Chapter 10 Antitrust, Mergers, and Competition Policy McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, All Rights Reserved.

Ch. 10: Key Learning Objectives  Understanding the dilemmas corporate power presents in a democratic society  Knowing the objectives of antitrust and competition laws  Recognizing the key issues in contemporary antitrust policy  Analyzing the reasons for mergers and acquisitions, and how have they affected the relationship between business and its stakeholders  Assessing how competition policies compare around the world, and what impact globalization has had on antitrust enforcement

The Dilemma of Corporate Power  Corporate power The capability of corporations to influence government, the economy, and society, based on their organizational resources  Power can be a function of size and world’s largest corporations are very big  Figure 10.1 shows 10 largest global corporations  Corporate power The capability of corporations to influence government, the economy, and society, based on their organizational resources  Power can be a function of size and world’s largest corporations are very big  Figure 10.1 shows 10 largest global corporations

Figure 10.1 The 10 Largest Global Corporations,

The Dilemma of Corporate Power  Economic power is evident when compare largest corporations’ annual sales revenue with countries whose GPD (gross domestic product) is at same level  Figure 10-2 shows this comparison  The dilemma of corporate power concerns how business uses its influence, not whether it should have power in the first place

Comparison of Annual Sales with GDP for Selected Transnational Companies and Nations, 2004 Figure 10.2

Antitrust Laws  Antitrust Laws that prohibit unfair, anti-competitive practices by business  Term derives from trust, the old-fashioned word for groups of companies that joined together to divide up markets and limit competition  New term for trust is cartel  The term antitrust law is used in the U.S., most other countries use the term competition law

Objectives of Antitrust and Competition Laws  The protection and preservation of competition  To protect the consumer’s welfare by prohibiting deceptive and unfair business practices  To protect small, independent business firms from the economic pressures exerted by big business competition  To preserve the values and customs of small-town America

The Sherman Act  Prohibits contracts, combinations, or conspiracies that restrain trade and commerce  Prohibits monopolies and all attempts to monopolize trade and commerce  Provides for enforcement by the Justice Department, and authorizes penalties for violations

The Clayton Act  Prohibits price discrimination by sellers  Forbids requiring someone to buy an unwanted product or service in order to get another one they want  Prohibits companies from merging if competition is lessened or a monopoly is created  Outlaws interlocking directorates in large competing corporations

The Federal Trade Commission Act  Created the Federal Trade Commission to help enforce antitrust laws  Prohibits all unfair methods of competition  Gives more protection to consumers by forbidding unfair business practices

The Antitrust Improvements Act  Requires large corporations to notify the Justice Department and the Federal Trade Commission about impending mergers and acquisitions  Expands the Justice Department’s antitrust investigatory powers  Authorizes the attorneys general of all 50 states to bring suits against companies that fix prices and to recover damages for consumers

Antitrust Law Exemptions  Some organizations are not covered  For example, Major League Baseball  Others not covered  Labor unions  Agricultural cooperatives  Insurance companies (regulated by State law)  Business transactions related to national defense

Antitrust Enforcement at the Federal Level Figure 10.3

Key Antitrust Issues - Monopoly  Does domination of an industry or a market by one or a few large corporations necessarily violate antitrust laws?  Should the biggest firms in each industry be broken up?  The courts have found that monopoly per se is not illegal  If a company dominates the market because it offers a superior product or service, has invented something unique, or even because it is just lucky, that is not against the law  If, however, a firm uses its market dominance to restrain commerce, compete unfairly, or hurt consumers, then it may be found guilty of violating antitrust laws

Key Antitrust Issues - Innovation  In early days of antitrust law, regulators promoted competition in order to provide consumer choice and keep prices down  Today, in the fast-paced economy, regulators have increasingly promoted competition to foster technological innovation  Quote from Federal Trade Commission Chairman:  “Innovation is more and more the central arena in which competition plays out. [It] is the hot issue for the foreseeable future.”

Key Antitrust Issues – High Technology Businesses  Economy has changed from when antitrust laws were crafted in the late 19th and early 20th century  We are now in the information age, where primary currency is intellectual property  Some argue that the basic principles of antitrust law are not applicable today  Monopolies in high-tech businesses are inherently unstable with low barriers to entry and dynamic technological change constantly changing basis of competition  Courts are struggling to resolve ways antitrust laws apply to high tech industries

Corporate Mergers  Corporate merger A combination of one company with another  Vertical mergers  Occur when the combining companies are at different stages of production in the same general line of business  Horizontal mergers  Occur when the combining companies are at the same stage or level of production or sales  Conglomerate merger  Occurs when firms that are in totally unrelated lines of business are combined

Three Different Types of Corporate Mergers Figure 10.4

Forces Driving Mergers in the 1990s and 2000s  Technological change  Major companies jockeyed for position in rapidly evolving technologies  Changes in regulatory environment  Examples include telecommunications deregulation and changes in health care industry laws  Globalization  Companies found they needed to be big to operate on the global stage  Stock price appreciation  Bull market in late 1990s gave some companies the means to purchase others

Value of mergers and acquisitions, 1990 – 2005 Figure 10.5

Consequences of Corporate Mergers  What stakeholders will be helped and what stakeholders will be hurt by wave of corporate mergers?  Mergers bring benefits to the firm, like economies of scale and access to new technologies  Sometimes, however, undermine responsibility to some stakeholder groups  Examples include employees losing their jobs and communities negatively impacted by companies moving out  Shareholders can lose if the merger is not well thought out or acquisition was overpriced

Comparative Competition Policies  Europe has lagged behind U.S. in antitrust regulation, but is catching up  EU today has complete set of competition policies, however enforcement emphasis is different  Attention paid to market domination by former state-run enterprises  Concern with price discrimination across borders  Strong inclination to protect small business  Developing nations have moved to adopt their own competition policies

Globalization and Competition Policy  Rapid globalization of business has created challenges for antitrust enforcement:  Should a government permit mergers, or joint ventures, even if they reduce competition, if they enhance the ability of domestic businesses to compete internationally?  Should a country government move to break up monopolies, if the global marketplace for the products offered is highly competitive?  Should regulators try to enforce antitrust laws against foreign companies if they operate subsidiaries within their borders?  What steps can governments take to create a level playing field, so that corporations operate under a common set of antitrust rules and regulations wherever they do business?

Antitrust Enforcement and National Competitiveness  Regulators have dilemma when goal of competitive market conflicts with goal of strong economy, relative to other countries  Since mid-1980s U.S. has permitted cooperative activities among firms where appropriate to enhance their competitiveness in the global economy  The 1984 National Cooperative Research Act (NCRA) sought to balance cooperative R&D with competition by instructing the courts to use a “rule of reason”  European regulators have similarly permitted joint R&D aimed at improving the competitiveness of their industries  Regulators have also loosened rules governing joint production agreements to permit economies of scale

Enforcing Antitrust Laws against Foreign Firms  In recent years, regulators have been more willing to address possible violations of antitrust law by foreign companies  Example - requiring merged Swiss drug companies Sandoz and Ciba-Geigy to divest product lines in the U.S. to avoid being a monopoly  European regulators have become more active in enforcement against U.S. companies  Example – European court in 2005 upheld EU’s veto of General Electric’s acquiring of Honeywell

Harmonization  Harmonization is process being used to coordinate laws and enforcement of competition policies across countries  Several bilateral treaties are in place  OECD has worked to coordinate antitrust enforcement  EU and U.S. now jointly review global mergers  EU also coordinating more closely with Japan Fair Trade Commission  Despite these efforts, lack of common standards creates a problem for cross-border mergers  Brookings Institution report has called for multi-country effort to harmonize competition policies