Antitrust Policy and Regulation

1. Antitrust Policy and Regulation Chapter 15

2. Laugher Curve Murphy’s Law of Economic Policy “Economists have the least influence on policy where they know the most and are agreed; They have the most influence on policy where they know the least and disagree most vehemently.” Alan S. Blinder

3. Antitrust Policy: Judgment by Performance or Structure? • Antitrust policy is the government’s policy toward the competitive process. • The two views of competition are judgment by performance and judgment by structure.

4. Antitrust Policy: Judgment by Performance or Structure? • Judgment by performance– we should judge the competitiveness of markets by the performance (behavior) of firms in the market.

5. Antitrust Policy: Judgment by Performance or Structure? • Judgment by structure– we should judge the competitiveness of markets by the structure of the industry.

6. History of U.S. Antitrust Laws • Americans generally are in favor of laissez-faire and government noninvolvement in business. • At the same time, there has been a populist sentiment that fears bigness and monopoly.

7. History of U.S. Antitrust Laws • Trusts and cartels burst forth in the late 1800s. • A trust or cartelis a combination of firms in which the firms have not actually merged, but act as a single entity.

8. History of U.S. Antitrust Laws • A trust sets common prices and governs the output of individual member firms. • A trust can, and often does act like a monopolist.

9. The Sherman Antitrust Act • Public outrage against trusts such as Standard Oil led to the passage of the Sherman Act, the Clayton Act, and the Federal Trade Commission Act.

10. The Sherman Antitrust Act • The Sherman Antitrust Act of 1890 is a law designed to regulate the competitive process.

11. The Sherman Antitrust Act • Its two main provisions are: • “Every contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade or commerce . . is declared to be illegal .”

12. The Sherman Antitrust Act • Its two main provisions are: • “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce . . . shall be guilty of a misdemeanor . . .”

13. The Sherman Antitrust Act • The Sherman Act is broad and sweeping, but vague. • Congress designed the Act that way to allow the courts to decide its meaning.

14. The Sherman Antitrust Act • In the 1890s, economists debated whether mergers reflected increased economies of scale or attempts to restrict output and generate monopoly profits.

15. The Sherman Antitrust Act • Economists with the performance viewpoint argued that competition was strong and it would ultimately limit monopolies.

16. The Sherman Antitrust Act • Economists with the structure viewpoint argued that trusts should be broken up by government.

17. The Standard Oil and American Tobacco Cases • In 1911, the U.S. Supreme Court ruled that both Standard Oil and American Tobacco were structural monopolies. • The court held that they violated the Sherman Act because of their “unfair business practices” not because of their structure.

18. The Standard Oil and American Tobacco Cases • Judgment based on performance, not structure, is often called the abuse theory. • A firm is legally considered a monopoly only if it commits monopolistic abuses.

19. The Standard Oil and American Tobacco Cases • In the 1920 U.S. Steel case, the Court ruled that while company was a structural monopoly, it was not a monopoly in performance.

20. Clayton Act and Federal Trade Commission Act • The Clayton Antitrust Act and the Federal Trade Commission Act were enacted in 1914.

21. Clayton Act and Federal Trade Commission Act • The Clayton Antitrust Act made four monopolistic practices illegal when their effect was to lessen competition: • Price discrimination. • Tie-in contracts. • Interlocking directorships. • Buying stock in a competitor’s company.

22. Clayton Act and Federal Trade Commission Act • The Federal Trade Commission Act made it illegal for firms: • To use “unfair methods of competition.” • To engage in “unfair or deceptive acts or practices,” whether or not those actions had any effect on competition.

23. Clayton Act and Federal Trade Commission Act • In 1938, Federal Trade Commission was given the job of preventing false and deceptive advertising which is one of its main functions today.

24. The ALCOA Case • Judgment by performance governed U.S. antitrust policy until the ALCOA case of 1945. • The court ruled that the structure of the market which it dominated was unlawful.

25. The ALCOA Case • ALCOA dominated the market in two ways: • It used its knowledge of the market to expand its capacity before any competitor had a chance to enter the market. • It kept prices low to prevent market entry.

26. Judging Markets by Structure and Performance: The Reality • Judging by structure is practical though seemingly unfair. • The alleged wrongdoer is doing what it is supposed to be doing, producing the best product at the lowest possible price.

27. Contextual Judgments and the Capabilities of the Courts • With judgment by performance, each action of a firm must be analyzed on a case-by-case basis. • Even though performance will ultimately be judged, courts use structure as a guideline.

28. Determining the Relevant Market and Industry • Choosing the relevant market when evaluating competitiveness is difficult to do. • The relevant market in the ALCOA case was the aluminum market not the metals market at large.

29. Determining the Relevant Market and Industry • The relevant market In the Du Pont case (1956), was flexible wrap not cellophane. • Du Pont was not considered a monopolist even though it sold 100 percent of cellophane.

30. Determining the Relevant Market and Industry • Both structure and performance criteria have ambiguities. • In the real world there are no definitive criteria for judging whether a firm has violated the antitrust statutes.

31. Recent Antitrust Enforcement • In recent years, antitrust law has worked mainly through its deterrent effect. • Many potential mergers are never even proposed because firms know the merger would not be allowed.

32. Recent Antitrust Enforcement • Since the 1980s, the government has been more lenient in antitrust cases. • Political pressure for antitrust action waned. • Globalization of the U.S. economy. • The increasing complexity of technology.

33. Three Recent Antitrust Cases • The modern era of antitrust policy has been marked by important cases in the computer and telecommunications market.

34. The IBM Case • In 1967, the U.S. Department of Justice sued IBM for violation of antitrust laws. • The company was charged with unfairly bundling hardware, software, and maintenance services on a take-it-or-leave-it basis. • The government also charged that IBM constantly redesigned its hardware making it impossible for competitors to keep up.

35. The IBM Case • In its defense, IBM argued: • The market was much larger than the government claimed • The fast-moving technology and customers’ desires forced it to constantly upgrade its equipment.

36. The IBM Case • The government dropped its suit in 1982. • Mainframe computers were replaced by PCs. • The globalization of the computer industry made IBM's dominance in the U.S. far less important.

37. The IBM Case • The prosecution likely led to IBM’s problems in the 1990s. • IBM didn’t buy the DOS operating system from Microsoft because of the pending litigation. • The PC market swelled while the mainframe market died.

38. The AT&T Case • Up until 1982, AT&T controlled most long-distance and local telephone services. • It produced telephones and other communications equipment.

39. AT&T as a Regulated Monopoly • It was a natural monopoly regulated by law. • Natural monopoly – an industry in which significant economies of scale make the existence of more than one firm inefficient.

40. AT&T as a Regulated Monopoly • AT&T was required to provide universal service so that it would not engage in cream skimming. • Cream skimming – providing service to low-cost areas and avoiding high-cost areas.

41. AT&T as a Regulated Monopoly • Many economists argued that AT&T’s guarantee of “fair returns” gave it a strong incentive to: • Act as a lazy monopolist • Invest heavily in new equipment thereby increasing costs and subsequently, profits.

42. Technological Change and Competition • Technological change and competition changed the natural monopoly character of the phone industry.

43. Technological Change and Competition • Satellite transmissions and fiber-optic cable turned AT&T into a traditional monopoly. • Potential competitors sued because they felt AT&T was charging too much to gain access on their system.

44. Technological Change and Competition • In 1978, the Justice Department sued AT&T on antitrust grounds. • The suit was settled out of court in 1982.

45. Resolution of the AT&T Case • In 1982, AT&T agreed to divest its 22 local operating companies which merged into seven Baby Bells. • It kept its long-distance telephone service, manufacturing arm and Bell Laboratories.

46. Resolution of the AT&T Case • This resulted in enormous upheaval in the industry. • Local telephone rates doubled and tripled. • Two major competitors, MCI and Sprint, developed.

47. Developments Since the AT&T Case • The seven Baby Bells have continued to merge – there are only four now. • AT&T split into three companies.

48. Developments Since the AT&T Case • Congress passed the Telecommunications Act in 1996. • The telecommunications industry was deregulated. • Long-distance carriers, local phone companies, and cable companies were allowed to enter one another’s markets.

49. Developments Since the AT&T Case • Wireless communications and international providers have increased competition in the telecommunications market.

50. Developments Since the AT&T Case • Technological developments will keep antitrust policy in the news.