19 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.. Antitrust Policy and Regulation

Antitrust Laws The purpose: Prevent monopoly Promote competition Achieve allocative efficiency Historical background Regulatory agencies Antitrust laws LO1

Antitrust Laws Sherman Act 1890 Made restraint of trade and monopolization illegal Injured firms can sue for treble damages Department of Justice or injured firms can initiate suits LO1

Antitrust Laws Clayton Act 1914 – Illegal if competition is reduced Outlaw price discrimination Prohibit tying contracts Prohibit stock acquisition No interlocking directorates LO1

Antitrust Laws Federal Trade Commission Act 1914 Power to investigate unfair business practices of firms Cease and desist orders Wheeler-Lea Act 1938 Made fraudulent advertising illegal FTC investigates fraudulent advertising LO1

Antitrust Laws Celler-Kefauver Act 1950 Made all mergers illegal if competition is significantly reduced LO1

Antitrust Policy Issues of interpretation Monopoly behavior or structure 1911 Standard Oil Case 1920 U.S. Steel Case Rule of reason 1945 Alcoa Case The relevant market rule 1956 DuPont Cellophane Case Issues of enforcement LO2

Antitrust Policy Issues of enforcement Active antitrust perspective Laissez-faire perspective LO2

Effectiveness of Antitrust Laws Monopoly AT&T Microsoft Case Mergers Horizontal merger Vertical merger Conglomerate merger LO2

Mergers Price fixing Per se violation Price discrimination Tying contracts LO2

Industrial Regulation Natural monopolies Economies of scale Public interest theory of regulation When it’s beneficial to have a single firm price and output must be regulated by government to prevent abuse of power LO3

Problems with Industrial Regulation Costs and inefficiency No incentive to reduce cost X-inefficiency Perpetuate monopoly Legal Cartel Theory Regulating potentially competitive industries Firms desire regulation LO3

Deregulation Began in the 1970s Has produced large net benefits for consumers and society Industries deregulated include: Airlines Railroads Telecommunications Electricity LO3

Social Regulation Concerned with the conditions under which goods and services are produced Impact of production on society Physical qualities of goods Applied “across the board” to all industries LO4

Social Regulation LO4

Social Regulation Optimal level of social regulation In support of social regulation Criticisms of social regulation High costs, higher prices Uneconomical goals MB<MC, overzealous personnel Inadequate information Unintended side effects Slower innovation Reduced competition LO4