Contents
Preface to the Third Edition

Introduction
The Rationalé for-Regulation and Antitrust Policies
Antitrust Regulation
The Changing Character of Antitrust Issues
Reasoning behind Antitrust Regulations
Economic Regulation
Development of Economic Regulation
Factors in Setting Rate Regulations
Health, Safety, and Environmental Regulation
Role of the Courts
Criteria for Assessment
Questions and Problems
Recommended Reading
Appendix
The Making of a Regulation
State versus Federal Regulation: The Federalism Debate
Advantages of Federalism
Advantages of National Regulations
The Overlap of State and Federal Regulations
The Character of the Rulemaking Process
The Chronology of New Regulations
Nature of the Regulatory Oversight Process
The Nixon and Ford Administrations
The Carter Administration
The Reagan Administration
The Bush Administration
The Clinton Administration
Regulatory Reform Legislation
Benefit-Cost Analysis
Discounting Deferred Effects
Present Value
The Criteria Applied in the Oversight Process
Regulatory Success Stories
Promotion of Cost-Effective Regulation
Distortion of Benefit and Cost Estimates
The Regulatory Role of Price and Quality
The Impact of the Oversight Process
The Cost of Regulation
Other Measures of the Size of Regulation
The Character of Regulatory Oversight Actions
What Do Regulators Maximize?
The Capture Theory
Other Theories of Influence Patterns
Comprehensive Models of Regulatory Objectives
Conclusion
Questions and Problems
Appendix: Trends in Regulatory Agency Budgets and Staif

I ANTITRUST
Introduction to Antitrust
Industrial Organization Analysis
Concentration
Entry Barriers
Product Differentiation
Antitrust
Enforcement and Remedies
Exemptions from Antitrust
Summary and Overview of Part I
Appendix: Antitrust Statutes
Sherman Act
Clayton Act
Federal Trade Commission Act
Efficiency and Technical Progress
Economic Efficiency
Partial Equilibrium Welfare Tools
Monopoly-versus-Competition Example
Oil Industry Application
Some Complications
X-Inefficiency
Monopoly-Induced Waste
Estimates of the Welfare Loss from Monopoly
Technical Progress
Importance of Technological Change
An R & D Rivalry Model
Summary
Questions and Problems
5 Oligopoly, Collusion, and Antitrust
Game Theory
Example 1: Advertising Competition
Example 2: Compatibiity of Standards
The Strategic Form of a Game
Nash Equilibrium
Oligopoly Theory
The Cournot Solution
Other Modeis of Oligopoly
Product Differentiation
Coliusion
A Theory of Coilusion
Cartel Problems
Coliusion in Practice
Antitrust Law toward Price Fixing
Economic Analysis of Legal Categories
Per Se Rule Cases
Conscious Parallelism
Summary
Questions and Problems
Appendix A
Game Theory: Formal Definitions
Appendix B
The Addyston Pipe Case
The Opinion of the Court
Market Structure and Strategic Competition
Market Structure
Concentration
Scale Economies
Entry Conditions
Dominant Firm Theory
Static Analysis
Dynamic Analysis: Limit Pricing
Strategic Competition
LimitPricing
Investment in Cost-Reducing Capital
Raising Rivals' Costs
Preemption and Brand Proliferation
Summary
Questions and Problems
Mergers
Antitrust Laws and Merger Trends
Reasons for Mergers
Monopoly
Economies
Reducing Management Inefficiencies
Other Motives
Horizontal Mergers
Benefits and Costs
Effects of Airline Mergers
Cases
The 1992 Merger Guidelines
Conglomerate Mergers
Potential Benefits
Anticompetitive Effects and Cases
Summary
Questions and Problems
Vertical Mergers and Restrictions
Vertical Mergers
Benefits
Anticompetitive Effects
Extension of Monopoly: Fixed Proportions
Extension of Monopoly: Variable Proportions
Cases
Vertical Restrictions
Resale Price Maintenance
Territorial Restraints
Exclusive Dealing
Tying
Summary
Questions and Problems
Monopolization and Price Discrimination
The Possession of Monopoly Power
Intent to Monopolize
Cases
1890-1940: Standard Oil and United States Steel
1940-1970: Alcoa and United Shoe Machinery
1970 to Present: Kodak, Cereais, IBM, and Others
1994-1998: Microsoft and Network Effects
Predatory Pricing: Proposed Legal Defimtions
The ATC Rule
The Output Restriction Rule
Joskow-Klevorick Two-Stage Rule
Price Discrimination and the Robinson-Patman Act
Systematic Discrimination
Unsystematic Discrimination
Cases
Summary
Questions and Problems

II ECONOMIC REGULATION
Introduction to Economic Regulation
What Is Economic Regulation?
Instruments of Regulation
Control of Price
Control of Quantity
Control of Entry and Exit
Control of Other Variables
Brief History of Economic Regulation
Formative Stages
Trends in Regulation
The Regulatory Process
Overview of the Regulatory Process
Regulatory Legislation
Independent Regulatory Commissions
Regulatory Procedures
The Theory of Regulation
Normative Analysis as a Positive Theory
Capture Theory
Economic Theory of Regulation
Testing Theories of Regulation
Summary and Overview of Part II
Questions and Problems
Theory of Natural Monopoly
The Natural Monopoly Problem
Permanent and Temporaiy Natural Monopoly
Subadditivity and Multiproduct Monopoly
Alternative Policy Solutions
Ideal Pricing
Franchise Bidding
Actual Solutions
Summary
Questions and Problems
Natural Monopoly Regulation and Electric Power
The Rate Case
Accounting Equation
Regulatory Lag
The Rate Level
Rate Base Valuation
Cost of Equity Capital
The Sliding Scale Plan and Yardstick Competition
Pnce Caps and Performance Standards
Averch-Johnson Effect
Rate Structure
FDC Pricing
Undue Discrimination
Peak-Load Pricing
Costs of Power Production
Peak-Load Pricing Model
Regulation/Deregulation of Electric Power
Effectiveness of Price Regulation
Trend toward Competition
Summary
Questions and Problems
Franchise Bidding and Cable Television
Theory of Franchise Bidding
Competition at the Bidding Stage
Contractual Arrangements for the Postbidding Stage
Assessment of Franchise Bidding
Cable Television
Historicall Regulatory Background
Cable Television as a Natural Monopoly
Franchising Process
Assessment of Franchise Bidding
Rate Regulation
Is There a Role for Government Intervention?
Summary
Questions and Problems
Public Enterprise
General Background
Positive Theory of Public Enterprise
Managerial Model of a Firm
Managerial Model of a Pnvate Enterprise
Managerial Model of a Public Enterprise
Comparison of Public and Private Enterprise
Municipal Electric Utilities
Pricing Behavior
Allocative Efficiency Comparison
Productive Efficiency Comparison
Assessment of Private versus Public Utilities
Airlines
Summary
Questions and Problems
Dynamic Issues in Natural Monopoly Regulation: Telecommunications
Transformation of a Natural Monopoly
Basis for Natural Monopoly Regulation
Sources of Natural Monopoly Transformation
Regulatory Response
Intercity Telecommunications Market
Local-Exchange Telecommunications Market
Separation of Regulated Monopolies and Competitive Markets
Benefits and Costs of Separation
Breakup of AT&T
Telecommunications and Computers
The Future of the Telecommunications Industry: Digital Convergence
Telecommunications Act of 1996
State of Competition
Summary
Questions and Problems
The Regulation of Potentially Competitive Markets: Theory and Estirnation
Methods
Theory of Price and EntryfExit Regulation
Direct Effects of Price and EntrylExit Regulation: The Competitive Model
Direct Effects of Price and EntryfExit Regulation: The Imperfectly Competitive
Model
Some Indirect Effects of Price and Entry Regulation
Some Indirect Effects of Price and Exit Regulation
Regulation and Innovation
Methods for Estimating the Effects of Regulation
Overview of Estimation Methods
Intertemporal Approach
Application: New York Stock Exchange
Intermarket Approach
Application: Advertising of Eyeglasses
Counterfactual Approach
Application: State Usury Laws
Measuring the Retum to Price and Entry Restrictions: Taxicab Regulation
Summary
Questions and Problems
Economic Regulation of Transportation: Surface Freight and Airlines
Transportation Industry
Surface Freight Transportation
Regulatory History
Descnption of Regulatory Practices
Effects of Regulation
Recent Regulatory Policy
Airlines
Regulatory History
Description of Regulatory Practices
Effects of Regulation
Competition and Antitrust Policy after Deregulation
Lessons from Regulation and Deregulation
Summary
Questions and Problems
Economic Regulation of Energy: Crude Oil and Natural Gas
The Theory of Price Ceilings
Price and Quantity Regulation of the Crude 0il Industry
Regulatory History
Oil Prorationing
Regulatory Practices
Rationale for Prorationing
Solutions to the Common Pool Problem
Effects of Prorationing
Mandatory Oil Import Program
Regulatory Practices
Effects of Regulation
Crude 0il Price Controls
Regulatory Practices
Effects of Price Regulation
Price Regulation of the Natural Gas Industry
Regulatory History
Regulatory Practices
Effects of Price Regulation
Transition from Regulation to Markets in Lhe Transmission of Natural Gas
Summary
Questions and Problems

III HEALTH, SAFETY, AND ENVIRONMENTAL REGULATION
Introduction: The Emergence of Health, Safety, and Environmental Regulatio
Risk in Perspective
Measunng Mortality Risks
The Infeasibility of a No-Risk Society
Wealth and Risk
Irrationality and Biases in Risk Perception
Policy Evaluation
Regulatory Standards
Benefit-Cost Analysis
The Role of Heterogeneity
Uncertainty and Conservatism
The Role of Risk Ambiguity
The Role of Political Factors
Economic Models of Environmental Policies
Voting Patterns
Summary and Overview of Part III
Questions and Problems
Recommended Reading
Valuing Life and Other Nonmonetary Benefits
Policy Evaluation Principies
Willingness to Pay versus Other Approaches
Variations in Lhe Value of Life
The Labor Market Model
Empirical Estimates of Lhe Value of Life
Value of Life for Regulatory Policies
Survey Approaches to Valuing Policy Effects
Valuation of Air Quality
Exploratory Nature of the Survey Approach
Sensitivity Analysis and Cost Effectiveness
Risk-Risk Analysis
Establishing Prices for Health, Safety, and Environmental Regulation
Questions and Problems
Environmental Regulation
The Coase Theorem for Externalities
The Coase Theorem as a Bargaining Game
A Poilution Example
Long-Run Efficiency Concerns
Transactions Costs and Other Problems
Smoking Externalities
Special Features of Environmental Contexts
Selecting the Optimal Policy: Standards versus Fines
Setting the Poflution Tax
The Role of Heterogeneity
The Role of Uncertainty
Pollution Taxes
Cost Heterogeneity for Water Poliution Control
Current Market Trading Policies
The Future of Market Approaches
Global Warming and Irreversible Environmental Effects
Assessing the Merits of Global-Warming Policies
How Should We React to Uncertainty?
Multiperson Decisions and Group Externalities
The Prisoner's Dilemma
The N-Person Prisoner's Dilemma
Applications of the Prisoner's Dilenmia
The Enforcement and Performance of Environmental Regulation
Enforcement Options and Consequences
Hazardous Wastes
Contingent Valuation for the Exxon Valdez Oil Spill
Evaluating Performance
Summiary
Questions and Problems
Product Safety
Emergence of Product Safety Regulations
Current Safety Decisions
Changing Emphasis of Product Regulation
Premanufactunng Screening: The Case of Pharmaceuticals
Weighing the Significance of Side Effects
Drug Approval Strategies
The Behavioral Response to Product Safety Regulation
Consumer's Potential for Muting Safety Device Benefits
The Costs of Product Safety Regulation: The Automobile Industry Case
Trends in Motor Vehicle and Home Accident Deaths
Accident Rate Influences
The Decline of Accident Rates
The Rise of Product Liability
The Negligence Standard
The Strict Liability Standard
Events-Study Evidence on Liability Costs
Escalation of Damages
Risk Information and Hazard Warnings
Self-Certification of Safe Products
Government Deterniination of Safety
AJternatives to Direct Command and Control Regulation
The Future of Product Safety Policy
Questions and Problems
Regulation of Workplace Heatth and Safety
The Potential for Inefficiencies
How Markets Can Promote Safety
Compensating Wage Differential Theory
Risk Information
On-the-Job Experience and Worker Quit Rates
Inadequacies in the Market
Informational Problems and Irrationalities
Externalities
OSHÀ's Regulatory Approach
Setting OSHA Standard Leveis
The Nature of OSHA Standards
The Reform of OSHA Standards
Regulatory Reform Initiatives
Changes in OSHA Standards
OSHA's Enforcement Strategy
Inspection Policies
Trivial Violations
OSHA Penaities
Enforcement Targeting
The Impact of OSHA Enforcement on Worker Safety
OSHA Reguiations in Different Situations
OSHA and Other Factors Affecting Injuries
The Role of Workers' Compensation
Agenda for Policy Reform Efforts
Questions and Probiems
Patents and Pharmaceuticals
Economics of Invention and Patents
Background on Patents
Incentives to Invent: Monopoiy versus Competition
Welfare Analysis of Patents
Pharmaceuticals and the Role of Patents
Industry Structure
The 1984 Drug Price Competition and Patent Restoration Act
Other Policies that Affect R&D Incentives
Summary
Questions and Problems

Author Index
Subject Index