Ch. 30 Antitrust Policy & Regulation

A. Antitrust (anti-monopoly) laws 1. Sherman Act of 1890 2. Clayton Act of 1914 3. Federal Trade Commission Act -- From Ch 22, 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.

1. Standard Oil case (1911) – broke-up. 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 A B C D E F T U V W X Y Z Glass Denim Fabric Horizontal Merger Vertical Merger -- Most Vertical mergers are approved by regulators.

Transaction value (in mil. USD) Top 10 M&A deals worldwide by value (in mil. USD) from 2000 to 2010: Rank Year Purchaser Purchased Transaction value (in mil. USD) 1 2000 Fusion: America Online Inc. (AOL)[23][24] Time Warner 164,747 2 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.[25][26] BellSouth Corporation 72,671 5 2001 Comcast Corporation AT&T Broadband & Internet Svcs 72,041 6 2009 Pfizer Inc. Wyeth 68,000 7 Spin-off: Nortel Networks Corporation 59,974 8 2002 Pharmacia Corporation 59,515 9 JP Morgan Chase & Co[27] Bank One Corp 58,761 10 Technofist Inc. Goldspark IT Solution PVT LTD, Inc N/A 11 2008 Inbev Inc. Anheuser-Busch Companies, Inc 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. Deregulation – started in 1970’s. F. Social Regulation Commission (Year Established) Jurisdiction * Food & Drug Safety & effectiveness Administration (1906) of food, drugs, & cosmetics * Equal Employment Hiring, promotion, & discharge Opportunity Comm (1964) of workers * Occupational Safety & Industrial Health & safety Health Admin (1971) * Environmental Protection Air, water, and noise pollution Agency (1972) The main Federal Regulatory Commissions providing social 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.