Antitrust Policy and Regulation

1. Antitrust Policy and Regulation Chapter 15

2. Laugher Curve Murphy�s Law of Economic Policy �Economists have the least influence on policy where they know the most and are agreed; They have the most influence on policy where they know the least and disagree most vehemently.� Alan S. Blinder

3. Antitrust Policy: Judgment by Performance or Structure? Antitrust policy is the government�s policy toward the competitive process. The two views of competition are judgment by performance and judgment by structure.

4. Antitrust Policy: Judgment by Performance or Structure? Judgment by performance � we should judge the competitiveness of markets by the performance (behavior) of firms in the market.

5. Antitrust Policy: Judgment by Performance or Structure? Judgment by structure � we should judge the competitiveness of markets by the structure of the industry.

6. History of U.S. Antitrust Laws Americans generally are in favor of laissez-faire and government noninvolvement in business. At the same time, there has been a populist sentiment that fears bigness and monopoly.

7. History of U.S. Antitrust Laws Trusts and cartels burst forth in the late 1800s.

8. History of U.S. Antitrust Laws A trust sets common prices and governs the output of individual member firms.

9. The Sherman Antitrust Act Public outrage against trusts such as Standard Oil led to the passage of the Sherman Act, the Clayton Act, and the Federal Trade Commission Act.

10. The Sherman Antitrust Act The Sherman Antitrust Act of 1890 is a law designed to regulate the competitive process.

11. The Sherman Antitrust Act Its two main provisions are:

12. The Sherman Antitrust Act Its two main provisions are: �Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce . . . shall be guilty of a misdemeanor . . .�

13. The Sherman Antitrust Act The Sherman Act is broad and sweeping, but vague.

14. The Sherman Antitrust Act In the 1890s, economists debated whether mergers reflected increased economies of scale or attempts to restrict output and generate monopoly profits.

15. The Sherman Antitrust Act Economists with the performance viewpoint argued that competition was strong and it would ultimately limit monopolies.

16. The Sherman Antitrust Act Economists with the structure viewpoint argued that trusts should be broken up by government.

17. The Standard Oil and American Tobacco Cases In 1911, the U.S. Supreme Court ruled that both Standard Oil and American Tobacco were structural monopolies. The court held that they violated the Sherman Act because of their �unfair business practices� not because of their structure.

18. The Standard Oil and American Tobacco Cases Judgment based on performance, not structure, is often called the abuse theory.

19. The Standard Oil and American Tobacco Cases In the 1920 U.S. Steel case, the Court ruled that while company was a structural monopoly, it was not a monopoly in performance.

20. Clayton Act and Federal Trade Commission Act The Clayton Antitrust Act and the Federal Trade Commission Act were enacted in 1914.

21. Clayton Act and Federal Trade Commission Act The Clayton Antitrust Act made four monopolistic practices illegal when their effect was to lessen competition:

22. Clayton Act and Federal Trade Commission Act The Federal Trade Commission Act made it illegal for firms:

23. Clayton Act and Federal Trade Commission Act In 1938, Federal Trade Commission was given the job of preventing false and deceptive advertising which is one of its main functions today.

24. The ALCOA Case Judgment by performance governed U.S. antitrust policy until the ALCOA case of 1945. The court ruled that the structure of the market which it dominated was unlawful.

25. The ALCOA Case ALCOA dominated the market in two ways:

26. Judging Markets by Structure and Performance: The Reality Judging by structure is practical though seemingly unfair. The alleged wrongdoer is doing what it is supposed to be doing, producing the best product at the lowest possible price.

27. Contextual Judgments and the Capabilities of the Courts With judgment by performance, each action of a firm must be analyzed on a case-by-case basis. Even though performance will ultimately be judged, courts use structure as a guideline.

28. Determining the Relevant Market and Industry Choosing the relevant market when evaluating competitiveness is difficult to do. The relevant market in the ALCOA case was the aluminum market not the metals market at large.

29. Determining the Relevant Market and Industry The relevant market In the Du Pont case (1956), was flexible wrap not cellophane.

30. Determining the Relevant Market and Industry Both structure and performance criteria have ambiguities.

31. Recent Antitrust Enforcement In recent years, antitrust law has worked mainly through its deterrent effect. Many potential mergers are never even proposed because firms know the merger would not be allowed.

32. Recent Antitrust Enforcement Since the 1980s, the government has been more lenient in antitrust cases.

33. Three Recent Antitrust Cases The modern era of antitrust policy has been marked by important cases in the computer and telecommunications market.

34. The IBM Case In 1967, the U.S. Department of Justice sued IBM for violation of antitrust laws. The company was charged with unfairly bundling hardware, software, and maintenance services on a take-it-or-leave-it basis. The government also charged that IBM constantly redesigned its hardware making it impossible for competitors to keep up.

35. The IBM Case In its defense, IBM argued:

36. The IBM Case The government dropped its suit in 1982.

37. The IBM Case The prosecution likely led to IBM�s problems in the 1990s.

38. The AT&T Case Up until 1982, AT&T controlled most long-distance and local telephone services. It produced telephones and other communications equipment.

39. AT&T as a Regulated Monopoly It was a natural monopoly regulated by law. Natural monopoly � an industry in which significant economies of scale make the existence of more than one firm inefficient.

40. AT&T as a Regulated Monopoly AT&T was required to provide universal service so that it would not engage in cream skimming.

41. AT&T as a Regulated Monopoly Many economists argued that AT&T�s guarantee of �fair returns� gave it a strong incentive to:

42. Technological Change and Competition Technological change and competition changed the natural monopoly character of the phone industry.

43. Technological Change and Competition Satellite transmissions and fiber-optic cable turned AT&T into a traditional monopoly.

44. Technological Change and Competition In 1978, the Justice Department sued AT&T on antitrust grounds.

45. Resolution of the AT&T Case In 1982, AT&T agreed to divest its 22 local operating companies which merged into seven Baby Bells. It kept its long-distance telephone service, manufacturing arm and Bell Laboratories.

46. Resolution of the AT&T Case This resulted in enormous upheaval in the industry.

47. Developments Since the AT&T Case The seven Baby Bells have continued to merge � there are only four now. AT&T split into three companies.

48. Developments Since the AT&T Case Congress passed the Telecommunications Act in 1996.

49. Developments Since the AT&T Case Wireless communications and international providers have increased competition in the telecommunications market.

50. Developments Since the AT&T Case Technological developments will keep antitrust policy in the news.

51. The Microsoft Case Microsoft is the dominant player in the software industry. It controls about 50 percent of the world market for software and over 90 percent of the operating systems market worldwide.

52. The Microsoft Case Since all software must be compatible with an operating system, Microsoft has an enormous competitive advantage for its other divisions.

53. The Microsoft Case The U.S. Justice department charged Microsoft with an antitrust violation:

54. The Microsoft Case The U.S. Justice department charged Microsoft with an antitrust violation:

55. Is Microsoft a Monopolist? The computer software industry is characterized by network externalities and economies of scale � both significant barriers to entry.

56. Is Microsoft a Monopolist? Network externalities exist because as the number of applications supported by a single platform increase, the value of the platform also increases.

57. Is Microsoft a Monopolist? Economies of scale exist because of the cost of developing a new platform and new software is significant while the cost of producing it is minimal.

58. Is Microsoft a Monopolist? With its stable 90 percent market share, it certainly is a monopoly.

59. Is Microsoft a Monopolist? With this dynamic view of the market, Microsoft�s monopoly is at best temporary.

60. Is Microsoft a Predatory Monopolist? By directing the development of in-house software to favor Windows, Microsoft strengthened the barrier to entry created by network externalities.

61. Is Microsoft a Predatory Monopolist? Microsoft also penalized computer manufacturers that installed Windows if they installed competing software.

62. Is Microsoft a Predatory Monopolist? Microsoft froze out Netscape Navigator by packaging Internet Explorer as part of Windows 95 at no additional cost to the buyer.

63. Is Microsoft a Predatory Monopolist? Sun Microsystems developed Java, a software language designed to create software applications on a variety of platforms not just Windows.

64. Resolution of the Microsoft Case In 2000, a federal judge ruled that Microsoft violated the Sherman Act by attempting to maintain its monopoly power by anti-competitive means.

65. Resolution of the Microsoft Case Microsoft agreed to a settlement:

66. Assessment of Antitrust Policy Almost all economists agree that antitrust enforcement has not reduced the size of firms below the level at which they can take advantage of economies of scale.

67. Assessment of Antitrust Policy Performance advocates generally believe enforcement was not needed.

68. Mergers, Acquisitions, and Takeovers During the 1990 and early 2000s, firms have been simultaneously breaking up and merging to achieve economies of scope and economies of scale.

69. Mergers, Acquisitions, and Takeovers The law allows firms to break up any way they like.

70. Acquisitions and Takeovers The term merger is a general term meaning the act of combining two firms. Two types of mergers are takeover and acquisition.

71. Acquisitions and Takeovers A takeover is the purchase of one firm by a shell firm that then takes control of the purchased firm�s operations.

72. Acquisitions and Takeovers An acquisition is a merger in which a company buys another company.

73. Acquisitions and Takeovers Takovers can be friendly or hostile.

74. Acquisitions and Takeovers In a hostile takeover, the shareholders ultimately decide whether to sell their shares.

75. Mergers There are three types of mergers: horizontal, vertical, and conglomerate.

76. Horizontal Mergers A horizontal merger is the merging of two companies in the same industry. Most antitrust policy has centered on horizontal mergers.

77. Horizontal Mergers Since the passage of the 1950 Cellar-Kefauver Act, almost all mergers of firms with substantial market shares in the same industry have been prohibited.

78. Horizontal Mergers For concentrated industries, the government would challenge all mergers involving the following combinations of market share:

79. Vertical Mergers A vertical merger is a combination of two companies that are involved in different phases of producing a product. If the merged firms are able to limit access of other buyers or sellers to the market, the merger would be in violation of the Clayton Act.

80. Vertical Mergers In the 1980s, the U.S. government challenged any vertical merger in which:

81. Conglomerate Mergers A conglomerate merger is the merging of two companies in relatively unrelated industries. Conglomerate mergers are generally approved by antitrust laws under the assumption that they do not significantly restrict competition.

82. Conglomerate Mergers There are five reasons why unrelated firms would wish to merge.

83. Recent Merger Activity and Deacquisitions Globalization, deregulation, and technological change led to a significant increase in mergers in the late 1990s into the early 2000s.

84. Recent Merger Activity and Deacquisitions Deacquisitions occur when a firm sells parts of another company it has bought or parts of itself.

85. Mergers in the United States Since 1892

86. Assessment of Mergers and Acquisitions Economists� assessment of mergers and acquisitions is mixed. Mergers have good and bad effects.

87. International Competition The internationalization of competition is changing the political climate in the U.S. Antitrust policymakers now view that the relevant market is the international market.

88. Antitrust Policies in Other Countries Antitrust legislation in other countries is much weaker than in the U.S. No other country forces companies to break up for antitrust violations.

89. Antitrust Policies in Other Countries Other countries oppose antitrust laws for the following reasons:

90. Regulation, Government Ownership, and Industrial Policies Governments can affect the competitive process by: Regulating the activities of firms. Taking direct charge of the firms and owning them directly. Industrial policy � influencing firms with laws and taxes.

91. Regulation The two types of regulation are pricing regulation and social regulation.

92. Price Regulation Pricing regulation is regulation directed at industries that have natural monopoly elements.

93. Price Regulation Problems with pricing regulation include:

94. Price Regulation All these criticisms have led to significant deregulation over the past twenty years.

95. Social Regulation Social regulation applies to most firms and is not designed specifically for natural monopolies.

96. Social Regulation Social regulation affects large aspects of all aspects of business:

97. Social Regulation Some economists argue that social regulation is bad:

98. Social Regulation Others argue that social regulation is good:

99. Government Ownership European governments have had a history of taking over large industries and running them themselves.

100. Government Ownership Government-owned firms have no incentive to keep costs down and introduce new technology.

101. Government Ownership Workers in government-owned firms were guaranteed jobs, and used political threats to hold their wages high.

102. Government Ownership The economic integration of Europe has been accompanied by privatization of many of the formerly government-owned industries.

103. Industrial Policies Industrial policy is a formal policy that government takes toward business. In the 1980s and early 1990s, many politicians argued that the U.S. needed an industrial policy modeled on Japan's. The calls went away when the Japanese economy faltered in the 1990s.

104. Industrial Policies In a way the U.S. has always had an industrial policy.

105. Industrial Policies Many close connections between and business have developed over the years:

106. Antitrust Policy and Regulation End of Chapter 15