Government Policies

1. Government Policies In this last lecture, various forms of mergers and government regulations are discussed. The impact of government policies are illustrated by using an example of the sugar industry. OBJECTIVES: 1. Define the mergers 2. Explain anti-trust law. 3. Analyze the impact of government regulations. TOPICS Please read all the following topics. MERGERS ANTI-TRUST REGULATIONS THE IMPACT OF GOVERNMENT POLICY - AN EXAMPLE

2. Mergers When two companies combine under single ownership of control, we say that the two companies have merged. There are three basic types of mergers: Horizontal Merger is a merger between firms that are selling similar products in the same market. The bank merger of 1980s and the merger of HP and Compaq are examples of horizontal merger. A horizontal merger decreases competition in the market. Vertical Merger is a merger between companies in the same industry, but at different stages of production process. In another words, a vertical merger occurs between companies where one buys or sells something from or to the other. For example, Pepsi’s merger with restaurant chains that it supplies with beverages is a vertical merger. E-Bay buying PayPal is another example. Conglomerate Merger is a merger between companies in different industries. Phillip Morris and Miller Brewing merger is an example. The government looks more carefully at proposed horizontal mergers because they are more likely to increase concentration and reduce competition. Vertical mergers are usually ignored unless they are between the two firms who are each in highly concentrated industries. However, in 1949 case, it was shown that DuPont had acquired controlling interest in GM, and the court ordered DuPont to sell its shares severing the relationship. Conglomerate mergers have generally been permitted.

3. Anti-Trust Regulations ANTI-TRUST POLICIES The historical background of anti-trust laws is rooted in the decades following the Civil War. When the corporate form of business began to develop and monopolies were formed in industries such as petroleum, meatpacking, railroads, sugar, etc., questionable tactics were used by these firms, and popular sentiment turned against them. Regulatory agencies were formed to control natural monopoly. Antitrust legislation was passed to inhibit the growth of monopolies in other industries. The Sherman Act of 1890 was the first major law and is still the cornerstone of antitrust legislation. It contains two major provisions: 1. Contracts or combinations in restraint of trade or commerce among the several states or with foreign nations are illegal. 2. Every person who shall monopolize or attempt to monopolize any part of the trade or commerce among the states or with foreign nations shall be deemed guilty of misdemeanor. Firms found violating either provision could be ordered dissolved by the courts or prohibited from unlawful practices. Fines and imprisonment were possible, and injured parties could sue for damage.

4. Anti-Trust Regulations Cont. The Clayton Act of 1914 is an elaboration of the Sherman Act, which was often not explicit enough to be effective. The Clayton Act strengthened the Sherman Act in several ways. 1. It outlaws anti-competition price discrimination among purchasers when the price differentiation is not based on cost. 2. It forbids exclusive or tying contracts in which a producer forces purchasers of one of its products to acquire other products from the same seller or producer. 3. Acquisition of stock in competing companies is forbidden if it lessens competition. 4. Interlocking directorates are not allowed where directors of one firm are also on the board of a competing firm. In the same year as the Clayton Act, Congress passed the Federal Trade Commission Act (FTC). FTC enforces antitrust laws and the Clayton acts in particular. Celler-Kefauver Act of 1950 amended Section 7 of the Clayton Act, which prohibits firms from acquiring the stock of competitors when this would reduce competition. This section had a loophole whereby firms could accomplish their purpose by acquiring the physical assets rather than stock of a competing company, the Celler-Kefauver bill closed this loophole. For natural monopolies, government uses price regulation, profit regulation, and output regulation. However, these regulations may distort incentive as profit becomes zero. Not all regulated industries are natural monopolies, in fact, most are not. Some non-natural monopolies are regulated in order to ensure service to customers and some because the service is considered too essential to be determined by market price. Social regulations are concerned with the conditions under which goods and services are produced and the safety of these items for the consumers. The most important government agencies that provide this regulation are the Occupational Safety and Health Administration (OSHA) and the Consumer Product Safety Commission (CPSC), and the Environmental Protection Agency (EPA). Opponents of social regulation say that the economic costs of social regulation are high, but proponents say that the benefits of regulation exceed their costs. If the EPA imposes pollution controls on a firm which, in turn, fires a worker because of the extra costs that the EPA has imposed upon it, the worker may oppose this regulation. But if the pollution would have caused the worker cancer, the costs of continuing on the job would have been high. Economists are not necessarily for or against regulation, but analyze its costs and benefits.

5. Impact of Regulations THE IMPACTS OF GOVERNMENT POLICES – AN EXAMPLE Price supports for 15,000 U. S. sugar producers has kept U.S. sugar prices at almost double the world price for an estimated cost to consumers of $1 billion per year. The effect was regressive because poor households spent a larger percentage of their income on food than do high-income households. Also, sugar growers received benefits that were estimated to be twice the nation’s average family income. Thirty-three farms obtained more than $1 million in benefits in 1991. Import quotas had been imposed to keep low-priced foreign sugar out of the U. S. market so that price supports could be maintained. In 1975, 30% of U. S. sugar was imported, 1999 imports was about 3-4 %. From both a domestic and global perspective, agricultural resources have been distorted. Overallocation has occurred in the less efficient American production areas; underallocation has occurred in the low-cost production areas of the world. Apart from the higher prices, jobs have been lost in the U.S. because of refinery closing due to the decline of sugar imports. Brach Candy Co. moved some 3500 jobs to Canada, where sugar prices were lower.