Ch. 18: Antitrust Policy and Regulation 1 Graphs and Tables Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Antitrust policy Main purpose: prevent monopolization, promote competition, and achieve allocative efficiency Trusts: business combinations that assign control to a single decision group – “trustees” – Acted as monopolies – “dominant seller” – P > MC – Consumer resentment 2

4 Antitrust Laws 1.Sherman Act (1890): outlawed restraints of trade (anti-competitive acts) and monopolization. 2.Clayton Act (1914): outlawed price discrimination, prohibited tying contracts, prohibited acquiring stocks of competitors, and prohibited interlocking directorates 3

4 Antitrust Laws 3.Federal Trade Commission Act (1914) a.Created the FTC b.Gave it the power to enforce antitrust law (along with U.S. Justice Department) c.Amended to protect against misleading advertising and misrepresentation of products. 4.Celler-Kefauver Act (1950) a.Prohibits firms from merging with a competitor through buying its physical assets (capital) 4

Inconsistent Interpretation Should the focus be on monopoly behavior or on monopoly structure? – Standard Oil (1911) divided into several firms. – U.S. Steel (1920) did not “reasonably” restrain trade. – Alcoa (1945) held 90% of aluminum market – IBM (mainframes), Intel (microprocessors) 5

Inconsistent Interpretation How broadly should markets be defined? “ rule” But what is the relevant market? DuPont cellophane (1956) controlled 100% of cellophane market but only 20% of “flexible wrapping material” market 6

Enforcement and Effectiveness Active antitrust perspective vs. laissez-faire perspective Effectiveness of Antitrust Law on Monopolies – U.S. government is lenient – “rule of reason” – Remedy: break-up firm (AT&T) or change behavior and sue (Microsoft) 7

Mergers Horizontal merger: two competitors that sell similar products in the same geographic market. – Exxon-Mobil Vertical merger: firms at different stages of the production process – Pepsi and Pizza Hut, Taco Bell, KFC; Comcast and NBC? Conglomerate: different industries in different geographic areas – ABC and Walt Disney 8

Mergers 9

Effectiveness of Antitrust Law on Mergers Herfindahl Index: sum of the squared percentage market shares (0 – 10,000) U.S. Gov will likely challenge horizontal merger if the resulting market has a Herf. Index above 1800 or if it has increased by more than 100. – Loose rule. – U.S. gov blocked merger between Staples and Office Depot – T-Mobile and AT&T? 10

Effectiveness of Antitrust Law on Mergers Most vertical mergers are allowed because they do not substantially lessen competition. – Exception: Ingram Book Co. and Barnes & Noble Conglomerates are usually permitted 11

Effectiveness of Antitrust Law Price-fixing – Known as “per se” violations: “in and of themselves” illegal. – Examples: DRAM (Samsung, Micron); LCD sales to Dell (by LG, Sharp, Hitachi, etc) Price Discrimination: rarely challenged by gov Tying Contracts: strictly enforced – Movie theaters; Kodak 12

Industrial Regulation Industrial Regulation: government regulation of prices or rates (for a natural monopoly, e.g.) Solutions: public ownership or industrial regulation 13

Problems with Industrial Regulation Costs and Inefficiency (from Ch. 10) – Regulation and “fair-return” price limit incentives to keep costs low. Perpetuating Monopoly – Industrial regulation may perpetuate monopoly after the conditions for natural monopoly have ended. Legal “cartels” 14

Deregulation 1970s: wave of deregulation Telecommunications (AT&T): gains to consumers and significant tech advances Airlines, railroads, and trucking: gains to society Electricity: good except for CA and Enron. 15

Social Regulation Social Regulation: regulation of production conditions (safety, worker rights), physical characteristics of goods, and the impact of production and consumption on society (pollution) 16

The Optimal Level of Social Reg. MB = MC Pro: regulation is costly, but necessary, since benefits (over time) are greater – Climate change? Con: too much regulation → MC > MB – Also: often inadequate info; unintended side- effects 17

Two last points No “free lunch” to more regulation – Higher prices (through higher costs), less innovation (due to uncertainty of future regulation), and reduced competition (regulations are more costly for smaller firms) Less government is not always better: the free market doesn’t always work. 18