Antitrust, Mergers, and Competition Policy Chapter 10 Antitrust, Mergers, and Competition Policy The Dilemma of Corporate Power Antitrust Regulation Corporate Mergers Global Competition and Antitrust Policy

Corporate power Corporate power The strength or capability of corporations to influence government, the economy, and society, based on their organizational resources and size.

The 10 largest global corporations, Figure 10.1 The 10 largest global corporations, 2002-2003 Rank 1 2 3 4 5 6 7 8 9 10 By Sale (billions of U.S. $) Wal-Mart $244.5 Exxon Mobil 204.5 General Motors 184.2 Royal Dutch/Shell 179.4 BP 178.7 Ford Motor 162.6 Daimler Chrysler 156.8 Toyota Motor 134.2 General Electric 131.7 Allianz 126.8 By Profits (billions of U.S. $) Citigroup $15.3 General Electric 15.1 Altria Group 11.1 Exxon Mobil 11.0 Royal Dutch/Shell 9.4 Bank of America 9.3 Pfizer 9.2 Wal-Mart 8.0 Toyota Motor 7.9 Microsoft 7.8 By Market Value (billions of U.S. $) General Electric $286.1 Microsoft 264.0 Exxon Mobil 244.9 Pfizer Wal-Mart 232.2 Citigroup 210.9 Johnson & Johnson 161.4 Royal Dutch/Shell 158.5 BP 153.2 AIG 151.0

Figure 10.2 Comparison of transnational corporations’ sales and the gross domestic product of selected nations ExxonMobil Indonesia Wal-Mart Turkey General Motors South Africa Ford Thailand DaimlerChrysler Finland General Electric Portugal Toyota Singapore $ Billions of Sales (2000) Gross Domestic Product $ Billions (2000)

Antitrust laws Antitrust Laws that promote competition or that oppose trusts, monopolies, or other business combinations that restrain trade.

Economic objectives of antitrust laws The protection and preservation of competition. To protect the consumer’s welfare by prohibiting deceptive and unfair business practices. To protect small, independent business firms from the economic pressures exerted by big business competition. To preserve the values and customs of small-town America.

Major federal antitrust laws Figure 10.3a Major federal antitrust laws Sherman Act Clayton Act Federal Trade Commission Act Antitrust Improvements Act Forbids restraint of trade and monopoly Forbids price discrimination, tying contracts, anticompetitive mergers, and interlocking directorates Forbids unfair competition and deceptive business practices Requires premerger notification and permits state suits on behalf of consumers against price fixing

The Sherman Act Prohibits contracts, combinations, or conspiracies that restrain trade and commerce. Prohibits monopolies and all attempts to monopolize trade and commerce. Provides for enforcement by the Justice Department, and authorizes penalties for violations.

The Clayton Act Prohibits price discrimination by sellers. Forbids tying contracts that require someone to buy a related and perhaps unwanted product in order to get another one produced by the same company. Prohibits companies from merging through purchase of shares or assets if competition is lessened or a monopoly is created. Outlaws interlocking directorates in large competing corporations.

The Federal Trade Commission Act Created the Federal Trade Commission to help enforce antitrust laws. Prohibits all unfair methods of competition. Gives more protection to consumers by forbidding unfair and deceptive business practices.

The Antitrust Improvements Act Requires large corporations to notify the Justice Department and the Federal Trade Commission about impending mergers and acquisitions. Expands the Justice Department’s antitrust investigatory powers. Authorizes the attorneys general of all 50 states to bring suits against companies that fix prices and to recover damages for consumers.

Federal antitrust enforcement Figure 10.3b Federal antitrust enforcement Federal Trade Commission Justice Department Private Persons and Companies State Attorneys General Federal Courts Investigation Guidelines Advisory opinions Informal settlements Lawsuits Lawsuits Investigation Lawsuits Consent decrees Court opinions and decisions

Key antitrust issues Monopoly: Does domination of an industry or a market by one or a few large corporations necessarily violate antitrust laws? Critics claim that economic concentration can eliminate effective price competition, reduce consumer choices, inhibit innovation, and concentrate profits in too few hands. Others claim the opposite is true. Innovation: Focus in antitrust policy. In today’s economy, regulators have increasingly promoted competition to foster technological innovation. Thus, the rationale for bringing antitrust actions is to spur innovation in many cases. High technology business: Economy has changed in the information age from when antitrust laws were crafted. Are the basic principles of antitrust law applicable today?

Corporate mergers Corporate merger A combination of one company with another. Vertical mergers Occur when the combining companies are at different stages of production in the same general line of business. Horizontal mergers Occur when the combining companies are at the same stage or level of production or sales. Conglomerate merger Occurs when firms that are in totally unrelated lines of business are combined.

Forces driving mergers in the 1990s and 2000s Technological change: Major companies in telecommunications and media industries jockeyed for a favorable position on the emerging information superhighway. The need to keep ahead of advances in biotechnology drove many mergers in the pharmaceutical and chemical industries. Changes in the regulatory environment: Telecommunications deregulation led to a wave of mergers among long-distance phone companies, cable operators, and regional carriers. Mergers also resulted in anticipation of regulatory changes in the health care industry. Many financial services firms merged in response to changes in federal law. Globalization: Many companies found it difficult to compete on the world stage as a result of globalization and subsequently merged. Stock price appreciation: The long bull market of the late 1990s contributed to the merger wave.

Value of mergers and acquisitions, Figure 10.4 Value of mergers and acquisitions, 1988-2002 Billions of dollars Source: “M & S Profile” published annually by Mergers and Acquisitions.

New challenges for antitrust enforcement Should the government permit mergers, joint ventures, or other cooperative arrangements among companies if they enhance the ability of American businesses to compete internationally? Should the government break up monopolies with the United States, if the global marketplace for the products or services offered by these companies is highly competitive? Should federal regulators and the courts try to enforce U.S. antitrust laws against foreign companies if these companies operate subsidiaries in the United States? What steps can the government take to create a level playing field for U.S. corporations, so that U.S. and foreign firms operate under a common set of antitrust rules and regulations?