19 Antitrust Policy and Regulation McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc All rights reserved 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 • 90-60-30 rule • 1956 DuPont Cellophane Case LO2 • Issues of enforcement 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 • LO3 consumers and society Industries deregulated include: • Airlines • Railroads • Telecommunications • Electricity Social Regulation • Concerned with the conditions under • • • LO4 which goods and services are produced Impact of production on society Physical qualities of goods Applied “across the board” to all industries 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