Section 4 Regulation and Deregulation

Preview

Objectives

After studying this section you will be able to:

1. Understand how firms use market power.
2. List three market practices that the government regulates or bans to protect competition.
3. Define deregulation, and list its effects on several industries.

Section Focus

The federal government sometimes steps into markets to promote competition and the lower prices it brings. In recent years, the government has also deregulated several markets to promote competition.

Key Terms

• predatory pricing
• antitrust laws
• trust
• merger
• deregulation

It's 1946. The soldiers have come home from World War II, the cities are booming, and you're a city planner who needs to get people to work each morning. You can build wide roads and parking lots and encourage people to buy cars, you can invest in a fleet of buses, or you can expand the streetcar lines and train tracks that already criss-cross the town center. Ideally, you will choose the most efficient system.

However, you never get to decide. A company called National City Lines (NCL) buys your city's streetcar network and decides to raise fares and shut down several lines. Service gets so bad that commuters stay away, and NCL soon shuts down the system. It's now 1966, and your streetcars are gone. Since the roads are too crowded for more cars, you must buy buses.

After World War II, National City Lines used its mass transit monopoly to shut down streetcar lines.

In the newspaper, you read that National City Lines was secretly funded by companies that make tires, automobiles, and gasoline—the same companies that now offer to sell you 200 new buses.

This really happened in cities like Los Angeles and Baltimore, where National City Lines turned a mass transit oligopoly into a monopoly by buying up its rivals. National City Lines then used its monopoly to close down the streetcar lines. Although some experts argue that the streetcars might have died out anyway, many critics blame National City Lines for the end result. No one can know what might have happened in a competitive market.

If you think what National City Lines did was unfair, the federal government agrees. In this section, you will read about anticompetitive practices and the tools the government uses to stop them.

Market Power

As you have read, monopoly and oligopoly can sometimes be bad for the consumer and the economy as a whole. Markets dominated by a few large firms tend to have higher prices and lower output than markets with many sellers. Before we look at antitrust policies, let's think about how a firm might try to increase its market power.

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