Warnings	753	(2)
Self-Certification of Safe Products	754	(1)
Government Determination of Safety	754	(1)
Alternatives to Direct Command and Control Regulation	755	(2)
The Future of Product Safety Policy	757	(1)
Questions and Problems	758	(3)
Regulation of Workplace Health and Safety	761	(38)
The Potential for Inefficiencies	763	(1)
How Markets Can Promote Safety	763	(2)
Compensating Wage Differential Theory	765	(2)
Risk Information	767	(2)
On-the-Job Experience and Worker Quit Rates	769	(1)
Inadequacies in the Market	770	(2)
Informational Problems and Irrationalities	771	(1)
Externalities	771	(1)
OSHA's Regulatory Approach	772	(13)
Setting OSHA Standard Levels	772	(3)
The Nature of OSHA Standards	775	(2)
The Reform of OSHA Standards	777	(1)
Regulatory Reform Initiatives	777	(1)
Changes in OSHA Standards	777	(3)
OSHA's Enforcement Strategy	780	(2)
Inspection Policies	782	(1)
Trivial Violations	783	(1)
OSHA Penalties	783	(1)
Enforcement Targeting	784	(1)
The Impact of OSHA Enforcement on Worker Safety	785	(9)
OSHA Regulations in Different Situations	787	(1)
OSHA and Other Factors Affecting Injuries	788	(6)
The Role of Workers' Compensation	794	(1)
Agenda for Policy Reform Efforts	795	(2)
Questions and Problems	797	(2)
Patents and Pharmaceuticals	799	(38)
Economics of Invention and Patents	799	(16)
Background on Patents	801	(1)
Incentives to Invent: Monopoly versus Competition	802	(4)
Welfare Analysis of Patents	806	(9)
Pharmaceuticals and the Role of Patents	815	(18)
Industry Structure	816	(9)
The 1984 Drug Price Competition and Patent Restoration Act	825	(3)
Other Policies that Affect R&D Incentives	828	(5)
Summary	833	(1)
Questions and Problems	833	(4)
Author Index	837	(4)
Subject Index	841