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Antitrust Policy and Regulation

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  1. Antitrust Policy and Regulation Chapter 16

  2. 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.

  3. 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.

  4. Antitrust Policy: Judgment by Performance or Structure? • Judgment by structure– we should judge the competitiveness of markets by the structure of the industry.

  5. History of U.S. Antitrust Laws • Americans generally are in favor of laissez-faire and government noninvolvement in business. • There has simultaneously been a populist sentiment that fears bigness and monopoly.

  6. History of U.S. Antitrust Laws • Trusts and cartels burst forth in the late 1800s. • A trust or cartelis a combination of firms in which the firms have not actually merged, but act as a single entity.

  7. History of U.S. Antitrust Laws • A trust sets common prices and governs the output of individual member firms. • A trust can, and often does act like a monopolist.

  8. History of U.S. Antitrust Laws • In the 1870s and 1880s, trusts were being form in railroads, steel, tobacco, and oil, as well as in many other areas of the economy.

  9. History of U.S. Antitrust Laws • John D. Rockefeller’s Standard Oil Company was the first and largest trust. • As competitors were driven out of business, Standard Oil raised prices.

  10. History of U.S. Antitrust Laws • When the oil trust was formed, Standard Oil used its monopoly power to close refineries, raise prices, and limit the production of oil.

  11. History of U.S. Antitrust Laws • The price of oil rose from a competitive level to a monopolistic level thereby hurting the consumer as well as Standard Oil’s competitor’s.

  12. The Sherman Antitrust Act • Public outrage at the formation and activities of trusts such as Standard Oil led to the passage of the Sherman Act, the Clayton Act, and the Federal Trade Commission Act.

  13. The Sherman Antitrust Act • The Sherman Antitrust Act of 1890 was a law designed to regulate the competitive process.

  14. The Sherman Antitrust Act • Its two main provisions are: • “Every contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade or commerce . . . is declared to be illegal . . .”

  15. 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 . . .”

  16. The Sherman Antitrust Act • The Sherman Act is broad and sweeping, but vague. • Although the Act prohibits monopolization, it did not prevent monopolies.

  17. The Sherman Antitrust Act • Congress designed the Act in such a way as to allow the courts to decide its meaning.

  18. The Sherman Antitrust Act • Economists in the 1890s debated whether mergers reflected increased economies of scale or attempts to restrict output and generate monopoly profits?"

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

  20. The Sherman Antitrust Act • Economists reflecting the structure viewpoint argued that trusts should be broken by government because competition is fragile and needed a large number of small firms

  21. The Standard Oil and American Tobacco Cases • In 1911, the U.S. Supreme Court determined that both Standard Oil and American Tobacco were structural monopolies in that each controlled over 90 percent of their markets.

  22. The Standard Oil and American Tobacco Cases • In spite of this, they were not judged to have violated the Sherman Act because of their structure but because of their “unfair business practices.”

  23. The Standard Oil and American Tobacco Cases • This judgment on performance, not structure, is often called the abuse theory since a firm is legally considered a monopoly only if it commits monopolistic abuses.

  24. 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.

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

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

  27. Clayton Act and Federal Trade Commission Act • Price discrimination, that is, selling identical goods to different customers at different prices. • Tie-in contracts in which the buyer must agree to deal exclusively with one seller and not to buy goods from competing sellers. • Interlocking directorships in which memberships of boards of directors of two or more firms are almost identical. • Buying stock in a competitor’s company when the purpose of buying that stock is to reduce competition.

  28. Clayton Act and Federal Trade Commission Act • The Federal Trade Commission Act made it illegal for firms to use “unfair methods of competition.” • It also made it illegal to engage in “unfair or deceptive acts or practices,” whether or not those actions had any effect on competition.

  29. Clayton Act and Federal Trade Commission Act • The Federal Trade Commission was given little direction as to how to police markets and for about 20 years, it drifted.

  30. 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.

  31. The ALCOA Case • Judgment by performance was the criterion governing U.S. antitrust policy until the ALCOA case of 1945.

  32. The ALCOA Case • In this case, the Court ruled that although ALCOA had not been guilty of unfair practices the structure of the market which it dominated was unlawful.

  33. The ALCOA Case • ALCOA dominated the market in two ways: • It used its knowledge of the market to expand its capacity before any competitor had a chance to enter the market. • It kept prices low to prevent market entry.

  34. Judging Markets by Structure and Performance: The Reality • Judging by structure seems inherently unfair since the alleged wrongdoer is doing what it is supposed to be doing—producing the best product at the lowest possible price.

  35. Judging Markets by Structure and Performance: The Reality • Supporters of this position recognize this problem, but they nevertheless favor the structure criterion because of its practicality.

  36. Contextual Judgments and the Capabilities of the Courts • Judgment by performance requires that each action of a firm must be analyzed on a case-by-case basis. • This is enormously expensive and time-consuming. • Courts must find a way to limit the cases they look at.

  37. Contextual Judgments and the Capabilities of the Courts • The Supreme Court provides guidelines that tell firms when the Court will take a closer look at their performance. • These guidelines invariably refer to structure.

  38. Contextual Judgments and the Capabilities of the Courts • Some argue that structure is a predictor of future performance. • A monopolist may be charging low prices now. • Once the competition melts away, the offending firm jacks up its prices.

  39. Determining the Relevant Market and Industry • The structural approach is not without faults. • Choosing the relevant market when evaluating competitiveness is difficult to do.

  40. Determining the Relevant Market and Industry • The relevant market in the ALCOA case was the aluminum market not the metals market at large.

  41. Determining the Relevant Market and Industry • In the du Pont case (1956), the relevant market for cellophane was the flexible- wrap industry not the cellophane market of which du Pont owned 100 percent. • Therefore, du Pont was not considered a monopolist.

  42. Determining the Relevant Market and Industry • In the Pabst Brewing case (1966), the relevant market was judged to be the state of Wisconsin not the national market, thereby disallowing its merger with Blatz Brewing Company, another Wisconsin brewer.

  43. Determining the Relevant Market and Industry • Both structure and performance criteria have ambiguities, and in the real world there are no definitive criteria for judging whether a firm has violated the antitrust statutes.

  44. 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.

  45. Recent Antitrust Enforcement • The government has been more lenient recently in its interpretation for three reasons.

  46. Recent Antitrust Enforcement • Political pressure for antitrust action waned. • In the 1950s and 1960s, big business was considered “bad.” • In the 1980s the ideology held that big business was “bad” as well as “good.” • International competition became fierce while domestic competition created by U.S. market structure became less important.

  47. Recent Antitrust Enforcement • Technology was changing so fast that by the time litigation reached the courts, the issues were no longer relevant.

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

  49. The IBM Case • In 1969, the U.S. Department of Justice sued IBM for violation of antitrust laws charging that the company was unfairly bundling hardware, software, and maintenance services on a take-it-or-leave-it basis (tie-in contracts).

  50. The IBM Case • The government also charged that IBM was constantly redesigning its hardware making it impossible for competitors to keep up.