Public Policy in Private Markets The Policy Process Overview of Antitrust laws

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Today Sources of Government failure in the policy process Overview of Antitrust laws

Question for the day If you were a possible violator of an antitrust law, would you prefer that your case be judged under a per se rule or a rule of reason? Why?

Steps in the Policy Process 1. Problem Recognition: government, industry, public, media 2. Policy Formation 3. Policy Application 4. Policy Enforcement

Source of possible government failure 1. Problem Recognition:  Whose voice is heard, biases: Concerned parties may lack information and/or incentive to raise concern effectively Special interest groups may be effective in having their voice be heard, even if that problem may not be too important  Bureaucracy structure: some problems are recognized more rapidly than others.

Source of possible government failure 2. In Policy Formation:  Policy may not be timely. Example: mortgage crisis  Policy may not be precise: it may miscalculate Health care reform  May not be sufficient. Hard to anticipate all ramifications Example: C0 2 emissions.

Source of possible government failure 3. In Policy Application: Legislation is general. Federal agencies write up the specific regulations  Example: Congress tells FDA to ensure that drugs in the US are safe (general legislation) FDA has to specify scientific research protocols to be used in showing what is safe or not (specific regulation) Potential problems: Process may be skewed by special interest lobbying (immigration reform?) Delays: Organic rules took 10 years to become a reality

Source of possible government failure 4. In Policy Enforcement:  Law is normally written so that maximum level of voluntary compliance is achieved, but:  Inadequate resources (too little enforcement)  Inefficient use of resources  Delays Example: Microsoft delayed fulfillment of penalties for several years in Europe

Important tool: cost-benefit analysis Question: What is the optimal rule in cost- benefit analysis (in this case regulation)? A. Total benefit of regulation is greater than total cost of regulation B. Total cost of regulation is minimized C. Total benefit of regulation is maximized D. Marginal cost of regulation is equal than marginal benefit of regulation

Important tool: cost-benefit analysis Environmental quality $ Total Benefits Total Costs Q* Maximum Net Benefit

Important tool: cost-benefit analysis MC=MB hard to do.  Second best: have policy as long as benefits > costs Typically, a policy will not make everyone better off:  Some lose, some win  Ideally: compensate losers with gains Dynamic aspect: future benefits and costs need to be discounted  Projects with negative flows first and positive flows later are particularly affected  However, future gains may also be larger as society may be more concerned in the future

Source of possible government failure To summarize: Government is not perfect Markets are not perfect Both are part of our daily lives Our goal: understand them both

Overview of Antitrust Laws

1. Types of Cases: A. Criminal: Penalty can be fines or imprisonment Gov’t is prosecutor, it is a jury trial Standard of proof is “beyond a reasonable doubt” B. Civil: Penalties are fines, injunctions, divestitures, etc. Trial may be by judge or jury (defendant’s choice) Plaintiff: party who brings the case Defendant: party who the suit is brought against

Overview of Antitrust Laws 2. Enforcement (3 possibilities) A. Dept. of Justice (DOJ): Antitrust Division Cabinet agency of the president responsible for enforcement of all federal laws. Professional staff under top political appointees B. Federal Trade Commission (FTC) Regulatory agency independent from the federal government. Headed by 5 commissioners appointed by president and confirmed by the Senate C. Private Suits: Brought by individuals

Overview of Antitrust Laws 3. Burden of Proof: What you need to show to win a case Important: Government cases include violation. Private cases include violation AND damages

Overview of Antitrust Laws 4. Pleas: How the defendant responds  In all cases: Guilty or innocent  In certain cases: Government-criminal: “Nolo contendere”, defendant “does not contend”. Similar consequences as guilty plea, but no need to confess/disclose information (+ other considerations, more later) Government-civil: “Consent Decree”. Judicial decree between parties to a suit. Defendant agrees to stop controversial activities. Do not have to accept guilt. Private-civil: settle out of court. Analogue of consent decree (do not have to accept guilt)

Overview of Antitrust Laws 5. Remedies: What does the court do if defendant is found at fault?  Fines  Imprisonment  Injunction: court order to do (or refrain from doing) certain acts. Failure to comply is often regarded as criminal behavior  Divestiture: sell off part of business  Treble damages: in private cases, courts can triple the amount of damages (incentive for plaintiffs to sue) Collusive Restraints of trade only Gov’t – Civil Private Suits

Sherman Act: Collusion & Monopolization Section 1: Collusive restraints of trade.  Criminal: Brought by the DOJ only To win case, DOJ must show that firm violated the law Defendant can plead: guilty, innocent or “nolo contendere”. Nolo plea:  Treated by the DOJ as a guilty plea in terms of punishment  Difference with guilty plea: firm can not be tried as guilty in another case  DOJ may or may not accept the nolo plea. Court decision is independent of DOJ’s

Sherman Act Section 1:  Civil: Brought by DOJ or private suits DOJ:  Need to prove violation  Pleas: guilty, innocent or a consent decree.  Consent decrees negotiated between gov’t and defendant. Agreement to end case + remedies (injunction or fines)  No agreement = trial  Advantages of consent decree: quick, both parties may save efforts

Section 1: Civil Cases Private suits:  Case 1: Plea is “not guilty” Gov’t cases typically precede private suits If Nolo plea (in govt case): plaintiff has to prove guilt + damages If guilty plea (in govt case): plaintiff has to prove damages only (PRIMA FACIE, or “on its first appearence”, evidence - also known as “making a case”)  Case 2: Guilty plea, or settle out of court Important: plaintiffs are encouraged to sue and firms are deterred to go to trial with the existence of treble damages

Section 1: Private Cases, case 1  Example: in a conspiracy to fix prices criminal case, toilet paper manufacturers are found guilty in a suit by the DOJ: Stop & Shop can bring a private case for damages only But, if nolo plea, Stop & Shop has to show violation + damages Nolo and consent decrees are attractive to firms in gov’t cases:  End gov’t case without trial  Makes private cases more difficult

Overview of Antitrust Laws Sherman Act:  Section 2: deals with monopolization All suits are civil (jury or judge) Similar set up as in Section 1, except:  Possible remedy: divestiture

Overview of Antitrust Laws Clayton Act (1914):  Sections 2 and 3: Vertical market restrictions, price discrimination (amended by Robinson-Patman Act)  Robinson-Patman Act applies to FTC only  Section 7: Mergers (amended by the Celler-Kefauver Act) Burden of proof, pleas and remedies are the same as in Sherman civil cases

Overview of Antitrust Laws FTC Act (1914):  Broader in scope than previous laws  Sets up FTC  Gives FTC jurisdiction over Clayton Act and enforcement of section 5 of FTC Act: Cover unfair methods of competition Unfair and deceptive acts

Overview of Antitrust Laws Important:  Government and private cases are linked Government has to prove violation Private cases have to prove violation + damages Government cases precede private cases:  If government case has a guilty plea: “prima facie” evidence in private case (only prove damages)  If nolo plea or consent decree then private cases must prove violation + damages

Overview of Antitrust Laws Important:  If government has a good case, it will not allow consent decree or it will argue that a nolo plea should not be accepted by the court  From a firm’s perspective a nolo plea or a consent decree make sense: To avoid embarrassment of a guilty plea If you know you are guilty Makes future (civil) cases unlikely/more difficult  In addition, a consent decree is attractive: To avoid trial costs To avoid uncertainty in trial To avoid disclosure of sensitive information

Overview of Antitrust Laws Overlap:  DOJ and FTC in Clayton Act  Section 5 FTC Act (unfair methods of competition) & Sherman Act (e.g. monopolization cases)  Several cases can be brought by either FTC or DOJ  Agencies manage overlap through memoranda: FTC: traditionally responsible for merger cases in grocery retailing DOJ: large technology cases (IBM, Microsoft, AT&T)

Rules of Analysis How to interpret the law? 1. PER SE RULE: Business practice is always anticompetitive Practice is always illegal: no room for arguments (no reasonableness) 2. RULE OF REASON (more common) Legality is ambiguous Case by case judgment (reasonableness)

Rules of Analysis Examples: Price fixing: per se rule. No matter why/how prices were fixed, it is illegal Mergers: rule of reason  Merger between two large firms: arguments for efficiency gains

Question for the day If you were a possible violator of an antitrust law, would you prefer that your case be judged under a per se rule or a rule of reason? A. Per se B. Rule of reason