Antitrust and Regulation

Since the passage of the Interstate Commerce Act (1897) and the Sherman Act (1890), regulation and antitrust (competition policy) have operated as competing mechanisms to control competition. Regulation produced cross-subsidies and favors to special interests, but specified prices and rules of mandatory dealing. Antitrust promoted competition without favoring special interests, but could not formulate rules for particular industries. Antitrust and regulation can be viewed as complements, where policymakers assign control of competition to courts or regulatory agencies based on their relative strengths. And antitrust may act as a constraint on what regulators can do. Controlling competition is a particular challenge in network industries, where mediating "vertical" interactions across firms, particularly for "bottleneck," or essential facilities, is important. This chapter uses a game theoretic framework of political bargaining and the historical record of antitrust and regulation across a number of regulated industries to explore both positive and normative rationales for choosing between these two policy instruments. It highlights the conditions under which competition policy and regulation may be complements rather than substitutes in the policy arsenal. The chapter argues that the deregulation movement reflected the relative competencies of antitrust and regulation, and describes the emergence of antitrust as the primary policy tool to control competition.