Public Policy in Private
Markets
FTC and DOJ Operating Manuals
Brief History of Antitrust
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Overview of Antitrust Laws
Rules of Analysis (last time)
How to interpret the law?
1. PER SE RULE:
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2.
Business practice is always anticompetitive
Practice is always illegal: no room for
arguments (no reasonableness)
RULE OF REASON (more common)
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Legality is ambiguous
Case by case judgment (reasonableness)
DOJ and FTC
Operating Manuals
Department of Justice
Develop a Case based on
complaints, news
(staff lawyers, economists)
Criminal:
Civil:
Grand Jury
Draft Complaint
File Complaint
Indictment
(with asst. attorney’s ok)
District Court
Circuit Court
Appeal
Civil: either party may appeal
Supreme Court
Appeal
•May end with consent decree • Remedies
Criminal: only defendant may appeal •May start with nolo plea
• Possible imprisonment
Federal Trade Commission
• Bureau of Competition
Draft Administrative
Complaint
• Bureau of Economics
(technical input)
Same sources as DOJ
FTC approves
Complaint
Trial Administrative
Law Judge (FTC)
FTC Judgment
Federal Courts
• Independent
regulatory body (5
commissioners, 7
years)
• Mixed duties:
executive + judicial
Either party may
appeal to Judge
Only defendant may
appeal Commission’s
decision
Circuit Court
Supreme Court
Either party may
appeal
A Brief Regulatory History
Pre-1880’s
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Local markets (poor transportation system)
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Few corporations (e.g. railroads)
1880’s-1905:
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States let companies incorporate freely
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Large firms start to control national markets
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Abuses of market power became visible
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Reform movement (railroads)
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Interstate Commerce Commission Act (1887) –
Railroad regulation
Sherman Act (1890) – Monopoly, price fixing
A Brief Regulatory History
1905-1915:
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Progressive era:
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1906: Federal Food and Drug Act
Under Sherman Act: Roosevelt sues 45
companies and Taft sues 75
1911: Standard Oil (Rockefeller) forced to break
up in > 36 units (Mobil, Amoco, Exxon, etc.)
1914 (Sherman Act needed clarification)
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FTC Act: outlawed unfair business practices
Clayton Act, regulates mergers, price discrimination,
exclusive dealing agreements
A Brief Regulatory History
1915-1925:
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Quiet period
1925-1938:
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Active regulatory period due to stock
market crash in 1929 and the Great
Depression
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Firms allowed to cooperate (cartelization)
under National Recovery Act (later deemed
unconstitutional); e.g. strengthening of
trade associations
A Brief Regulatory History
1938-1945:
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Return to strong enforcement
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1938: Robinson-Patman Act (PD)
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Many antitrust cases brought forward
1950’s
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Cellar-Kefauver Act, strengthens merger regulation
1960-1980:
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SOCIAL regulation
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Environment, health, safety, equal opportunity, etc.
Based on intra-firm decisions (how and what firms
produce) rather than on market performance
A Brief Regulatory History
1980-2008:
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Era of deregulation:
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Airlines (Airline Deregulation Act, 1978),
telecommunications (1996), railroads (Staggers
Rail Act of 1980), trucking, banking (Garn-St
Germain Depository Institutions Act,1982 )
Also, an era of product regulations
2000-8 significant decrease in antitrust
activity (Bush administration)
A Brief Regulatory History
2008-:
 Era of strong enforcement (?):
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Apparent increase in antitrust activity
FTC/DOJ playing prominent roles
But at the same time:
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Era of recession
Many large mergers allowed (or promoted by
gov’t)
Businesses are hurting, some leeway has
been granted
Sherman Act, Section 2
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Monopolization
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Market definition
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Intent (next class)
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Brief history
Predatory Pricing
Why is a monopoly undesirable?
P
P
CS
CS
S=MC
S=MC
DWL
PM
PC
PS
PS
QC
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D
MR
Q
D
QM
Quantity is smaller, price is higher,
total welfare is smaller
Q
Overview of Antitrust Laws
Sherman Act, section 2
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“Every person who shall monopolize,
or attempt to monopolize, or combine
or conspire with any other person or
persons, to monopolize any part of the
trade or commerce among the several
States, or with foreign nations, shall be
deemed guilty of a misdemeanor”
Sherman Act, section 2
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Rule of reason approach:
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A monopoly is not necessarily illegal
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Illegal: attempts to monopolize
(aggressive/unusual behavior)
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Pattern of behavior over time is studied
Overview of Antitrust Laws
FTC Act (1914):
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Broader in scope than previous laws
Sets up FTC
Gives FTC jurisdiction over Clayton Act
and enforcement of section 5 of FTC Act:
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Cover unfair methods of competition
Unfair and deceptive acts
Overview of Antitrust Laws
Sherman Act, section 2
Burden of Proof:
1.
Substantial market power (structural
criteria)
A.
B.
2.
Define relevant market
Show market power
Intent to monopolize (conduct criteria)
Sherman Act, section 2
Burden of Proof:
1.
Substantial market power (structural
criteria)
A.
B.
2.
Define relevant market
Show market power
Intent to monopolize (conduct criteria)
Showing Substantial Market Power
Define Relevant Market
A.
Both product and geographic
This is VERY important under Section 2 (and
elsewhere)
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Example: Du Pont – limit pricing (1956)
Government definition: relevant market was cellophane.
Mkt share = 75%
Du Pont’s definition: flexible wrapping materials (wax
paper, foil, etc.). Mkt share = 20%
Du Pont persuades Court with their definition. Case
stops (intent stage is not reached)
Defining Relevant Product Market
Are convenience stores (e.g. 7-11, Dairy Mart) in the
same relevant product market as supermarkets? (e.g.
Stop & Shop, Big Y)?
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What would the value of the cross-price elasticity need to be to
say YES?
A.
-1
-0.5
0
0.2
0.8
B.
C.
D.
E.
Cross price Elast = % Change in Quantity Demanded at Supermarkets
% Change in Price at Convenience Stores
Defining Relevant Product Market
Are convenience stores (e.g. 7-11, Dairy Mart) in the
same relevant product market as supermarkets? (e.g.
Stop & Shop, Big Y)?
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A.
B.
C.
D.
As an estimate, what value would the cross-price
elasticity take?
-0.9
-0.2
0.3
1.1
Showing Substantial Market Power
Define Relevant Market
A.
i.
Product (service) Market:
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Physical characteristics (e.g. Du Pont case)
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Firm: the broader the better
Distinct customers or end users (e.g.
commercial vs. retail)
Cross price elasticity:
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E.g.: bread and cookies, same market?
Strong substitutes: high and positive cross-price
elasticity
No clear cut-offs
Showing Substantial Market Power
Define Relevant Market
A.
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Product (service) Market:
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Absolute price differences: if large may
signal different markets (e.g. luxury cars vs.
economy cars)
Unique production facilities: are both goods
produced in same type of facility?
Industry recognition of each other: e.g. do
they belong to the same trade association?
Showing Substantial Market Power
Define Relevant Market
A.
i.
Geographical Market:
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Transportation costs: are they high with
respect to price? E.g. construction materials,
coal
Barriers to trade? (e.g. ban on cross-state
shipments)
% Exported, % Imported: LIFO (little in from
outside), LOFI (little out from inside); <10%
Sherman Act, section 2
Burden of Proof:
1.
Substantial market power
A.
B.
2.
Define relevant market
Show market power (next class)
Intent to monopolize (next class)