antitrust policy & government regulation. what is a trust, and why don’t we want one? trust...
TRANSCRIPT
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