16. Antitrust Regulation Regulation Antitrust Law & Cases Regulation Antitrust Law & Cases

Public Interest Theory regulate to achieve an efficient use of resources –monopolies are inefficient –oligopolies may be inefficient regulate to achieve an efficient use of resources –monopolies are inefficient –oligopolies may be inefficient

Regulating a monopoly Natural Monopoly –Distribution of electricity Natural Monopoly –Distribution of electricity

P, cost Q (households) D MC$10 ATC

deadweight loss P, cost Q (households) D MC$10 ATC MR 4 million $20 consumer surplus economic profit

public interest P = MC maximize consumer surplus but involves a loss for firm –set P = ATC P = MC maximize consumer surplus but involves a loss for firm –set P = ATC

P, cost Q (households) D MC$10 ATC consumer surplus 8 million 6 $15 deadweight loss

allow firm to earn set rate of return –P = ATC firm may exaggerate costs to earn monopoly profit allow firm to earn set rate of return –P = ATC firm may exaggerate costs to earn monopoly profit

Antitrust Laws Sherman Antitrust Act 1890 –collusion in restraint of trade illegal -- price fixing illegal –monopolizing or colluding is felony Sherman Antitrust Act 1890 –collusion in restraint of trade illegal -- price fixing illegal –monopolizing or colluding is felony

Clayton Act, 1914 & amendments prohibits –price discrimination –tying, exclusion contracts –mergers that substantially lessen competition prohibits –price discrimination –tying, exclusion contracts –mergers that substantially lessen competition

Celler-Kefauver Act, 1950 Further restrictions on mergers –Horizontal –Vertical –Conglomerate U.S. govt. has become more permissive about mergers over time Further restrictions on mergers –Horizontal –Vertical –Conglomerate U.S. govt. has become more permissive about mergers over time

Some cases: price fixing 1927 Trenton Potteries –all price fixing illegal 1961 GE –executives fined & jailed 1996 ADM –fines to company 1927 Trenton Potteries –all price fixing illegal 1961 GE –executives fined & jailed 1996 ADM –fines to company

Attempts to monopolize 1911 Standard Oil –ordered to sell of holdings 1920 U.S. Steel –not guilty: big not bad 1945 Alcoa –guilty: too big 1911 Standard Oil –ordered to sell of holdings 1920 U.S. Steel –not guilty: big not bad 1945 Alcoa –guilty: too big

Merger rules Justice Dept. uses HHI index to evaluate mergers if 1000 <HHI < 1800 –increase of > 100 challenged if HHI > 1800 –increase of > 50 challenged Justice Dept. uses HHI index to evaluate mergers if 1000 <HHI < 1800 –increase of > 100 challenged if HHI > 1800 –increase of > 50 challenged

Example: soda mergers, 1986 Coca-cola & Dr. Pepper market for carbonated soft drinks –HHI 2430 –mergers increase HHI by 800 merger blocked Coca-cola & Dr. Pepper market for carbonated soft drinks –HHI 2430 –mergers increase HHI by 800 merger blocked

Example: United & USAir, 2003 Justice Dept. also opposed to merger –merger plans dropped TWA & American merger allowed Justice Dept. also opposed to merger –merger plans dropped TWA & American merger allowed

Other large mergers allowed: Exxon and Mobil (1998) AOL and Time Warner (2000) Chrysler and American Motors (1987) Chrysler and Daimler (1998) Exxon and Mobil (1998) AOL and Time Warner (2000) Chrysler and American Motors (1987) Chrysler and Daimler (1998)

U.S. vs. Microsoft The Case –Microsoft monopoly in PC operating systems –used predatory pricing with web browsers –other anticompetitive practices -- tying, exclusionary contracts The Case –Microsoft monopoly in PC operating systems –used predatory pricing with web browsers –other anticompetitive practices -- tying, exclusionary contracts

Microsoft response –innovation too fast for monopolies –browser worked w/ operated system, not separate –penalized for making superior product Microsoft response –innovation too fast for monopolies –browser worked w/ operated system, not separate –penalized for making superior product

The ruling –1999 judge ordered breakup -- Windows vs. other software -- Microsoft appealed 2000 –settlement 11/ no breakup -- Microsoft agree to code of conduct & to reveal some source code –European courts still pursuing their case The ruling –1999 judge ordered breakup -- Windows vs. other software -- Microsoft appealed 2000 –settlement 11/ no breakup -- Microsoft agree to code of conduct & to reveal some source code –European courts still pursuing their case