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Competition Policy: brief history Lesson 1. Anti-trust law in the US  Origins of the Sherman Act: formation of trusts  Formation of a large single market.

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Presentation on theme: "Competition Policy: brief history Lesson 1. Anti-trust law in the US  Origins of the Sherman Act: formation of trusts  Formation of a large single market."— Presentation transcript:

1 Competition Policy: brief history Lesson 1

2 Anti-trust law in the US  Origins of the Sherman Act: formation of trusts  Formation of a large single market due to transportation & communication  economies of scale and scope + innovations  expansion in the size of firms  Separation between ownership-control  Liberalization of incorporation laws  waves of mergers  Fall in trasportation and communication resulted also in a rise competition  low and unstable prices (low costs for scale/scope ec.)

3  Large investments  attempt to operate at full capacity to cover fixed costs resulted also in price decrease  Firms answered to price war with PRICE AGREEMENTS to keep margins  Consumers and small firms were hurt by high prices  political force of farmers and small bussiness lead to ANTI-TRUST laws in many US states  Little effects at a federal level  in 1890 enough consensus for the SHERMAN ACT

4 Sherman Act  Section 1 prohibits contracts which restrain trade  prison and fines for violators  Section 2 prohibits monopolisation (prison up to 3 years)  In the first decade enforcement was not strict  1897: Supreme Court decision on a cartel of 18 railways fixing the transport fares  illegal  Prohibition of price agreements: strong principle, still valid, few exceptions  Prohibitions in vertical relationships:resale-price maintenance  Standard oil  trust by Rockfeller  monopolisation practices (predatory prices and acquisition of minor firms) + Terminal railroad (essential facility case)

5 Sherman Act II  Sherman act cover price fixing, market sharing agreements and monopolization, not mergers  Firms wishing to coordinate price had the option of merging into a single firm  sharp increse in the number of mergers  The Clayton Act of 1914 extended antitrust to cover mergers reducing competition  The Clayton act also forbids other practices like price discrimination  Creation of the Federal trade Commission – independent agency - that shares with the Department of Justice enforcement of antitrust laws

6 History…Politics…  During the great depression less enforcement of antitrust laws: more price control, more regulation  Ex. Coal Mine industry  reduction of demand, to avoid losses 137 producers formed a company to control prices and allocate output  reasonable protection of the market against destruction  Competition laws and enforcement should be understood in the political-economic-historic context

7 More activism  Until the mid-70s: more activism  International salt (1947) esatblished a rule prohibiting TIE-In SALES (a producer sells a product only if the consumer buy another one)  Courts ruled against “exclusive territorial clauses” (only one distributor can operate in each area)  Alcoa case (alluminium): the mere fact that Alcoa had 90% market shares and was building new capacity was enough to prove “monopolisation”

8 Chicago and Reagan  Chicago school criticized antitrust activism and stessed the efficiency rationale behind vertical restraints and mergers  Joint effect of the Chicago views and the loss of competitveness of US firm abroad changed the enforcement attitude of antitrust  This trend became a major change during the Reagan Administration  market forces should be let free to select more efficient firms  In 1977 there was a peak of 1611 antitrust cases, in 1989 only 638

9 Competition laws in the EU- Germany  National and supra-national jurisdiction  Most European Countries had competition laws very recently (reproducing the features of the treaty of Rome)  Germany: initially cartel were seen as an instrument to control instability created by cut-throat competition and price-wars  Cartel were even enforced in Courts  In 1923 an anti-cartel law was introduced as a reaction to hyperinflation  Firms cooperation and mergers was seen as a way to make them stronger and create “national champions”  After world War II the Allied imposed antitrust laws in Germany & Japan to break concentration of economic power  Germany passed a competition law in 1957

10 Competition laws in the EU- The UK  After world War II competition was seen as a remedy to unemployment  Competition law of 1998 brought the Uk in line with the EU  Until the 1998 the UK lacked a system of penalties and tools of enforcement (Uk authorities were not entitled to search firms’headquarters and seize documents)

11 Competition law in the European Communities  Supra-national competition law in the EU orginates from the “Treaty of Paris”  European Coal & Steel Community  Prohibition of trade barriers, discriminatory practices and other restrictions able to distort competition  Aims: 1.equal access to basic resources 2. free competition increasingly seen as the best way to assure efficient markets (due to the success of the US economy relying on antitrust law)  Competition rules under the Treaty of Paris wanted to avoid discrimination on national grounds

12 Competition Policy in the EU  Today the main objectives of Competition policy enforced by the EC (under the Treaty of Rome) are probably economic efficiency and European market Integration  Social reasons are also considered  exemption to “Crisis cartels”  agreeements where firms engage in reciprocal permanent reductions of overcapacity  minimize the social cost of unemployment: the social cost may be too high since many firms might exit the industry producing job losses  Importance give to SME  ”de minimis rule”  little harm can be done by firms of limited size compared to the size of the market  origins from the crisis of the heavy industry in the 70’  rely on SME for industrial growth

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