Antitrust Policy & Regulation

A. Antitrust (anti-monopoly) laws 1. Sherman Act of 18902. Clayton Act of 19143. Federal Trade

Commission Act

-- Monopolists tend to produce less and charge more.-- Regulatory Agencies control economic behavior (Dept of Justice, Fed Trade Comm)-- Sherman Act outlawed collusive price fixing and monopolies.-- Strengthened the Sherman Act.-- FTC, with Justice Dept., to investigate unfair competitive practices.

Sherman Antitrust Act

1890 – used in early 19000’s

First government law to limit monopolies

Gave federal gov’t power to investigate trusts and companies suspected of violating the Act

“Antitrust” really means “competition law”

Outlaws monopolies

TrustsDEF: A combination of firms or corporations formed by a legal agreement Especially in order to reduce competition Standard Trust – came after Standard Oil

Clayton Antitrust Act

1914 Strengthened

Sherman Act Prohibit

“anticompetitive practices”– Mergers/Acquisitions

that lessen competition– One person being a

director of competing companies

B. Cases1. Standard Oil case (1911) – broke-up.2. U.S. Steel case (1920) – ‘rule of

reason’ by Supreme Court that unreasonably restrain trade.

John D. Rockefellercontrolled nearly alltrade for oil and gas.The Supreme Courtused the Sherman Act to break up Standard Oil into 34 companies.

Other cases…

In an out-of-court settlement, AT&T divested itself into 22 regional phone-operating companies in 1982.

AT&T’s deal to buy T-Mobile USA for $39 billion is shaping up to be a heated regulatory battle. It would create the nation’s largest cellular carrier. Lawmakers are already denouncing the deal, saying it will reduce competition in an already consolidated industry.

Countries with Antitrust Laws shown in red

C. Mergers1. Horizontal2. Vertical3. Conglomerate

-- Horizontal: merger of two competitors that sell similar products in the same geographic market. Examples are Chase & Chemical Bank, Exxon & Mobile.

-- Vertical: firms at different stages of production process. Examples are PepsiCo withPizza Hut, Taco Bell, and KFC.

-- Conglomerate: not horizontal or vertical, different firms in different geographic areas.-- Merger Guidelines: The Federal gov’t has loose guidelines based on the Herfindahl

Index (ch 23), measure of concentration is the sum of squared percentage market shares of firms within industry.

-- Herfindahl Index: is there are four firms, each with 25% market share, the index #is 2,500 (252 + 252 + 252 + 252). A pure monopoly has index of 10,000 (1002)

Effectiveness of Antitrust Laws

Automobiles Blue Jeans

Types of Mergers

Autos

Glass

BlueJeans

DenimFabric

A CB D E F

ZYXWVUT

Horizontal Merger

Conglomerate Merger

Vertical Merger

-- Most Vertical mergers are approved by regulators.

Top 10 M&A deals worldwide by value (in mil. USD) from 2000 to 2010:

Rank

Year Purchaser Purchased Transaction value (in mil. USD)

1 2000 Fusion: America Online Inc. (AOL)[23]

[24]

Time Warner 164,747

2 2000 Glaxo Wellcome Plc. SmithKline Beecham Plc. 75,961

3 2004 Royal Dutch Petroleum Co. Shell Transport & Trading Co 74,559

4 2006 AT&T Inc.[25][26] BellSouth Corporation 72,671

5 2001 Comcast Corporation AT&T Broadband & Internet Svcs 72,041

6 2009 Pfizer Inc. Wyeth 68,000

7 2000 Spin-off: Nortel Networks Corporation 59,974

8 2002 Pfizer Inc. Pharmacia Corporation 59,515

9 2004 JP Morgan Chase & Co[27] Bank One Corp 58,761

10 2009 Technofist Inc. Goldspark IT Solution PVT LTD, Inc N/A

11 2008 Inbev Inc. Anheuser-Busch Companies, Inc 52,000

D. Industrial Regulation.1. Natural Monopoly2. X-inefficiency

-- There are situations that are economically beneficial to have a monopoly.-- A natural monopoly occurs when ‘economies of scale’ are so extensive that a single

firm can supply the entire market at a lower cost than competing firms could.They are rare, but conditions exist for public utilities.

-- X-inefficiency is the failure to produce any specific output at the lowest average (and total) cost possible.

E. Deregulation – started in 1970’s.F. Social Regulation

-- “…deregulation of formerly regulated industries is contributing more than $50 billionannually to society’s well-being through lower prices, lower costs, and increased outputs. McConnell Brue, 2008

-- The textbook lists industries of airlines, railroads, and trucking, but not banking.-- “It is simply far too soon to declare deregulation either a success or failure.”

McConnell Brue, 2008-- California’s wholesale electricity prices were deregulated, but not retail rates, leading

to the Enron debacle in 2001, prompting Governor Davis’ recall.

Commission (Year Established) Jurisdiction * Food & Drug Safety & effectiveness Administration (1906) of food, drugs, & cosmetics* Equal Employment Hiring, promotion, & discharge Opportunity Comm (1964) of workers* Occupational Safety & Industrial Health & safety Health Admin (1971) * Environmental ProtectionAir, water, and noise pollution Agency (1972)

The mainFederal

RegulatoryCommissions

providingsocial

regulation