Antitrust policy - Laws and government actions designed to prevent monopoly and promote competition

Industrial regulation - Gov’t regulation of firms’ prices within selected industries

Social regulation - Government regulation of the conditions under which goods are produced, the physical characteristics of goods, and the impact of the production and consumption of goods on society

Historical background

• Dominant firms used questionable tactics in consolidating industries + charged high prices to consumers

• Society benefits from greater competition

• Gov’t used regulatory agencies + antitrust laws to supplement market forces

Sherman Act - Cornerstone of antitrust legislation

• Outlawed restraints of trade + monopolization

• Courts can prohibit anticompetitive practices + break up monopolists

• Not effective, needed more explicit statement

Clayton Act - Strengthened + made clear the intent of the Sherman Act

• Outlaws price discrimination

• Prohibits tying contracts - Producer requires that a buyer purchase another (or others) of its products as a condition for obtaining a desired product

• Prohibits interlocking directorates - Situations where a director of one firm is also a board member of a competing firm—in large corporations where the effect would be reduced competition

Federal Trade Commission Act - Created Federal Trade Commission (FTC)

• Cease-and-desist orders - Issued in cases with unfair methods of competition

• Wheeler-Lea Act - Amended Federal Trade Commission Act + gave FTC more responsibilities

Celler-Kefauver Act - Amended Clayton Act; prohibited one firm from obtaining the physical assets of another firm when the effect would be reduced competition

Issues + impacts of anti-trust policy

• Gov’t has varied in aggression in enforcing antitrust laws

• Issues of interpretation

  • Standard Oil case - Supreme Court found Standard Oil guilty of monopolizing the petroleum industry through a series of abusive and anticompetitive actions

  • US Steel case - Courts established a rule of reason, saying that not every monopoly is illegal

  • Alcoa case - Even though a firm’s behavior may be legal, possessing monopoly power violates antitrust laws

  • Structuralists vs. behavioralists

• The relevant market

  • Courts consider share of market held by dominant firm

  • DuPont cellophane case - The government contended that DuPont, along with a licensee, controlled 100 percent of the cellophane market. But the Court accepted DuPont’s contention that the relevant market included all “flexible packaging materials”—waxed paper, aluminum foil, and so forth, in addition to cellophane

Issues of enforcement

• Individual firms can sue other firms under antitrust laws

• Administrations can enforce antitrust laws differently

• Active antitrust perspective - Competition is insufficient in some circumstances to achieve allocative efficiency and ensure fairness to consumers and competing firms

• Laissez-faire perspective - Antitrust intervention largely unnecessary

Effectiveness of antitrust laws

• Firms only sued if it has high market share + evidence of abusive conduct

• Microsoft case - Microsoft was found guilty of violating the Sherman Act by taking several unlawful actions designed to maintain its monopoly of operating systems for personal computers

  • A lower court ordered that Microsoft be split into two competing firms

  • A court of appeals upheld the lower-court finding of abusive monopoly but rescinded the breakup of Microsoft

  • Instead of the structural remedy, the eventual outcome was a behavioral remedy in which Microsoft was prohibited from engaging in a set of specific anticompetitive business practices

• Overall considered moderately effective

Mergers

• Horizontal merger - Merger between two competitors that sell similar products in the same geographic market

• Vertical merger - Merger between firms at different stages of the production process

• Conglomerate merger - Any merger not horizontal or vertical

• Merger guidelines based on Herfindahl index

• Most vertical mergers escape antitrust prosecution

• Conglomerate mergers generally permitted

Price fixing - An agreement (written, verbal, or inferred from conduct) among competitors to raise, lower, maintain, or stabilize prices or price levels

• Per se violations - Collusive activities such as scheming to rig bids on government contracts or dividing up sales in a market

• Very commonly persecuted under antitrust law

Price discrimination - The action of selling the same product at different prices to different buyers, in order to maximize sales and profits

• Rarely challenged by gov’t

Tying contracts - An agreement in which the seller conditions the sale of one product (the "tying" product) on the buyer's agreement to purchase a separate product (the "tied" product) from the seller

• Strictly prohibited

Industrial regulation

• Natural monopoly - When economies of scale are so extensive that a single firm can supply the entire market at a lower unit cost than could a number of competing firms

• Public interest theory of regulation - Industrial regulation is necessary to keep a natural monopoly from charging monopoly prices and thus harming consumers and society

Problems with industrial regulation

• Costs and inefficiency

• Perpetuating monopoly long after conditions of natural monopoly have ended

Legal cartel theory of regulation - Practical politicians “supplying” regulation to local, regional, and national firms that fear the impact of competition on their profits or even on their long-term survival. These firms desire regulation because it yields a legal monopoly that can virtually guarantee a profit

• Gov’t-sponsored cartel under guise of regulation

Deregulation

• Caused lower prices + increased efficiency

• Wave of technological advances

Social regulation - Concerned with the conditions under which goods and services are produced, the impact of production on society, and the physical qualities of the goods themselves

• Applied to all industries + affects many producers

• Intrudes into day-to-day production processes

• Expanded rapidly