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antitrust policy and industrial regulation

1. Both antitrust policy and industrial regulation deal with monopoly. What distinguishes the two approaches? How does the government decide to use one form of remedy rather than the other?

2. Suppose a merger of firms would simultaneously lessen competition and reduce unit costs through economies of scale. Do you think such a merger should be allowed?

3. In the 1980s, PepsiCo Inc., which then had 28 percent of the soft-drink market, proposed to acquire the Seven-Up Company. Shortly thereafter the Coca-Cola Company, with 39 percent of the market, indicated it wanted to acquire the Dr. Pepper Company. Seven-Up and Dr. Pepper each controlled about 7 percent of the market. In your judgement, was the government's decision to block these mergers appropriate?

4. Use economic analysis to explain why the optimal amount of product safety may be less than the amount that would totally eliminate risks of accidents and deaths. Use automobiles as an example.

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Questions
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1. Both antitrust policy and industrial regulation deal with monopoly. What distinguishes the two approaches? How does the government decide to use one form of remedy rather than the other?

Solution:

The purpose of antitrust policies is to prevent monopolization, promote competition and achieve allocative efficiency. i.e Antitrust legislation was passed to inhibit or prevent the growth of monopolies. While industrial regulations were formed to control "natural" monopolies. Because, sometimes it is beneficial for the society to allow monopolies to exist. For example, when there are natural monopolies with underlying economies of scale that allow the good to be produced at a lower cost than would otherwise have been the case. This might allow the good to be sold at a lower price, provided the monopoly does not abuse the situation. It is in this scenario that it is worthwhile for monopolies to be regulated. Often monopolies are expected to charge the fair price.

Usually government decides to use industrial regulations when it aims to allow the public to benefit from the lower costs of a natural monopoly whilst avoiding the reduction in output associated with an unregulated monopoly. For example if we consider public utilities, such as electricity, water, gas, local telephone service, and cable TV etc, government decide to regulate the above mentioned ...

Solution Summary

The purpose of antitrust policies is emphasized.

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