Antitrust and Regulation
Reading: Chapter 13 of Tucker
History of Antitrust
Industrialization period after the Civil War, growth of the RR, nationalization of markets, all helped create economies of scale in production. Many mergers took place, larger industrial corporations developed. Some businesses that did not merge formed trusts (a trust is a combination or cartel consisting of firms that place their assets in the custody of a board of directors) or cartels in industries such as iron, sugar, copper, coal, oil, tobacco, etc. The US Senate during this time period was called the millionaire's club. This was also a time of growing populist politics.
One large company was Standard Oil, which dominated the early oil market. Standard Oil acted like a monopolist once it had a monopoly market structure by reducing output and raising prices.
Populism combined with the robber barons' tactics created public opinion hostile to big business (like today?). By 1888 the major political parties had added anti-monopoly planks to their political platforms.
Major antitrust question: Is antitrust policy supposed to be directed towards protecting consumers (or, more generally, protecting the competitive process) or toward protecting competitors (by limiting various forms of business rivalry)?
The Sherman Antitrust Act
Passed in 1890. The cornerstone of U.S. antitrust policy. Two main sections
1. Every contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal.
2. 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 among the several States, or with foreign nations, shall be deemed guilty of a misdemeanor, and, on conviction thereof, shall be punished by a fine not exceeding five thousand dollars, or by imprisonment not exceeding one year, or by both said punishments, in the discretion of the court.
But what constitutes a "restraint of trade" and thus is a violation of the law? That is up to federal judges, and ultimately the Supreme Court, to decide. It took about 20 years to get the first successful cases won against monopolies (Standard Oil and U.S. Tobacco, 1911).
More recent case: ADM (1995) for fixing prices of lysine and citric acid with other international firms. Fined $100 million.
The Clayton Antitrust Act
Passed in 1914 in response to the difficulties and the loopholes associated with the Sherman Act. Made the following acts illegal when they "substantially lessen competition or tend to create a monopoly"
1. Price Discrimination
2. Exclusive dealing
3. Tying contracts
4. Stock acquisition of competing companies (allows the feds to regulate mergers)
5. Interlocking corporate directorates
But what does "substantially lesson competition to tend to create a monopoly" mean? Requires federal judges to decide.
Federal Trade Commission Act of 1914
Created the FTC and gave it the power to investigate unfair competitive practices of firms. Today the FTC is primarily concerned with (i) enforcing consumer protection legislation, (ii) prohibiting deceptive advertising, and (iii) preventing collusion. The U.S. Department of Justice handles the investigation of mergers and monopolies.
Robinson-Patman Act of 1936--strengthened the Clayton Act by preventing large sellers from offering different prices to different buyers where the effect is to harm even a single small firm. More protects competitors than protects the competitive process. Controversial.
Celler-Kefauver Act of 1950--Strengthened the Clayton Act by preventing one firm from merging with a competitor by purchasing it physical assets if the effect is to substantially lessen competition (see #4 in Clayton Act)
Standard Oil Case (1911): Teddy Roosevelt sought to break up Standard Oil, which was a large industrial monopoly. After 10 years of litigation, the Supreme Court found under the Sherman Act that Standard had achieved its monopoly position in the oil refining business through illegal business practices (including espionage, control of supplies to rivals, predatory pricing (pricing below MC)). In the Std Oil case the Sup Ct established an important legal standard for the Sherman Act. The standard is called the rule of reason doctrine: (a) Does the business have a structural monopoly? Yes, Std Oil was a monopoly with over 90 percent of the refined-oil market. This alone was found not to be sufficient for them to have violated the Sherman Act. (b) Does the monopolist engage in illegal business practices. Monopoly alone is not per-se illegal. Big is not necessarily bad.
Under the rule of reason doctrine the Sup Ct did not find against U.S. Steel due to part (b), but it did find against U.S. Tobacco based on (b).
The per-se doctrine (illegal when the practice is observed) is reserved for price-fixing conspiracies.
Utah Pie Case (1950's): Utah Pie would enter markets and capture market share by setting prices below those of its rivals. In Salt Lake City it had a plant that gave it a cost advantage in SLC. Rivals cut prices in SLC, and ended up charging SLC customers a lower price than the customers where the pies were actually made. Utah Pie sued under the Clayton and Robinson-Patman Acts, charging price discrimination. In the late 1960's the Supreme Ct. found that the rivals' actions were illegal PD. Discussion: If no rivals were actually driven out of the market by the PD, should the PD have been illegal?
AT&T Case (1982): Originally telephone was a natural monopoly. Technological change and development of rival networks changed that, especially for long-distance. AT&T tried to resist allowing rivals access (connectivity) to its telephone network at reasonable prices. Moreover, AT&T was leased its telephones to its customers, and these phones were manufactured by Western Electric, its manufacturing division. Western Electric was found to have been charging AT&T monopoly prices, which were simply passed along to customers in the form of high phone lease rates.
Microsoft Case (1995): U.S. DoJ sued to block the merger of Microsoft and Intuit. Argument: The merger would give Microsoft a monopoly in the personal finance app software market (MS Money + Intuit Quicken, in addition to its monopoly of PC operating systems). Current case: Tying contract: MS tying Internet Explorer with Win 95 op sys.
Mergers: Horizontal and Vertical and conglomerate.
Mergers reduce competition. The issue is how concentrated the market becomes. DoJ has merger guidelines for when to attempt to block mergers.
Economic Regulation: Regulate entry conditions and prices. Started with ICC and railroads. Moved to oil and natural gas pipelines, airlines, trucking....
Original efficiency argument for economic regulation: Natural monopoly.
Alternative argument: Capture theory of regulation.
Deregulation movement: Started in late 1970's. Deregulated oil, natural gas, airlines, trucking.
Three economic reasons for antitrust and regulation:
1. Monopoly or natural monopoly
2. Externalities
3. Imperfect information.