Government Regulation Antitrust Policy and Regulation Chapter 28.

Government Regulation

Antitrust Policy and Regulation

Chapter 28

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.

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 higher prices… and pressured resource suppliers to provide resources as lower prices. (sort of an Al Capone style)

Conclusions of the 1800’sThese 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.

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.

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)

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.

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)

Federal Trade Commission

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

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.

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.

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

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.

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

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.

Robinson-Patman ActAmendment to Clayton 1936Large 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.

White House Power

Independent Regulatory Commissions All Regulatory Agencies fall under Executive

branch of government

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

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.

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?

Why does government have such a waffling track record?

Simple……………….

It’s political!

Two theories:

1) Active antitrust perspective (not the right mix of outputs… not enough competition… govt needs to correct).

2) Laissez faire perspective (markets will battle each other develop innovative ways of producing more efficiently).

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)

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).

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.

Regulatory QuizRegulatory Quiz

Who regulates advertising on TV?

Who controls money in circulation?

Who regulates your bank deposit guarantees?

Who regulates mail-orders?

• Who regulates baby pacifier recall?

• Who regulates securities?

• Who regulates health foods?

• Who regulates water we drink?

• Who regulates pet food?

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 of market failure – where markets fail to reach an optimal allocation of resources. 

Monopoly power may lead to consumers being exploited. (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)

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.”

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:

1) Everyone have full knowledge2) Economic activities must never enjoy or

suffer externalities3) High initial/low incremental cost

production never occur… NEVER WILL HAPPEN!

Of course, these conditions fail!We do not know everythingCars and other goods release exhaustsSteel 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.

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?

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.

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

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)

In 1913 Congress created series of new agencies in ICC mold (Fed Reserve 1913)

FTC (1914)

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

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)

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?

Two categories of Federal Regulation

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

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

LOOK WHO I FOUND!!!

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

Cease and Desist Order on Saturday mornings

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 the merits, not through misusing the government to stifle your competition."

March 20, 2006DES 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.

 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.

Federal Communications Commission – FCC

http://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

FCC Continued

FCC does not regulate broadcast networks or programming of individual stations

FCC has no authority over any form of government communication

FCC has no authority over communication media (movies, newspapers, books)

http://www.fcc.gov/

Federal Deposit Insurance Corporation - FDIC IRC-1933 Insures funds of bank depositors up to

$100,000 (until 12/31 - will be $250,000) Regulator of banks that hold state charters

and not members of Federal Reserve Examines banks periodically Approves bank mergers Requires adequate security system

Food and Drug AdministrationFDA

Not an IRC- Agency within Health and Human Services Dept – 1953

Tests products for approval Evaluates and approves claims for new drugs Develops policy for labeling of all drugs Develops standards for otc drugs Sets standards for safe use of color and food

additives. Develops standards for veterinary drugs Conducts research on effects of radiation exposure

National Labor Relations BoardNLRB IRC – 1935 Conducts elections to determine if workers in plant,

factory wish to join a union Conducts elections to determine which of two unions

preferred Serves as arbitrator in labor dispute Acts to prevent employers and unions from engaging

in unfair and illegal union organization activities and unfair labor practices

Labor Law

Taft-Hartley Act 1947 (restored balance between labor and business by prohibiting unfair practices by labor)

Passed over Truman’s veto Some of unfair practices forbid were “closed

shop, feather bedding, high initiation fees, wildcat striking

Security Exchange CommissionSEC IRC – 1934 Purpose to protect investors and public from

disorderly and unscrupulous operations of securities and financial markets

Has to receive detailed annual financial report from corporations listed on stock exchanges.

Any stock made public must provide financial condition and prospectus

Additional power through Sarbanes-Oxley (2006) after WC, Enron, Global Crossing, Arthur Anderson

Let’s Look at Social Regulation a minute!

As we said… social cuts “across the board.” Social gets in our face on a daily basis.

(traditional focuses on rates, cost, profits, competitiveness…. Social focuses on product design, safety for consumer, employment conditions, health)

Major social players were created between ’70s and ’80s… additional responsibilities have been added up to 2006.

Why the sudden push for “social” Regs?

Because………. Standard of living was continually increasing for majority of Americans… now time to assess “quality of living.”

Hence, the EEOC was given the assignment to enforce the Americans with Disability Act of 1990.

Now… think back can this be assessed with MC/MB formula?

So………….the regulation emerged to improve the non-material quality of life.

Cleaner Air

Safer Products

Safer Workplace

Less Pollution

Cleaner Water

Great equality of opportunity

Consumer Product Safety Commission(CPSC)

http://www.cpsc.gov/ IRC- 1970’s Protects consumers against product

malfunctions, and dangers Recalls millions of dollars yearly of products

produced that are dangerous Halogen lamps (40 million were recalled) in

1998 because they were a fire hazard

Environmental Protection Agency - EPA Independent Agency- 1970 Establishes national air quality Air pollution limits set Establishes emission standards Supervises clean air plans Issues permits for discharge of pollutants into

navigable waters

EPA Continued Sets national drinking water standards Regulates sludge, low-level radioactivity

materials Maintains inventory of existing hazardous

waste dumps Coordinates clean-up of oil spills Requires registration of insecticides,

herbicides, pesticides

Occupational Safety and Health Administration - OSHA Agency under Labor Department – 1970 Encourages employers and employees to

reduce hazards in workplace Keeps records of job-related injuries,

illnesses and deaths Enforces mandatory job safety and health

standards

Cost-Benefit Analysis Is Regulation really worth the cost?

*social/economiccost for Coal-firing plant to put on scrubbers?cost for Dow Chemical to stop polluting?

What are the benefits?what is the benefit to see across the Grand Canyon

what is the benefit to having safe drinking water?what is the benefit for having consumer products that do not cause fires when used?

Or products that do not cause death or blindness from imported Chinese products?

There is No Free Lunch

But………..can we continue to enjoy a higher standard of living if our environment is trashed?

examples: Mercury in lakes now

Eastern Germany…now

Pollutants in ozone… now

Do benefits outweigh the costs? Are their hidden costs, direct costs, and are benefits

tangible or intangible? Do “regulators” want to enact their own political

agenda? (legislate morals?) Do the costs pull the standard of living down because

businesses cannot afford to comply? Can they be costly in unintended effect? (gas

mileage increased… car safety decreased) Price-fixing for oil companies? (bad unintended

effect?) Who should oversee the cost?

(executive/legislative)?

A word about De-regulation

Have you flown recently?

Have you shipped anything UPS?

Do you have DISH Network?

How does Colorado regulate Marijuana?

http://www.cnn.com/2013/12/28/us/10-things-colorado-recreational-marijuana/

Consensus among economists(that has to be an oxymoron)

De-regulation has benefited consumers and the economy

Lower-prices More competition Innovation More jobs created

Wrap-Up Regulation

Regulatory Commissions- control industries by public regulation.

Was originally assumed the agencies would be free from political influence..

apolitical… Instead, politicians have

used agencies to further their careers.

68 Regulatory Agencies - ?? Government budget of

1998 said $17.2 billion spend on regulation

In year 2001 = $19.8 billion

In year 2006 = $41.4 (up from $39.5 in 2005)

2011 – http://www.heritage.org/research/reports/2011/07/red-tape-rising-a-2011-mid-year-report

Federal Regulation affects nearly every facet of our daily lives

Regulation is costly and causes massive paperwork.

Federal Register- publishes ALL proposed and final regulations.