Antitrust Policy & Regulation
A. Antitrust (anti-monopoly) laws
1.
Sherman Act of 1890
2.
Clayton Act of 1914
3.
Federal Trade
Commission Act
------
Monopolists tend to produce less and charge more.
Regulatory Agencies control economic behavior (Dept of Justice, Fed Trade Comm)
Sherman Act outlawed collusive price fixing and monopolies.
Strengthened the Sherman Act.
FTC, with Justice Dept., to investigate unfair competitive practices.
Sherman Antitrust Act
1890 – used in early
 Outlaws monopolies
19000’s
 First government law to
limit monopolies
 Gave federal gov’t
power to investigate
trusts and companies
suspected of violating
the Act
 “Antitrust” really means
“competition law”

Trusts
DEF: A combination
of firms or
corporations formed
by a legal
agreement
 Especially in order
to reduce
competition
 Standard Trust –
came after Standard
Oil
Clayton Antitrust Act
1914
 Strengthened Sherman
Act
 Prohibit “anticompetitive
practices”

– Mergers/Acquisitions that
lessen competition
– One person being a
director of competing
companies
B. Cases
1.
Standard Oil case (1911) – broke-up.
2.
U.S. Steel case (1920) – ‘rule of
reason’ by Supreme Court that
unreasonably restrain trade.
John D. Rockefeller
controlled nearly all
trade for oil and gas.
The Supreme Court
used the Sherman
Act to break up
Standard Oil into 34
companies.
Other cases…


In an out-of-court settlement,
AT&T divested itself into 22
regional phone-operating
companies in 1982.
AT&T’s deal to buy T-Mobile
USA for $39 billion is shaping
up to be a heated regulatory
battle. It would create the
nation’s largest cellular
carrier. Lawmakers are
already denouncing the deal,
saying it will reduce
competition in an already
consolidated industry.
Countries with Antitrust Laws
shown in red
C.
Mergers
1. Horizontal
2. Vertical
3. Conglomerate
-- Horizontal: merger of two competitors that sell similar products in the same
geographic market. Examples are Chase & Chemical Bank, Exxon & Mobile.
-- Vertical: firms at different stages of production process. Examples are PepsiCo with
Pizza Hut, Taco Bell, and KFC.
-- Conglomerate: not horizontal or vertical, different firms in different geographic areas.
-- Merger Guidelines: The Federal gov’t has loose guidelines based on the Herfindahl
Index (ch 23), measure of concentration is the sum of squared percentage
market shares of firms within industry.
-- Herfindahl Index: is there are four firms, each with 25% market share, the index #
is 2,500 (252 + 252 + 252 + 252). A pure monopoly has index of 10,000 (1002)
Effectiveness of Antitrust Laws
Types of Mergers
Automobiles
Blue Jeans
Conglomerate Merger
Blue
Jeans
Autos
B
A
T
U
C
V
E
D
W X
Glass
Horizontal Merger
-- Most Vertical mergers are approved by regulators.
F
Y Z
Denim
Fabric
Vertical Merger
Top 10 M&A deals worldwide by value (in mil.
USD) from 2000 to 2010:
Year
Purchaser
Purchased
Ran
k
Transaction value (in mil.
USD)
1
2000
Fusion: America Online Inc.
[23][24]
(AOL)
Time Warner
164,747
2
2000
Glaxo Wellcome Plc.
SmithKline Beecham Plc.
75,961
3
2004
Royal Dutch Petroleum Co.
Shell Transport & Trading Co
74,559
4
2006
AT&T Inc.
BellSouth Corporation
72,671
5
2001
Comcast Corporation
AT&T Broadband & Internet Svcs
72,041
6
2009
Pfizer Inc.
Wyeth
68,000
7
2000
Spin-off: Nortel Networks Corporation
8
2002
Pfizer Inc.
[25][26]
[27]
59,974
Pharmacia Corporation
59,515
Bank One Corp
58,761
9
2004
JP Morgan Chase & Co
10
2009
Technofist Inc.
Goldspark IT Solution PVT LTD, Inc
11
2008
Inbev Inc.
Anheuser-Busch Companies, Inc
N/A
52,000
D.
Industrial Regulation.
1. Natural Monopoly
2. X-inefficiency
-- There are situations that are economically beneficial to have a monopoly.
-- A natural monopoly occurs when ‘economies of scale’ are so extensive that a single
firm can supply the entire market at a lower cost than competing firms could.
They are rare, but conditions exist for public utilities.
-- X-inefficiency is the failure to produce any specific output at the lowest average
(and total) cost possible.
E.
F.
Deregulation – started in 1970’s.
Social Regulation
*
*
*
*
Commission
(Year Established)
Food & Drug
Administration (1906)
Equal Employment
Opportunity Comm (1964)
Occupational Safety &
Health Admin (1971)
Environmental Protection
Agency (1972)
The main
Jurisdiction
Federal
Safety & effectiveness
Regulatory
of food, drugs, & cosmetics
Hiring, promotion, & discharge Commissions
of workers
providing
Industrial Health & safety
social
Air, water, and noise pollution
regulation
-- “…deregulation of formerly regulated industries is contributing more than $50 billion
annually to society’s well-being through lower prices, lower costs, and
increased outputs. McConnell Brue, 2008
-- The textbook lists industries of airlines, railroads, and trucking, but not banking.
-- “It is simply far too soon to declare deregulation either a success or failure.”
McConnell Brue, 2008
-- California’s wholesale electricity prices were deregulated, but not retail rates, leading
to the Enron debacle in 2001, prompting Governor Davis’ recall.