1. Antitrust Policy and Regulation Chapter 18 McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Chapter Objectives Antitrust laws in the United States Interpretation and application of antitrust laws Natural monopolies Social regulation 18-2

3. Antitrust Laws The purpose: –Prevent monopoly (and trusts) –Promote competition –Achieve allocative efficiency Historical background –Regulatory agencies Natural monopolies –Antitrust laws 18-3

4. Antitrust Laws Sherman Act 1890 –Illegal to monopolize or restrict trade –Treble damages Clayton Act 1914 –Outlawed price discrimination when unlinked to cost –Prohibit tying contracts –No interlocking directorates 18-4

5. Antitrust Laws Federal Trade Commission Act 1914 –Independent agency - investigate and enforce Wheeler-Lea Act 1938 –Outlawed deceptive advertising Celler-Kefauver Act 1950 –Strengthened Clayton Act

6. Antitrust Policy Issues of interpretation –Judges/administrations Monopoly behavior or structure –1911 Standard Oil Case –1920 U.S. Steel Case –1945 Alcoa Case The relevant market –1956 DuPont Cellophane Case Issues of enforcement –Active vs. laissez-faire –Creative destruction? 18-6

7. Effectiveness of Antitrust Laws Monopoly –Microsoft Case Mergers –Horizontal merger –Vertical merger –Conglomerate merger 18-7

8. Horizontal Merger

11. Vertical Merger

12. Who is the King of the Vertical Merger in America?

13. Conglomerates Companies that operate four or more distinct businesses, none of which constitutes more than 50% of their total revenue. Translation: Companies that do lots of different “stuff”

14. Conglomerates

15. Types of Mergers Automobiles Blue Jeans Autos Glass Blue Jeans Denim Fabric A C BD EF Z Y X W VU T Horizontal Merger Conglomerate Merger Vertical Merger 18-15

16. Merger guidelines –The Herfindahl Index –Each case is specific… –Horizontal vs. vertical vs. conglomerate Price fixing Price discrimination –When restricting competition Tying contracts Effectiveness of Antitrust Laws 18-16

17. Natural Monopoly Economies of scale Public utilities –Electricity, water, gas, phone Solutions for better outcomes –Public ownership –Public regulation –Public interest theory of regulation Low cost provided by natural monopoly without low output/high prices prevalent with monopolies 18-17

18. Industrial Regulation Regulators establish rates to give natural monopoly “fair return” No incentive to reduce cost X-inefficiency Perpetuate monopoly –Conditions of natural monopoly can end without the regulated monopoly itself ending 18-18

19. Social Regulation Applies “across the board” to all industries Food and Drug Administration 1906 Equal Employment Opportunity Commission 1964 Occupational Safety and Health Administration 1971 Environmental Protection Agency 1972 Consumer Product Safety Commission 1972 18-19

20. Social Regulation Optimal level of social regulation –Not easily quantified In support of social regulation –externalities Criticisms of social regulation –Regulatory capture -- comiccomic Two reminders –There is no free lunch Higher prices, less competition, less innovation –Less government is not always better than more 18-20

21. United States vs. Microsoft Charged May 1998 under the Sherman Act Accused of having a “Windows” monopoly District court findings: –Used anticompetitive means District court remedy Appeals court ruling Final settlement 18-21

22. Key Terms antitrust policy industrial regulation social regulation Sherman Act Clayton Act tying contracts interlocking directorates Federal Trade Commission Act cease-and-desist order Wheeler-Lea Act Celler-Kefauver Act Standard Oil case U.S. Steel case rule of reason Alcoa case DuPont cellophane case Microsoft case horizontal merger vertical merger conglomerate merger per se violations natural monopoly public interest theory of regulation legal cartel theory of regulation 18-22

23. Next Chapter Preview… Agriculture: Economics and Policy 18-23