Antitrust Policy and Regulation

Chapter 19

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19-2

Antitrust Laws

• The purpose:• Prevent monopolization• Promote competition• Achieve allocative efficiency

• Historical background• Regulatory agencies• Antitrust laws

LO1

19-3

Antitrust Laws

• Sherman Act 1890• Clayton Act 1914• Outlaws price discrimination• Prohibits tying contracts• Prohibits stock acquisition• No interlocking directorates

• Federal Trade Commission Act 1914• Wheeler-Lea Act 1938

• Celler-Kefauver Act 1950

LO1

19-4

Antitrust Policy: Issues and Impacts

• Issues of interpretation• Monopoly behavior vs. Monopoly structure• 1911 Standard Oil Case• 1920 U.S. Steel Case• 1945 Alcoa Case

• Relevant market• 1956 DuPont Cellophane Case

• Issues of enforcement

LO2

19-5

Effectiveness of Antitrust Laws

• Monopoly• AT&T• Microsoft Case

• Mergers• Horizontal merger• Vertical merger• Conglomerate merger

LO2

19-6

Mergers

Automobiles Blue Jeans

Autos

Glass

BlueJeans

DenimFabric

A CB D E F

ZYXWVUT

Horizontal Merger

Conglomerate Merger

Vertical Merger

LO2

19-7

Mergers

• Merger guidelines• The Herfindahl Index

• Price fixing• Price discrimination• Tying contracts

LO2

19-8

Industrial Regulation

• Natural monopoly• Economies of scale• Public utilities• Electricity, water, gas, phone

• Solutions for better outcomes• Public ownership• Public regulation• Public interest theory of regulation

LO3

19-9

Industrial Regulation

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

LO3

*Originally called the Federal Power Commission, renamed in 1977

19-10

Problems with Industrial Regulation

• Regulators establish rates to give natural monopoly “fair return”• No incentive to reduce cost• X-inefficiency• Perpetuating Monopoly• Conditions of natural monopoly can end

• Legal Cartel Theory of Regulation

LO3

19-11

Deregulation

• Began in the 1970s• Has produced large net benefits for consumers

and society• Industries deregulated include:• Airlines• Railroads• Telecommunications• Electricity

LO3

19-12

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

19-13

Social Regulation

Commission(Year Established) JurisdictionFood 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)Consumer Financial Protection Bureau (2011)

Safety of consumer products

Fairness and transparency in lending and other financial services

LO4

19-14

Social Regulation

• Optimal level of social regulation• In support of social regulation• Criticisms of social regulation• Two reminders• There is no free lunch• Less government is not always better than

more

LO4

19-15

United States vs. Microsoft

• Charged in May 1998 under the Sherman Act• Accused of having a “Windows” monopoly• District court findings:• Used anticompetitive means

• District court remedy• Appeals court ruling• Final settlement