Government
Regulation
Antitrust Policy and Regulation
Chapter 28
What are Antitrust Laws?
Antitrust policy can also be called antimonopoly
policy….
HISTORY IN BRIEF FOR ANTITRUST LAWS
U.S. civil War (1861-1865)… after this period
markets expanded which led to some firms
becoming dominant.
Among these, petroleum, meatpacking, sugar,
railroads, whiskey, tobacco.
These dominant firms whether oligopolists or
monopolists became known as trusts (or business
combinations that assign control to a single decision
group)… I.e. trustees.
Hence, word trust became synonymous with monopoly
(as it is used today)
These dominant firms used questionable tactics in
conducting business… and in consolidating and
keeping market share… They charged higher
prices… and pressured resource suppliers to
provide resources as lower prices. (sort of an Al
Capone style)
Conclusions of the 1800’s
These dominant firms did not do anything to
protect the consumer.
There was no fair competition or in some cases,
complete barrier to entry existed.
Government steps in:
Set up through legislation (Sherman being the
first) alternative methods of control:
Regulatory agencies – Interstate Commerce
Commission was first - 1887 directed to
protect against railroad abuse
Antitrust laws.
Antitrust
 Antitrust Law

Legislation passed for the stated purpose of
controlling monopoly power and preserving and
promoting competition.
 A monopoly:
 Produces a smaller output than is produced by a
perfectly competitive firm with the same revenue and
cost considerations,
 Charges a higher price, and
 Causes a deadweight loss.
Antitrust Acts
 Sherman Act (1890)
 Clayton Act (1914)
 Federal trade Commission Act (1914)
 Robinson – Patman Act (1936)
 Wheeler – Lea Act (1938)
 Celler – Kefauver Anti-merger Act (1950)
Sherman Act of 1890
Outlawed:
“Restraints of Trade”
Collusive price fixing
Dividing up the market
Very ineffective legislation… nothing much
changed…. Dominant firms kept right on
dominating….
Did bring suit again Standard Oil Ohio –
controlled 80% of nation’s oil-refining.
Clayton Act of 1914
Legislation to cure the ills of the Sherman foibles.
Set up the FTC as the watchdog for:
Price discrimination eliminated.
Tying contracts (producer requires buyer to purchase
another of its products as condition for obtaining the
desired product.
Acquisition of stocks of competing corporations that
would lesson competition
Interlocking directorates (director of one firm on board
of competing firm)
Federal Trade Commission
Robinson-Patman Act 1936- amended the Clayton and
buying power of chain stores. Referred to as “Chain
Store Act.”
Wheeler-Lea Act 1938 – amended FTC Act on
protecting consumers against false advertising.
Celler-Kefauver Act 1950- amended Clayton to include
regulation of vertical and conglomerate mergers.
Difference between vertical/horizontal/conglomerate
mergers
Exemptions from Antitrust Laws
 Labor unions
 Public utilities
 Professional baseball
 Cooperative activities of U.S. Exporters
 Hospitals
 Insurance companies
 Publit transit and water systems
 Supplies of military equipment
 Joint publishing in single town – 2 or more
newspapers.
 Price Fixing – an obvious deterrent to
competition.
This brings government in to shut down very
quickly. Many instances of price fixing
through the years in U.S. But is illegal.
Rigging bids for government contracts..such as
dividing up the market (without competitive
bid) known as per se violations in antitrust
law.
Price Discrimination
Common practice that rarely elicits the ire of
government…
Why? Green fees and tee times!
Doesn’t really deter competition.
Unless the discriminated prices are used to
obstruct entry or drive out competition.
Today who watches
FTC (5 member commission appointed by
Pres/confirmed by Senate)
Along with the U.S. Justice Department… the
enforcer for antitrust laws.
(note the separation of powers in force here….
Which branch makes the law?
Which branch enforces the law?
Which branch interprets the law
Legal Framework for FTC
Quasi-legislative
Quasi-judicial
Can issue cease and desist orders
Can do ALL of this on its own initiative
What is the Wheeler-Lea Act of 1938…?
It allowed more latitude for FTC… additional policing of
businesses… now FTC responsible for “deceptive
acts or practices in commerce.”
Until this amendment was passed, the FTC could only
restrict practices that were unfair to competitors.
Robinson-Patman Act
Amendment to Clayton 1936
Large volume buyers who might use their buying power to extract
special deals,
including quantity discounts,
free promotional materials or
purchase allowances, were targeted by the Robinson-Patman Act.
The Robinson-Patman Act imposes limits on these practices
without prohibiting them entirely.
The act is enforced by the Federal Trade Commission in
conjunction with the Department of Justice.
White House Power
 Independent Regulatory Commissions
 All Regulatory Agencies fall under Executive
branch of government
Political Appointments of Chairmen or
Boards Affects Judicial Interpretation
 Power of Commissions…. In political
spectrum
 When in Court… get diverse judgments on
monopoly power, mergers, anti-trust.
Where should focus be?
 On monopoly behavior (or)
 Monopoly structure
What is the verdict?
Structure or Behavior.
 If Justice Dept and/or courts think the corporation or
company is acting in anticompetitive way, will be a
violation of Sherman.
 Alcoa was acting like monopoly (hence had to breakup)
 If not… and is doing good for society ( IBM, Intel)
then it is “behaving” OK… and is permitted.
 But if considered a “bad monopoly” like Microsoft….
Then the boom is lowered by government.
Why don’t companies sue each other?
They do! But it is very expensive and lengthy
process.
Take the case to government… let government
bring the case… then after verdict…if
favorable… will sue for treble damages.
State most Fortune 500 companies are domiciled?
Why does government have such a
waffling track record?
Simple……………….
It’s political!
Two theories:
1) Active antitrust perspective (not the
right mix of outputs… not enough
competition… govt needs to correct).
2) Laissez faire perspective (markets will
battle each other develop innovative
ways of producing more efficiently).
Rule of Reason by government
 Govt usually lenient if monopoly developed
naturally…
 Govt will sue usually if a very high market
share and abusive power used by it.
 Two big cases in which govt stepped in and
altered the structure.
 AT&T and Microsoft. In 1982 AT&T settled
out of court… Ma Bell would divest itself of 22
baby bells…(now look what 2007 has
brought)
Microsoft Case:
Govt accused Microsoft of maintaining
monopoly of operating systems for PCs
Two courts issued a “break-up” order… but later
rescinded and allowed a behavioral
remedy.(in the interim… Microsoft was fined a
million $$ a day for over two years).
3 Things To Remember about
Regulation
 1. More regulations less freedom
2. More regulations higher cost to consumer
 3. Regulations would NOT be needed if
business policed itself.
Regulatory Quiz
Regulatory Quiz
 Who regulates
advertising on TV?
 Who controls money in
circulation?
 Who regulates your
bank deposit
guarantees?
 Who regulates mailorders?
• Who regulates baby
pacifier recall?
• Who regulates
securities?
• Who regulates health
foods?
• Who regulates water
we drink?
• Who regulates pet
food?
What is regulation?
 Rules set by government or their agencies that seek
to control the operation of firms that may have
monopoly power in their own industry.
 Regulation is meant to deal with the problems of
market failure – where markets fail to reach an
optimal allocation of resources.
 Monopoly power may lead to consumers
being exploited. (i.e. prices charge above the
true marginal cost of supply)
 In terms of regulation of the market, the
government attempts to prevent operations in
the market that are against the public interest.
(i.e. anti-competitive practices)
Where does government get the power to
regulate?
 ARTICLE I, SECTION 8 CLAUSE 3.
“To regulate Commerce with foreign Nations,
and among the several States, and with the
Indian Tribes.”
When is Government Regulation needed?
Under the right conditions… competitive, free
markets succeed (meaning the efficient
allocation of economic resources)
For competitive, free markets to success- must
have 3 things:
1) Everyone have full knowledge
2) Economic activities must never enjoy or
suffer externalities
3) High initial/low incremental cost
production never occur…
NEVER WILL HAPPEN!
Of course, these conditions fail!
We do not know everything
Cars and other goods release exhausts
Steel and flour mills,oil refineries, railroads…all
have high initial and low incremental costs.
***Government can permit a market to allocate
goods when people know of risks, private and
social benefits are the same, and no industries
exist with decreasing costs.
So……………the question continues…How much
government involvement do we want in our
society, our economy, our lives????????
How do we keep a balance?
What drives the balance?
But………….. As you have learned……..
Governments also fail!
*People in government act to promote their
interests or interests of their associates
*Businesses often use government as a
shield for to help build regulation as a
shield from their competitors.
Criteria to determine if Regulatory
Agency
 Has decision-making authority
 Establishes standards or guidelines
 Operates principally in domestic activity
 Head of agency appointed by
Pres/confirmed by Senate
America was first an agrarian economy.
 Moved to Industrial- brought regulation with it.
 ICC was first federal regulatory agency
passed in 1887 (intended to handle all
regulation) (note before the Sherman)(existed
until 1996.. Now just a department)
 In 1913 Congress created series of new
agencies in ICC mold (Fed Reserve 1913)
 FTC (1914)
Continued
 Most of traditional agencies appeared during
New Deal era
 Early 1970’s saw new surge of regulation.
 Regulation was intended to be apolitical
 Regulation was to set policy after opinions
were discussed on pros/cons
 Regulation would provide uniformity to
government policy
Why are IRC’s Created?
 Basic purpose- correct for market failure
 Establish stability for the economy
 Destructive competition
 Consumers incapable of making decisions
 External diseconomies
 Social regulation (used to achieve broad-
based social policy objectives)
Reasons for Regulation
 America is mixed-economy-explain
 All industries are regulated (taxi cabs – nuclear plants)
Anytime “public interest” is in question, demands “public
oversight”
What is a recent plea for more Regulation? What
agency might be given more control?
 Legal authority- where found?
Two categories of Federal
Regulation
 Traditional –
regulation that usually
is aimed at specific
industries and pursues
economic objectives
(this is the one the book would refer to
as Industrial Regulatory Commission)

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Fed Reserve
FTC
SEC
FCC
 New – usually cuts
across industry lines
and pursues noneconomic objectives (these
are the ones the book refers to as Social
Regulatory Commissions)

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CPSC-1972
OSHA-1971
EPA – 1971
EEOC- 1964
Federal Trade Commission
FTC
 Created 1914, is an IRC
 Promotes free and fair competition in interstate




commerce through prevention of trade restraints
(price-fixing, illegal combinations of competitors,
unfair practices)
Sherman – 1890, Clayton 1914
Protects public- false/deceptive advertising
Prevents practices that lead to monopoly
Prevents price discrimination
LOOK WHO I FOUND!!!
FTC Continued
 Requires accurate labels on fur and textile
products
 Supervises operators of export business
 Regulates mail-order firms
 Requires lending institutions (retailers,
finance companies, etc) to give accurate and
complete information about cost of credit
Cease and Desist Order on Saturday
mornings
 For Release: March 7, 2003
 FTC Charges Bristol-Myers Squibb with Pattern of
Abusing Government Processes to Stifle Generic Drug
Competition
 Alleged Illegal Conduct Involves Three Drugs; Includes
Improper "Orange Book" Listings and Unlawful
Agreements in Restraint of Trade
http://www.fda.gov/cder/ob/
 "This case, and others we have brought and
will bring," stated Timothy J. Muris, Chairman
of the Federal Trade Commission, "stands for
an important proposition: competition must
be on the merits, not through misusing
the government to stifle your
competition."
March 20, 2006
DES MOINES, Iowa (AP) -- Shares of Maytag and
Whirlpool have fallen amid speculation that
the Justice Department is going to challenge
their proposed merger.
Michigan-based Whirlpool is offering
$1.79 billion for rival Maytag.
The Justice Department's anti-trust division has
sought more time to review the deal and the
companies have agreed not to close before
March 30th. There could be a decision this
week.
WASHINGTON, March 20 (Reuters) - U.S. antitrust
authorities on Monday said they had approved the
proposed buyout of retailer Sports Authority Inc.
(TSA.N: Quote, Profile, Research) by an affiliate of
private equity firm Leonard Green & Partners.
Federal Communications Commission –
FCC
http://www.ftc.gov/
 IRC – 1934
 Responsible for regulating all interstate and
foreign communications (radio, television,
wire, cable and satellite.
 Allocates bands of frequencies
 Licenses and regulates station operators
 Regulates common carriers- telephone,
telegraph, satellite
FCC Continued
 FCC does not regulate broadcast networks or
programming of individual stations
 FCC has no authority over any form of
government communication
 FCC has no authority over communication
media (movies, newspapers, books)
http://www.fcc.gov/
Federal Deposit Insurance
Corporation - FDIC
 IRC-1933
 Insures funds of bank depositors up to
$100,000 (until 12/31 - will be $250,000)
 Regulator of banks that hold state charters
and not members of Federal Reserve
 Examines banks periodically
 Approves bank mergers
 Requires adequate security system
Food and Drug Administration
FDA
 Not an IRC- Agency within Health and Human

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


Services Dept – 1953
Tests products for approval
Evaluates and approves claims for new drugs
Develops policy for labeling of all drugs
Develops standards for otc drugs
Sets standards for safe use of color and food
additives.
Develops standards for veterinary drugs
Conducts research on effects of radiation exposure
National Labor Relations Board
NLRB
 IRC – 1935
 Conducts elections to determine if workers in plant,
factory wish to join a union
 Conducts elections to determine which of two unions
preferred
 Serves as arbitrator in labor dispute
 Acts to prevent employers and unions from engaging
in unfair and illegal union organization activities and
unfair labor practices
Labor Law
 Taft-Hartley Act 1947 (restored balance
between labor and business by prohibiting
unfair practices by labor)
 Passed over Truman’s veto
 Some of unfair practices forbid were “closed
shop, feather bedding, high initiation fees,
wildcat striking
Security Exchange Commission
SEC
 IRC – 1934
 Purpose to protect investors and public from
disorderly and unscrupulous operations of
securities and financial markets
 Has to receive detailed annual financial report
from corporations listed on stock exchanges.
 Any stock made public must provide financial
condition and prospectus
 Additional power through Sarbanes-Oxley (2006)
after WC, Enron, Global Crossing, Arthur
Anderson
Let’s Look at Social Regulation a minute!
 As we said… social cuts “across the board.”
 Social gets in our face on a daily basis.
(traditional focuses on rates, cost, profits,
competitiveness…. Social focuses on product
design, safety for consumer, employment
conditions, health)
 Major social players were created between
’70s and ’80s… additional responsibilities
have been added up to 2006.
Why the sudden push for “social” Regs?
Because………. Standard of living was
continually increasing for majority of
Americans… now time to assess “quality of
living.”
Hence, the EEOC was given the assignment to
enforce the Americans with Disability Act of
1990.
Now… think back
can this be
assessed with
MC/MB formula?
So………….the regulation emerged to improve
the non-material quality of life.
Cleaner Air
Safer Products
Safer Workplace
Less Pollution
Cleaner Water
Great equality of opportunity
Consumer Product Safety Commission
(CPSC)
http://www.cpsc.gov/
 IRC- 1970’s
 Protects consumers against product
malfunctions, and dangers
 Recalls millions of dollars yearly of products
produced that are dangerous
 Halogen lamps (40 million were recalled) in
1998 because they were a fire hazard
Environmental Protection Agency
- EPA
 Independent Agency- 1970
 Establishes national air quality
 Air pollution limits set
 Establishes emission standards
 Supervises clean air plans
 Issues permits for discharge of pollutants into
navigable waters
EPA Continued
 Sets national drinking water standards
 Regulates sludge, low-level radioactivity
materials
 Maintains inventory of existing hazardous
waste dumps
 Coordinates clean-up of oil spills
 Requires registration of insecticides,
herbicides, pesticides
Occupational Safety and Health
Administration - OSHA
 Agency under Labor Department – 1970
 Encourages employers and employees to
reduce hazards in workplace
 Keeps records of job-related injuries,
illnesses and deaths
 Enforces mandatory job safety and health
standards
Cost-Benefit Analysis
 Is Regulation really worth the cost?
*social/economic
cost for Coal-firing plant to put on scrubbers?
cost for Dow Chemical to stop polluting?
 What are the benefits?
what is the benefit to see across the Grand Canyon
what is the benefit to having safe drinking water?
what is the benefit for having consumer products that
do not cause fires when used?
Or products that do not cause death or blindness from
imported Chinese products?
There is No Free Lunch
But………..can we continue to enjoy a higher
standard of living if our environment is
trashed?
examples: Mercury in lakes now
Eastern Germany…now
Pollutants in ozone… now
Do benefits outweigh the costs?
 Are their hidden costs, direct costs, and are benefits
tangible or intangible?
 Do “regulators” want to enact their own political
agenda? (legislate morals?)
 Do the costs pull the standard of living down because
businesses cannot afford to comply?
 Can they be costly in unintended effect? (gas
mileage increased… car safety decreased)
 Price-fixing for oil companies? (bad unintended
effect?)
 Who should oversee the cost?
(executive/legislative)?
A word about De-regulation
Have you flown recently?
Have you shipped anything UPS?
Do you have DISH Network?
How does Colorado regulate Marijuana?
http://www.cnn.com/2013/12/28/us/10-thingscolorado-recreational-marijuana/
Consensus among economists
(that has to be an oxymoron)
 De-regulation has benefited consumers and the




economy
Lower-prices
More competition
Innovation
More jobs created
Wrap-Up Regulation
 Regulatory Commissions-
control industries by public
regulation.
 Was originally assumed the
agencies would be free from
political influence..
apolitical…
 Instead, politicians have
used agencies to further
their careers.
68 Regulatory Agencies ??
 Government budget of
1998 said $17.2 billion
spend on regulation
 In year 2001 = $19.8
billion
 In year 2006 = $41.4
(up from $39.5 in 2005)
 2011 –
http://www.heritage.org/
research/reports/2011/0
7/red-tape-rising-a2011-mid-year-report
Federal Regulation affects nearly every
facet of our daily lives
Regulation is costly and causes massive
paperwork.
Federal Register- publishes ALL
proposed and final regulations.