Micro Topic 6.
4
The Effects of Government Intervention
Part 1: Check for Understanding- Read the quote below and answer the following questions
"If we will not endure a king as a political power, we should not endure a king over the
production, transportation and sale of any of the necessaries of life.”
- US Senator John Sherman, chief sponsor of the Sherman Antitrust Act of 1890
1. Senator Sherman compared monopolies to a king. Identify three reasons why unregulated
monopolies might be bad for society. Answers will vary. Monopolies charge higher prices, monopolies
produce less output (cause deadweight loss), monopolies face no competition so they might not
innovate, monopolies can use their power to bully suppliers and politicians.
2. Despite antitrust laws designed to prevent monopolies, sometimes the government allows and
encourages monopolies to exist. Under what conditions might society prefer a monopoly to a
competitive market? Answers will vary. When one firm can produce a good or service at the lowest
cost. This is called a natural monopoly. An example is the electric company.
Part 2: Graph Practice- Use the graph below of a non-price discriminating natural monopoly to answer
the following questions.
3. Identify the unregulated profit
maximizing price and quantity.
Price = $50, Quantity = 7 units
4. Assume that the government
regulates this monopoly by
setting a price ceiling at the fair
return (break even) price. What
would be the price and quantity?
Price = $35, Quantity = 10 units
5. Does regulating this monopoly at
the fair return price increase or
decrease deadweight loss?
Explain. Decrease because Q
increased
6. Assume instead that the
government regulated this
monopoly by setting a price
ceiling at the socially optimal (or
allocatively efficient) price. What
would be the price and quantity?
Price = $25, Quantity = 12 units
7. Identify one advantage and one
disadvantage of regulating a
monopoly at the socially optimal price. Advantages- No deadweight loss, lower prices for consumers;
Disadvantages- Firm is making a loss, they will need a subsidy to continue to produce.
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Micro Topic 6.4
The Effects of Government Intervention
Part 3: Graph Practice- Read the excerpt from and article that was written in December 2017 and
answer the following questions.
The Walt Disney Co. may be willing to wager $2.5 billion that its 11-figure deal with 21st Century Fox will
pass regulatory muster, but antitrust lawyers aren't so sure.
The companies expect the regulatory review and closing process to take up to 18 months, which will
likely include a thorough analysis of whether the combined entity could substantially lessen competition
in the marketplace.
That the Department of Justice is formally contesting AT&T's proposed $85 billion acquisition of Time
Warner could signal an uphill battle for Disney and Fox.
"The government went after a vertical merger involving AT&T," says Loyola Law School professor
emeritus Daniel Lazaroff. "They generally are viewed with more tolerance. Horizontal mergers are
viewed as the most threatening types of mergers for competition."
While some could argue the Time Warner deal is irrelevant because it presents different issues, experts
say it's not reaching too far to compare the two regulatory paths.
The entertainment content acquisition portion of the deal will likely be the primary focus of antitrust
scrutiny. Disney is buying Fox's film and TV studio, which includes 20th Century Fox, Fox Searchlight
Pictures and FX Productions, among other entities.
Leslie anticipates that the government will assess whether the combined Disney-Fox entity would have
unfair market power with regard to theatrical distribution. Would it be able to negotiate higher licensing
fees or longer runs for its films? "If you let the biggest player eliminate one of its bigger competitors,
that’s going to eliminate the leverage of the theaters to say no," he says.
8. According to this article, why might regulators and society be concerned about Disney purchasing
Fox? Regulators worry that the combined company will have too much market power making. They
are worried that it will become a monopoly that will ”have unfair market power with regard to theatrical
distribution”
9. The article states that government regulators will conduct a “thorough analysis” before letting this deal
go through. Identify specific information the regulators might consider to make their decision.
Answers will vary. How many other firms are in the entertainment and theatrical distribution
industries? How much market power do each of these other firms have? Have there been other
mergers like this in the past?
10. The article refers to “vertical mergers” and “horizontal mergers”. Research the difference online and
explain why “horizontal mergers” are more likely to be scrutinized by regulators. A horizontal merger
is when one company buys a director competitor that is in their same industry (Ex: If Ford merged
with Toyota) A vertical merger is when a company buys a supplier. (Ex: If Ford merged with a tire
company). Horizontal mergers face scrutiny because it reduces competition.
11. Research online the outcome of this deal. Was Disney able to buy Fox? Why or why not? Answers
will vary.
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