ECO 2023
Chapter 18: Antitrust Policy and Regulation
Antitrust Policy
 Government regulation aimed at preventing
monopoly and fostering competition in
markets where competition is desirable
 Pursued in courts
Antitrust Law and Enforcement
 Antitrust policy attempts to promote socially desirable
market performance
 Origins of Antitrust Policy
o Economics developments in the 19th century
created bigger firms serving wider markets
o Two most important developments
 Technological breakthroughs that led to a
larger optimal plant size in manufacturing
 The rise of the railroad which reduced
transport costs
o Economies of scale and cheaper transport costs
extended the geographical size of markets, so
firms grew larger and served a wider geographical
market
o Trust
 Any firm or group of firms that tries to
monopolize a market
Created by: M. Mari
Fall 2007
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Chapter 18: Antitrust Policy and Regulation
Antitrust Laws
 Sherman Antitrust Act of 1890
o First national legislation in the world against
monopoly
o Two provisions
 Section 1: Every contract, combination in the
form of a trust or otherwise, or conspiracy, in
restraint of trade or commerce among the
several States, or with foreign nations is
declared to be illegal.
 Section 2: Every person who shall
monopolize or attempt to monopolize, or
combine or conspire with any person or
persons to monopolize any part of the trade
or commerce among the several states, or
with foreign nations, shall be deemed guilty
or a felony.
o Outlawed
 Restraints of trade
 Collusive price fixing
 Dividing up markets
 Prohibited trusts
 Monopolization
o Treble damages available
o Sound foundation for positive government action
against business monopolies.
o Vague and ineffective
 Clayton Act of 1914
o Contained the desired elaboration of the Sherman
Act.
o Four sections
 Section 2 outlaws price discrimination when
such discrimination is not justified on the
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Fall 2007
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Chapter 18: Antitrust Policy and Regulation
basis of cost differences and when it reduces
competition.
 Section 3 prohibited tying contracts, in which
a producer requires that a buyer purchase
another of it products as a condition for
obtaining a desired product.
 Section 7 prohibits the acquisition of stocks
of competing corporations when the outcome
would be less competition.
 Section 8 prohibits the formation of
interlocking directorates – situations where a
director of one firm is also a board member
of a competing firm
 Federal Trade Commission Act of 1914
o Established a federal body to help enforce
antitrust laws
o Run by commissioners assisted by economists and
lawyers
o Gave FTC the power to investigate unfair
competitive practices on its own initiative or at the
request of injured firms.
o Issue cease and desist orders where unfair
methods of competition in commerce occur
 Wheeler-Lea Act of 1938
o Gave FTC the additional responsibility of policing
deceptive acts or practices in commerce
 False or misleading advertising
 Misrepresentation of products
o Established FTC as an independent antitrust
agency
o Made unfair and deceptive sales practices illegal.
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Fall 2007
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Chapter 18: Antitrust Policy and Regulation
 Celler-Kefauver Anti Merger Act
o Amended the Clayton Act, Section 7, which
prohibits a firm from merging with a competing
firm
o Which prevents one firm from buying the physical
assets of another firm if the effect is to reduce
competition
o Prevents horizontal merger
 A merger which one firm combines with
another that produces the same product
o Prevents vertical merger
 A merger in which one firm combines with
another from which it had purchased inputs
or to which it had sold output
o Allows conglomerate merger
 A merger of firms in different industries
Issues of Interpretation
Differences in judicial interpretations have led to vastly
different applications of antitrust laws.
Questions
o Should the focus of antitrust policy be on
monopoly behavior or on monopoly structure?
o How broadly should markets be defined in
antitrust cases?
Monopoly Behavior vs. Structure
o Standard Oil Case (1911)
 Found them guilty of monopolizing the
petroleum industry through a series of
abusive and anticompetitive actions
 Broke up the company
o US Steel (1920)
 Courts established a rule of reason, saying
that not every monopoly is illegal
 Size alone is not an offense
 Steel did not resort to illegal acts against
competitors in obtaining monopoly power
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Fall 2007
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Chapter 18: Antitrust Policy and Regulation
o ALCOA (1945)
 Possession of monopoly power is wrong
o Does it act like a monopoly or does it look like a
monopoly
o Microsoft
 Charged with practicing like a monopolist
Mergers
Horizontal mergers
o A merger which one firm combines with
another that produces the same product
o Exxon merges with Mobil
Vertical merger
o A merger in which one firm combines with
another from which it had purchased inputs
or to which it had sold output
o Pizza Hut, Taco Bell, and KFC
Conglomerate merger
o A merger of firms in different industries
o Walt Disney owns ABC, sports teams, cruise
line
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Fall 2007
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