1 ANTITRUST POLICY l Principles of Microeconomic Theory, ECO 284 l John Eastwood l CBA 247 l l address:

2 Trust: n A combination of firms that come together to act as a monopolist. In the legal sense, a trust is a form of ownership, usually where one party controls the property for the benefit of another.

3 History n Severe deflation following Civil War n Some firms formed trusts that functioned as cartels n Ended price competition n Some exercised much market power

4 The Standard Oil Trust (S. O. -- John D. Rockefeller) n A good customer of the railroads n Standard Oil Group increased its share of oil refining capacity from 10% to 90% n In 1882, the partially independent companies in the S. O. Group formed the Standard Oil Trust. n The Trust then performed as economic theory would predict.

5 Three Alternatives n Nationalization -- government ownership n Regulation n Antitrust law -- legislation to control monopoly power

6 Antitrust Remedies n Dissolution -- breaking a large firm into several smaller firms. n Divorce -- separating the units of a vertically integrated firm. n Divestiture -- selling a firm's assets.

7 The Sherman Act of 1890 (1) “Every contract, combination..., or conspiracy, in restraint of trade or commerce... is hereby declared illegal;” and, (2) “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons to monopolize any part of trade or commerce... shall be guilty of a …”

8 Enactment of the Sherman Act n Senator Sherman warned his fellow conservatives: "Sir, now the people of the United States, as well as other countries, are feeling the power and grasp of these combinations, and are demanding of every legislature and of Congress a remedy of this evil... You must heed their appeal or be ready for the socialist, the communist, and the nihilist. Society is now disturbed by forces never felt before. The popular mind is agitated with problems that may disturb social order...."

9 Enforcement of the Sherman Act n Teddy Roosevelt n The Justice Department n Standard Oil and American Tobacco were broken up (1911) n The Sherman Act did not curb horizontal mergers. A “wave” occurred between 1895 and 1900.

10 The Clayton Act (1914) n Practices made illegal: – Price Discrimination (section 2) - – Exclusive Dealings (sec. 3) – Tying Contracts (sec. 3) – The Acquisition of Competing Companies’ Stock (sec. 7) – Interlocking Directorates – Exempted Labor Unions from Antitrust Laws. ( unsuccessfully)

11 The Norris-LaGuardia Act n Removed federal court power to stop peaceful labor disputes (1932)

12 Federal Trade Commission Act n Established the Federal Trade Commission (FTC) in 1914 n Empowered FTC to combat “unfair methods of competition in commerce” n This act did not define “unfair.” n Note: Wave of vertical mergers in the 1920’s

13 The Robinson-Patman Act n (1936) Prohibited suppliers from offering special discounts to large chain stores unless they also offered those discounts to everyone else. n Justified by an appeal to Jeffersonian ideals, this law may have lessened competition rather than strengthening it.

14 The Miller Tydings Act n Allowed resale price maintenance contracts (1937) – Such contracts bind the retailer to sell at a price a price fixed by the manufacturer. n A 1951 Supreme Court decision rendered the law ineffective. n Later repealed

15 The Wheeler-Lea Act (1938) n Empowered the Federal Trade Commission (FTC) to deal with false and deceptive trade practices in order to protect consumers. (Amended FTC Act)

16 Celler-Kefauver Antimerger Act n (1950) Amended Clayton Act to close a “loophole” that had permitted mergers through one company acquiring the physical assets of another. n Note: A wave of conglomerate mergers occurred from 1960 to early 1970’s.

17 The Hart-Scott Rodino Antitrust Procedural Improvements Act n required that pending mergers be reported in advance to the FTC and the Justice Department ( 1980)

18 Judicial Interpretation n Rule of Reason – US vs. U S Steel (USX) – overt acts n The Per Se Doctrine – US vs. Aluminum Company of America (ALCOA) – Sherman Act … prohibits all monopolization and restraint of trade.

19 Antitrust policy varies from president to president n Carter n Reagan and Bush n Clinton

20 Current policy n A dozen relatively recent Supreme Court decisions have made enforcement of US antitrust law difficult. n Exception: price fixing

21 Unsettled Points n Definition of the Market n Effectiveness n Sustainable Industrial Configurations n Exemptions n International competition