U.S. Regulation of Business
(1) Overview
(2) Anti-Trust Regulation
Business, Government & Society
Spring 2000
U.S. GOVT REGULATION:
An Overview
Cycles of regulation
–periods of heavy regulation
–followed by periods of
deregulation
 Economic and political influences
 Federal regulatory agencies and
commissions
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HISTORY: GOVT REGULATION OF
BUSINESS IN THE US
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Justification for Government
Regulation --the use of private
property can be regulated to serve the
public interest
Prior to the 1880s most regulation of
business took place at the state and
local level
Congress established the first modern
regulatory agency in 1887
HISTORY OF GOVERNMENT
REGULATION
- Interstate Commerce Commission
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** initially set railroad rates
ICC was the first significant reaction to
concerns regarding the detrimental effects
of the concentration of ownership with
higher prices and reduced output
ICC in line with the constitution --right of
federal government to regulate trade among
the states
HISTORY OF GOVERNMENT
REGULATION
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Level of federal regulation remained low
until the Great Depression in the 1930s
The Depression (stock market “crash” and
collapse of the banking industry)
represented to many:
-- “the failure of the free enterprise
system”
-- the problems with concentration of
economic resources
HISTORY OF GOVT REGULATION
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THE NEW DEAL (FDR): Vast System of
Federal Economic Regulation attempted to
alleviate detrimental effects of concentrated
ownership and private market through:
– Price control
– Control over the entry of firms
– Vested federal government with
unprecedented authority to intervene in
business affairs
HISTORY OF REGULATON
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By the 1960s government regulation
of prices and entry was
commonplace in the transportation
(railroads, trucking, airlines),
communications (telephone
services, radio, television), and
“natural” utility (electricity, natural
gas) industries
SOCIAL REGULATION
* Increased significantly starting late
1960s and continuing in the 1970s
-- in the wake of Vietnam protests and
emergence of environmental and
consumer movements
 Scale & scope of regulatory activity
expanded
 Fed govt imposed new controls on
environmental pollution, the safety of
the workplace & consumer products
DEREGULATION
Then came the late 1970s--Great
Stagflation (double digit inflation and
unemployment during the Carter
administration)
 This undermined public confidence in
the prevailing system of regulation
 From the late 1970s through the
Reagan/Bush administrations there
was a move to Deregulation and
greater reliance on market forces
ECONOMIC DEREGULATION
Emanated from:
-- the perceived failure of government
regulation
-- the value placed on the efficacy of
free markets by Reagan/Bush
administrations
 Removal of many price and entry
restrictions in regulated industries
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DEREGULATION OF THE 1980s:
Started with Carter accelerated with Reagan
-Airline Industry & Trucking deregulation
was supported by some, but not all,
firms in the effected industries
- particularly supportive were new and
small firms who could now compete
more effectively
- however, many incumbent firms lost
market share & profits
- also, wages of unionized workers (e.g.,
Teamsters in trucking) in “protected”
industries declined
DEREGULATION OF THE 1980s
* While economic regulation declined,
social regulations (e.g., environmental,
product safety, workplace) remained
-- Interest groups and general public
support remained high for social
regulation
US GOVERNMENT REGULATION
IN SUMMARY
* U.S. Government Regulation has been
characterized as a “middle way” of
relating government to industry
-- somewhere between government
control and more complete reliance on
private markets
* Cycles of Regulation and Deregulation
affected by economic conditions,
public interest and politics
CURRENT REGULATORY
ENVIRONMENT
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Clinton administration “middle ground”
Support for social (e.g., equal employment
opportunity, increased min. wage) and
environmental regulation
Economic deregulation of:
(1) Telecommunications
(2) Electrical Utilities
(3) Banking/Financial Services
Regulatory institutional arenas
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Most U.S. Government Regulations are
implemented through independent
commissions and agencies of the
federal executive branch and state
government
Regulatory statutes and practices can
be appealed to the courts to test their
constitutionality and to ensure that
agencies satisfy due process in their
decision making
FEDERAL REGULATORY AGENCIES
--There are 60 autonomous federal
agencies, some (e.g.,EPA) report
directly to the President, bypassing
cabinet secretaries
-- There are also 20 independent
regulatory commissions which do not
report to the President (e.g., Fed
Reserve System, FCC, CPSC)
FEDERAL REGULATORY AGENCIES
Independent Regulatory Commissions
(IRCs)
-- Commission members appointed by
President and approved by Senate,
terms are not coterminous with
President (e.g, FEC)
-- Lack continuing supervision of any of
the formal branches of government
-- Represent the “fourth branch of
government”
LISTING OF SOME FEDERAL
AGENCIES AND IRCs
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“many familiar names”
– INTERSTATE COMMERCE COMMISSION,
(1887) IRC
– FED RESERVE SYSTEM, (1913) IRC
– FED TRADE COMMISION, (1914) IRC
– FOOD AND DRUG ADM, (1931) AGENCY
UNDER HHS
EXAMPLES OF
FEDERAL AGENCIES & IRCs
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SECURITIES AND EXCHANGE
COMMISSION, (1934) IRC
FEDERAL COMMUNICATIONS
COMMISSION, (1934) IRC
FEDERAL AVIATION AGENCY, (1948)
agency under DOT
EQUAL EMPLOYMENT OPPORTUNITY
COMMISSION, (1965) IRC
ENVIRONMENTAL PROTECTION AGENCY,
(1970) IND. AGENCY
ANTI-TRUST POLICY
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HISTORY
JUSTIFICATIONS
INSTITUTIONAL ARENAS
EXEMPTIONS
DIFFERENT APPROACHES:
TRADITIONAL, “CHICAGO SCHOOL”,
CURRENT POLICY
MICROSOFT CASE (ROLE PLAYS)
ANTI-TRUST POLICY
HISTORY
 Anti-trust became an issue at the turn
of the 20th century
 Concern about control of industry by
single firm, “unnatural” monopoly &
loss of economic efficiency
-- resulting in reduction of output and
rise in prices which worked against
interests of consumers and
detrimental to US economy
ANTI-TRUST POLICY
Monopoly as market failure justifying
government intervention:
-- price above MC
-- output below efficient level
-- loss of consumer surplus
-- transfer of surplus to producers
-- loss of efficiency in economy, as
** max (PS+CS) is not achieved
ANTI-TRUST POLICY
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To promote economic efficiency govt. antitrust policy attempts to ensure entry and fair
competition in industries with barriers to
entry and anti-competitive practices
Anti-trust policies (as with all govt regs)
change over time and are strongly
influenced by economics and politics
The awarding of triple damages in anti-trust
cases provides significant incentive for
private firms to initiate cases
Anti-Trust institutional arenas
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Anti-Trust laws are established by the
U.S. Congress. However, laws are
enforced mostly through the courts
by private litigation & law suits
-- in contrast with most govt regs
where main I.A.s are agencies,
commissions & legislatures
Broad language of anti-trust acts
leaves considerable room for
interpretation for courts/judges/juries
INSTITUTIONAL ARENAS
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Apart from the courts the enforcement
of Anti-Trust is the responsibility of the
DOJ Anti-Trust Div., FTC, the DOT (with
airlines) and state attorney generals
FTC has enforcement, investigation
and regulatory role (e.g., Staples-Office
Depot proposed merger)
DOJ’s role in enforcement is through
law suits brought to Federal Courts as
in the Microsoft case
Key Issues to consider in Anti-Trust
- what is the relevant market?
- market share of competitors?
- prices, are they fair?
- barriers to entry (capital costs, distribution
chains, software platforms)?
- is there international competition?
- cost structure of industry (is it subject to
increasing returns to scale?)
- incentives to innovate ?
- the effect of tech change on relevant market?
Types of Anti-Competitive Behavior
(1) Horizontal Restraint of Trade
-- a division of market, which reduces
competition and creates monopoly
-- a single company dominates a market
and/or industry
Types of Anti-Competitive Behavior
(2) Vertical Restraint of Trade
examples:
--resale price maintenance (manufacturer
tries to control the retail price)
-- exclusive dealing (e.g., Anheuser
Bush)
-- a single firm controls supply chain
Types of Anti-Competitive Practices
(3) Predatory Pricing
-- firms price below marginal cost until
other firms get driven out of
business and then they price and
profit as a monopolist
-- most relevant in industries with high
barriers to entry (e.g., airlines)
MICROSOFT & ANTI-COMPETITIVE
PRACTICES
Microsoft has been accused of
Horizontal and Vertical Monopoly
practices
-- MS dominates operating system (OS)
market with MS DOS
-- accused of unfairly using position in
supply chain in browser competition
with Netscape/American Online
SOME EXEMPTIONS TO ANTI-TRUST
-- Regulated Industries (e.g.., natural
monopolies)
-- Agricultural Cooperatives
-- State Economic Activity (e.g., NH liquor
monopoly)
-- Major League Baseball (“it is a game”)
-- Competitors working together to lobby the
govt-- First Amendment right
-- Unions (first thought to be unlawful
combinations not serving the public good)
SCHOOLS OF “THOUGHT”
ON ANTI-TRUST
(1) TRADITIONAL/STRUCTURALIST
 the dominant school until 1970s,
emanated from populist tradition
- social, political & econ justifications for
breaking up large companies
- concern with economic power leading
to political power
- concern with fairness and protection of
consumer & small businesses
SCHOOLS OF “THOUGHT”
ON ANTI-TRUST
(1) Traditional/Structuralist (continued)
- “Per Se” rule -- few competitors
reduced supply, increased price
- most concerned with industry
structure, i.e., the number of firms
and market share
SCHOOLS OF “THOUGHT”
ON ANTI-TRUST
(2) CHICAGO SCHOOL
 Started to dominate in late 70s, in
Reagan and Bush administrations
- Economic objectives emphasized
- market efficiency is objective i.e., P=MC &
max(PS+CS)
- not concerned with distribution of income
or equity
- “Rule of Reason” Test-- does market
operate as if competition was possible?
SCHOOLS OF “THOUGHT” ON
ANTI-TRUST
(2) CHICAGO SCHOOL(continued)
- barriers to entry, substitutes and
international competition are
considered
- not concerned with social and
political implications of
concentration of economic resources
GOVERNMENTAL POLICIES
-- suggested by the different schools of thought
(1) STRUCTURALISTS
- active government role
- promote an increased number of firms
in industries
- focus removing barriers to entry
- break-up “per se” monopolies
- restrict mergers that will result in
market power (e.g., Staples-Office
Depot, Microsoft and Intuit)
SUGGESTED GOVERNMENTAL
POLICIES
(2) CHICAGO SCHOOL
- minimal government anti-trust effort
- government intervention often makes
markets less competitive and less efficient
- government can inhibit entry, e.g., govt
regulation of trucking till the 1980s
- private firm control of regulatory agencies
can lead to “capture”
- large firms and limited competition could be
most efficient, particularly in capital
intensive industries with increasing returns
CURRENT ANTI-TRUST
POLICIES
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Microsoft is the leading example
Also in the news
– Airline industry (American Airlines, ContinentalNorthwest)
– Visa/MasterCard
– Auction Houses
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Mix of traditional & Chicago views used,
reflective of economic as leading, but not
only concern
Also the internationalization of anti-trust
reg., e.g., EU vs. Boeing, Lonza vs. US
MICROSOFT CASE
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ACCUSATIONS AGAINST
MICROSOFT
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MICROSOFT --IT’S DEFENSE
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RULING