2. 18. Antitrust Policy and Regulation McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

3. 32 - 2 Copyright McGraw-Hill/Irwin, 2002 Antitrust Policy and Regulation The Antitrust Laws Types of Mergers Industrial Regulation Social Regulation Key Terms Previous Slide Next Slide End Show Chapter Objectives The Core Elements of the Major Antitrust (Antimonopoly) Laws in the United States Some of the Key Issues Relating to the Interpretation and Application of Antitrust Laws The Economic Principles and Difficulties Related to the Setting of Prices (Rates) Charged by So-Called “Natural Monopolies” The Nature of “Social Regulation,” Its Benefits and Costs, and Its Optimal Level

4. 32 - 3 Copyright McGraw-Hill/Irwin, 2002 Antitrust Policy and Regulation The Antitrust Laws Types of Mergers Industrial Regulation Social Regulation Key Terms Previous Slide Next Slide End Show ANTITRUST POLICY AND REGULATION Antitrust Policy Industrial Regulation Social Regulation

5. Antitrust Laws The purpose: Prevent monopoly Promote competition Achieve allocative efficiency LO1 18-4

6. 32 - 5 Copyright McGraw-Hill/Irwin, 2002 Antitrust Policy and Regulation The Antitrust Laws Types of Mergers Industrial Regulation Social Regulation Key Terms Previous Slide Next Slide End Show THE ANTITRUST LAWS Historical Background Trusts P=MC Pricing Monopoly Pricing Regulatory Agencies Natural Monopolies

7. 32 - 6 Copyright McGraw-Hill/Irwin, 2002 Antitrust Policy and Regulation The Antitrust Laws Types of Mergers Industrial Regulation Social Regulation Key Terms Previous Slide Next Slide End Show THE ANTITRUST LAWS Sherman Act of 1890 Section 1 - Restraint of Trade Section 2 – Monopolization Treble Damages Clayton Act of 1914 Section 2 - Price Discrimination Section 3 - Tying Contracts Section 7 – Stock Ownership Section 8 – Interlocking Directorates

8. 32 - 7 Copyright McGraw-Hill/Irwin, 2002 Antitrust Policy and Regulation The Antitrust Laws Types of Mergers Industrial Regulation Social Regulation Key Terms Previous Slide Next Slide End Show THE ANTITRUST LAWS Federal Trade Commission Act of 1914 Established FTC Holds Hearings on Complaints Seeks Cease-and-Desist Orders Wheeler-Lea Act of 1938 Policing Deceptive Practices False Advertising Misleading Representation of Products

9. 32 - 8 Copyright McGraw-Hill/Irwin, 2002 Antitrust Policy and Regulation The Antitrust Laws Types of Mergers Industrial Regulation Social Regulation Key Terms Previous Slide Next Slide End Show THE ANTITRUST LAWS Celler-Kefauver Act of 1950 Strengthened Clayton Act Regarding Asset Ownership in Competing Firms Anticompetitive Mergers Illegal No Matter How Accomplished

10. 32 - 9 Copyright McGraw-Hill/Irwin, 2002 Antitrust Policy and Regulation The Antitrust Laws Types of Mergers Industrial Regulation Social Regulation Key Terms Previous Slide Next Slide End Show THE ANTITRUST LAWS Issues of Interpretation Monopoly Behavior vs. Structure Standard Oil Case – 1911 U.S. Steel Case – 1920 Rule of Reason Alcoa Case - 1945 Du Pont Cellophane Case Issues of Enforcement: Tradeoffs Among Goals Balance of Trade Defense Cutbacks Emerging New Technologies

11. Antitrust Policy Issues of interpretation Monopoly behavior or structure 1911 Standard Oil Case 1920 U.S. Steel Case 1945 Alcoa Case The relevant market 1956 DuPont Cellophane Case Issues of enforcement LO2 18-10

12. 32 - 11 Copyright McGraw-Hill/Irwin, 2002 Antitrust Policy and Regulation The Antitrust Laws Types of Mergers Industrial Regulation Social Regulation Key Terms Previous Slide Next Slide End Show THE ANTITRUST LAWS Effectiveness of Antitrust Existing Market Structures Mergers Merger Types Horizontal Merger Vertical Merger Conglomerate Merger Merger Guidelines Herfindahl Index Price Fixing – Per se Violations Tying Contracts

13. 32 - 12 Copyright McGraw-Hill/Irwin, 2002 Antitrust Policy and Regulation The Antitrust Laws Types of Mergers Industrial Regulation Social Regulation Key Terms Previous Slide Next Slide End Show Types of Mergers Automobiles Blue Jeans Autos Glass Blue Jeans Denim Fabric A C BD EF Z Y X W VU T Horizontal Merger Conglomerate Merger Vertical Merger 18-12

14. Industrial Regulation Natural monopolies Economies of scale Public utilities Electricity, water, gas, phone Solutions for better outcomes Public ownership Public regulation Public interest theory of regulation LO3 18-13

15. Industrial Regulation LO3 Commission (Year Established) Jurisdiction Federal Energy Regulatory Commission (1930)* Electricity, gas, gas pipelines, oil pipelines, water-powered sites Federal Communications Commission (1934) Telephones, television, cable television, radio, telegraph, CB radios, ham operators State public utility commissions (various years) Electricity, gas telephones *Originally called the Federal Power Commission, renamed in 1977 18-14

16. Problems with Industrial Regulation Regulators establish rates to give natural monopoly “fair return” No incentive to reduce cost X-inefficiency Perpetuate monopoly Conditions of natural monopoly can end Legal Cartel Theory LO3 18-15

17. Deregulation Began in the 1970s Has produced large net benefits for consumers and society Industries deregulated include: Airlines Railroads Telecommunications Electricity LO3 18-16

18. 32 - 17 Copyright McGraw-Hill/Irwin, 2002 Antitrust Policy and Regulation The Antitrust Laws Types of Mergers Industrial Regulation Social Regulation Key Terms Previous Slide Next Slide End Show SOCIAL REGULATION Applies to Far More Firms More Intrusive into Daily Activities Food & Drugs (1906) EEOC (1964) OSHA (1971) EPA (1972) CPSC (1972) Optimal Level of Social Regulation

19. 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 18-18

20. Social Regulation Commission (Year Established)Jurisdiction Food and Drug Administration (1906) Safety and effectiveness of food, drugs, and cosmetics Equal Employment Opportunity Commission (1964) Hiring, promotion, and discharge of workers Occupational Safety and Health Administration (1972) Industrial health and safety Environment Protection Agency (1972) Air, water, and noise pollution Consumer Product Safety Commission (1972) Safety of consumer products LO4 18-19

21. 32 - 20 Copyright McGraw-Hill/Irwin, 2002 Antitrust Policy and Regulation The Antitrust Laws Types of Mergers Industrial Regulation Social Regulation Key Terms Previous Slide Next Slide End Show Social Regulation Optimal Level of Social Regulation (MB = MC) –In Support of Social Regulation –Criticisms of Social Regulation –Two Reminders There is No Free Lunch! Less Government is Not Always Better than More

22. 32 - 21 Copyright McGraw-Hill/Irwin, 2002 Antitrust Policy and Regulation The Antitrust Laws Types of Mergers Industrial Regulation Social Regulation Key Terms Previous Slide Next Slide End Show United States v. Microsoft Charges May 1998 Windows Monopoly District Court Findings –95% of Intel PCs –Restrictive Contracts –District Court Remedy Appeals Court Ruling Final Settlement –No Break Up

23. 32 - 22 Copyright McGraw-Hill/Irwin, 2002 Antitrust Policy and Regulation The Antitrust Laws Types of Mergers Industrial Regulation Social Regulation Key Terms Previous Slide Next Slide End Show Key Terms antitrust policy industrial regulation social regulation Sherman Act Clayton Act tying contracts interlocking directorates Federal Trade Commission ActFederal Trade Commission Act cease-and-desist order Wheeler-Lea Act Celler - Kefauver Act Standard Oil case U.S. Steel case rule of reason Alcoa case DuPont cellophane case Microsoft case horizontal merger vertical merger conglomerate merger per se violations natural monopoly public interest theory of regulationpublic interest theory of regulation legal cartel theory of regulationlegal cartel theory of regulation