Contents

Preface to the Fourth Edition

1 Introduction
The Rationale for Regulation and Antitrust Policies
Antitrust Regulation
The Changing Character of Antitrust Issues
Reasoning behind Antitrust Regulations
Econornic Regulation
Development of Economic Regulation
Factors in Setting Rate Regulations
Health, Safety, and Environmental Regulation
Role of the Courts
Criteria for Assessrnent
Questions and Problems
Recommended Reading
Appendix

2 The Making of a Regulation
State versus Federal Regulation: The Federalism Debate
Advantages of Federalism
Advantages of National Regulations
Product Labeling Example
The Overlap of State and Federal Regulations
The Character of the Rulemaking Process
The Chronology of New Regulations
Nature of the Regulatury Oversight Process
The Nixon and Ford Adminitrations
The Carter Administration
The Reagan Administration
The Bush Administration
The Clinton Administration
The George W. Bush Administration
Regulatory Reforrn 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 Staff

I ANTITRUST

3 Introduction to Antitrust
Industrial Organization
Structure
Conduct
Performance
Government
Antitrust
Federal Antitrust Laws
Enforcement and Remedies
Exemptions from Antitrust
Summary and Overview of Part I
Appendix; Antitrust Statutes
Sherman Act
Clayton Act
Federal Trade Comniission Act

4 Efficiency and Technical Progress
Economic Efficiency
Partial Equilibrium Welfare Tools
Monopoly-versus-Competition Example
Oil Industry Application
Some Complícations
X-Inefficiency
Monopoly-Induced Waste
Estimates of the Welfare Loss from Monopoly
Technical Progress
Importance of Technological Change
A Model of R & D Rivalry
Summary
Questions and Problems

5 Oligopoly, Collusion, and Antitrust
Game Theory
Example 1: Advertising Competition
Example 2: Compatibility of Standards
The Strategic Form of a Game
Nash Equilibrium
Oligopoly Theory
The Cournot Solution
Other Models of Oligopoly
Product Differentiation
Collusion
A Theory of Collusion
Challenges to Collusion
Collusion in Practice
Antitrust Law and Policy toward Price Fixing
Economic Analysis of Legal Categories
Per Se Rule Cases
Tacit Collusion
Enforcement Policy
Summary
Questions and Problems
Appendix
Game Theory: Formal Definitions

6 Market Structure and Strategic Competition
Market Structure
Concentration
Scale Economies
Entry Conditions
Dominant Firm Theory
Static Analysis
Dynamic Analysis.: Limit Pricing
Strategic Competition
Limit Pricing
lnvestment in Cost-Reducing Capital
Raising Rivals' Costs
Preemption and Brand Proliferation
Summary
Questions and Problems

7 Mergers
Antitrust Laws and Merger Trends
Reasons for Mergers
Monopoly
Economies
Reducing Management lnefficiencies
Horizontal Mergers
Benefits and Costs
Effects of Airline Mergers
Cases
U.S. Department of Justice Merger Guidelines
Conglomerate Mergers
Potential Benefits
Anticompetitive Effects and Cases
Summary
Questions and Problems

8 Vertical Mergers and Vertical Restraints
Vertical Mergers
Benefits
Anticompetitive Effects
Commitment and the Restoration of Market Power
Raising Rivais' Costs
Antitrust Law and Policy
Historical Development
Time Warner and Turner
Vertical Restraints
Exclusive Dealing
Antitrust Law and Policy
Tying
Modern Theories of Leveraging
Manufacturer-Retailer Restraints
Summary
Questions and Problems

9 Monopolization and Price Discrimination
Establishing Monopolization Claims
Measuring Monopoly Power
Assessing Intent to Monopolize
Development of Antitrust Case Law
1890-1940: Standard Oil and United States Steel
1940-1970: Alcoa and United Shoe Machinery
1970 to Present: Kodak, IBM, Microsoft, and Others
Predatory Pricing
Theories of Predatory Pricing
Efficiency Rationales
Antitrust Policy
The Areeda-Turner Rule and Other Single-Parameter Rules
The Brooke Case and the Two-Tier Rule
Recent Developments
Refusal to Deal and the Essential Facilities Doctrine
Essential Facilities Doctrine
Intellectual Property Rights
Kodak and Monopoly Power in Aftermarkets
Microsoft Case
Network Externalities
Antitrust Case
Tying and Monopolization of the Browser Market
Maintenance of Monopoly in the Operating Systems Market
Remedies and Harm
Price Discrimination and the Robinson-Patman Act
Systematic Discrimination
Unsystematic Discrimination
Cases
Summary
Questions and Problems

II ECONOMIC REGULATION

10 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 Variabies
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
Appendix

11 A Theory of lnterest Group Competition
Questions and Problerns
Theory of Natural Monopoly
The Natural Monopoly Problem
Perrnanent and Temporary Natural Monopoly
Subadditivitv and Multiproduct Monopoly
Alternative Policy Solutions
Ideal Pricing
Franchise Bidding
Actual Solutions
Summary
Appendix
The Troublesome Case of a Natural Monopoly
Questions and Problems

12 Natural Monopoly Regulation and Electric Power
Traditional Rate-of-Return Regulation
The Rate Case
Averch-Johnson Effect
Incentive Regulation
Performance Standards
Earnings Sharings
Price Caps
Yardstick Regulation
Rate Structure
FDC Pricing
Undue Discrimination
Peak-Load Pricing
Costs of Power Production
Peak-Load Pricing Model
Regulation and Restructuring of Electric Power
Historical, Technological, and Regulatory Background
Overview of Recent Legislation
Restructuring in California
Summary
Questions and Problems

13 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
Historical 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

14 Public Enterprise
General Background
Positive Theory of Public Enterprise
Managerial Model of a Firm
Managerial Model of a Private 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
Privatization
Summary
Questions and Problems

15 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
Telecommunications Act of 1996
Separation of Regulated Monopolies and Compettive Markets
Benefits and Costs of Separation
Breakup of AT&T
Summary
Questions and Problems

16 The Regulation of Potentially Competitive Markets: Theory and Estimation Methods
Theory of Price and Entry/Exit Regulation
Direct Effects of Price and Entry/Exit Regulation: The Competitive Model
Direct Effects of Price and Entry/Exit Regularion: The Imperfectly Competitive Model
Indirect Eifects 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
Application: 44 Liquorinari Decision
Counterfactual Approach
Application: State Usury Laws
Measuring the Return to Price and Entry Restrictions: Taxicab Regulation
Summary
Questions and Problems

17 Economic Regulation of Transportation: Surface Freight and Airlines
Transportation lndustry
Surface Freight Transportation
Regulatory History
Description of Regulatory Practices
Effects of Regulation
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

18 Economic Regulation of Energy: Crude Oil and Natural Gas
The Theory of Price Ceilings
Price and Quantity Regulation of the Crude Oil lndustry
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 Oil Price Controis
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 the Transmission of Natural Gas
Summary
Questions and Problems

III HEALTH, SAFETY, AND ENVIRONMENTAL REGULATION

19 Introduction: The Emergence of Health, Safety, and Environmental Regulation
Risk in Perspective
Measuring Mortality Risks
The Infeasibility of a No-Risk Society
Homeland Security
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

20 Valuing Life and Other Nonmonetary Benefits
Policy Evaluation Principles
Willingness-to-Pay versus Other Approaches
Variations in the Value of Statistical Life
The Labor Market Model
Empirical Estimates of the Value of Life
Value of Risks to 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

21 Environmental Regulation
The Coase Theorem for Externalities
The Coase Theorem as a Bargaining Game
A Pollution Example
Long-Run Efficiency Concerns
Transaction Costs and Other Problems
Smoking Externalities
Special Features of Environmental Contexts
Siting Nuclear Wastes
Selecting the Optimal Policy: Standards versus Fines
Setting the Pollution Tax
The Role of Heterogeneity
The Role of Uncertainty
Pollution Taxes
Cost Heterogeneity for Water Pollution Control
Current Market Trading Policies
The Future of Market Approaches
Global Warming and In-eversible 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 Prisioners Dilemma
Applications of the Prisoner's Dilemma
The Enforcemment and Performance of Environmental Regulation
Enforcement Options and Consequences
Hazardous Wastes
Contingent Valuation for the Evwn Valdez Oil Spill
The Senior Discount for the Value of Life
Evaluating Performance
Sunirnary
Questions and Problems

22 Product Safety
Emergence of Product Safety Regulations
Current Safety Decisions
Changing Emphasis of Product Regulation
Premanufacturing Screening: The Case of Pharmaceuticals
Weigthing the Significance of Side Effects
Drug Approval Strategic
The Behavioral Response to Product Safety Regulation
Consurner'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
The Ford Pinto Case
Escalaton of Damages
Risk Information and Hazard Warnings
SeIf-Certification of Safe Products
Government Determination of Safety
Alternatives to Direct Command and Control Regulation
Regulation through Litigation
Breast Implant Litigation and Regulation
The Future of Produet Safety Policy
Questions and Problems

23 Regulation of Workplace Health 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
Inadequacíes in the Market
Externalities
OSHA's Regulatory Approach
Setting OSHA Standard Leveis
The Nature of OSHA Standards
The Reforrn of OSHA Standards
Regulatory Reform initiatives
Changes in OSHA Standards
OSHA's Enforcernent Strategy
Inspection Policies
Trivial Violations
OSHA Penaities
Enforcement Targeting
The Irnpact of OSHA Enforcernent on Worker Safety
OSHA Regulations in Different Situations
OSHA and Other Factors Affecting Injuries
The Role of Workers' Compensation
Agenda for Policy Reform Efforts
Questions and Problems

24 Patents and Pharmaceuticals
Economics of Invention and Patents
Background on Patents
Incentives to Invent: Monopoly 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