Introduction to Antitrust Law n Always two questions in any antitrust case: –What is prohibited according to the antitrust statutes? –Will the actions the firm is taking/has taken result in these prohibited things? n Legal side of antitrust is answering the first question.

Economic Side of Antitrust n Determine whether a firm’s actions will have specific effects that have been determined to be illegal. –For the most part, a postitive question -- a question of fact. –But ultimately the courts will decide because inevitably different economists will have different opinions.

Sherman Act n Earliest antitrust act by any country. n Outlaws "every contract, combination... or conspiracy, in restraint of trade,” –Supreme Court decided it only prohibits contracts that restrain trade unreasonably. What is unreasonable is up to the courts. n Makes it unlawful to monopolize, or attempt to monopolize a market. –As interpreted by the courts, the law is violated only if the company tries to maintain or acquire a monopoly position through unreasonable methods. Courts decide what is unreasonable.

Clayton Act n Prohibits mergers and acquisitions where the effect "may be substantially to lessen competition, or to tend to create a monopoly." –Determining whether a merger will have such an effect requires a thorough economic evaluation or market study.  Also interpreted as limiting the use of tying and exclusive contracts.  Passed partly in response to perceived shortcomings in the Sherman Act as interpreted by the courts.

Federal Trade Commission Act n Outlaws "unfair methods of competition.” –Does not define unfair. The courts must decide. –The Supreme Court has ruled that violations of the Sherman Act also are violations of FTC Act, but the FTC Act covers some practices that are beyond the scope of the Sherman Act.

Robinson-Patman Act n Price discrimination that lessens competition is illegal. –In general, price discrimination is lawful. Must hurt competition to be illegal.

“Chicago School” n A group of academics, primarily at the University of Chicago. n Belief that markets will eventually erode most monopolies quickly and more effectively than governments.

Post-Chicago School n Revival of interest in antitrust law and economics. –Development of new theories that show persistent existence of market power. n Additional increase in interest due to increase in merger activity.

History of Industrial Organization n Structure-Conduct-Performance Paradigm –First formal theory of industrial organization –Developed in the 1940’s by Mason and Bain –Assumes a causal relationship: Structure  Conduct  Performance

S-C-P n Structure: characteristics of the market. –number of firms, distribution of market share, degree of product differentiation, entry conditions, n Conduct: choices of firms. –price, quantity, investments, service, quality. n Performance: how firms do. –price, consumer surplus, product variety, technological progress.

New Industrial Organization n Focuses on models of firm behavior. n Uses game theory as a basic tool. –Explicitly incorporates strategic interaction among firms n New Empirical Industrial Organization (NEIO) –Based on theoretical models. –Econometric analysis, not case studies.

Major Questions in Industrial Organization n Is there market power? n How do firms acquire and maintain market power? n What are the implications of market power? n Is there a role for public policy regarding market power?