Government Regulation

1. Government Regulation Antitrust Policy and Regulation Chapter 28

3. What are Antitrust Laws? Antitrust policy can also be called antimonopoly policy…. HISTORY IN BRIEF FOR ANTITRUST LAWS U.S. civil War (1861-1865)… after this period markets expanded which led to some firms becoming dominant. Among these, petroleum, meatpacking, sugar, railroads, whiskey, tobacco.

5. These dominant firms whether oligopolists or monopolists became known as trusts (or business combinations that assign control to a single decision group)… I.e. trustees. Hence, word trust became synonymous with monopoly (as it is used today) These dominant firms used questionable tactics in conducting business… and in consolidating and keeping market share… They charged higherprices… and pressured resource suppliers toprovide resources as lower prices. (sort of an Al Capone style)

6. Conclusions of the 1800’s These dominant firms did not do anything to protect the consumer. There was no fair competition or in some cases, complete barrier to entry existed. Government steps in: Set up through legislation (Sherman being the first) alternative methods of control: Regulatory agencies – Interstate Commerce Commission was first - 1887 directed to protect against railroad abuse Antitrust laws.

7. Antitrust • Antitrust Law • Legislation passed for the stated purpose of controlling monopoly power and preserving and promoting competition. • A monopoly: • Produces a smaller output than is produced by a perfectly competitive firm with the same revenue and cost considerations, • Charges a higher price, and • Causes a deadweight loss.

8. Antitrust Acts • Sherman Act (1890) • Clayton Act (1914) • Federal trade Commission Act (1914) • Robinson – Patman Act (1936) • Wheeler – Lea Act (1938) • Celler – Kefauver Anti-merger Act (1950)

9. Sherman Act of 1890 Outlawed: “Restraints of Trade” Collusive price fixing Dividing up the market Very ineffective legislation… nothing much changed…. Dominant firms kept right on dominating…. Did bring suit again Standard Oil Ohio – controlled 80% of nation’s oil-refining.

10. Clayton Act of 1914 Legislation to cure the ills of the Sherman foibles. Set up the FTC as the watchdog for: Price discrimination eliminated. Tying contracts (producer requires buyer to purchase another of its products as condition for obtaining the desired product. Acquisition of stocks of competing corporations that would lesson competition Interlocking directorates (director of one firm on board of competing firm)

11. Federal Trade Commission

12. Robinson-Patman Act 1936- amended the Clayton and buying power of chain stores. Referred to as “Chain Store Act.” Wheeler-Lea Act 1938 – amended FTC Act on protecting consumers against false advertising. Celler-Kefauver Act 1950- amended Clayton to include regulation of vertical and conglomerate mergers. Difference between vertical/horizontal/conglomerate mergers

13. Exemptions from Antitrust Laws • Labor unions • Public utilities • Professional baseball • Cooperative activities of U.S. Exporters • Hospitals • Insurance companies • Publit transit and water systems • Supplies of military equipment • Joint publishing in single town – 2 or more newspapers.

14. Price Fixing – an obvious deterrent to competition. This brings government in to shut down very quickly. Many instances of price fixing through the years in U.S. But is illegal.

15. Rigging bids for government contracts..such as dividing up the market (without competitive bid) known as per se violations in antitrust law.

16. Price Discrimination Common practice that rarely elicits the ire of government… Why? Green fees and tee times! Doesn’t really deter competition. Unless the discriminated prices are used to obstruct entry or drive out competition.

17. Today who watches FTC (5 member commission appointed by Pres/confirmed by Senate) Along with the U.S. Justice Department… the enforcer for antitrust laws. (note the separation of powers in force here…. Which branch makes the law? Which branch enforces the law? Which branch interprets the law

18. Legal Framework for FTC Quasi-legislative Quasi-judicial Can issue cease and desist orders Can do ALL of this on its own initiative What is the Wheeler-Lea Act of 1938…? It allowed more latitude for FTC… additional policing of businesses… now FTC responsible for “deceptive acts or practices in commerce.” Until this amendment was passed, the FTC could only restrict practices that were unfair to competitors.

19. Robinson-Patman ActAmendment to Clayton 1936 Large volume buyers who might use their buying power to extract special deals, including quantity discounts, free promotional materials or purchase allowances, were targeted by the Robinson-Patman Act. The Robinson-Patman Act imposes limits on these practices without prohibiting them entirely. The act is enforced by the Federal Trade Commission in conjunction with the Department of Justice.

20. White House Power • Independent Regulatory Commissions • All Regulatory Agencies fall under Executive branch of government

21. Political Appointments of Chairmen or Boards Affects Judicial Interpretation • Power of Commissions…. In political spectrum • When in Court… get diverse judgments on monopoly power, mergers, anti-trust. Where should focus be? • On monopoly behavior (or) • Monopoly structure

22. What is the verdict? Structure or Behavior. • If Justice Dept and/or courts think the corporation or company is acting in anticompetitive way, will be a violation of Sherman. • Alcoa was acting like monopoly (hence had to break-up) • If not… and is doing good for society ( IBM, Intel) then it is “behaving” OK… and is permitted. • But if considered a “bad monopoly” like Microsoft…. Then the boom is lowered by government.

23. Why don’t companies sue each other? They do! But it is very expensive and lengthy process. Take the case to government… let government bring the case… then after verdict…if favorable… will sue for treble damages. State most Fortune 500 companies are domiciled?

24. Why does government have such a waffling track record? Simple………………. It’s political! Two theories: • Active antitrust perspective (not the right mix of outputs… not enough competition… govt needs to correct). • Laissez faire perspective (markets will battle each other develop innovative ways of producing more efficiently).

25. Rule of Reason by government • Govt usually lenient if monopoly developed naturally… • Govt will sue usually if a very high market share and abusive power used by it. • Two big cases in which govt stepped in and altered the structure. • AT&T and Microsoft. In 1982 AT&T settled out of court… Ma Bell would divest itself of 22 baby bells…(now look what 2007 has brought)

26. Microsoft Case: Govt accused Microsoft of maintaining monopoly of operating systems for PCs Two courts issued a “break-up” order… but later rescinded and allowed a behavioral remedy.(in the interim… Microsoft was fined a million $$ a day for over two years).

27. 3 Things To Remember about Regulation • 1. More regulations less freedom 2. More regulations higher cost to consumer • 3. Regulations would NOT be needed if business policed itself.

28. Who regulates advertising on TV? Who controls money in circulation? Who regulates your bank deposit guarantees? Who regulates mail-orders? Regulatory Quiz Regulatory Quiz • Who regulates baby pacifier recall? • Who regulates securities? • Who regulates health foods? • Who regulates water we drink? • Who regulates pet food?

29. What is regulation? • Rules set by government or their agencies that seek to control the operation of firms that may have monopoly power in their own industry. • Regulation is meant to deal with the problems ofmarket failure – where markets fail to reach an optimal allocation of resources. 

30. Monopoly power may lead to consumers beingexploited. (i.e. prices charge above the true marginal cost of supply)  • In terms of regulation of the market, the government attempts to prevent operations in the market that are against the public interest. (i.e. anti-competitive practices)

31. Where does government get the power to regulate? • ARTICLE I, SECTION 8 CLAUSE 3. “To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.”

32. When is Government Regulation needed? Under the right conditions… competitive, free markets succeed (meaning the efficient allocation of economic resources) For competitive, free markets to success- must have 3 things: • Everyone have full knowledge • Economic activities must never enjoy or suffer externalities • High initial/low incremental cost production never occur… NEVER WILL HAPPEN!

33. Of course, these conditions fail! We do not know everything Cars and other goods release exhausts Steel and flour mills,oil refineries, railroads…all have high initial and low incremental costs. ***Government can permit a market to allocate goods when people know of risks, private and social benefits are the same, and no industries exist with decreasing costs.

34. So……………the question continues…How much government involvement do we want in our society, our economy, our lives???????? How do we keep a balance? What drives the balance?

35. But………….. As you have learned…….. Governments also fail! *People in government act to promote their interests or interests of their associates *Businesses often use government as a shield for to help build regulation as a shield from their competitors.

36. Criteria to determine if Regulatory Agency • Has decision-making authority • Establishes standards or guidelines • Operates principally in domestic activity • Head of agency appointed by Pres/confirmed by Senate

37. America was first an agrarian economy. • Moved to Industrial- brought regulation with it. • ICC was first federal regulatory agency passed in 1887 (intended to handle all regulation) (note before the Sherman)(existed until 1996.. Now just a department)

38. In 1913 Congress created series of new agencies in ICC mold (Fed Reserve 1913) • FTC (1914)

39. Continued • Most of traditional agencies appeared during New Deal era • Early 1970’s saw new surge of regulation. • Regulation was intended to be apolitical • Regulation was to set policy after opinions were discussed on pros/cons • Regulation would provide uniformity to government policy

40. Why are IRC’s Created? • Basic purpose- correct for market failure • Establish stability for the economy • Destructive competition • Consumers incapable of making decisions • External diseconomies • Social regulation (used to achieve broad-based social policy objectives)

41. Reasons for Regulation • America is mixed-economy-explain • All industries are regulated (taxi cabs – nuclear plants) Anytime “public interest” is in question, demands “public oversight” What is a recent plea for more Regulation? What agency might be given more control? • Legal authority- where found?

42. Traditional – regulation that usually is aimed at specific industries and pursues economic objectives (this is the one the book would refer to as Industrial Regulatory Commission) Fed Reserve FTC SEC FCC New – usually cuts across industry lines and pursues non-economic objectives (these are the ones the book refers to as Social Regulatory Commissions) CPSC-1972 OSHA-1971 EPA – 1971 EEOC- 1964 Two categories of Federal Regulation

43. Federal Trade CommissionFTC • Created 1914, is an IRC • Promotes free and fair competition in interstate commerce through prevention of trade restraints (price-fixing, illegal combinations of competitors, unfair practices) • Sherman – 1890, Clayton 1914 • Protects public- false/deceptive advertising • Prevents practices that lead to monopoly • Prevents price discrimination

44. LOOK WHO I FOUND!!!

45. FTC Continued • Requires accurate labels on fur and textile products • Supervises operators of export business • Regulates mail-order firms • Requires lending institutions (retailers, finance companies, etc) to give accurate and complete information about cost of credit

46. Cease and Desist Order on Saturday mornings

47. For Release:March 7, 2003 • FTC Charges Bristol-Myers Squibb with Pattern of Abusing Government Processes to Stifle Generic Drug Competition • Alleged Illegal Conduct Involves Three Drugs; Includes Improper "Orange Book" Listings and Unlawful Agreements in Restraint of Trade http://www.fda.gov/cder/ob/ • "This case, and others we have brought and will bring," stated Timothy J. Muris, Chairman of the Federal Trade Commission, "stands for an important proposition: competition must be on themerits, not through misusing the government to stifle your competition."

48. March 20, 2006 DES MOINES, Iowa (AP) -- Shares of Maytag and Whirlpool have fallen amid speculation that the Justice Department is going to challenge their proposed merger. Michigan-based Whirlpool is offering $1.79 billion for rival Maytag. The Justice Department's anti-trust division has sought more time to review the deal and the companies have agreed not to close before March 30th. There could be a decision this week.

49. WASHINGTON, March 20 (Reuters) - U.S. antitrust authorities on Monday said they had approved the proposed buyout of retailer Sports Authority Inc. (TSA.N: Quote, Profile, Research) by an affiliate of private equity firm Leonard Green & Partners.

50. Federal Communications Commission – FCChttp://www.ftc.gov/ • IRC – 1934 • Responsible for regulating all interstate and foreign communications (radio, television, wire, cable and satellite. • Allocates bands of frequencies • Licenses and regulates station operators • Regulates common carriers- telephone, telegraph, satellite