Antitrust, Mergers, and Antitrust, Mergers, and Competition PolicyCompetition Policy

The Dilemma of Corporate Power Antitrust Regulation Corporate Mergers Global Competition and Antitrust Policy

Chapter

10

Corporate powerCorporate power

Corporate powerThe strength or capability of corporations to influence government, the economy, and society, based on their organizational resources and size.

Figure 10.1The 10 largest global corporations,

2002-2003By Sale

(billions of U.S. $)Wal-Mart

$244.5Exxon Mobil

204.5General Motors

184.2Royal Dutch/Shell

179.4BP

178.7Ford Motor

162.6Daimler Chrysler

156.8Toyota Motor

134.2General Electric

131.7Allianz126.8

By Profits(billions of U.S. $)

Citigroup$15.3

General Electric15.1

Altria Group11.1

Exxon Mobil11.0

Royal Dutch/Shell9.4

Bank of America 9.3

Pfizer9.2

Wal-Mart8.0

Toyota Motor7.9

Microsoft7.8

By Market Value(billions of U.S. $)

General Electric$286.1

Microsoft264.0

Exxon Mobil244.9Pfizer244.9

Wal-Mart232.2

Citigroup210.9

Johnson & Johnson161.4

Royal Dutch/Shell158.5

BP153.2AIG151.0

Rank

1

2

3

4

5

6

7

8

9

10

Comparison of transnational corporations’ sales and Comparison of transnational corporations’ sales and the gross domestic product of selected nationsthe gross domestic product of selected nations

Figure 10.2

Wal-Mart

DaimlerChrysler

Singapore

Portugal

Finland

South Africa

Turkey

Indonesia

Thailand

General Motors

Ford

General Electric

Toyota

ExxonMobil

$ Billions of Sales (2000) Gross Domestic Product $ Billions (2000)

Antitrust lawsAntitrust laws

AntitrustLaws that promote competition or that oppose trusts, monopolies, or other business combinations that restrain trade.

Economic objectives of antitrust lawsEconomic objectives of antitrust laws

1. The protection and preservation of competition.2. To protect the consumer’s welfare by prohibiting deceptive and

unfair business practices.3. To protect small, independent business firms from the economic

pressures exerted by big business competition.4. To preserve the values and customs of small-town America.

Figure 10.3a

Major federal antitrust laws

Sherman Act

Clayton Act

Federal TradeCommission Act

Antitrust Improvements Act

Forbids restraint of trade and monopoly

Forbids price discrimination, tying contracts,anticompetitive mergers, and interlocking directorates

Forbids unfair competition and deceptive business practices

Requires premerger notification and permits state suits on behalf of consumers against price fixing

The Sherman ActThe Sherman Act

Prohibits contracts, combinations, or conspiracies that restrain trade and commerce.

Prohibits monopolies and all attempts to monopolize trade and commerce.

Provides for enforcement by the Justice Department, and authorizes penalties for violations.

The Clayton ActThe Clayton Act

Prohibits price discrimination by sellers. Forbids tying contracts that require someone to buy a related and

perhaps unwanted product in order to get another one produced by the same company.

Prohibits companies from merging through purchase of shares or assets if competition is lessened or a monopoly is created.

Outlaws interlocking directorates in large competing corporations.

The Federal Trade Commission ActThe Federal Trade Commission Act

Created the Federal Trade Commission to help enforce antitrust laws.

Prohibits all unfair methods of competition. Gives more protection to consumers by forbidding unfair and

deceptive business practices.

The Antitrust Improvements ActThe Antitrust Improvements Act

Requires large corporations to notify the Justice Department and the Federal Trade Commission about impending mergers and acquisitions.

Expands the Justice Department’s antitrust investigatory powers. Authorizes the attorneys general of all 50 states to bring suits

against companies that fix prices and to recover damages for consumers.

Figure 10.3b

Federal antitrust enforcement

FederalTrade

Commission

JusticeDepartment

PrivatePersons andCompanies

State Attorneys

General

FederalCourts

• Investigation• Guidelines• Advisory opinions• Informal settlements• Lawsuits

• Lawsuits • Investigation• Lawsuits

• Consent decrees• Court opinions and decisions

Key antitrust issues

Monopoly: Does domination of an industry or a market by one or a few large

corporations necessarily violate antitrust laws? Critics claim that economic concentration can eliminate effective price competition, reduce consumer choices, inhibit innovation, and concentrate profits in too few hands. Others claim the opposite is true.

Innovation: Focus in antitrust policy. In today’s economy, regulators have increasingly promoted competition to foster technological innovation. Thus, the rationale for bringing antitrust actions is to spur innovation in many cases.

High technology business: Economy has changed in the information age from when antitrust laws were crafted. Are the basic principles of antitrust law applicable today?

Corporate mergersCorporate mergers

Corporate mergerA combination of one company with another.

Vertical mergersOccur when the combining companies are at different stages of production in the same general line of business.

Horizontal mergersOccur when the combining companies are at the same stage or level of production or sales.

Conglomerate mergerOccurs when firms that are in totally unrelated lines of business are combined.

Forces driving mergers in the 1990s and 2000s

Technological change: Major companies in telecommunications and media industries jockeyed for a favorable position on the emerging information superhighway. The need to keep ahead of advances in biotechnologydrove many mergers in the pharmaceutical and chemical industries.

Changes in the regulatory environment: Telecommunications deregulation led to a wave of mergers among long-distance phone companies, cable operators, and regional carriers. Mergers also resulted in anticipation of regulatory changes in the health care industry. Many financial services firms merged in response to changes in federal law.

Globalization: Many companies found it difficult to compete on the world stage as a result of globalization and subsequently merged.

Stock price appreciation: The long bull market of the late 1990s contributedto the merger wave.

Figure 10.4Value of mergers and acquisitions,

1988-2002

Source: “M & S Profile” published annually by Mergers and Acquisitions.

0200400600800

10001200140016001800

1988 1990 1992 1994 1996 1998 2000 2002

Bill

ions

of d

olla

rs

New challenges for antitrust enforcementNew challenges for antitrust enforcement

Should the government permit mergers, joint ventures, or other cooperative arrangements among companies if they enhance the ability of American businesses to compete internationally?

Should the government break up monopolies with the United States, if the global marketplace for the products or services offered by these companies is highly competitive?

Should federal regulators and the courts try to enforce U.S. antitrust laws against foreign companies if these companies operate subsidiaries in the United States?

What steps can the government take to create a level playing field for U.S. corporations, so that U.S. and foreign firms operate under a common set of antitrust rules and regulations?