Antitrust PolicyAntitrust Policy& &

Government Government RegulationRegulation

What is a Trust, and Why Don’t we What is a Trust, and Why Don’t we Want one?Want one?

• Trust defined: a combination of firms aimed at consolidating, coordinating, and controlling the operations and policies of several firms

• Trusts and monopolies limit competition, allowing collection of firms to approach being a monopoly

• Remember: monopoly pricing is a type of market failure (why?)

• Antitrust policy is government policy to combat the existence of trusts

– Prevent acquisitions that would lead to monopoly

– Break up behemoth firms into smaller competitive firms

Sherman Antitrust ActSherman Antitrust Act

• 1890, passed by President Cleveland, placed antitrust burden on government

• Prohibits "agreements, conspiracies or trusts in restraint of trade."

• Two types of reasons for breaking up trusts:

– “Illegal per se” (just plain criminal behavior)

– “Rule of Reason” examines firm’s practices in light of the circumstances of the actions

• Size alone is not a reason for breakup; illegal business practices may be

• Supreme Court has given inconsistent decisions over the decades, varying between per se and rule of reason

Senator John Sherman

So what is reasonable?So what is reasonable?

• Being big, or dominating an industry, is often allowed, if largeness is achieved by fair business practices

– “Coercive” monopoly violates Sherman Antitrust Act through consciously anticompetitive behavior

– “Innocent” monopoly simply becomes big through efficiency

• 1914: Clayton Act extended right to individuals and firms to sue trusts

• 1945-1970s, Court did strike down large companies, often for size alone

Merger TerminologyMerger Terminology

• Vertical integration: Buying suppliers or customers (Oracle buying Sun; Oracle databases run on Sun machines)

• Horizontal integration: buying direct competitors

• Federal Trade Commission (FTC) must approve mergers

Oracle CEO, Larry Ellison

Government RegulationGovernment Regulation

• Public Interest Theory: government regulates businesses to protect consumers and workers

• Public Choice Theory: – Regulators and firms

serve their own interests– Firms lobby regulators to

win changes to protect profits

– Regulators end up “captured” by regulated firms

– Regulators seek to expand office, not for public good, but for own careers and power

Consumer ProtectionConsumer Protection

• Government regulates firms to protect consumers

– Legislation (industry standards, meat inspections, etc.)

– Approval committees (e.g., FDA, FTC)

– Law suits (McDonald’s 1994 suit for hot coffee)

• Benefits:– Safer products, higher

quality products• Drawbacks

– Less consumer choice (only less-hot coffee now)

– Government playing the role of decider, not consumer