18 Antitrust Policy and Regulation McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc All rights reserved Chapter Objectives Antitrust Policy and Regulation The Antitrust La ws Types of Mergers Industrial Regula tion Social Regulation Key Terms Previous Slide End Show 32 - 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 McGraw-Hill/Irwin, 2002 Antitrust Policy and Regulation ANTITRUST POLICY AND REGULATION Antitrust Policy The Antitrust La ws Types of Mergers Industrial Regula tion Social Regulation Industrial Regulation Key Terms Social Regulation Previous Slide End Show 32 - Next Slide Copyright McGraw-Hill/Irwin, 2002 Antitrust Laws • The purpose: •Prevent monopoly •Promote competition •Achieve allocative efficiency LO1 18-4 THE ANTITRUST LAWS Antitrust Policy and Regulation The Antitrust La ws Types of Mergers Industrial Regula tion Social Regulation Key Terms Previous Slide End Show 32 - Next Slide Historical Background •Trusts •P=MC Pricing •Monopoly Pricing •Regulatory Agencies •Natural Monopolies Copyright McGraw-Hill/Irwin, 2002 THE ANTITRUST LAWS Antitrust Policy and Regulation The Antitrust La ws Types of Mergers Industrial Regula tion Social Regulation Key Terms Previous Slide End Show 32 - Next Slide Sherman Act of 1890 • Section - Restraint of Trade • Section – Monopolization • Treble Damages Clayton Act of 1914 • • • • Section - Price Discrimination Section - Tying Contracts Section – Stock Ownership Section – Interlocking Directorates Copyright McGraw-Hill/Irwin, 2002 THE ANTITRUST LAWS Antitrust Policy and Regulation The Antitrust La ws Types of Mergers Industrial Regula tion Social Regulation End Show 32 - • 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 McGraw-Hill/Irwin, 2002 THE ANTITRUST LAWS Antitrust Policy and Regulation The Antitrust La ws Types of Mergers Industrial Regula tion Social Regulation Key Terms Previous Slide End Show 32 - Celler-Kefauver Act of 1950 • Strengthened Clayton Act Regarding Asset Ownership in Competing Firms • Anticompetitive Mergers Illegal No Matter How Accomplished Next Slide Copyright McGraw-Hill/Irwin, 2002 THE ANTITRUST LAWS Antitrust Policy and Regulation The Antitrust La ws Types of Mergers Industrial Regula tion Social Regulation Key Terms Previous Slide End Show 32 - 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 McGraw-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 DuPont Cellophane Case • Issues of enforcement LO2 18-10 THE ANTITRUST LAWS Effectiveness of Antitrust Antitrust Policy and Regulation The Antitrust La ws Types of Mergers Industrial Regula tion Social Regulation Key Terms Previous Slide End Show 32 - 11 Next Slide • Existing Market Structures • Mergers •Merger Types •Horizontal Merger •Vertical Merger •Conglomerate Merger • Merger Guidelines •Herfindahl Index • Price Fixing – Per se Violations • Tying Contracts Copyright McGraw-Hill/Irwin, 2002 Types of Mergers Antitrust Policy and Regulation Automobiles The Antitrust La ws Blue Jeans Conglomerate Merger Types of Mergers Autos Industrial Regula tion 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 McGraw-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 LO3 18-13 Industrial Regulation Commission (Year Established) Jurisdiction Federal Energy Regulatory Commission (1930)* Electricity, gas, 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 LO3 18-14 Problems with Industrial Regulation • Regulators establish rates to give • • • • LO3 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 1970s • Has produced large net benefits for • LO3 consumers and society Industries deregulated include: • Airlines • Railroads • Telecommunications • Electricity 18-16 SOCIAL REGULATION Antitrust Policy and Regulation The Antitrust La ws Types of Mergers Industrial Regula tion 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 McGraw-Hill/Irwin, 2002 Social Regulation • Concerned with the conditions under • • • LO4 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 LO4 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 La ws Types of Mergers Industrial Regula tion 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 McGraw-Hill/Irwin, 2002 Antitrust Policy and Regulation The Antitrust La ws Types of Mergers Industrial Regula tion 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 McGraw-Hill/Irwin, 2002 Key Terms Antitrust Policy and Regulation The Antitrust La ws Types of Mergers Industrial Regula tion Social Regulation Key Terms Previous Slide End Show 32 - 22 Next Slide • antitrust policy • industrial regulation • U.S Steel case • rule of reason • social regulation • Sherman Act • Alcoa case • DuPont cellophane case • Clayton Act • tying contracts • Microsoft case • horizontal merger • interlocking directorates • Federal Trade Commission A ct • cease-and-desist order • Wheeler-Lea Act • vertical merger • conglomerate merger • per se violations • natural monopoly • public interest theory of regulation • legal cartel theory of regulation • Celler - Kefauver Act • Standard Oil case Copyright McGraw-Hill/Irwin, 2002 ... conditions under • • • LO4 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 LO4... McGraw-Hill/Irwin, 2002 Vertical Merger 18- 12 Industrial Regulation • Natural monopolies • Economies of scale • Public utilities • Electricity, water, gas, phone • Solutions for better outcomes •... Commission (1934) Telephones, television, cable television, radio, telegraph, CB radios, ham operators State public utility commissions (various years) Electricity, gas telephones *Originally called