Course Prerequisites: ECO 101 or 105 and ECO 240

REQUIRED RESOURCES:*

Required Text: W. Kip Viscusi, John M. Vernon, and Joseph E. Harrington, Jr. Economics of Regulation and Antitrust 4th Ed. , Cambridge, Mass.: MIT Press, 2005. (Abbreviated VVH)

 

Papers referenced in the syllabus will be on e- reserves at the Milner Library website.  To access the articles, go to www.mlb.ilstu.edu, Reserve Readings, Enter On-line Catalog, Course Reserves, and choose ECO 235.

 

A class web site will be maintained for the course.  This web site can be found at http://www.econ.ilstu.edu/Econ_Web_Pages/David_Loomis/335web/335home.htm.  You may find it more convenient to go to the Department of Economics Home Page at http://www.econ.ilstu.edu/, follow the link for Course Web Pages and find ECO 335 under my name.  At the class web site, you will find the following:

 

·              A current copy of this syllabus,

·              Class Announcements under "What's New",

·              Lecture Notes,

·              Problem Sets,

·              Links to Useful web sites, and

·              Student Papers from previous years.

 

COURSE OBJECTIVES:

This course covers the origins, aims, methods and effects of economic regulation and antitrust. The course will provide the theoretical foundation for economic analysis while allowing the student to apply sound reasoning to actual legal cases or case studies. The study of legal cases and case studies will be done primarily through in-class discussions.

Students will learn to use economic criteria for judging the applicability of regulation to different industries. Since this is the first course in the Master's Degree sequence in Policy Studies in Electricity, Natural Gas, and Telecommunications, there will be an emphasis on case studies in these industries. Current events in these and other industries will be analyzed with the economic framework developed in class.

By the conclusion of the course, students should be able to

·        understand the reasons for regulation and antitrust,

·        determine when antitrust and/or regulation is an appropriate remedy,

·        give the relative merits of various regulatory schemes, and

·        provide a brief industry background for electricity, natural gas, and telecommunications.

COURSE REQUIREMENTS

 

There will be 2 midterms and a final. No make-up exams will be given unless arrangements have been made prior to the exam and approved by the instructor.  The final will be comprehensive in the sense that material from earlier in the class is needed to understand later material.  The final will focus on material from the last 1/3 of the class. 

 

Problem Sets will be given throughout the semester, usually one per week. Problems will include the use of spreadsheet analysis, preferably using Microsoft Excel.  If you have never used spreadsheets, please seek out resources (i.e. books, people) to help you learn how to use the software.  Instructional Technology regularly schedules a basic Microsoft Excel course for the fall semester. 

 

Regular attendance is expected and class participation counts towards the final grade. A paper will be due towards the end of the semester and you will have an opportunity to rewrite the paper based on my comments to improve your grade. The topic must be approved by the instructor in advance.

Graduate students will have additional assignments throughout the semester and will not always be graded on the same scale as undergraduate students. Graduate students are expected to attend the Institute for Regulatory Policy's fall workshop. Transportation, lunch and registration will be provided. A short paper reviewing the workshop will be assigned.

Class Participation grades will be determined at the end of the semester based on the following criteria:

 

 

The final grade will be based on the following point scheme:

Midterm #1                  100 points

Midterm # 2                 100 points

Problem Sets                100 points

Class Participation          50 points

Paper                             50 points

Final                             100 points

TOTAL                        500 points

 

            The following point scale will be used to evaluate your performance:

 

                        Grade              Total Points

                           A                       450 or above

                           B                        400 or above

                           C                       350 or above

                           D                       300 or above

                           F                        less than 300

KEYS TO SUCCESS

 

This course has a large volume of reading.  Some of the reading is technical, focused on economic theory and some of the reading is narrative, focused on actual case studies.  It is imperative that you read the assigned material in both areas. Because the class is discussion oriented, you will not maximize your classroom learning if you have not read the material in advance.  In addition, participating in classroom discussion will help you clarify your own thinking as we review cases.  As you listen to others' economic reasoning and express your own ideas, true learning takes place.  The goal of this course is not to memorize a set of facts the night before the exam but to develop economic reasoning in the area of regulation and antitrust.  This cannot be done by cramming the night before the exam!!  Finally, do the problem set independently so that you know not only the correct answer but also how to arrive at the correct answer.  Many exam questions will be similar to problem set questions, so view problem sets as practice exams.

 

If, after reading the assigned material, participating in class discussion and working independently on problem sets, you are not achieving the level of success that you expect of yourself, please come to see me regularly during office hours.  My goal as your professor is to see you succeed.  If you are doing your best to learn, I will do my best to help you learn.

 

 

COURSE OUTLINE (Readings with * are required)

I. Introduction and Review

II. Government vs. Markets

* VVH Chap. 1

III. Why Regulate? /Who controls whom?

* VVH Chap. 2&3

* Posner, Richard A., "Theories of Economic Regulation," Bell Journal of

Economics, Autumn 1974, pp. 335-358.

* Peltzman, Sam, "Toward a More General Theory of Regulation," Journal of Law

and Economics, 1976, pp. 211-240.

* http://www.antitrust.org/

IV. Monopolization

* VVH Chap. 4 & 9 (pp. 293-304; 332-342)

* Williamson, Oliver E., "Dominant Firms and the Monopoly Problem: Market

Failure Considerations," Harvard Law Review, June 1972, pp. 1512-1531.

* Horowitz, Ira, "The Reasonableness of Horizontal Restraints: NCAA," in The Antitrust Revolution: Economics, Competition, and Policy, (ed. by Kwoka and White), New York: Oxford University Press, 1999

JEP, Spring 2001 Symposia "The Microsoft Case"

* Direct Testimony Of Franklin M. Fisher, U.S. vs. Microsoft, Civil Action No. 98-1232.

* Direct Testimony of Richard L. Schmalensee, U.S. vs. Microsoft, Civil Action No. 98-1232.

* Keyte, James A. and Neal R. Stoll, “Markets? We Don’t Need No Stinking Markets! The FTC and Market Definition, Antitrust Bulletin, Vol. 49 No. 3, Fall 2004, pp. 593-632.

 

Waldman, Donald E., "The duPont Cellophane Case Revisited," Antitrust

Bulletin, Winter 1980, pp. 805-830.

 

V. Oligopoly and Collusion

* VVH Chap. 5-6

* Stigler, George J., "A Theory of Oligopoly," Journal of Political Economy

Vol. 72, pp. 44-61. 

* Bloom, Paul N., "The Cereal Companies: Monopolists or Super Marketers?",

MSU Business Topics, Summer 1978, pp. 41-49.

* Carlton, Dennis W., Gustavo E. Bamberger, and Roy J. Epstein, "Antitrust and

Higher Education: Was There a Conspiracy to Restrict Financial Aid?", RAND Journal of Economics, Vol. 25 No. 1., Spring 1995, pp. 131-147.

Smith, R. A., "The Incredible Electrical Conspiracy," Fortune, April and May

1961, pp. 132ff.

VI. Mergers and Acquisitions

* VVH Chap. 7 & 8 (pp. 235-256)

* Joskow, Paul L., "Restructuring Electric Utilities: BG&E and PEPCO Propose to Merge," in The Antitrust Revolution: Economics, Competition, and Policy, (ed. by Kwoka and White), New York: Oxford University Press, 1999

* Brenner, Steven R., "Potential Competition in Local Telephone Service: Bell Atlantic-NYNEX," in The Antitrust Revolution: Economics, Competition, and Policy, (ed. by Kwoka and White), New York: Oxford University Press, 1999

* Dalkir, Serdar and Frederick R. Warren-Boulton, "Prices, Market Definition, and the Effects of Merger: Staples-Office Depot," in The Antitrust Revolution: Economics, Competition, and Policy, (ed. by Kwoka and White), New York: Oxford University Press, 1999

Fisher, Franklin M., "Horizontal Mergers: Triage and Treatment," Journal of

Economic Perspectives, Vol. 1. No. 2 Fall 1987, pp. 23-40.

Schmalensee, Richard, "Horizontal Merger Policy: Problems and Changes,"

Journal of Economic Perspectives, Vol. 1. No. 2 Fall 1987, pp. 41-54.
Griff, Marvin T., "What's New About the FERC's New Utility Merger Policy?",

Public Utility Fortnightly, February 1, 1997, pp. 16-21.

 

EXAM #1

VII. Price Discrimination

* VVH Chap. 9 (pp. 305-331)

* Bowman, Ward S., "Restraint of Trade by the Supreme Court," Yale Law

Journal, 1967, pp. 70-85.

VIII. Vertical Restraints

* VVH Chap. 8 (pp. 257-292)

* Baldwin, William L., "The Feedback Effect of Business Conduct on Industry

Structure," The Journal of Law and Economics, 1969, pp. 123-144.

* Ahlborn, Christian, David Evans & Jorge Padilla , "The Antitrust Economics of Tying: A Farewell to Per Se Illegality," The Antitrust Bulletin, Spring 2004, pp. 287-341.

* Noll, Roger G., "The Role of Antitrust in Telecommunications," The Antitrust

Bulletin, Fall 1995, pp. 501-528.

* Gilbert, Richard J., "Networks, Standards, and the Use of Market Dominance: Microsoft," in The Antitrust Revolution: Economics, Competition, and Policy, (ed. by Kwoka and White), New York: Oxford University Press, 1999

Alchian, Armen A., "Vertical Integration and Regulation in the Telephone

Industry," Managerial and Decision Economics, Vol. 16, 1995, pp. 323-326.

IX. Natural Monopoly Regulation

* VVH Chap. 10 & 11

* Demsetz, H., "Why Regulate Utilities?", Journal of Law and Economics, 1968,

pp. 55-65.

* Berg, Sanford V. and John Tschirhart, "A Market Test for Natural Monopoly in

Local Exchange," Journal of Regulatory Economics, 1995, pp. 103-124.

Leibenstein, Harvey, "Allocative Efficiency Vs. 'X-Efficiency'," American

Economic Review, Vol. 56, June 1966, pp. 392-415.

 

 

X. Rate Cases and Optimal Pricing

* VVH Chapter 12

 

EXAM #2

XI. Rate-of-Return Regulation/Regulatory Strategies and Alternatives

* VVH Chap. 13 & 14

* Braeutigam, Ronald E. & John C. Panzar, "Effects of the Change from Rate-of-

Return to Price-Cap Regulation," American Economic Review, May 1993, pp. 191-198.

* Joskow, Paul and Richard Schmalensee, "Incentive Regulation for Electric

Utilities," Yale Journal on Regulation, Vol. 4 1986, pp. 1-49.

Averch, H. And L.L. Johnson, "Behavior of the Firm Under Regulatory

Constraint," American Economic Review, 1962, pp. 1052-1069.

Johnson, L.L., "Behavior of the Firm Under Regulatory Constraint: A

Reassessment," American Economic Review, Vol. 63 No. 2, May 1973.

XII. Regulation and Fairness

* Zajac, Edward E., Political Economy of Fairness, Chapter 7, 11, 12.

* Loomis, David G., "The FCC Price Cap Regulation Proposal: A Fairness

Analysis," October, 1989.

XIII. Industry Studies

* VVH Chap. 15 & 18 (pp. 663-688)

            * Economic Report of the President, Chapter 6, US Government Printing Office, 1996

 

A.     Telecommunications

 

* Sappington, David E. M. and Dennis L. Weisman, "Today's Telecommunications Industry," Chapter 2 from Designing Incentive Regulation For the Telecommunications Industry, MIT Press, Cambridge, 1996.

* Alexander, Donald L. and Feinberg, Robert M., “Entry in Local Telecommunications Markets, Review of Industrial Organization, Vol. 25 No. 2, September 2004, pp. 107-27.

 

Dadd, C. Mark, "The Outlook for the Telecommunications Industry and the Implications for the Economy and for Business," Business Economics, January 1998, pp. 14-17.

Economides, Nicholas, "Telecommunications Today," Business Economics, April 1998, pp. 7-13.

 

B.     Electricity

 

* Brennan, Timothy J., Karen L. Palmer, Raymond J. Kopp, Alan J. Krupnick, Vito Stagliano, and Dallas Burtraw, A Shock to the System: Restructuring America's Electricity Industry, Washington, DC: Resources for the Future, 1996, Chapter 1 and 2.

* Joskow, Paul L., "Restructuring, Competition and Regulatory Reform in the U.S. Electricity Sector," Journal of Economic Perspectives, Summer 1997, pp. 119-138.

* Eckert, Toby, "Unplugging the Electric Power Monopolies," Illinois Issues,

January 1997, pp. 12-15.

Woolf, Fiona, "The Unbundling and Rebundling of Transmission and Market

Related Functions," The Electricity Journal, December 1996, pp. 44-51.

Madian, Alan L. "Meaningful Restructuring: Resolving the Stranded Cost

Dilemma," The Electricity Journal, January/February 1997, pp. 62-86.

 

C.     Natural Gas

 

* Dreyfus, Daniel A., "Deregulation of Utilities: The Natural Gas Experience," Business Economics, April 1989, v. 24 n. 2, pp. 41ff.

* Barcella, Mary L., "Natural Gas in the Twenty-First Century," Business Economics, October 1996, v. 31 n. 4, p. 19ff.

 

FINAL EXAM