Public Policy in Private Markets

1. Public Policy in Private Markets FTC and DOJ Operating Manuals Brief History of Antitrust

2. Announcements • i>clicker starts counting today • Will you do the presentation? Must tell me today. • Grades (from class participation) will start appearing on Spark next week.

3. Case Presentations • 15 minute video • Each group goes to either prosecution or defense • Material will be given to you for the case; you can complement with your own research. • You are free to choose the format of your video presentation.

4. Example of video formats • Narrated PPT presentation • See: http://www.youtube.com/watch?v=qKXRfJPUzIQ&feature=related • See: http://www.youtube.com/watch?v=QZp3jumnWUg • PPT + one (or several) of you: • http://www.youtube.com/watch?v=9CORfJoBDko&feature=related • No PPT, just one of you: • See:http://www.youtube.com/watch?v=wI9dpdH4hyQ • See:http://www.youtube.com/watch?v=hc5d1wPasXA&feature=related • Documentary-style presentation • See: http://www.youtube.com/watch?v=1XsJfn2Kd_0

5. Help for this • Learning commons: • Equipment: digital video camera, voice recorder, tripod, etc. • Hardware and software: Mac and PC stations, (iMovie 09, Windows Movie maker) • Support: technical support • Other: “Atomic Learner” (at Learning Commons website), source for step-by-step tutorials on instruction technology (video clips). Free for UMass students.

6. Overview of Antitrust Laws

7. Rules of Analysis (last time) How to interpret the law? • PER SE RULE: • Business practice is always anticompetitive • Practice is always illegal: no room for arguments (no reasonableness) • RULE OF REASON (more common) • Legality is ambiguous • Case by case judgment (reasonableness)

8. DOJ and FTC Operating Manuals

9. Department of Justice Develop a Case based on complaints, news (staff lawyers, economists) Criminal: Grand Jury Civil: Draft Complaint File Complaint (with asst. attorney’s ok) Indictment District Court Circuit Court Supreme Court Appeal Appeal Civil: either party may appeal Criminal: only defendant may appeal • May end with consent decree • May start with nolo plea • Remedies • Possible imprisonment

10. Federal Trade Commission Draft Administrative Complaint Same sources as DOJ • Bureau of Competition • Bureau of Economics (technical input) • Independent regulatory body (5 commissioners, 7 years) • Mixed duties: executive + judicial FTC approves Complaint Trial Administrative Law Judge (FTC) Either party may appeal to Judge FTC Judgment Only defendant may appeal Commission’s decision Federal Courts Circuit Court Either party may appeal Supreme Court

11. A Brief Regulatory History Pre-1880’s • Local markets (poor transportation system) • Few corporations (e.g. railroads) 1880’s-1905: • States let companies incorporate freely • Large firms start to control national markets • Abuses of market power became visible • Reform movement (railroads) • Interstate Commerce Commission Act (1887) – Railroad regulation • Sherman Act (1890) – Monopoly, price fixing

12. A Brief Regulatory History 1905-1915: • Progressive era: • 1906: Federal Food and Drug Act • Under Sherman Act: Roosevelt sues 45 companies and Taft sues 75 • 1911: Standard Oil (Rockefeller) forced to break up in > 36 units (Mobil, Amoco, Exxon, etc.) • 1914 (Sherman Act needed clarification) • FTC Act: outlawed unfair business practices • Clayton Act, regulates mergers, price discrimination, exclusive dealing agreements

13. A Brief Regulatory History 1915-1925: • Quiet period 1925-1938: • Active regulatory period due to stock market crash in 1929 and the Great Depression • Firms allowed to cooperate (cartelization) under National Recovery Act (later deemed unconstitutional); e.g. strengthening of trade associations

14. A Brief Regulatory History 1938-1945: • Return to strong enforcement • 1938: Robinson-Patman Act (PD) • Many antitrust cases brought forward 1950’s • Cellar-Kefauver Act, strengthens merger regulation 1960-1980: • SOCIAL regulation • Environment, health, safety, equal opportunity, etc. • Based on intra-firm decisions (how and what firms produce) rather than on market performance

15. A Brief Regulatory History 1980-2008: • Era of deregulation: • Airlines (Airline Deregulation Act, 1978), telecommunications (1996), railroads (Staggers Rail Act of 1980), trucking, banking (Garn-St Germain Depository Institutions Act,1982 ) • Also, an era of product regulations • 2000-8 significant decrease in antitrust activity (Bush administration)

16. A Brief Regulatory History 2008-: • Era of strong enforcement (?): • Apparent increase in antitrust activity • FTC/DOJ playing prominent roles • But at the same time: • Era of recession • Many large mergers allowed (or promoted by gov’t) • Businesses are hurting, some leeway has been granted

17. Sherman Act, Section 2 • Monopolization • Market definition • Intent (next class) • Brief history • Predatory Pricing

18. Why is a monopoly undesirable? P • Quantity is smaller, price is higher, total welfare is smaller P CS CS S=MC S=MC DWL PM PC PS D PS MR D Q Q QM QC

19. Overview of Antitrust Laws

20. Sherman Act, section 2 • “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 among the several States, or with foreign nations, shall be deemed guilty of a misdemeanor”

21. Sherman Act, section 2 • Rule of reason approach: • A monopoly is not necessarily illegal • Illegal: attempts to monopolize (aggressive/unusual behavior) • Pattern of behavior over time is studied

22. Overview of Antitrust Laws FTC Act (1914): • Broader in scope than previous laws • Sets up FTC • Gives FTC jurisdiction over Clayton Act and enforcement of section 5 of FTC Act: • Cover unfair methods of competition • Unfair and deceptive acts

23. Overview of Antitrust Laws

24. Sherman Act, section 2 Burden of Proof: • Substantial market power (structural criteria) • Define relevant market • Show market power • Intent to monopolize (conduct criteria)

25. Sherman Act, section 2 Burden of Proof: • Substantial market power (structural criteria) • Define relevant market • Show market power • Intent to monopolize (conduct criteria)

26. Showing Substantial Market Power • Define Relevant Market • Both product and geographic • This is VERY important under Section 2 (and elsewhere) • Example: Du Pont – limit pricing (1956) • Government definition: relevant market was cellophane. Mkt share = 75% • Du Pont’s definition: flexible wrapping materials (wax paper, foil, etc.). Mkt share = 20% • Du Pont persuades Court with their definition. Case stops (intent stage is not reached)

27. Defining Relevant Product Market • Are convenience stores (e.g. 7-11, Dairy Mart) in the same relevant product market as supermarkets? (e.g. Stop & Shop, Big Y)? • What would the value of the cross-price elasticity need to be to say YES? • -1 • -0.5 • 0 • 0.2 • 0.8 Cross price Elast = % Change in Quantity Demanded at Supermarkets % Change in Price at Convenience Stores

28. Defining Relevant Product Market • Are convenience stores (e.g. 7-11, Dairy Mart) in the same relevant product market as supermarkets? (e.g. Stop & Shop, Big Y)? • As an estimate, what value would the cross-price elasticity take? • -0.9 • -0.2 • 0.3 • 1.1

29. Showing Substantial Market Power • Define Relevant Market • Product (service) Market: • Physical characteristics (e.g. Du Pont case) • Firm: the broader the better • Distinct customers or end users (e.g. commercial vs. retail) • Cross price elasticity: • E.g.: bread and cookies, same market? • Strong substitutes: high and positive cross-price elasticity • No clear cut-offs

30. Showing Substantial Market Power • Define Relevant Market • Product (service) Market: • Absolute price differences: if large may signal different markets (e.g. luxury cars vs. economy cars) • Unique production facilities: are both goods produced in same type of facility? • Industry recognition of each other: e.g. do they belong to the same trade association?

31. Showing Substantial Market Power • Define Relevant Market • Geographical Market: • Transportation costs: are they high with respect to price? E.g. construction materials, coal • Barriers to trade? (e.g. ban on cross-state shipments) • % Exported, % Imported: LIFO (little in from outside), LOFI (little out from inside); <10%

32. Sherman Act, section 2 Burden of Proof: • Substantial market power • Define relevant market • Show market power (next class) • Intent to monopolize (next class)