1 Introduction 1
The Rationale for Regulation and Antitrust Policies 2
Antitrust Regulation 3
The Changing Character of Antitrust Issues 4
Reasoning behind Antitrust Regulations 5
Economic Regulation 5
Development of Economic Regulation 6
Factors in Setting Rate Regulations 6
Health，Safety，and Environmental Regulation 8
Role of the Courts 9
Criteria for Assessment 9
Questions and Problems 11
Recommended Reading 11
Appendix 11
2 The Making of a Regulation 13
State versus Federal Regulation：The Federalism Debate 14
Advantages of Federalism 15
Advantages of National Regulations 16
Product Labeling Example 17
The Overlap of State and Federal Regulations 18
The Character of the Rulemaking Process 19
The Chronology of New Regulations 19
Nature of the Regulatory Oversight Process 24
The Nixon and Ford Administrations 24
The Carter Administration 25
The Reagan Administration 27
The Bush Administration 28
The Clinton Administration 28
The George W.Bush Administration 28
Regulatory Reform Legislation 28
Benefit-Cost Analysis 30
Discounting Deferred Effects 33
Present Value 34
The Criteria Applied in the Oversight Process 36
Regulatory Success Stories 36
Promotion of Cost-Effective Regulation 37
Distortion of Benefit and Cost Estimates 38
The Regulatory Role of Price and Quality 39
The Impact of the Oversight Process 39
The Cost of Regulation 40
Other Measures of the Size of Regulation 40
The Character of Regulatory Oversight Actions 45
What Do Regulators Maximize？ 48
The Capture Theory 48
Other Theoryes of Influence Patterns 49
Comprehensive Models of Regulatory Objectives 49
Conclusion 51
Questions and Problems 51
Appendix：Trends in Regulatory Agency Budgets and Staff 52
Ⅰ ANTITRUST 59
3 Introduction to Antitrust 61
Industrial Organization 62
Structure 63
Conduct 66
Performance 66
Government 68
Antitrust 69
Federal Antitrust Laws 69
Enforcement and Remedies 71
Exemptions from Antitrust 75
Summary and Overview of Part Ⅰ 76
Appendix：Antitrust Statutes 76
Sherman Act 76
Clayton Act 77
Federal Trade Commission Act 78
4 Efficiency and Technical Progress 79
Economic Efficiency 79
Partial Equilibrium Welfare Tools 80
Monopoly-versus-Competition Example 82
Oil Industry Application 84
Some Complications 85
X-Inefficiency 88
Monopoly-Induced Waste 89
Estimates of the Welfare Loss from Monopoly 90
Technical Progress 93
Importance of Technological Change 93
A Model of R ＆ D Rivalry 95
Summary 98
Questions and Problems 99
5 Oligopoly，Collusion，and Antitrust 101
Game Theory 101
Example 1：Advertising Competition 101
Example 2：Compatibility of Standards 103
The Strategic Form of a Game 104
Nash Equilibrium 105
Oligopoly Theory 106
The Cournot Solution 106
Other Models of Oligopoly 112
Product Differentiation 113
Collusion 116
A Theory of Collusion 117
Challenges to Collusion 121
Collusion in Practice 128
Antitrust Law and Policy toward Price Fixing 134
Economic Analysis of Legal Categories 135
Per Se Rule Cases 137
Tacit Collusion 140
Enforcement Policy 144
Summary 150
Questions and Problems 151
Appendix 153
Game Theory：Formal Definitions 153
6 Market Structure and Strategic Competition 155
Market Structure 155
Concentration 155
Scale Economies 162
Entry Conditions 164
Dominant Firm Theory 174
Static Analysis 174
Dynamic Analysis：Limit Pricing 177
Strategic Competition 182
Limit Pricing 183
Investment in Cost-Reducing Capital 190
Raising Rivals’ Costs 194
Preemption and Brand Proliferation 194
Summary 198
Questions and Problems 198
7 Mergers 203
Antitrust Laws and Merger Trends 204
Reasons for Mergers 207
Monopoly 207
Economies 207
Reducing Management Inefficiencies 208
Horizontal Mergers 210
Benefits and Costs 210
Effects of Airline Mergers 219
Cases 220
U.S.Department of Justice Merger Guidelines 225
Conglomerate Mergers 229
Potential Benefits 229
Anticompetitive Effects and Cases 230
Summary 232
Questions and Problems 233
8 Vertical Mergers and Vertical Restraints 235
Vertical Mergers 236
Benefits 237
Anticompetitive Effects 241
Commitment and the Restoration of Market Power 246
Raising Rivals’ Costs 248
Antitrust Law and Policy 253
Historical Development 254
Time Warner and Turner 255
Vertical Restraints 257
Exclusive Dealing 258
Antitrust Law and Policy 263
Tying 266
Modern Theories of Leveraging 275
Manufacturer-Retailer Restraints 282
Summary 288
Questions and Problems 289
9 Monopolization and Price Discrimination 293
Establishing Monopolization Claims 294
Measuring Monopoly Power 294
Assessing Intent to Monopolize 298
Development of Antitrust Case Law 299
1890-1940：Standard Oil and United States Steel 299
1940-1970：Alcoa and United Shoe Machinery 300
1970 to Present：Kodak，IBM，Microsoft，and Others 303
Predatory Pricing 305
Theories of Predatory Pricing 309
Efficiency Rationales 316
Antitrust Policy 317
The Areeda-Turner Rule and Other Single-Parameter Rules 317
The Brooke Case and the Two-Tier Rule 319
Recent Developments 321
Refusal to Deal and the Essential Facilities Doctrine 322
Essential Facilities Doctrine 323
Intellectual Property Rights 324
Kodak and Monopoly Power in Aftermarkets 326
Microsoft Case 332
Network Externalities 332
Antitrust Case 336
Tying and Monopolization of the Browser Market 338
Maintenance of Monopoly in the Operating Systems Market 339
Remedies and Harm 342
Price Discrimination and the Robinson-Patman Act 343
Systematic Discrimination 344
Unsystematic Discrimination 349
Cases 350
Summary 352
Questions and Problems 352
Ⅱ ECONOMIC REGULATION 355
10 Introduction to Economic Regulation 357
What Is Economic Regulation？ 357
Instruments of Regulation 358
Control of Price 358
Control of Quantity 359
Control of Entry and Exit 359
Control of Other Variables 360
Brief History of Economic Regulation 362
Formative Stages 362
Trends in Regulation 364
The Regulatory Process 369
Overview of the Regulatory Process 369
Regulatory Legislation 371
Independent Regulatory Commissions 371
Regulatory Procedures 373
The Theory of Regulation 375
Normative Analysis as a Positive Theory 376
Capture Theory 379
Economic Theory of Regulation 380
Testing Theoryes of Regulation 392
Summary and Overview of Part Ⅱ 396
Appendix 397
A Theory of Interest Group Competition 397
Questions and Problems 399
11 Theory of Natural Monopoly 401
The Natural Monopoly Problem 401
Permanent and Temporary Natural Monopoly 402
Subadditivity and Multiproduct Monopoly 404
Alternative Policy Solutions 408
Ideal Pricing 409
Franchise Bidding 421
Actual Solutions 421
Summary 423
Appendix 423
The Troublesome Case of a Natural Monopoly 423
Questions and Problems 425
12 Natural Monopoly Regulation and Electric Power 429
Traditional Rate-of-Return Regulation 430
The Rate Case 431
Averch-Johnson Effect 433
Incentive Regulation 436
Performance Standards 436
Earnings Sharings 437
Price Caps 439
Yardstick Regulation 442
Rate Structure 443
FDC Pricing 443
Undue Discrimination 445
Peak-Load Pricing 447
Costs of Power Production 447
Peak-Load Pricing Model 449
Regulation and Restructuring of Electric Power 453
Historical，Technological，and Regulatory Background 453
Overview of Recent Legislation 455
Restructuring in California 456
Summary 461
Questions and Problems 462
13 Franchise Bidding and Cable Television 465
Theory of Franchise Bidding 465
Competition at the Bidding Stage 467
Contractual Arrangements for the Postbidding Stage 475
Assessment of Franchise Bidding 478
Cable Television 479
Historical/Regulatory Background 480
Cable Television as a Natural Monopoly 481
Franchising Process 485
Assessment of Franchise Bidding 487
Rate Regulation 492
Is There a Role for Government Intervention？ 497
Summary 499
Questions and Problems 500
14 Public Enterprise 503
General Background 504
Positive Theory of Public Enterprise 505
Managerial Model of a Firm 506
Managerial Model of a Private Enterprise 507
Managerial Model of a Public Enterprise 508
Comparison of Public and Private Enterprise 510
Municipal Electric Utilities 512
Pricing Behavior 512
Allocative Efficiency Comparison 513
Productive Efficiency Comparison 515
Assessment of Private versus Public Utilities 515
Airlines 516
Privatization 517
Summary 521
Questions and Problems 522
15 Dynamic Issues in Natural Monopoly Regulation：Telecommunications 523
Transformation of a Natural Monopoly 523
Basis for Natural Monopoly Regulation 524
Sources of Natural Monopoly Transformation 527
Regulatory Response 529
Intercity Telecommunications Market 534
Telecommunications Act of 1996 544
Separation of Regulated Monopolies and Competitive Markets 546
Benefits and Costs of Separation 547
Breakup of AT＆T 550
Summary 551
Questions and Problems 553
16 The Regulation of Potentially Competitive Markets：Theory and Estimation Methods 555
Theory of Price and Entry/Exit Regulation 556
Direct Effects of Price and Entry/Exit Regulation：The Competitive Model 556
Direct Effects of Price and Entry/Exit Regulation：The Imperfectly Competitive Model 560
Indirect Effects of Price and Entry Regulation 564
Some Indirect Effects of Price and Exit Regulation 567
Regulation and Innovation 568
Methods for Estimating the Effects of Regulation 572
Overview of Estimation Methods 572
Intertemporal Approach 572
Application：New York Stock Exchange 574
Intermarket Approach 575
Application：Advertising of Eyeglasses 576
Application：44 Liquormart Decision 578
Counterfactual Approach 578
Application：State Usury Laws 579
Measuring the Return to Price and Entry Restrictions：Taxicab Regulation 583
Summary 585
Questions and Problems 587
17 Economic Regulation of Transportation：Surface Freight and Airlines 589
Transportation Industry 589
Surface Freight Transportation 591
Regulatory History 591
Description of Regulatory Practices 595
Effects of Regulation 597
Airlines 609
Regulatory History 609
Description of Regulatory Practices 611
Effects of Regulation 612
Competition and Antitrust Policy after Deregulation 625
Lessons from Regulation and Deregulation 638
Summary 639
Questions and Problems 640
18 Economic Regulation of Energy：Crude Oil and Natural Gas 641
The Theory of Price Ceilings 642
Price and Quantity Regulation of the Crude Oil Industry 646
Regulatory History 648
Oil Prorationing 651
Regulatory Practices 651
Rationale for Prorationing 651
Solutions to the Common Pool Problem 656
Effects of Prorationing 657
Mandatory Oil Import Program 659
Regulatory Practices 659
Effects of Regulation 659
Crude Oil Price Controls 661
Regulatory Practices 661
Effects of Price Regulation 663
Price Regulation of the Natural Gas Industry 671
Regulatory History 672
Regulatory Practices 673
Effects of Price Regulation 675
Transition from Regulation to Markets in the Transmission of Natural Gas 683
Summary 685
Questions and Problems 686
Ⅲ HEALTH，SAFETY，AND ENVIRONMENTAL REGULATION 689
19 Introduction：The Emergence of Health，Safety，and Environmental Regulation 691
Risk in Perspective 692
Measuring Mortality Risks 694
The Infeasibility of a No-Risk Society 695
Homeland Security 696
Wealth and Risk 699
Irrationality and Biases in Risk Perception 700
Policy Evaluation 703
Regulatory Standards 704
Benefit-Cost Analysis 704
The Role of Heterogeneity 705
Uncertainty and Conservatism 707
The Role of Risk Ambiguity 707
The Role of Political Factors 709
Economic Models of Environmental Policies 709
Voting Patterns 711
Summary and Overview of Part Ⅲ 713
Questions and Problems 714
Recommended Reading 715
20 Valuing Life and Other Nonmonetary Benefits 717
Policy Evaluation Principles 718
Willingness-to-Pay versus Other Approaches 720
Variations in the Value of Statistical Life 723
The Labor Market Model 725
Empirical Estimates of the Value of Life 730
Value of Risks to Life for Regulatory Policies 731
Survey Approaches to Valuing Policy Effects 736
Valuation of Air Quality 738
Exploratory Nature of the Survey Approach 738
Sensitivity Analysis and Cost-Effectiveness 739
Risk-Risk Analysis 740
Establishing Prices for Health，Safety，and Environmental Regulation 742
Questions and Problems 742
21 Environmental Regulation 745
The Coase Theorem for Externalities 746
The Coase Theorem as a Bargaining Game 747
A Pollution Example 748
Long-Run Efficiency Concerns 750
Transaction Costs and Other Problems 750
Smoking Externalities 751
Special Features of Environmental Contexts 754
Siting Nuclear Wastes 756
Selecting the Optimal Policy：Standards versus Fines 757
Setting the Pollution Tax 758
The Role of Heterogeneity 760
The Role of Uncertainty 761
Pollution Taxes 763
Cost Heterogeneity for Water Pollution Control 764
Current Market Trading Policies 765
The Future of Market Approaches 768
Global Warming and Irreversible Environmental Effects 769
Assessing the Merits of Global Warming Policies 769
How Should We React to Uncertainty？ 771
Multiperson Decisions and Group Externalities 772
The Prisoner’s Dilemma 772
The N-Person Prisoner’s Dilemma 773
Applications of the Prisoner’s Dilemma 774
The Enforcement and Performance of Environmental Regulation 775
Enforcement Options and Consequences 775
Hazardous Wastes 776
Contingent Valuation for the Exxon Valdez Oil Spill 779
The Senior Discount for the Value of Life 782
Evaluating Performance 783
Summary 785
Questions and Problems 786
22 Product Safety 789
Emergence of Product Safety Regulations 789
Current Safety Decisions 790
Changing Emphasis of Product Regulation 792
Premanufacturing Screening：The Case of Pharmaceuticals 793
Weighing the Significance of Side Effects 794
Drug Approval Strategies 794
The Behavioral Response to Product Safety Regulation 798
Consumer’s Potential for Muting Safety Device Benefits 801
The Costs of Product Safety Regulation：The Automobile Industry Case 804
Trends in Motor Vehicle and Home Accident Deaths 808
Accident Rate Influences 809
The Decline of Accident Rates 809
The Rise of Product Liability 810
The Negligence Standard 812
The Strict Liability Standard 813
The Ford Pinto Case 813
Escalation of Damages 815
Risk Information and Hazard Warnings 816
Self-Certification of Safe Products 817
Government Determination of Safety 818
Alternatives to Direct Command and Control Regulation 818
Regulation through Litigation 820
Breast Implant Litigation and Regulation 821
The Future of Product Safety Policy 823
Questions and Problems 825
23 Regulation of Workplace Health and Safety 827
The Potential for Inefficiencies 829
How Markets Can Promote Safety 829
Compensating Wage Differential Theory 831
Risk Information 833
On-the-Job Experience and Worker Quit Rates 835
Inadequacies in the Market 836
Externalities 838
OSHA’s Regulatory Approach 838
Setting OSHA Standard Levels 839
The Nature of OSHA Standards 841
The Reform of OSHA Standards 843
Regulatory Reform Initiatives 843
Changes in OSHA Standards 843
OSHA’s Enforcement Strategy 847
Inspection Policies 848
Trivial Violations 849
OSHA Penalties 849
Enforcement Targeting 850
The Impact of OSHA Enforcement on Worker Safety 851
OSHA Regulations in Different Situations 852
OSHA and Other Factors Affecting Injuries 854
The Role of Workers’ Compensation 860
Agenda for Policy Reform Efforts 861
Questions and Problems 863
24 Patents and Pharmaceuticals 865
Economics of Invention and Patents 865
Background on Patents 867
Incentives to Invent：Monopoly versus Competition 868
Welfare Analysis of Patents 872
Pharmaceuticals and the Role of Patents 881
Industry Structure 881
The 1984 Drug Price Competition and Patent Restoration Act 891
Other Policies That Affect R＆D Incentives 894
Summary 899
Questions and Problems 899
Author Index 903
Subject Index 909