For the people or against them? - Antitrust laws

For the people or against them? - Antitrust laws A bit of history Outcry over trusts (late 19th century monopolies) Important economic growth after US civil war Productivity growth Competition sharpened Rivals sought greater security and profits (e.g. oil and steel) The Sherman Act (1890) -Limitations -Politicians did not know what steps to take -Courts to play a leading role -Federal enforcement picked up speed during 20th century -Notable cases: Standard Oil, IBM, Kodak, AT&T, Microsoft

For the people or against them? - Antitrust laws As a consumer, antitrust laws affect your daily life Goal: ensure that you have the benefit of competitive prices and high quality goods and services Sherman Antitrust Act, in 1890 – first antitrust law 1) Makes corporate trusts Illegal 2) Prohibits efforts to monopolize Enforcement: Department of Justice Antitrust Division and Federal Trade Commission (US), European Commission (EU), but also private parties

For the people or against them? - Antitrust laws What do these laws prohibit? Not clear -When competition is lessened -Monopoly in sight -Left to courts to interpret Two approaches on section 1 of the Act: i) Per se offenses: when the harm on consumers is clear ii) Broader rule: when the harm on consumers is not clear

For the people or against them? - Antitrust laws Examples of per se offenses: Price fixing Bid rigging Market or customer allocation Group boycotts Tying arrangements Examples of the broader rule Restraints in the supply chain -Exclusive dealing

For the people or against them? - Antitrust laws Section 2 of the Act Bars control over prices and the restriction of production In contrast with section 1, section 2 does not require that there be 2 entities A single firm can violate section 2 Market and monopoly power Define product and geographic market “In-depth” study Monopoly power? Market power-narrower definition Control prices Exclude competition-barriers to entry Monopolies which are the result of competitions are not prohibited

For the people or against them? - Antitrust laws Anticompetitive mergers and acquisitions M&A which lessen competition Horizontal mergers  antitrust laws Vertical mergers Conglomerate mergers Merger review process Product and geographic market Substitute products or not?

For the people or against them? - Antitrust laws “Antitrust” by Alan Greenspan (1962) Competition the guiding principle yet “too much” is bad Actions that limit competition are “criminal” or “enlightened” Law is vague – no way of knowing after judge’s verdict It is necessary to study i) historical roots & ii) economic theories As for i) a change occurred after the US civil war

For the people or against them? - Antitrust laws Use of physical force? Businessmen need customers! Railroads as a threat to farmers If left free, would business necessarily develop into an institution vested with arbitrary power? Railroads in the East to move West--public policy: subsidies Shabby trains not to carry traffic but to acquire land Power did not come from free market but from government

For the people or against them? - Antitrust laws Standard Oil, for example, amounted to less than 1% of GNP--having 80% of refining capacity made economic sense then The trend of dominant companies to lose part of their share of the market is not caused by antitrust laws but by competition To keep market share by being efficient—praise v. condemnation As for ii) theory, the misconception is more fundamental Failed classical economics?

For the people or against them? - Antitrust laws “Coercive monopoly”—is it possible? Capital market as a regulator of prices Antitrust laws are thus the result of gross misinterpretation of history and rather naïve unrealistic economic theories One last argument—antitrust laws do no harm…but…”No one will ever know what new products, processes, machines, and cost-saving mergers failed to come into existence”

For the people or against them? - Antitrust laws “Abolish Antitrust Laws” by Murray N. Rothbard (1977) “Quasi monopolies” and antitrust laws “They haven't gone far enough“ To decrease monopoly by law or to remove monopoly grants? Impossible to know in advance what a "monopolistic" crime is Arbitrary rules and ex post facto findings of "crime”

For the people or against them? - Antitrust laws “Abolish Antitrust Laws” by Murray N. Rothbard (1977) Effects: initiative is hampered; businessmen are fearful and subservient to the arbitrary rulings of government officials; and business is not permitted to be efficient in serving the consumer Vagueness of the law in defining monopolies: size of firm, "closeness" of substitutes, too high prices (or too low), mergers If to maintain competition it is necessary that cooperation be destroyed, then the "antimonopolists" must advocate the complete prohibition of all corporations and partnerships

For the people or against them? - Antitrust laws “Barriers to Entry” by Dominick Armentano (2000) Can dominant firms erect barriers to entry that limit competition and harm consumers? Current discussions intermingle legal and economic barriers Harmful barriers are legal: leave consumers with fewer choices or less welfare Legal barriers protect inefficiencies and the profit margins of existing suppliers

For the people or against them? - Antitrust laws “Barriers to Entry” by Dominick Armentano (2000) Economic barriers are another matter entirely (e.g. Microsoft) These barriers are in reality important consumer benefits (e.g. consumers received a quality browser for free) In summary, economic barriers(benefits) can be overcome by firms that offer superior economic benefits to consumer

For the people or against them? - Antitrust laws