Governments, Competition and Utility Regulation

Governments, Competition and Utility Regulation

Edited by Colin Robinson

Governments, Competition and Utility Regulation continues the series of annual books, published in association with the Institute of Economic Affairs and the London Business School, which critically reviews the state of utility regulation and competition policy.

Chapter 2: Does antitrust policy improve consumer welfare? Assessing the evidence

Robert W. Crandall and Clifford Winston

Subjects: economics and finance, competition policy, public sector economics

Extract

* Robert W. Crandall and Clifford Winston Should the United Stales pursue a vigorous antitrust policy? Soon after the passage of the Sherman Antitrust Act of 1890, economists led by John Bates Clark (1901) argued that the enforcement of such laws should be informed by the prevailing economic theory on the merits of competition and the extent to which firms’ conduct can enhance or weaken competition. However, economic theory since then has proven remarkably fertile in pointing out how various actions by firms may be interpreted as either procompetitive or anticompetitive. For example, when prices decline sufficiently so that no firm in an industry is earning economic profits and some firms exit, this outcome may reflect a highly competitive market adjusting to a condition of temporary oversupply, or it could indicate that a large competitor is employing a strategy of predatory pricing to drive out its rivals. Similarly, when a firm builds a large factory, it may be engaged in vigorous competition and new entry, or it may be creating excess capacity as an implicit threat to potential competitors that it may raise output and cut price quickly if circumstances warrant. Although economic theory can help organize analysis of the economic variables affected by antitrust policy, it often offers little policy guidance because almost any action by a firm short of outright price fixing can turn out to have procompetitive or anticompetit ive consequences. Given this range of theoretical possibilities, the case for a tough and broad antitrust...

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