Georgetown University

The Efficiency Properties of Competitive Markets Q $/q S D MC ATC P P=MC Allocative efficiency P=minAC Productive efficiency IndustryFirm Dynamic efficiency (?) J. Schumpeter’s Theory of Creative Destruction

Market Failures  Fill In – what market failures can you think of? Natural Monopoly Contrived monopoly Public Goods Externalities Asymmetric Information

Monopoly: Profit Maximization $ Q P(Q) MR QMQM PMPM PROFIT ATC MC

“ Antitrust laws in general, and the Sherman Act in particular, are the Magna Carta of free enterprise. They are as important to the preservation of economic freedom and our free enterprise system as the bill of rights is to the protection of our fundamental personal freedoms.” Thurgood Marshall Supreme Court Justice

Antitrust effectiveness  Statutes Origins Origins Goals Goals Language Language  Enforcement Institutions and Agencies  Case Law

Origins of the Antitrust Laws  Rise in methods of mass production  Reduced transportation cost  Outbreaks of price wars  Formation of trusts  Political opposition from consumers, farmers and political satirists

Goals of Antitrust  The goal of antitrust is to ensure that firms compete to serve the needs of consumers, … even when vigorous competition is contrary to the interests of powerful and entrenched suppliers. Carl Shapiro Carl Shapiro May 2009 May 2009

Sherman Act (1890)  Section 1 “Any contract, combination or conspiracy in restraint of trade...is hereby declared illegal.” [akin to Article 81 in EC]  Section 2 “Every person who shall monopolize or attempt to monopolize...any part of trade or commerce among the several states shall be guilty of a felony.” [akin to article 82 in EC]

Clayton Act (1914)  Price Discrimination [Sec. 2] Section 2(a) permits “cost justification defense” Section 2(a) permits “cost justification defense” Section 2(b) permits “good faith” meeting of competition Section 2(b) permits “good faith” meeting of competition  Exclusionary practices [Sec. 3]  (e.g., exclusive dealing; territorial restrictions; tying)  Mergers [Sec. 7] [Hart-Scott-Rodino (1976)][Hart-Scott-Rodino (1976)] That it shall be unlawful for any person engaged in commerce...to ACT...where the effect...may be to substantially lessen competition or tend to create a monopoly in any line of commerce That it shall be unlawful for any person engaged in commerce...to ACT...where the effect...may be to substantially lessen competition or tend to create a monopoly in any line of commerce

Federal Trade Commission Act (1914)  Section 5(a) (1) Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.

Article 81  1. The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which:  (a) directly or indirectly fix purchase or selling prices or any other trading conditions;  (b) limit or control production, markets, technical development, or investment;  (c) share markets or sources of supply;  (d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;  (e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

Article 82  Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States.  Such abuse may, in particular, consist in:  (a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;  (b) limiting production, markets or technical development to the prejudice of consumers;  (c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;  (d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

Antitrust Enforcement  Antitrust Division of the U.S. Department of Justice Sherman Act (criminal cases) Sherman Act (criminal cases) Some Clayton Act Some Clayton Act  Federal Trade Commission FTC Act FTC Act Some Clayton Act Some Clayton Act  State Antitrust Agencies  Private Enforcement

Antitrust effectiveness  Clayton Act, Section 4 “Any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue in any district court of the United States...and shall recover threefold the damages by him sustained, and the cost of the suit, including a reasonable attorney‘s fees.”

U.S. Antitrust Exemptions  Labor – Clayton Act (Section 6) “the labor of a human being is not a commodity or article of commerce” (e.g., employer unions; NFL scout teams) (e.g., employer unions; NFL scout teams)  Agricultural cooperatives  Patents  The State Action Doctrine Parker v. Brown (1943) Parker v. Brown (1943)  Noerr-Pennington Doctrine Eastern Railroad Presidents‘ Conference v. Noerr Motor Freight (1967) Eastern Railroad Presidents‘ Conference v. Noerr Motor Freight (1967)  Trade occuring outside the U.S with foreign nations Foreign Trade Improvements Act (1982) exempts “trade or commerce (other than import trade and commerce) with foreign nations“ Foreign Trade Improvements Act (1982) exempts “trade or commerce (other than import trade and commerce) with foreign nations“

Competition Policy in the larger socio-economic context  Economic freedoms  Protection of small business  Political ideology  Antitrust in a distressed industry/economy Shapiro (2009) Shapiro (2009)

Antitrust in the Current Economy

Antitrust in Distressed Industries  Recent economic times have led some (many) pundits to challenged the fundamental propositions of the beneficial effects of markets and a more cooperative model of firm behavior What has been the historical response to of policymakers with respect to competition policy in times of economic downturn? What has been the historical response to of policymakers with respect to competition policy in times of economic downturn? Did efforts such as the NRA in the Great Depression help the recovery process? Did efforts such as the NRA in the Great Depression help the recovery process?

The likely political push points  Pressure on enforcers  Exemptions  We are all for competition, but…  Expansion of failing firm defense (mergers)