18. Antitrust Policy and Regulation McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Antitrust Laws The purpose: Prevent monopoly Promote competition Achieve allocative efficiency Historical background Regulatory agencies Antitrust laws LO1 18-2

Antitrust Laws Sherman Act 1890 Clayton Act 1914 Outlaw price discrimination Prohibit tying contracts Prohibit stock acquisition No interlocking directorates Federal Trade Commission Act 1914 Wheeler-Lea Act 1938 Celler-Kefauver Act 1950 LO1 18-3

Antitrust Policy Issues of interpretation Monopoly behavior or structure 1911 Standard Oil Case 1920 U.S. Steel Case 1945 Alcoa Case The relevant market 1956 DuPont Cellophane Case Issues of enforcement LO2 18-4

Effectiveness of Antitrust Laws Monopoly AT&T Microsoft Case Mergers Horizontal merger Vertical merger Conglomerate merger LO2 18-5

Mergers Automobiles Blue Jeans Autos Glass Blue Jeans Denim Fabric A C BD EF Z Y X W VU T Horizontal Merger Conglomerate Merger Vertical Merger LO2 18-6

Mergers Merger guidelines The Herfindahl Index Price fixing Price discrimination Tying contracts LO2 18-7

Industrial Regulation Natural monopolies Economies of scale Public utilities Electricity, water, gas, phone Solutions for better outcomes Public ownership Public regulation Public interest theory of regulation LO3 18-8

Industrial Regulation LO3 Commission (Year Established) Jurisdiction Federal Energy Regulatory Commission (1930)* Electricity, gas, gas pipelines, oil pipelines, water-powered sites Federal Communications Commission (1934) Telephones, television, cable television, radio, telegraph, CB radios, ham operators State public utility commissions (various years) Electricity, gas telephones *Originally called the Federal Power Commission, renamed in

Problems with Industrial Regulation Regulators establish rates to give natural monopoly “fair return” No incentive to reduce cost X-inefficiency Perpetuate monopoly Conditions of natural monopoly can end Legal Cartel Theory LO

Deregulation Began in the 1970s Has produced large net benefits for consumers and society Industries deregulated include: Airlines Railroads Telecommunications Electricity LO

Social Regulation Concerned with the conditions under which goods and services are produced Impact of production on society Physical qualities of goods Applied “across the board” to all industries LO

Social Regulation Commission (Year Established)Jurisdiction Food and Drug Administration (1906) Safety and effectiveness of food, drugs, and cosmetics Equal Employment Opportunity Commission (1964) Hiring, promotion, and discharge of workers Occupational Safety and Health Administration (1972) Industrial health and safety Environment Protection Agency (1972) Air, water, and noise pollution Consumer Product Safety Commission (1972) Safety of consumer products LO

Social Regulation Optimal level of social regulation In support of social regulation Criticisms of social regulation Two reminders There is no free lunch Less government is not always better than more LO

United States vs. Microsoft Charged in May 1998 under the Sherman Act Accused of having a “Windows” monopoly District court findings: Used anticompetitive means District court remedy Appeals court ruling Final settlement 18-15