Economics of Regulation and Antitrust, 5e

by Viscusi, Jr., Sappington

ISBN: 9780262364355 | Copyright 2018

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A thoroughly revised and updated edition of the leading textbook on government and business policy, presenting the key principles underlying sound regulatory and antitrust policy.Regulation and antitrust are key elements of government policy. This new edition of the leading textbook on government and business policy explains how the latest theoretical and empirical economic tools can be employed to analyze pressing regulatory and antitrust issues. The book departs from the common emphasis on institutions, focusing instead on the relevant underlying economic issues, using state-of-the-art analysis to assess the appropriate design of regulatory and antitrust policy. Extensive case studies illustrate fundamental principles and provide insight on key issues in regulation and antitrust policy. This fifth edition has been thoroughly revised and updated, reflecting both the latest developments in economic analysis and recent economic events. The text examines regulatory practices through the end of the Obama and beginning of the Trump administrations. New material includes coverage of global competition and the activities of the European Commission; recent mergers, including Comcast-NBC Universal; antitrust in the new economy, including investigations into Microsoft and Google; the financial crisis of 2007–2008 and the Dodd-Frank Act; the FDA approval process; climate change policies; and behavioral economics as a tool for designing regulatory strategies.
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Contents (pg. v)
Preface to the Fifth Edition (pg. xxi)
Organization of the Book (pg. xxiv)
Suggested Course Outlines (pg. xxvi)
Acknowledgments (pg. xxix)
1. Introduction (pg. 1)
The Rationale for Regulation and Antitrust Policies (pg. 3)
Antitrust Regulation (pg. 4)
The Changing Character of Antitrust Issues (pg. 4)
Reasoning behind Antitrust Regulations (pg. 5)
Economic Regulation (pg. 6)
Development of Economic Regulation (pg. 6)
Factors in Setting Rate Regulations (pg. 6)
Health, Safety, and Environmental Regulation (pg. 8)
Role of the Courts (pg. 9)
Criteria for Assessment (pg. 9)
Questions and Problems (pg. 11)
Recommended Reading (pg. 11)
Appendix (pg. 12)
2. The Making of a Regulation (pg. 15)
State versus Federal Regulation: The Federalism Debate (pg. 16)
Advantages of Federalism (pg. 17)
Advantages of National Regulations (pg. 18)
Product Labeling Example (pg. 19)
Overlap of State and Federal Regulations (pg. 20)
The Character of the Rulemaking Process (pg. 21)
Chronology of New Regulations (pg. 21)
Nature of the Regulatory Oversight Process (pg. 25)
The Nixon and Ford Administrations (pg. 26)
The Carter Administration (pg. 27)
The Reagan Administration (pg. 29)
The Bush Administration (pg. 30)
The Clinton Administration (pg. 30)
The George W. Bush Administration (pg. 30)
The Obama Administration (pg. 30)
The Trump Administration (pg. 31)
Regulatory Reform Legislation (pg. 32)
Benefit-Cost Analysis (pg. 34)
Discounting Deferred Effects (pg. 37)
Present Value (pg. 37)
The Criteria Applied in the Oversight Process (pg. 40)
Regulatory Success Stories (pg. 40)
Promotion of Cost-Effective Regulation (pg. 40)
Distortion of Benefit and Cost Estimates (pg. 41)
Regulatory Role of Price and Quality (pg. 42)
Impact of the Oversight Process (pg. 43)
Alternative Measures of the Scale of Regulation (pg. 47)
The Character of Regulatory Oversight Actions (pg. 50)
Trends in Major Regulations (pg. 43)
The Costs and Benefits of Major Regulations (pg. 44)
Judicial Review of Regulatory Impact Analyses (pg. 52)
What Do Regulators Maximize? (pg. 53)
Capture Theory (pg. 54)
Other Theories of Influence Patterns (pg. 54)
Comprehensive Models of Regulatory Objectives (pg. 55)
Conclusion (pg. 56)
Questions and Problems (pg. 56)
Appendix (pg. 57)
Trends in Regulatory Agency Budgets and Staff (pg. 57)
I. Antitrust (pg. 65)
3. Introduction to Antitrust (pg. 67)
Competition and Welfare (pg. 68)
Industrial Organization (pg. 88)
Antitrust (pg. 96)
Summary of the Chapter and Overview of Part I (pg. 108)
Questions and Problems (pg. 109)
Appendix: Excerpts from Antitrust Statutes (pg. 111)
4. Oligopoly, Collusion, and Antitrust (pg. 115)
Game Theory (pg. 115)
Oligopoly Theory (pg. 119)
Collusion (pg. 130)
Antitrust Law and Enforcement with Respect to Price Fixing (pg. 153)
Summary (pg. 167)
Questions and Problems (pg. 168)
Appendix (pg. 171)
5. Market Structure and Dynamic Competition (pg. 173)
Market Structure (pg. 173)
Dynamic Competition (pg. 192)
Summary (pg. 209)
Questions and Problems (pg. 210)
6. Horizontal Mergers (pg. 213)
Antitrust Laws and Merger Trends (pg. 214)
The Effects of Horizontal Mergers (pg. 217)
Merger Law and Enforcement (pg. 232)
Summary (pg. 255)
Questions and Problems (pg. 256)
7. Vertical Mergers and Vertical Restraints (pg. 259)
Vertical Mergers (pg. 260)
Vertical Restraints (pg. 284)
Summary (pg. 320)
Questions and Problems (pg. 321)
8. Monopolization and Price Discrimination (pg. 323)
Establishing Monopolization Claims (pg. 324)
Development of Antitrust Case Law (pg. 328)
Predatory Pricing (pg. 334)
Refusal to Deal and the Essential Facilities Doctrine (pg. 351)
Price Discrimination and the Robinson-Patman Act (pg. 365)
Summary (pg. 372)
Questions and Problems (pg. 373)
9. Antitrust in the New Economy (pg. 375)
Economic Fundamentals of the New Economy (pg. 375)
Antitrust Issues in the New Economy (pg. 379)
Network Effects (pg. 383)
Big Data (pg. 399)
Two-Sided Platforms (pg. 404)
Industries with Rapid and Disruptive Innovation (pg. 419)
Summary (pg. 427)
Questions and Problems (pg. 429)
II. Economic Regulation (pg. 433)
10. Introduction to Economic Regulation (pg. 435)
What Is Economic Regulation? (pg. 435)
Brief History of Economic Regulation (pg. 442)
The Regulatory Process (pg. 449)
Theory of Regulation (pg. 453)
Summary and Overview of Part II (pg. 473)
Appendix (pg. 474)
Questions and Problems (pg. 476)
11. Alternatives to Regulation in the Market: Public Enterprise and Franchise Bidding, with an Application to Cable Television (pg. 479)
Public Enterprise (pg. 479)
Early Regulation of Cable Television (pg. 492)
Cable Television as a Natural Monopoly (pg. 494)
Franchising Process (pg. 498)
The Limits of Government Regulation (pg. 507)
Summary (pg. 508)
Questions and Problems (pg. 509)
12. Optimal Pricing (pg. 511)
Subadditivity and Multiproduct Monopoly (pg. 511)
Optimal Pricing Policies (pg. 516)
Optimal Pricing of a Single Service (pg. 516)
Linear Pricing (pg. 516)
Nonlinear Pricing (pg. 519)
Optimal Pricing of Multiple Services (pg. 522)
Ramsey Pricing (pg. 523)
Non-Ramsey Pricing of Telephone Services (pg. 525)
Optimal Pricing in Two-Sided Markets (pg. 526)
Rate Structure (pg. 528)
FDC Pricing (pg. 528)
Avoiding Inefficient Entry (pg. 530)
Time of Use Pricing (pg. 531)
Costs of Power Production (pg. 531)
TOU Pricing Model (pg. 532)
Summary (pg. 537)
Questions and Problems (pg. 537)
13. Incentive Regulation (pg. 539)
Traditional Rate of Return Regulation (pg. 539)
Rate Hearings (pg. 540)
Averch-Johnson Effect (pg. 541)
Prudence Reviews and Cost Disallowances (pg. 544)
Regulatory Lag (pg. 545)
Incentive Regulation (pg. 546)
Price Cap Regulation (pg. 546)
Earnings Sharing (pg. 550)
Performance Based Regulation in the Electricity Sector (pg. 553)
Regulatory Options (pg. 555)
Yardstick Regulation (pg. 556)
Summary (pg. 557)
Questions and Problems (pg. 558)
14. Dynamic Issues in Natural Monopoly Regulation: Telecommunications (pg. 561)
Basis for Natural Monopoly Regulation (pg. 561)
Sources of Natural Monopoly Transformation (pg. 564)
Demand Side (pg. 564)
Cost Side (pg. 564)
Regulatory Response (pg. 567)
Asymmetric Regulation and Cream-Skimming (pg. 568)
Interstate Telecommunications Market (pg. 570)
Regulatory Background (pg. 570)
Transformation of a Natural Monopoly (pg. 571)
Regulatory Policy in the Microwave Era (pg. 574)
Regulated Monopoly to Regulated Competition (pg. 576)
Regulated Competition to Unregulated Competition (pg. 577)
Telecommunications Act of 1996 (pg. 578)
Net Neutrality (pg. 581)
Internet Structure (pg. 582)
The Meaning of Net Neutrality (pg. 584)
Rationale for Net Neutrality (pg. 585)
Summary (pg. 588)
Questions and Problems (pg. 588)
15. Regulation of Potentially Competitive Markets: Theory and Estimation Methods (pg. 591)
Theory of Price and Entry/Exit Regulation (pg. 591)
Direct Effects of Price and Entry/Exit Regulation: The Competitive Model (pg. 591)
Direct Effects of Price and Entry/Exit Regulation: The Imperfectly Competitive Model (pg. 595)
Indirect Effects of Price and Entry Regulation (pg. 598)
Indirect Effects of Price and Exit Regulation (pg. 601)
Regulation and Innovation (pg. 602)
Methods for Estimating the Effects of Regulation (pg. 604)
Overview of Estimation Methods (pg. 605)
Intertemporal Approach (pg. 605)
Intermarket Approach (pg. 607)
Counterfactual Approach (pg. 610)
Measuring the Effects of Price and Entry Restrictions: Taxicab Regulation (pg. 614)
Regulatory History (pg. 614)
Entry Restrictions (pg. 615)
Value of a Medallion (pg. 616)
The Rise of Ride Sharing (pg. 617)
Summary (pg. 622)
Questions and Problems (pg. 623)
16. Economic Regulation of Transportation: Surface Freight and Airlines (pg. 625)
Transportation Industry (pg. 625)
Surface Freight Transportation (pg. 627)
Regulatory History (pg. 627)
Why Was Regulation Imposed? (pg. 629)
Regulatory Practices (pg. 630)
Effects of Regulation (pg. 632)
Lessons from Regulation (pg. 641)
Airlines (pg. 642)
Regulatory History (pg. 643)
Description of Regulatory Practices (pg. 644)
Effects of Regulation (pg. 646)
Competition and Antitrust Policy after Deregulation (pg. 656)
Measuring Concentration in the Airline Industry (pg. 657)
Anticompetitive Nonprice Practices (pg. 657)
Anticompetitive Pricing Practices (pg. 659)
Lessons from Regulation and Deregulation (pg. 665)
Summary (pg. 666)
Questions and Problems (pg. 667)
17. Economic Regulation in the Energy Sector (pg. 669)
Regulation in the Electricity Sector (pg. 669)
Historical, Technological, and Regulatory Background (pg. 669)
Restructuring in California (pg. 671)
California Energy Crisis, 2000–2001 (pg. 673)
Effects of Restructuring in the Electricity Sector (pg. 678)
Distributed Generation (pg. 680)
Future Regulation in the Electricity Sector (pg. 683)
Economic Regulation in the Oil Sector (pg. 683)
Industry Background (pg. 683)
Effects of Price Ceilings (pg. 684)
Rationale for Restricting Domestic Oil Production (pg. 687)
Restricting Oil Imports (pg. 692)
Crude Oil Price Controls (pg. 694)
Summary (pg. 697)
Questions and Problems (pg. 698)
18. Regulation in the Financial Sector (pg. 699)
Role of the Financial Sector (pg. 699)
Rationale for Regulation in the Financial Sector (pg. 701)
Bank Runs (pg. 702)
Bank Runs in Practice (pg. 702)
Government Intervention and Regulation (pg. 703)
Deposit Insurance (pg. 703)
Restrictions on Banks’ Investments (pg. 705)
Reserve Requirements (pg. 705)
Limiting Competition among Banks (pg. 705)
Ongoing Monitoring of Bank Activities (pg. 706)
Historic Legislation in the Financial Sector (pg. 706)
Federal Reserve Act of 1913 (pg. 706)
Banking Acts of 1933 (Glass-Steagall) and 1935 (pg. 706)
Gramm-Leach-Bliley Act of 1999 (pg. 707)
Depository Institutions Deregulation and Monetary Control Act of 1980 (pg. 707)
Securities and Exchange Act of 1934 (pg. 707)
Sarbanes-Oxley Act of 2002 (pg. 708)
Causes of the Great Recession (pg. 709)
Rising Housing Prices (pg. 709)
The Bubble Bursts (pg. 711)
Crisis in the Financial Sector (pg. 713)
Regulatory Reform: The Dodd-Frank Act of 2010 (pg. 714)
Limiting Systemic Risk to Avoid Future Financial Shocks (pg. 715)
Banking Reform (pg. 715)
Ending Bailouts of Firms That Are “Too Big to Fail” (pg. 715)
Reducing Risks Posed by Securities (pg. 716)
New Requirements and Oversight of Securities Rating Agencies (pg. 716)
Increased Transparency and Accountability in Securities Markets (pg. 716)
Summary (pg. 717)
Questions and Problems (pg. 717)
III. Health, Safety, and Environmental Regulation (pg. 719)
21. Environmental Regulation (pg. 771)
The Coase Theorem for Externalities (pg. 772)
The Coase Theorem as a Bargaining Game (pg. 773)
Pollution Example (pg. 774)
Long-Run Efficiency Concerns (pg. 776)
Transaction Costs and Other Problems (pg. 776)
Smoking Externalities (pg. 777)
Special Features of Environmental Contexts (pg. 780)
Siting Nuclear Wastes (pg. 781)
Selecting the Optimal Policy: Standards versus Fines (pg. 783)
Setting the Pollution Tax (pg. 784)
Role of Heterogeneity (pg. 786)
Standard Setting under Uncertainty (pg. 787)
Pollution Taxes (pg. 789)
Prices versus Quantities (pg. 790)
Market Trading Policies (pg. 792)
Netting (pg. 793)
Offsets (pg. 793)
Bubbles (pg. 793)
Banking (pg. 794)
The Expanding Role of Market Approaches (pg. 794)
Cap and Trade in Action: The SO2 Allowance Trading System (pg. 795)
Global Warming and Irreversible Environmental Effects (pg. 797)
Policy Options for Addressing Global Warming (pg. 799)
Social Cost of Carbon (pg. 800)
Assessing the Merits of Global Warming Policies (pg. 801)
How Should We React to Uncertainty? (pg. 803)
Multiperson Decisions and Group Externalities (pg. 804)
The Prisoner’s Dilemma (pg. 805)
The N-PersonPrisoner’s Dilemma (pg. 805)
Applications of the Prisoner’s Dilemma (pg. 806)
Enforcement and Performance of Environmental Regulation (pg. 807)
Enforcement Options and Consequences (pg. 807)
Hazardous Wastes (pg. 809)
Contingent Valuation for the Exxon Valdez Oil Spill (pg. 812)
Senior Discount for the Value of a Statistical Life (pg. 815)
Evaluating Performance (pg. 817)
Summary (pg. 817)
Questions and Problems (pg. 819)
20. Valuing Life and Other Nonmonetary Benefits (pg. 743)
Policy Evaluation Principles (pg. 744)
Willingness-to-Pay versus Other Approaches (pg. 746)
Variations in the Value of a Statistical Life (pg. 749)
Labor Market Model (pg. 751)
Empirical Estimates of the Value of a Statistical Life (pg. 756)
Value of Risks to Life for Regulatory Policies (pg. 757)
Survey Approaches to Valuing Policy Effects (pg. 763)
Sensitivity Analysis and Cost Effectiveness (pg. 765)
Risk-Risk Analysis (pg. 767)
Summary (pg. 769)
Questions and Problems (pg. 769)
19. Introduction to Health, Safety, and Environmental Regulation (pg. 721)
The Emergence of Health, Safety, and Environmental Regulation (pg. 721)
Risk in Perspective (pg. 722)
Infeasibility of a No-Risk Society (pg. 725)
Policy Evaluation (pg. 731)
Summary and Overview of Part III (pg. 739)
Questions and Problems (pg. 741)
Recommended Reading (pg. 742)
22. Product Safety (pg. 823)
Emergence of Product Safety Regulations (pg. 823)
Current Safety Decisions (pg. 824)
Consumer Complaints (pg. 825)
Factors Affecting Producer and Consumer Actions (pg. 825)
Product Performance and Consumer Actions (pg. 826)
Changing Emphasis of Product Regulation (pg. 826)
Premanufacturing Screening: The Case of Pharmaceuticals (pg. 827)
Weighing the Significance of Side Effects (pg. 829)
Drug Approval Strategies (pg. 830)
Accelerated Drug Approval Process (pg. 831)
Behavioral Response to Product Safety Regulation (pg. 833)
Consumer’s Potential for Muting Safety Device Benefits (pg. 835)
The Lulling Effect (pg. 837)
Effect of Consumer’s Perception of Safety Device Efficacy (pg. 839)
Costs of Product Safety Regulation: The Automobile Industry Case (pg. 840)
Trends in Motor Vehicle and Home Accident Deaths (pg. 844)
Accident Rate Influences (pg. 844)
The Decline of Accident Rates (pg. 845)
The Rise of Product Liability (pg. 846)
Negligence Standard (pg. 848)
Strict Liability Standard (pg. 849)
Tracing Accident Costs and Causes (pg. 849)
The Ford Pinto Case (pg. 849)
Escalation of Damages (pg. 851)
Risk Information and Hazard Warnings (pg. 853)
Self-Certificationof Safe Products (pg. 854)
Government Determination of Safety (pg. 854)
Alternatives to Direct Command and Control Regulation (pg. 856)
Regulation through Litigation (pg. 858)
Breast Implant Litigation and Regulation (pg. 858)
Summary (pg. 861)
Questions and Problems (pg. 862)
23. Regulation of Workplace Health and Safety (pg. 865)
Potential for Inefficiencies (pg. 867)
How Markets Can Promote Safety (pg. 868)
Compensating Wage Differential Theory (pg. 869)
Risk Information (pg. 871)
On-the-Job Experience and Worker Quit Rates (pg. 873)
Inadequacies in the Market (pg. 874)
Informational Problems and Irrationalities (pg. 874)
Segmented Markets and the Failure of Compensating Differentials (pg. 875)
Externalities (pg. 877)
OSHA’s Regulatory Approach (pg. 877)
Setting OSHA Standard Levels (pg. 878)
The Nature of OSHA Standards (pg. 880)
Reform of OSHA Standards (pg. 882)
Regulatory Reform Initiatives (pg. 882)
Changes in OSHA Standards (pg. 882)
Chemical Labeling (pg. 883)
Economic Role of Hazard Warnings (pg. 883)
Effective Hazard Warnings (pg. 885)
Innovations in OSHA Regulation (pg. 885)
OSHA’s Enforcement Strategy (pg. 886)
Inspection Policies (pg. 887)
Trivial Violations (pg. 888)
OSHA Penalties (pg. 888)
Enforcement Targeting (pg. 889)
Impact of OSHA Enforcement on Worker Safety (pg. 891)
OSHA Regulations in Different Situations (pg. 892)
OSHA and Other Factors Affecting Injuries (pg. 893)
Determining OSHA’s Impact on Safety (pg. 896)
Mixed Opinions Regarding OSHA’s Impact (pg. 898)
Role of Workers’ Compensation (pg. 900)
Summary (pg. 902)
Questions and Problems (pg. 904)
24. Behavioral Economics and Regulatory Policy (pg. 905)
Prospect Theory: Loss Aversion and Reference Dependence Effects (pg. 906)
Prospect Theory: Irrationality and Biases in Risk Perception (pg. 911)
Role of Risk Ambiguity (pg. 915)
Examples of Uncertainty and Conservatism (pg. 916)
Intertemporal Irrationalities (pg. 917)
Energy Regulations and the Energy Efficiency Gap (pg. 919)
Making Decisions (pg. 923)
Behavioral Nudges (pg. 925)
The Behavioral Transfer Test (pg. 932)
Summary (pg. 933)
Questions and Problems (pg. 935)
Index (pg. 937)

W. Kip Viscusi

W. Kip Viscusi is the George G. Allen Professor of Economics at Duke University.

Joseph E. Harrington Jr.

Joseph E. Harrington, Jr., is Patrick T. Harker Professor in the Department of Business Economics and Public Policy at the Wharton School at the University of Pennsylvania.

David E. M. Sappington

David E. M. Sappington is an Eminent Scholar in the Department of Economics at the University of Florida.

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