Chapter 10 - Antitrust, Mergers, and Competition Policy

CHAPTER 10ANTITRUST, MERGERS, AND

COMPETITION POLICY

INTRODUCTION

All societies face the problem of deciding how much power should be held by leading enterprises. In the United States and in many other nations, antitrust laws have long been used to foster competition and protect consumers. A particular aim of such laws and competition policies is to assure that mergers and acquisitions do not reduce choice in the marketplace. Advancing technology and globalization have raised new issues concerning business competitiveness. These trends have presented public policy makers with the challenge of protecting consumers and promoting fair competition in an era of great corporate power.PREVIEW CASES

Blackboard, WebCT and Coach

Teaching Tip: Preview Cases

These Preview Cases illustrate several current issues in antitrust and competition policy. The first example considers the possibly anticompetitive impacts of the merger of two leading providers of online courseware, Blackboard and WebCT. The second example describes the response of regulators to competition in the market for luxury handbags in Japan. The third example addresses price-fixing in the market for elevator and escalator service contracts in Europe.

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Chapter 10 - Antitrust, Mergers, and Competition Policy

CHAPTER OUTLINE

I. THE DILEMMA OF CORPORATE POWER

Teaching Tip: Do Corporations HaveToo Much Power?

Students may wish to debate the question: Do modern corporations have too much economic, social, and political power? On one hand, concentration on power permits corporations to achieve unprecedented economies of scale and to bring great resources to bear to solve complex human problems. On the other hand, concentration of power risks corporate abuse of less powerful stakeholder groups and individuals and may in some cases challenge democratic political institutions. Two provocative books that discuss the global reach of powerful multinational corporations are When Corporations Rule the World, 2 nd ed. by David C. Korten (San Francisco: Berrett-Koehler, 2001) and Alastair McIntosh, Soil and Soul: People Versus Corporate Power (London: Aurum Press, 2004).

II. ANTITRUST LAWS

A. Objectives of Antitrust and Competition Laws

Teaching Tip: The Relevant MarketA central objective of antitrust law is to prohibit monopoly. The idea of monopoly implies that regulators or the courts can accurately determine the “relevant market.” A useful class exercise would be to present a hypothetical merger (for example, Pepsi and Coca-Cola) and ask students if it would create a monopoly. Would the relevant market be cola drinks, carbonated drinks, or all beverages? Depending on the answer, a merger of Coca-Cola and Pepsi might or might not be judged to create a monopoly.

B. The Major U.S. Antitrust Laws

*The Sherman Act

*The Clayton Act

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Chapter 10 - Antitrust, Mergers, and Competition Policy

*The Federal Trade Commission Act

*The Antitrust Improvements Act

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Chapter 10 - Antitrust, Mergers, and Competition Policy

*Exemptions

Teaching Tip: Baseball’s ExemptionStudents are often very interested in baseball’s exemption from antitrust laws and the consequences for the organization of the sport. A lively class exercise would be to compare baseball with other professional sports, such as football or basketball, focusing on the consequences of the exemption. Should baseball be exempted, or not?

C. Enforcing U.S. Antitrust Laws

D. Key Antitrust Issues

*Monopoly

*Innovation

*High-Technology Businesses

III. CORPORATE MERGERS

A. The Consequences of Corporate Mergers

Teaching Tip: Corporate MergersStudents may wish to select a recently proposed merger reported in the press and analyze whether or not it violated antitrust law. Their conclusions could then be compared with action taken by the FTC or justice department, if any.

IV. COMPARATIVE COMPETITION POLICIES

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Chapter 10 - Antitrust, Mergers, and Competition Policy

V. GLOBALIZATION AND COMPETITION POLICY

Teaching Tip: Antitrust policyAntitrust policy is sometimes considered less impacted by changes in the political party in power than some other areas of public policy. According to this argument, antitrust is basically a form of law enforcement, and both Republicans and Democrats believe in enforcing the law. An alternative view is that Republicans tend to be less likely to restrict corporate mergers and less likely to prosecute antitrust violations vigorously. As a class exercise, students may be asked to review changes in the policies and practices of antitrust regulators in the Justice Department and the Federal Trade Commission following an election in which the party holding the presidency changed, such as the 2000 election of George W. Bush.

A. Antitrust Enforcement and National Competitiveness

B. Enforcing Antitrust Laws against Foreign Firms

C. HarmonizationGETTING STARTED

KEY LEARNING OBJECTIVES

1. Understanding the dilemmas corporate power presents in a democratic society.

The world’s largest corporations are capable of wielding much influence because of the central functions they perform in their respective societies and throughout the world. Corporate power is legitimate when used to affirm broad public purposes, but may also be abused.2. Knowing the objectives of the antitrust and competition laws.

The objectives of antitrust and competition laws in all countries are to protect consumers, small businesses, and others from unfair, anticompetitive practices.3. Recognizing the key issues in contemporary antitrust policy.

Courts and regulators have generally maintained that monopoly does not in itself constitute a violation of antitrust laws; what is important is whether a company has competed unfairly. Other key issues include how to use antitrust policy to foster innovation and national competitiveness.

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4. Analyzing the reasons for mergers and acquisitions, and how they have affected the relationship between business and its stakeholders.

The key causes of mergers and acquisitions in recent years were technological change, globalization, shifts in the regulatory environment, and increases in stock valuations. Some believed that mergers were good for stockholders and other stakeholders, while others expressed concern about the long-run effects such mergers would have on stakeholders.5. Assessing how competition policies compare around the world, and what impact globalization has had on antitrust enforcement.

Many countries have adopted or are adopting competition policies, and efforts are underway to better harmonize these policies across national borders. KEY TERMS AND CONCEPTS USED IN THE CHAPTERantitrust laws, 210

competition policy, 221

conglomerate merger, 218

corporate merger, 217

corporate power, 209

harmonization, 224

horizontal mergers, 218

hostile takeover, 218

monopoly, 213

national competitiveness, 223

predatory pricing, 211

tying, 214

vertical mergers, 217

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Chapter 10 - Antitrust, Mergers, and Competition Policy

INTERNET RESOURCES

www.usdoj.gov/ U.S. Department of Justicewww.ftc.gov/ U.S. Federal Trade Commissionwww.abanet.org/antitrust/ American Bar Association, Antitrust

Sectionwww.yahoo.com/Government/Law/Cases Information on current antitrust cases

http://europa.eu.int/comm/competition European Commission, Director-General for Competition

DISCUSSION CASE

MICROSOFT’S ANTITRUST TROUBLES IN EUROPE AND ASIA

Discussion Questions

1. What differences do you observe in how regulators in the United States, Europe, and Asia dealt with anticompetitive practices by Microsoft? What do you think explains these differences?

Antitrust regulators in the United States, Europe, and Asia all pursued cases against Microsoft, but were interested in different issues. U.S. regulators had been mainly concerned with the issue of tying. That is, Microsoft had integrated its browser, Internet Explorer, with its operating system, Windows, making it difficult for users to adopt a competing browser. European regulators had been mainly concerned with Microsoft’s use of its dominance in operating systems software to thwart the development of independent software so users would choose Microsoft applications. South Korean regulators had been mainly concerned with the bundling of the operating system with Microsoft’s media player and instant messaging software. One reason might be that all three countries (regions) were attempting to protect their companies or industries from tough competition by Microsoft. In the United States (at the time the first antitrust case was brought again Microsoft), Netscape was strong; in Europe, open soft software was strong; in South Korea, media and messaging software was strong.

2. Antitrust and competition policies are designed to protect both consumers and other businesses from unfair competition. In this case, do you think regulators were more concerned about consumers, other businesses, or both?

Arguably, regulators were concerned about both. As explained in the answer to Question 1, regulators were clearly concerned about protecting companies that competed against Microsoft. Protecting their interests, however, could help consumers in the long run, by providing more choices and potentially keeping prices down through vigorous market competition.

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Chapter 10 - Antitrust, Mergers, and Competition Policy

3. If you were an executive of Microsoft faced with multiple antitrust actions in different regions of the world, how would you respond?

One of the interesting facets of this case is that Microsoft was forced to respond to antitrust actions brought by multiple regulatory agencies, operating under multiple laws, in multiple jurisdictions. Obviously, this greatly increased the difficulty and challenge of responding. In each nation or region, Microsoft will have to make a strategic decision whether or not the economic value of that market warrants the expense of defending itself in antitrust actions, and possibly the expense of developing new versions of its products to meet regulatory requirements. It might also be in Microsoft’s interest to advocate for the harmonization of antitrust statutes around the world, so that it wouldn’t have to make different standards in different countries and regions. Arguably, if Microsoft chooses to compete fairly in all areas where it is active, the likelihood of antitrust actions against it will be reduced.

4. What do you think is the best remedy for Microsoft’s market dominance: structural, conduct, intellectual property, or something else? Why do you think so?

The chapter discusses three possible kinds of remedies (penalties) for antitrust violations, in addition to monetary fines. A structural remedy may require the break-up of a monopolistic firm; in this case, this would mean Microsoft’s division into two or more companies. A conduct remedy involves an agreement that the offending firm will change its conduct, often under government supervision – in this case court-enforced rules restricting Microsoft’s behavior. An intellectual property remedy involves disclosure of information to competitors. In this case, this might include disclosure of source code to other software developers. Students may wish to argue for any one of them, or a combination. The Europeans, who were most interested in protecting its open source software developers, might favor an intellectual property remedy. The Americans and South Koreans, who were most concerned about tying, might favor conduct remedies that prohibited such actions.

Teaching TipStudents may be asked to use the Internet to reach the latest developments in the European and South Korean cases.

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