18 Antitrust Policy and Regulation Mc GrawHillIrwin Copyright

18 Antitrust Policy and Regulation Mc. Graw-Hill/Irwin Copyright © 2012 by The Mc. Graw-Hill Companies, Inc. All rights reserved. .

Chapter Objectives Antitrust Policy and Regulation The Antitrust Laws Types of Mergers Industrial Regulation Social Regulation Key Terms Previous Slide End Show 32 - 2 Next Slide • The Core Elements of the Major Antitrust (Antimonopoly) Laws in the United States • Some of the Key Issues Relating to the Interpretation and Application of Antitrust Laws • The Economic Principles and Difficulties Related to the Setting of Prices (Rates) Charged by So-Called “Natural Monopolies” • The Nature of “Social Regulation, ” Its Benefits and Costs, and Its Optimal Level Copyright Mc. Graw-Hill/Irwin, 2002

Antitrust Policy and Regulation The Antitrust Laws ANTITRUST POLICY AND REGULATION Antitrust Policy Types of Mergers Industrial Regulation Social Regulation Key Terms Previous Slide End Show 32 - 3 Next Slide Industrial Regulation Social Regulation Copyright Mc. Graw-Hill/Irwin, 2002

Antitrust Laws • The purpose: • Prevent monopoly • Promote competition • Achieve allocative efficiency LO 1 18 -4

THE ANTITRUST LAWS Antitrust Policy and Regulation The Antitrust Laws Types of Mergers Industrial Regulation Social Regulation Key Terms Previous Slide End Show 32 - 5 Next Slide Historical Background • Trusts • P=MC Pricing • Monopoly Pricing • Regulatory Agencies • Natural Monopolies Copyright Mc. Graw-Hill/Irwin, 2002

THE ANTITRUST LAWS Antitrust Policy and Regulation The Antitrust Laws Types of Mergers Industrial Regulation Social Regulation Key Terms Previous Slide End Show 32 - 6 Next Slide Sherman Act of 1890 • Section 1 - Restraint of Trade • Section 2 – Monopolization • Treble Damages Clayton Act of 1914 • • Section 2 - Price Discrimination Section 3 - Tying Contracts Section 7 – Stock Ownership Section 8 – Interlocking Directorates Copyright Mc. Graw-Hill/Irwin, 2002

THE ANTITRUST LAWS Antitrust Policy and Regulation The Antitrust Laws Types of Mergers Industrial Regulation Social Regulation End Show 32 - 7 • Established FTC • Holds Hearings on Complaints • Seeks Cease-and-Desist Orders Wheeler-Lea Act of 1938 Key Terms Previous Slide Federal Trade Commission Act of 1914 Next Slide • Policing Deceptive Practices • False Advertising • Misleading Representation of Products Copyright Mc. Graw-Hill/Irwin, 2002

THE ANTITRUST LAWS Antitrust Policy and Regulation The Antitrust Laws Types of Mergers Industrial Regulation Social Regulation Key Terms Previous Slide End Show 32 - 8 Celler-Kefauver Act of 1950 • Strengthened Clayton Act Regarding Asset Ownership in Competing Firms • Anticompetitive Mergers Illegal No Matter How Accomplished Next Slide Copyright Mc. Graw-Hill/Irwin, 2002

THE ANTITRUST LAWS Antitrust Policy and Regulation The Antitrust Laws Types of Mergers Industrial Regulation Social Regulation Key Terms Previous Slide End Show 32 - 9 Next Slide Issues of Interpretation • Monopoly Behavior vs. Structure • Standard Oil Case – 1911 • U. S. Steel Case – 1920 • Rule of Reason • Alcoa Case - 1945 • Du Pont Cellophane Case Issues of Enforcement: Tradeoffs Among Goals • Balance of Trade • Defense Cutbacks • Emerging New Technologies Copyright Mc. Graw-Hill/Irwin, 2002

Antitrust Policy • Issues of interpretation • Monopoly behavior or structure • 1911 Standard Oil Case • 1920 U. S. Steel Case • 1945 Alcoa Case • The relevant market • 1956 Du. Pont Cellophane Case • Issues of enforcement LO 2 18 -10

THE ANTITRUST LAWS Effectiveness of Antitrust Policy and Regulation The Antitrust Laws Types of Mergers Industrial Regulation Social Regulation Key Terms Previous Slide End Show 32 - 11 Next Slide • Existing Market Structures • Merger Types • Horizontal Merger • Vertical Merger • Conglomerate Merger • Merger Guidelines • Herfindahl Index • Price Fixing – Per se Violations • Tying Contracts Copyright Mc. Graw-Hill/Irwin, 2002

Types of Mergers Antitrust Policy and Regulation Automobiles Blue Jeans Conglomerate Merger The Antitrust Laws Types of Mergers Autos Industrial Regulation A B C D E F Blue Jeans Social Regulation Key Terms Glass Previous Slide End Show 32 - 12 T U V W X Y Z Denim Fabric Next Slide Horizontal Merger Copyright Mc. Graw-Hill/Irwin, 2002 Vertical Merger 18 -12

Industrial Regulation • Natural monopolies • Economies of scale • Public utilities • Electricity, water, gas, phone • Solutions for better outcomes • Public ownership • Public regulation • Public interest theory of regulation LO 3 18 -13

Industrial Regulation Commission (Year Established) Jurisdiction Federal Energy Regulatory Commission (1930)* Electricity, gas pipelines, oil pipelines, water-powered sites Federal Communications Commission (1934) Telephones, television, cable television, radio, telegraph, CB radios, ham operators State public utility commissions (various years) Electricity, gas telephones *Originally called the Federal Power Commission, renamed in 1977 LO 3 18 -14

Problems with Industrial Regulation • Regulators establish rates to give • • LO 3 natural monopoly “fair return” No incentive to reduce cost X-inefficiency Perpetuate monopoly • Conditions of natural monopoly can end Legal Cartel Theory 18 -15

Deregulation • Began in the 1970 s • Has produced large net benefits for • LO 3 consumers and society Industries deregulated include: • Airlines • Railroads • Telecommunications • Electricity 18 -16

SOCIAL REGULATION Antitrust Policy and Regulation The Antitrust Laws Types of Mergers Industrial Regulation Social Regulation Key Terms Previous Slide End Show 32 - 17 Next Slide Applies to Far More Firms More Intrusive into Daily Activities • Food & Drugs (1906) • EEOC (1964) • OSHA (1971) • EPA (1972) • CPSC (1972) Optimal Level of Social Regulation Copyright Mc. Graw-Hill/Irwin, 2002

Social Regulation • Concerned with the conditions under • • • LO 4 which goods and services are produced Impact of production on society Physical qualities of goods Applied “across the board” to all industries 18 -18

Social Regulation LO 4 Commission (Year Established) Jurisdiction Food and Drug Administration (1906) Safety and effectiveness of food, drugs, and cosmetics Equal Employment Opportunity Commission (1964) Hiring, promotion, and discharge of workers Occupational Safety and Health Administration (1972) Industrial health and safety Environment Protection Agency (1972) Air, water, and noise pollution Consumer Product Safety Commission (1972) Safety of consumer products 18 -19

Social Regulation Antitrust Policy and Regulation The Antitrust Laws Types of Mergers Industrial Regulation Social Regulation Key Terms Previous Slide End Show 32 - 20 Next Slide • Optimal Level of Social Regulation (MB = MC) – In Support of Social Regulation – Criticisms of Social Regulation – Two Reminders • There is No Free Lunch! • Less Government is Not Always Better than More Copyright Mc. Graw-Hill/Irwin, 2002

Antitrust Policy and Regulation The Antitrust Laws Types of Mergers Industrial Regulation Social Regulation Key Terms Previous Slide End Show 32 - 21 Next Slide United States v. Microsoft • Charges May 1998 • Windows Monopoly • District Court Findings – 95% of Intel PCs – Restrictive Contracts – District Court Remedy • Appeals Court Ruling • Final Settlement – No Break Up Copyright Mc. Graw-Hill/Irwin, 2002

Key Terms Antitrust Policy and Regulation The Antitrust Laws Types of Mergers Industrial Regulation Social Regulation Key Terms Previous Slide End Show 32 - 22 Next Slide • • • antitrust policy industrial regulation social regulation Sherman Act Clayton Act tying contracts interlocking directorates Federal Trade Commission Act cease-and-desist order Wheeler-Lea Act Celler - Kefauver Act Standard Oil case Copyright Mc. Graw-Hill/Irwin, 2002 • • • U. S. Steel case rule of reason Alcoa case Du. Pont cellophane case Microsoft case horizontal merger vertical merger conglomerate merger per se violations natural monopoly public interest theory of regulation • legal cartel theory of regulation