Public Policy in Private Markets

Public Policy in Private Markets The Policy Process Overview of Antitrust laws

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Today • Sources of Government failure in the policy process • Overview of Antitrust laws

Question for the day • If you were a possible violator of an antitrust law, would you prefer that your case be judged under a per se rule or a rule of reason? Why?

Steps in the Policy Process • Problem Recognition: government, industry, public, media • Policy Formation • Policy Application • Policy Enforcement

Source of possible government failure 1. Problem Recognition: • Whose voice is heard, biases: • Concerned parties may lack information and/or incentive to raise concern effectively • Special interest groups may be effective in having their voice be heard, even if that problem may not be too important • Bureaucracy structure: some problems are recognized more rapidly than others.

Source of possible government failure 2. In Policy Formation: • Policy may not be timely. • Example: mortgage crisis • Policy may not be precise: it may miscalculate • Health care reform • May not be sufficient. Hard to anticipate all ramifications • Example: C02 emissions.

Source of possible government failure 3. In Policy Application: • Legislation is general. Federal agencies write up the specific regulations • Example: • Congress tells FDA to ensure that drugs in the US are safe (general legislation) • FDA has to specify scientific research protocols to be used in showing what is safe or not(specific regulation) • Potential problems: • Process may be skewed by special interest lobbying (immigration reform?) • Delays: Organic rules took 10 years to become a reality

Source of possible government failure 4. In Policy Enforcement: • Law is normally written so that maximum level of voluntary compliance is achieved, but: • Inadequate resources(too little enforcement) • Inefficient use of resources • Delays • Example: Microsoft delayed fulfillment of penalties for several years in Europe

Important tool: cost-benefit analysis Question: What is the optimal rule in cost-benefit analysis (in this case regulation)? • Total benefit of regulation is greater than total cost of regulation • Total cost of regulation is minimized • Total benefit of regulation is maximized • Marginal cost of regulation is equal than marginal benefit of regulation

Important tool: cost-benefit analysis Total Costs $ Total Benefits Maximum Net Benefit Q* Environmental quality

Important tool: cost-benefit analysis • MC=MB hard to do. • Second best: have policy as long as benefits > costs • Typically, a policy will not make everyone better off: • Some lose, some win • Ideally: compensate losers with gains • Dynamic aspect: future benefits and costs need to be discounted • Projects with negative flows first and positive flows later are particularly affected • However, future gains may also be larger as society may be more concerned in the future

Source of possible government failure To summarize: • Government is not perfect • Markets are not perfect • Both are part of our daily lives • Our goal: understand them both

Overview of Antitrust Laws

Overview of Antitrust Laws 1. Types of Cases: A. Criminal: Penalty can be fines or imprisonment • Gov’t is prosecutor, it is a jury trial • Standard of proof is “beyond a reasonable doubt” B. Civil: Penalties are fines, injunctions, divestitures, etc. • Trial may be by judge or jury (defendant’s choice) • Plaintiff: party who brings the case • Defendant: party who the suit is brought against

Overview of Antitrust Laws 2. Enforcement (3 possibilities) A. Dept. of Justice (DOJ): Antitrust Division • Cabinet agency of the president responsible for enforcement of all federal laws. • Professional staff under top political appointees B. Federal Trade Commission (FTC) • Regulatory agency independent from the federal government. • Headed by 5 commissioners appointed by president and confirmed by the Senate C. Private Suits: Brought by individuals

Overview of Antitrust Laws 3. Burden of Proof: What you need to show to win a case Important: Government cases include violation. Private cases include violation AND damages

Overview of Antitrust Laws 4. Pleas: How the defendant responds • In all cases: Guilty or innocent • In certain cases: • Government-criminal: “Nolo contendere”, defendant “does not contend”. Similar consequences as guilty plea, but no need to confess/disclose information (+ other considerations, more later) • Government-civil: “Consent Decree”. Judicial decree between parties to a suit. Defendant agrees to stop controversial activities. Do not have to accept guilt. • Private-civil: settle out of court. Analogue of consent decree (do not have to accept guilt)

Overview of Antitrust Laws 5. Remedies: What does the court do if defendant is found at fault? • Fines • Imprisonment • Injunction: court order to do (or refrain from doing) certain acts. Failure to comply is often regarded as criminal behavior • Divestiture: sell off part of business • Treble damages: in private cases, courts can triple the amount of damages (incentive for plaintiffs to sue) Collusive Restraints of trade only Gov’t – Civil Private Suits

Sherman Act: Collusion & Monopolization • Section 1: Collusive restraints of trade. • Criminal: • Brought by the DOJ only • To win case, DOJ must show that firm violated the law • Defendant can plead: guilty, innocent or “nolo contendere”. Nolo plea: • Treated by the DOJ as a guilty plea in terms of punishment • Difference with guilty plea: firm can not be tried as guilty in another case • DOJ may or may not accept the nolo plea. Court decision is independent of DOJ’s

Sherman Act • Section 1: • Civil: Brought by DOJ or private suits • DOJ: • Need to prove violation • Pleas: guilty, innocent or a consent decree. • Consent decrees negotiated between gov’t and defendant. Agreement to end case + remedies (injunction or fines) • No agreement = trial • Advantages of consent decree: quick, both parties may save efforts

Section 1: Civil Cases Private suits: • Case 1: Plea is “not guilty” • Gov’t cases typically precede private suits • If Nolo plea (in govt case): plaintiff has to prove guilt + damages • Ifguilty plea (in govt case): plaintiff has to prove damages only (PRIMA FACIE, or “on its first appearence”, evidence - also known as “making a case”) • Case 2: Guilty plea, or settle out of court • Important: plaintiffs are encouraged to sue and firms are deterred to go to trial with the existence of treble damages

Section 1: Private Cases, case 1 • Example: in a conspiracy to fix prices criminal case, toilet paper manufacturers are found guilty in a suit by the DOJ: • Stop & Shop can bring a private case for damages only • But, if nolo plea, Stop & Shop has to show violation + damages • Nolo and consent decrees are attractive to firms in gov’t cases: • End gov’t case without trial • Makes private cases more difficult

Overview of Antitrust Laws Sherman Act: • Section 2: deals with monopolization • All suits are civil (jury or judge) • Similar set up as in Section 1, except: • Possible remedy: divestiture

Overview of Antitrust Laws Clayton Act (1914): • Sections 2 and 3: Vertical market restrictions, price discrimination (amended by Robinson-Patman Act) • Robinson-Patman Act applies to FTC only • Section 7: Mergers (amended by the Celler-Kefauver Act) • Burden of proof, pleas and remedies are the same as in Sherman civil cases

Overview of Antitrust Laws FTC Act (1914): • Broader in scope than previous laws • Sets up FTC • Gives FTC jurisdiction over Clayton Act and enforcement of section 5 of FTC Act: • Cover unfair methods of competition • Unfair and deceptive acts

Overview of Antitrust Laws Important: • Government and private cases are linked • Government has to prove violation • Private cases have to prove violation + damages • Government cases precede private cases: • If government case has a guilty plea: “prima facie” evidence in private case (only prove damages) • If nolo plea or consent decree then private cases must prove violation + damages

Overview of Antitrust Laws Important: • If government has a good case, it will not allow consent decree or it will argue that a nolo plea should not be accepted by the court • From a firm’s perspective a nolo plea or a consent decree make sense: • To avoid embarrassment of a guilty plea • If you know you are guilty • Makes future (civil) cases unlikely/more difficult • In addition, a consent decree is attractive: • To avoid trial costs • To avoid uncertainty in trial • To avoid disclosure of sensitive information

Overview of Antitrust Laws Overlap: • DOJ and FTC in Clayton Act • Section 5 FTC Act (unfair methods of competition) & Sherman Act (e.g. monopolization cases) • Several cases can be brought by either FTC or DOJ • Agencies manage overlap through memoranda: • FTC: traditionally responsible for merger cases in grocery retailing • DOJ: large technology cases (IBM, Microsoft, AT&T)

Rules of Analysis How to interpret the law? • PER SE RULE: • Business practice is always anticompetitive • Practice is always illegal: no room for arguments (no reasonableness) • RULE OF REASON (more common) • Legality is ambiguous • Case by case judgment (reasonableness)

Rules of Analysis Examples: • Price fixing: per se rule. No matter why/how prices were fixed, it is illegal • Mergers: rule of reason • Merger between two large firms: arguments for efficiency gains

Question for the day • If you were a possible violator of an antitrust law, would you prefer that your case be judged under a per se rule or a rule of reason? • Per se • Rule of reason

Public Policy in Private Markets