Deck 12: Antitrust Policy and Regulation

Question 1

In 1920, the U.S. government was successful in using the Sherman Antitrust Act against U.S. Steel.

Answer 1

False

Question 2

The U.S. government withdrew its antitrust case against IBM in 1982 because

A) the per se standard did not apply to the case.
B) IBM agreed to cooperate.
C) there was no proof that IBM's mainframe computer profits cross-subsidized its personal computer activity.
D) the Supreme Court redefined the rule of reason to make it more difficult to prove guilt.
E) competition in computer markets increased rapidly after the case began.

Answer 2

competition in computer markets increased rapidly after the case began.

Question 3

Antitrust policy includes all of the following except

A) challenging and breaking up existing firms with significant market power.
B) preventing mergers that would increase monopoly power significantly.
C) limiting competitive arrangements between firms and their suppliers.
D) prohibiting price fixing.
E) prohibiting collusion.

Answer 3

limiting competitive arrangements between firms and their suppliers.

Question 4

A 1945 Supreme Court decision found Alcoa Aluminum guilty of monopolization.

Question 5

Antitrust policy began in the United States just over 100 years ago in response to

A) predatory pricing on the part of small retailers.
B) a massive breaking up of existing firms.
C) massive waves of immigration into the country.
D) the development of contestable markets.
E) a massive wave of mergers and consolidations among firms.

Question 6

The antitrust case standard that holds that it is necessary only to show that an action occurred, not that there was intent or significant impact, is called the

A) rule of reason.
B) antimonopoly rule.
C) predatory pricing rule.
D) per se rule.
E) antidiscrimination.

Question 7

Antitrust policy aims at restoring confidence in government.

Question 8

The basis for breaking apart Standard Oil in 1911 was the

A) Clayton Antitrust Act.
B) Sherman Antitrust Act.
C) Celler-Kefauver Act.
D) Robinson-Patman Act.
E) Glass-Steagall Act.

Question 9

A firm's action to set a price below its shutdown point with the intent to drive a competitor out of business is called

A) hostile takeover.
B) lowering the firm's price-cost margin.
C) predatory pricing.
D) price discrimination.
E) a contestable market action.

Question 10

Which of the following gives the government the authority to take action against price fixing?

A) Section 1 of the Sherman Act
B) Section 2 of the Sherman Act
C) The Clayton Act
D) The Glass-Steagall Act
E) The Federal Trade Commission Act

Question 11

The first antitrust law in the United States was the

A) Clayton Antitrust Act.
B) Sherman Antitrust Act.
C) Celler-Kefauver Act.
D) Robinson-Patman Act.
E) Glass-Steagall Act.

Question 12

Zenith lost, and Matsushita and other Japanese companies won, a 1986 Supreme Court predatory pricing decision because

A) the Court's majority opinion stated that the predatory pricing case appeared to make "no economic sense."
B) the Japanese companies charged higher prices than Zenith.
C) the Court ruled that the Japanese companies were not competing vigorously against Zenith.
D) the Japanese companies' share of the U.S. market was too large for them to predatory-price.
E) foreign companies are exempt from antitrust regulations.

Question 13

A massive wave of mergers and consolidations in the United States 100 years ago was made possible by

A) the opening up of the western states.
B) rapid innovations in transportation, communication, and management techniques.
C) a massive influx of immigrants from foreign countries.
D) the growth of the American economy due to international trade.
E) the growth of toll roads.

Question 14

Antitrust policy attempts to prevent collusion among sellers and to prevent restraint of trade resulting from monopoly power.

Question 15

Which of the following statements about the Sherman Antitrust Act is false?

A) Section 2 of the act makes attempts to monopolize illegal.
B) It established the Antitrust Division of the U.S. Justice Department.
C) Section 1 of the act makes price fixing illegal.
D) It is a law that aims at reducing anticompetitive behavior.
E) It is a law passed in the United States in 1890.

Question 16

What is the name of the antitrust case standard that requires a court to consider the rationale for the offending practice and its effect on competition?

A) Rule of reason
B) Antimonopoly rule
C) Predatory pricing rule
D) Per se rule
E) Antidiscrimination

Question 17

A business practice is deemed illegal under the per se rule when the court decision is made without regard to the practice's economic rationale or consequences.

Question 18

Government actions designed to promote competition among firms are called

A) antitrust policy.
B) economic regulation.
C) incentive regulation.
D) government regulation.
E) monopoly policy.

Question 19

Which of the following gives the government the authority to take action in breaking up an existing monopoly?

A) Section 1 of the Sherman Act
B) Section 2 of the Sherman Act
C) The Clayton Act
D) The Glass-Steagall Act
E) The Federal Trade Commission Act

Question 20

The main purpose of antitrust law is to promote competition and control monopoly power.

Question 21

Suppose that Industry A has two firms of the same size and Industry B has three firms with 65 percent, 30 percent, and 5 percent market shares, respectively. Which of the following is true of the Herfindahl-Hirschman indexes for the two industries?

A) The HHI for Industry A is 50 higher than the HHI for Industry B.
B) The HHI for Industry A is 50 lower than the HHI for Industry B.
C) The HHI for Industry A is 150 higher than the HHI for Industry B.
D) The HHI for Industry A is 150 lower than the HHI for Industry B.
E) The HHI is the same for both industries.

Question 22

Predatory pricing is being practiced when firms sell products to make large, short-run profits.

Question 23

A downward-sloping demand curve that incorporates the firm's expectations of what other firms will do is called a

A) compensated demand curve.
B) independent demand curve.
C) uncompensated demand curve.
D) consumer's demand curve.
E) strategic demand curve.

Question 24

Predatory pricing interpretations are now well established, and new court rulings are unlikely to change them.

Question 25

Suppose that within an industry, firm A has 50 percent market share, firm B has 30 percent market share, and firm C has 2 percent market share. Which of the following is not likely to be challenged by the Federal Trade Commission?

A) A merger between firms A and B
B) A merger between firms A and C
C) A merger between firms B and C
D) A merger of firms A, B, and C
E) Any merger among the three firms is likely to be challenged.

Question 26

In accordance with their merger guidelines, the Justice Department and the Federal Trade Commission would probably challenge a merger if the

A) number of firms in the industry were very large.
B) industry had a Herfindahl-Hirschman index above 800 and the index rose by 80 points or more.
C) industry had a Herfindahl-Hirschman index above 1,800 and the index rose by 100 points or more.
D) industry had a Herfindahl-Hirschman index below 1,000.
E) firms' markets were very large.

Question 27

The 1986 Supreme Court decision in Matsushita v. Zenith has made predatory pricing more difficult to prove.

Question 28

Exhibit 12-1
Exhibit 12-1 shows the market shares of eight firms in an industry. Which of the following mergers would most likely be challenged by the U.S. Department of Justice?

A) A merger between two of the firms, each with 5 percent market share
B) A merger between two of the firms, each with 10 percent market share
C) A merger between a firm with 5 percent market share and a firm with 10 percent market share
D) A merger between a firm with 50 percent market share and a firm with 10 percent market share
E) Any merger in this industry would be challenged.

Question 29

Which of the following markets has the highest Herfindahl-Hirschman index?

A) Eight firms of exactly the same size
B) Three firms of widely differing sizes
C) Three firms of exactly the same size
D) Twenty firms of widely differing sizes
E) Twenty firms of exactly the same size

Question 30

Since 1890, the government has ordered the breakup of

A) Standard Oil.
B) Pacific Bell.
C) Coca-Cola.
D) IBM.
E) General Motors.

Question 31

The Herfindahl-Hirschman index is a measure of

A) market size.
B) firm size.
C) the degree of firm responsiveness to a change in demand.
D) the degree of concentration in a market.
E) the degree of collusion among firms in a market.

Question 32

According to the Federal Trade Commission merger guidelines, a merger is likely to be challenged if

A) the HHI after the merger is the same as the HHI before the merger.
B) the HHI decreases after the merger.
C) the HHI after the merger is above 1,000 and has increased.
D) the HHI after the merger is above 1,800 and has increased by 50 points or more.
E) the HHI after the merger is above 1,500 and has decreased.

Question 33

The Herfindahl-Hirschman index is measured by

A) adding the market shares of the four largest firms in an industry.
B) calculating the eight-firm concentration ratio for an industry.
C) summing the squares of the market shares of all firms in an industry.
D) calculating the four-firm concentration ratio for an industry.
E) squaring the sum of the market shares of all firms in an industry.

Question 34

The Herfindahl-Hirschman index tends to be lower when

A) one firm has 81 percent market share and all others have 1 percent each.
B) there are more firms in the industry.
C) the shares of each firm are more unequal.
D) the four largest firms control over 80 percent of the market share.
E) one or two firms have a large market share.

Question 35

The measure used by the U.S. government to determine whether a merger should be allowed is the

A) price elasticity of demand.
B) price-cost margin.
C) Herfindahl-Hirschman index.
D) producer price index.
E) market size.

Question 36

The 1914 law aimed at preventing monopolies from forming through mergers is called the

A) Clayton Antitrust Act.
B) Sherman Antitrust Act.
C) Celler-Kefauver Act.
D) Fair Labor Standards Act.
E) Robinson-Patman Act.

Question 37

When a court uses the rule of reason to interpret the Sherman Antitrust Act, its ruling is based on a firm's market share alone.

Question 38

The relative infrequency of government-forced breakups in recent years may be due to

A) decreased profitability of U.S. firms.
B) greater international competition.
C) government reaction to losing many court cases.
D) the inability of government to decide which action to take.
E) the decreased effectiveness of merger policy.

Question 39

The Justice Department and Federal Trade Commission use the Herfindahl-Hirschman index because it indicates how likely it is that, after a merger, firms in an industry will

A) have enough market power to raise prices well above marginal cost.
B) have enough market power to use predatory pricing.
C) consider setting prices jointly.
D) increase output.
E) increase economic efficiency.

Question 40

The government agency that is partially responsible for competition policy in the United States is the

A) Department of Commerce.
B) Treasury Department.
C) Congressional Budget Office.
D) Antitrust Division of the Justice Department.
E) Federal Reserve System.

Question 41

A merger of firms with low price-cost margins is less likely to be challenged by the Federal Trade Commission.

Question 42

The Herfindahl-Hirschman index increases with a narrower market definition.

Question 43

A 1,000-point change in the Herfindahl-Hirschman index corresponds roughly to a merger of two firms, each with a 7 percent share of the market.

Question 44

If powdered soft drinks were perfect substitutes for carbonated soft drinks, then the demand curve for carbonated soft drinks would

A) be perfectly inelastic.
B) have a price elasticity of 0.5.
C) be perfectly elastic.
D) have no price elasticity.
E) have a unit-price elasticity.

Question 45

A vertical merger will seldom reduce competition if

A) there is exclusive dealing in the market.
B) the merger occurs at the raw materials stage of production.
C) there are other firms competing at each level of production.
D) there is resale price maintenance in the market.
E) the merged firm competes only in prices.

Question 46

The type of merger that will most likely reduce market competition is a horizontal merger.

Question 47

If a group of firms in a particular category of goods all change their quantity sold by 1 percent and revenues change significantly, then the firms constitute a market.

Question 48

The Federal Trade Commission is likely to challenge a merger in an industry with

A) a low price-cost margin because it reflects firm inefficiency.
B) a high price-cost margin because it reflects firm inefficiency.
C) a low price-cost margin because it reflects high market power.
D) a high price-cost margin because it reflects high market power.
E) a negative price-cost margin because it reflects poor industry performance.

Question 49

If the value of the Herfindahl-Hirschman index is 10,000, then there must be a monopoly in the industry.

Question 50

If one includes carbonated soft drinks, powdered soft drinks, bottled water, and juice drinks in the definition of the beverage industry, one is using a

A) broad market definition.
B) medium market definition.
C) narrow market definition.
D) Department of Commerce market definition.
E) Federal Trade Commission market definition.

Question 51

When a clothing manufacturer merges with a retail clothing store chain, the merger is considered a

A) vertical merger.
B) conglomerate merger.
C) horizontal merger.
D) corporate raid.
E) competitive merger.

Question 52

An industry with a high degree of concentration may in fact be acting competitively because of the threat of new firms coming into the business.

Question 53

A broader definition of a market implies

A) a lower market concentration.
B) a higher Herfindahl-Hirschman index.
C) a higher price-cost margin.
D) a higher possibility of mergers.
E) a higher possibility of price fixing.

Question 54

A description of the types of goods and services offered and the geographic area of a market is called

A) the large market concept.
B) competition.
C) a contestable market boundary.
D) territorial market boundary.
E) market definition.

Question 55

The combining of two firms, one of which supplies goods to the other, is called a

A) conglomerate merger.
B) horizontal merger.
C) competitive merger.
D) cartel.
E) vertical merger.

Question 56

The type of merger that increases the degree of concentration the most is a

A) conglomerate merger.
B) horizontal merger.
C) competitive merger.
D) vertical merger.
E) diagonal merger.

Question 57

The combining of two firms that sell the same good or type of good is called a

A) conglomerate merger.
B) competitive merger.
C) vertical merger.
D) cartel.
E) horizontal merger.

Question 58

The Herfindahl-Hirschman index rises as concentration in an industry falls.

Question 59

A vertical merger has a smaller impact on market concentration than does a horizontal merger.

Question 60

The Justice Department and the FTC have used economic analysis to develop a quantitative procedure to help define the extent of a market.

Question 61

Lawsuits against alleged price fixers can claim treble damages.

Question 62

Price fixing is the practice of charging the same price for a product to all customers.

Question 63

One of the most famous price-fixing cases in U.S. history occurred in the 1950s and involved

A) Alcoa and Reynolds Aluminum Company.
B) General Motors and Ford.
C) Westinghouse and General Electric.
D) IBM and Digital Equipment Company.
E) American Airlines and United Airlines.

Question 64

A situation in which firms conspire to set prices for goods sold in the same market is called

A) a horizontal merger.
B) price fixing.
C) resale price maintenance.
D) a vertical restraint.
E) artificial price control.

Question 65

Resale price maintenance is the situation in which a producer

A) sets a list price and does not allow the retailer to offer a discount.
B) does not allow a retailer to sell goods made by a competing manufacturer.
C) places no restrictions on a retailer's prices.
D) limits the regions over which a retailer can sell a certain product.
E) restrains trade horizontally.

Question 66

The government enforces laws against price fixing by

A) putting the alleged price fixers out of business but not confiscating their assets.
B) regulating prices for a certain period of time.
C) ordering the alleged price fixers to stop fixing prices.
D) confiscating the assets of the alleged price fixers.
E) bringing lawsuits against the alleged price fixers.

Question 67

When two or more firms conspire to fix prices, they do something

A) anticompetitive but legal.
B) competitive but illegal.
C) illegal and anticompetitive.
D) legal and competitive.
E) that increases profits of major producers in the market.

Question 68

There is more controversy among economists about the effects of vertical restraints than the effects of horizontal restraints.

Question 69

A region over which a manufacturer limits the distribution or selling of its products to one retailer or wholesaler is called a(n)

A) uncontested market.
B) exclusive territory.
C) captured territory.
D) strategic market territory.
E) inclusive territory.

Question 70

A court decision forbidding resale price maintenance would mean that

A) firms that were not horizontally integrated would not enjoy the advantages of horizontally integrated firms.
B) competition among producers would decrease.
C) competition among retailers would increase.
D) firms that were not vertically integrated would not enjoy the advantages of vertically integrated firms.
E) it would become profitable to merge horizontally.

Question 71

Price fixing is illegal in the United States.

Question 72

Price fixing is illegal under the per se rule outlined in Section 1 of the Sherman Act.

Question 73

Suppose a low-price discount store competes with a high-price retail store that provides services to customers. One can view resale price maintenance as a means of

A) preventing the discount store from charging a lower price.
B) preventing the retail store from changing its behavior.
C) preventing the discount store from capturing the best customers.
D) enabling the low-price discount store to sell in the high-price retail store market.
E) eliminating the discount store.

Question 74

A contract condition whereby a manufacturer does not allow a retailer to sell goods made by a competing manufacturer is called

A) uncontested trading.
B) boycott dealing.
C) market fixing.
D) exclusive dealing.
E) resale price maintenance.

Question 75

Lawsuits against alleged price fixers can be brought

A) directly by the Justice Department but not by the individual firms harmed by the price fixing.
B) neither directly by the Justice Department nor by the individual firms harmed by the price fixing.
C) not directly by the Justice Department but by the individual firms harmed by the price fixing.
D) directly by the Justice Department and by the individual firms harmed by the price fixing.
E) by the Justice Department only after they are brought by the individual firms harmed by the price fixing.

Question 76

Price-fixing arrangements can take the form of an effort to restrict trade in one horizontal market.

Question 77

Soft drink distributors commonly use the practice of

A) price discrimination.
B) horizontal mergers.
C) resale price maintenance.
D) exclusive territories.
E) price fixing.

Question 78

Resale price maintenance can never increase economic efficiency.

Question 79

Restraints on trade may do all the following except

A) decrease the quantity produced.
B) decrease profits.
C) cause a deadweight loss.
D) raise prices.
E) limit other firms' access to a market.

Question 80

Most economists agree that resale price maintenance reduces economic efficiency.