Chapter 10
Antitrust, Mergers, and
Competition Policy
McGraw-Hill/Irwin
Copyright © 2008 The McGraw-Hill Companies, All Rights Reserved.
Ch. 10: Key Learning Objectives
 Understanding the dilemmas corporate power
presents in a democratic society
 Knowing the objectives of antitrust and competition
laws
 Recognizing the key issues in contemporary antitrust
policy
 Analyzing the reasons for mergers and acquisitions,
and how have they affected the relationship between
business and its stakeholders
 Assessing how competition policies compare around
the world, and what impact globalization has had on
antitrust enforcement
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The Dilemma of Corporate Power
 Corporate power
The capability of corporations to influence
government, the economy, and society, based on
their organizational resources
 Power can be a function of size and world’s largest
corporations are very big
 Figure 10.1 shows 10 largest global corporations
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Figure 10.1
The 10 Largest Global
Corporations, 2005-2006
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The Dilemma of Corporate Power
 Economic power is evident when compare largest
corporations’ annual sales revenue with countries
whose GPD (gross domestic product) is at same
level
 Figure 10-2 shows this comparison
 The dilemma of corporate power concerns how
business uses its influence, not whether it should
have power in the first place
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Figure 10.2
Comparison of Annual Sales with GDP for
Selected Transnational Companies and
Nations, 2004
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Antitrust Laws
 Antitrust
Laws that prohibit unfair, anti-competitive practices by
business
 Term derives from trust, the old-fashioned word for
groups of companies that joined together to divide up
markets and limit competition
 New term for trust is cartel
 The term antitrust law is used in the U.S., most other
countries use the term competition law
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Objectives of Antitrust and Competition Laws
 The protection and preservation of competition
 To protect the consumer’s welfare by prohibiting
deceptive and unfair business practices
 To protect small, independent business firms from
the economic pressures exerted by big business
competition
 To preserve the values and customs of small-town
America
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The Sherman Act
 Prohibits contracts, combinations, or conspiracies
that restrain trade and commerce
 Prohibits monopolies and all attempts to monopolize
trade and commerce
 Provides for enforcement by the Justice Department,
and authorizes penalties for violations
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The Clayton Act
 Prohibits price discrimination by sellers
 Forbids requiring someone to buy an unwanted
product or service in order to get another one they
want
 Prohibits companies from merging if competition is
lessened or a monopoly is created
 Outlaws interlocking directorates in large competing
corporations
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The Federal Trade Commission Act
 Created the Federal Trade Commission to help
enforce antitrust laws
 Prohibits all unfair methods of competition
 Gives more protection to consumers by forbidding
unfair business practices
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The Antitrust Improvements Act
 Requires large corporations to notify the Justice
Department and the Federal Trade Commission
about impending mergers and acquisitions
 Expands the Justice Department’s antitrust
investigatory powers
 Authorizes the attorneys general of all 50 states to
bring suits against companies that fix prices and to
recover damages for consumers
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Antitrust Law Exemptions
 Some organizations are not covered
 For example, Major League Baseball
 Others not covered
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Labor unions
Agricultural cooperatives
Insurance companies (regulated by State law)
Business transactions related to national defense
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Figure Antitrust Enforcement at the Federal Level
10.3
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Key Antitrust Issues - Monopoly
 Does domination of an industry or a market by one or
a few large corporations necessarily violate antitrust
laws?
 Should the biggest firms in each industry be broken
up?
 The courts have found that monopoly per se is not
illegal
 If a company dominates the market because it offers a
superior product or service, has invented something unique,
or even because it is just lucky, that is not against the law
 If, however, a firm uses its market dominance to restrain
commerce, compete unfairly, or hurt consumers, then it may
be found guilty of violating antitrust laws
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Key Antitrust Issues - Innovation
 In early days of antitrust law, regulators promoted
competition in order to provide consumer choice and
keep prices down
 Today, in the fast-paced economy, regulators have
increasingly promoted competition to foster
technological innovation
 Quote from Federal Trade Commission Chairman:
 “Innovation is more and more the central arena in which
competition plays out. [It] is the hot issue for the foreseeable
future.”
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Key Antitrust Issues – High Technology Businesses
 Economy has changed from when antitrust laws were
crafted in the late 19th and early 20th century
 We are now in the information age, where primary
currency is intellectual property
 Some argue that the basic principles of antitrust law
are not applicable today
 Monopolies in high-tech businesses are inherently unstable
with low barriers to entry and dynamic technological change
constantly changing basis of competition
 Courts are struggling to resolve ways antitrust laws apply to
high tech industries
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Corporate Mergers
 Corporate merger
A combination of one company with another
 Vertical mergers
 Occur when the combining companies are at different stages of
production in the same general line of business
 Horizontal mergers
 Occur when the combining companies are at the same stage or
level of production or sales
 Conglomerate merger
 Occurs when firms that are in totally unrelated lines of business
are combined
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Figure 10.4
Three Different Types of Corporate
Mergers
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Forces Driving Mergers in the 1990s and 2000s
 Technological change
 Major companies jockeyed for position in rapidly evolving
technologies
 Changes in regulatory environment
 Examples include telecommunications deregulation and
changes in health care industry laws
 Globalization
 Companies found they needed to be big to operate on the
global stage
 Stock price appreciation
 Bull market in late 1990s gave some companies the means
to purchase others
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Figure 10.5
Value of mergers and acquisitions,
1990 – 2005
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Consequences of Corporate Mergers
 What stakeholders will be helped and what
stakeholders will be hurt by wave of corporate
mergers?
 Mergers bring benefits to the firm, like economies of
scale and access to new technologies
 Sometimes, however, undermine responsibility to
some stakeholder groups
 Examples include employees losing their jobs and
communities negatively impacted by companies moving out
 Shareholders can lose if the merger is not well
thought out or acquisition was overpriced
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Comparative Competition Policies
 Europe has lagged behind U.S. in antitrust regulation,
but is catching up
 EU today has complete set of competition policies,
however enforcement emphasis is different
 Attention paid to market domination by former state-run
enterprises
 Concern with price discrimination across borders
 Strong inclination to protect small business
 Developing nations have moved to adopt their own
competition policies
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Globalization and Competition Policy
 Rapid globalization of business has created challenges for
antitrust enforcement:
 Should a government permit mergers, or joint ventures, even
if they reduce competition, if they enhance the ability of
domestic businesses to compete internationally?
 Should a country government move to break up monopolies,
if the global marketplace for the products offered is highly
competitive?
 Should regulators try to enforce antitrust laws against foreign
companies if they operate subsidiaries within their borders?
 What steps can governments take to create a level playing
field, so that corporations operate under a common set of
antitrust rules and regulations wherever they do business?
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Antitrust Enforcement and National
Competitiveness
 Regulators have dilemma when goal of competitive
market conflicts with goal of strong economy, relative to
other countries
 Since mid-1980s U.S. has permitted cooperative activities
among firms where appropriate to enhance their
competitiveness in the global economy
 The 1984 National Cooperative Research Act (NCRA)
sought to balance cooperative R&D with competition by
instructing the courts to use a “rule of reason”
 European regulators have similarly permitted joint R&D
aimed at improving the competitiveness of their industries
 Regulators have also loosened rules governing joint
production agreements to permit economies of scale
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Enforcing Antitrust Laws against Foreign Firms
 In recent years, regulators have been more willing to
address possible violations of antitrust law by foreign
companies
 Example - requiring merged Swiss drug companies Sandoz
and Ciba-Geigy to divest product lines in the U.S. to avoid
being a monopoly
 European regulators have become more active in
enforcement against U.S. companies
 Example – European court in 2005 upheld EU’s veto of
General Electric’s acquiring of Honeywell
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Harmonization
 Harmonization is process being used to coordinate laws and
enforcement of competition policies across countries
 Several bilateral treaties are in place
 OECD has worked to coordinate antitrust enforcement
 EU and U.S. now jointly review global mergers
 EU also coordinating more closely with Japan Fair Trade
Commission
 Despite these efforts, lack of common standards creates a
problem for cross-border mergers
 Brookings Institution report has called for multi-country effort to
harmonize competition policies
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