Antitrust Policy & Government Regulation

What is a Trust, and Why Don’t we Want one? Trust defined: a combination of firms aimed at consolidating, coordinating, and controlling the operations and policies of several firms Trusts and monopolies limit competition, allowing collection of firms to approach being a monopoly Remember: monopoly pricing is a type of market failure (why?) Antitrust policy is government policy to combat the existence of trusts –Prevent acquisitions that would lead to monopoly –Break up behemoth firms into smaller competitive firms

Sherman Antitrust Act 1890, passed by President Cleveland, placed antitrust burden on government Prohibits "agreements, conspiracies or trusts in restraint of trade." Two types of reasons for breaking up trusts: –“Illegal per se” (just plain criminal behavior) –“Rule of Reason” examines firm’s practices in light of the circumstances of the actions Size alone is not a reason for breakup; illegal business practices may be Supreme Court has given inconsistent decisions over the decades, varying between per se and rule of reason Senator John Sherman

So what is reasonable? Being big, or dominating an industry, is often allowed, if largeness is achieved by fair business practices –“Coercive” monopoly violates Sherman Antitrust Act through consciously anticompetitive behavior –“Innocent” monopoly simply becomes big through efficiency 1914: Clayton Act extended right to individuals and firms to sue trusts s, Court did strike down large companies, often for size alone

Merger Terminology Vertical integration: Buying suppliers or customers (Oracle buying Sun; Oracle databases run on Sun machines) Horizontal integration: buying direct competitors Federal Trade Commission (FTC) must approve mergers Oracle CEO, Larry Ellison

Government Regulation Public Interest Theory: government regulates businesses to protect consumers and workers Public Choice Theory: –Regulators and firms serve their own interests –Firms lobby regulators to win changes to protect profits –Regulators end up “captured” by regulated firms –Regulators seek to expand office, not for public good, but for own careers and power

Consumer Protection Government regulates firms to protect consumers –Legislation (industry standards, meat inspections, etc.) –Approval committees (e.g., FDA, FTC) –Law suits (McDonald’s 1994 suit for hot coffee) Benefits: –Safer products, higher quality products Drawbacks –Less consumer choice (only less-hot coffee now) –Government playing the role of decider, not consumer