1

Chapter 13 Antitrust and Regulation

• Key Concepts• Summary• Practice Quiz• Internet Exercises

©2002 South-Western College Publishing

2

What is a trust?A combination or cartel consisting of firms that place their assets in the custody of a board of trustees

3

What ispredatory pricing?

The practice of one or more firms temporarily reducing prices in order to eliminate competition and then raising prices

4

When was the age of the robber barons?

In the later part of the 1800’s

5

What was done to limit the power of trusts?

Congress passed laws aimed at preventing firms from engaging in anticompetitive activities

6

What is theSherman Act?

The federal antitrust law enacted in 1890 that prohibits monopolization and conspiracies to restrain trade

7

What is the Clayton Act?

A 1914 amendment that strengthens the Sherman Act by making it illegal for firms to engage in certain anticompetitive business practices

8

What business practices were

declared illegal under the Clayton Act?

• Price discrimination• Exclusive dealing• Tying contracts• Stock acquisition of

competing companies• Interlocking directorates

9

Was the Clayton Act an improvement over

the Sherman Act?Although more specific than the Sherman Act, the Clayton Act is also vague

10

What is the Federal Trade Commission Act? The federal act that in 1914 established the Federal Trade Commission (FTC) to investigate unfair competition

11

What is theRobinson-Patman Act?

A 1936 amendment to the Clayton Act that strengthens the Clayton Act against price discrimination

12

What is the basic purpose of the

Robinson-Patman Act?To prevent large sellers from offering different prices to different buyers where the effect is to harm even a single small firm

13

What is theCeller-Kefauver Act?

A 1950 amendment to the Clayton Act that prohibits one firm from merging with a competitor by purchasing its physical assets if the effect is to substantially lessen competition

14

What are some key antitrust cases?

• Standard Oil Case 1911• Alcoa Case 1945• IBM Case 1982• AT&T Case 1982• MIT Case 1992• Microsoft Case 1995

15

What was the outcome of the

standard oil case?The rule of reason

16

What is therule of reason?

The antitrust doctrine that the existence of monopoly alone is not illegal unless the monopoly engages in illegal business practices

17

What was the outcome of the Alcoa case?

The per se rule

18

What is the per se rule?

The antitrust doctrine that the existence of monopoly alone is illegal, regardless of whether or not the monopoly engages in illegal business practices

19

What was the result of the IBM case?A switch back to the rule of reason

20

What was the result of the AT&T case?

Technology made this government-regulated natural monopoly obsolete, and AT&T was found guilty of anticompetitive pricing

21

What was the result of the MIT case?

Eight Ivy League schools agreed to stop colluding to fix prices, and MIT was found guilty of price fixing

22

What was the result of the Microsoft case?

Microsoft was not allowed to purchase Intuit Inc., a competitor in the personal finance software industry

23

What was the Microsoft case of 2001?

This case charged Microsoft with predatory pricing by tying its monopoly in Windows to its Internet Explorer browser

24

How can firms avoid charges of

price fixing?They can merge into one company

25

When did a lot of mergers begin taking place?

In the 1980’s

26

What are the different types of mergers?

• Horizontal • Vertical• Conglomerate

27

What is ahorizontal merger?

A merger of firms that competes in the same market

28

What is avertical merger?A merger of a firm with its suppliers

29

What is aconglomerate merger?A merger between firms in unrelated markets

30

What can be said about conglomerate mergers?

They are generally allowed because they do not significantly decrease competition

31

What can be said about antitrust laws in other countries?They are weak in comparison to U.S. antitrust laws

32

What is the history of government regulation?

From the later part of the 1800’s to the 1970’s, there was an increase in regulation; in the 1970’s there was a movement away from regulation

33

What is the basic argument in favor of

government regulation?Market failure

34

In what ways does the market fail?

• Natural monopoly• Externalities• Imperfect information

35

What is anatural monopoly?

An industry in which long-run average cost is minimized when only one firm serves the market

36

What ismarginal cost pricing?A system of pricing in which the price charged equals the marginal cost of the last unit produced

37

$20$15$10

$5

1 2 3 4

$25$30$40$50

5 6 7 8 9DMR

Regulated Monopoly

A

LRMC

B

C

P

Q

efficient price

LRAC

Fair return price

38

What is anormal profit?

The accounting profit required to induce a firm’s

owners to employ their resources in the firm

39

Do production costs include normal profit?Yes, because normal profit is considered a necessary

expense of a business

40

What kind of profit is made at the

fair return price?Normal Profit

41

What happens when pollution is present?

Pollution causes polluting firms to overproduce, while causing firms that pay the cost of cleaning up the pollution to underproduce

42

What can be done when the externality of pollution is present?The government can regulate the industry to minimize the pollution

43

What happens with imperfect information?Deficient information on unsafe products can cause consumers to overconsume a product

44

$10

$5

25 50

$15

$20

75 100

Impact of Imperfect InformationP

Q

D1

E1 S

D2

E2

45

Consumers informed of defect

Increase in Demand

Decrease in quantity supplied

46

Key Concepts

47

Key Concepts• What is a trust?• What is predatory pricing?• What is the Sherman Act?• What is the Clayton Act?• What is the Federal Trade Commission Act?• What is the Robinson-Patman Act?• What is the Celler-Kefauver Act?• What is the rule of reason?• What is the per se rule?

48

Key Concepts cont.• What are the different types of mergers?• What is a horizontal merger?• What is a vertical merger?• What is a conglomerate merger?• What can be said about antitrust laws in other cou

ntries?• What is a natural monopoly?• What happens when pollution is present?• What happens with imperfect information?

49

Summary

50

A trust is a cartel that places the assets of competing companies in the custody of a board of trustees. During the last decades of the 19th century, trusts engaged in anticompetitive strategies to eliminate competition and raise prices, such as predatory pricing.

51

The Sherman Act of 1890 and the Clayton Act of 1914 are the two most important antitrust laws. The Sherman Act marked the first attempt of the U.S. government to outlaw monopolizing behavior. Because this act was vague, the Clayton Act was passed to define anticompetitive behavior more precisely.

52

The Clayton Act prohibited (1) price discrimination, (2) exclusive dealing, (3) tying contracts, (4) stock acquisition, and (5) interlocking directorates.

53

The Robinson-Patman Act of 1936 strengthened the Clayton Act by prohibiting certain forms of price discrimination. This law is called the “Chain Store Act” because it was aimed at large retail chain stores that were obtaining volume discounts.

54

The Celler-Kefauver Act of 1950 strengthened the Clayton Act declaring illegal the acquisition of the assets of one firm by another firm if the effect is to lessen competition.

55

The rule of reason and the per se rule are the two main philosophies the courts have used in interpreting antirust law. Under the rule of reason, monopolist were not subject to prosecution unless they acted in an anticompetitive manner.

56

The Supreme Court decision in the Alcoa case of 1945 replaced the rule of reason with the per se rule, which states that the mere existence of monopoly is illegal. Today, the trend is in favor of dominant firms because of international competition.

57

A horizontal merger is a merger of two competing firms. A vertical merger is a merger of two firms where one produces an input used by the other firm. A conglomerate merger is a merger of two firms producing unrelated products.

58

Deregulation is a movement that began in the1980’s to eliminate regulations primarily in the transportation and telecommunications industries. Today, the current trend is toward further deregulation resulting from federal budget cuts.

59

Marginal cost pricing is a competitive pricing strategy for a regulated natural monopoly. Using this approach, regulators set the monopolist’s price equal to its marginal cost. Another method is for regulators to establish a fair-return price equal to long-run average cost and the monopolist earns zero economic profit.

60

Regulation of a natural monopoly is justified on the basis of market failure. Two other cases based on market failure include externalities and imperfect information.

61

$20$15$10

$5

1 2 3 4

$25$30$40$50

5 6 7 8 9DMR

Regulated Monopoly

LRMC

A

B

C

P

Q

efficient price

LRAC

Fair return price

62

Chapter 13 Quiz

©2002 South-Western College Publishing

63

1. Which of the following is illegal under the Sherman Act?a. Attempts to monopolize.b. Price fixing.c. Formation of cartels.d. All of the above are illegal under

the Sherman Act.

D. The Sherman Act of 1890 is the federal antitrust law to curb trusts, but the federal government did not win a notable case until 1911.

64

2. Officers of five large building-materials companies meet and agree that none of them will submit bids on government contracts lower than an agreed-upon level. This is an example of a. price fixing.b. vertical restriction.c. a tying contract.d. an interlocking directorate.

A. The Sherman Act was enacted with vague language, but price fixing is clearly a “conspiracy in restraint of trade”.

65

3. A fabric shop cannot sell Singer sewing machines if it also sells other brands of sewing machines. This is an example of a. a resale price maintenance.b. territorial restrictions.c. a tying agreement.d. exclusive dealing.

D. If the effect is to “substantially lessen competition” such as an agreement between a manufacturer and a retailer is a violation of the Clayton Act of 1914.

66

4. Under the Clayton Act, horizontal mergers by stock acquisition were a. not considered.b. illegal if they could be shown to

lessen competition.c. illegal under any circumstances.d. legal if they could be shown to

lessen competition.

B. Horizontal mergers are combinations among competitors in the same industry which, if allowed, eliminate existing competition.

67

5. Under the Clayton Act, which of the following was illegal even if it was not shown to lessen competition substantially?a. Price discrimination.b. Tying contracts.c. Horizontal mergers by stock

acquisition.d. Interlocking directorates.

D. Interlocking directorates is the situation in which a director of one company serves on the board of directors of a competing company.

68

6. The importance of the Federal Trade Commission Act of 1914 is that it a. set up an independent antitrust

agency with the power to investigate complaints.

b. strengthened the law against mergers.

c. strengthened the law against price discrimination..

d. none of the above.A. The FTC Act of 1914 established a

five-member commission appointed by the president to investigate “unfair methods of competition.”

69

7. Which of the following is concerned primarily with price discrimination? a. The Sherman Act.b. The Clayton Act.c. The Robinson -Patman Act.d. The Celler-Kefauver Act.

C. The Robinson-Patman Act of 1936 is an amendment to the Clayton Act that strengthens the Clayton Act against price discrimination.

70

8. Which of the following is concerned primarily with mergers? a. The Sherman Act.b. The Clayton Act.c. The Robinson-Patman Act.d. The Celler-Kefauver Act.

D. The Celler-Kefauver Act is called the “antimerger act” because it closed the loophole in the Clayton Act by prohibiting mergers by sale of physical assets.

71

9. The Utah Pie case was brought under which of the following laws? a. The Sherman Act.b. The Federal Trade Commission

Act.c. The Robinson-Patman Act.d. The Celler-Kefauver Act.

C. Utah Pie was a small frozen desert pie firm in Salt Lake City that used three outside national competitors for price discrimination. The Supreme Court ruled in Utah Pie’s favor.

72

10. Although U.S. Steel controlled nearly 75% of the domestic iron and steel industry, in 1920 the Supreme Court ruled that the firm was not in violation of the Sherman Act because there was no evidence of abusive behavior. What antitrust doctrine was the court applying in this case? a. The rule of reason.b. The per se rule.c. The marginal cost pricing rule.d. The natural monopoly rule.

A. The rule of reason applied when a firm was not engaged in anticompetitive behavior.

73

11. In which antitrust case did the Supreme Court begin to apply the per se rule to determine whether a firm was in violation of the Sherman Act? a. The Standard Oil case.b. The Alcoa case.c. The IBM case.d. The MIT case.

B. The Supreme Court decision in the Alcoa case of 1945 replaced the rule of reason with the per se rule, which states that the mere existence of monopoly is illegal.

74

12. The Interstate Commerce Commission (ICC) was established in a. 1887.b. 1890.c. 1929.d. 1933.A. The ICC was established for the

original purpose of regulating rail prices by reducing duplicate trains, depots, and tracks.

75

13. Today, the Civil Aeronautics Board (CAB) regulates airline a. ticket prices.b. routes.c. safety.d. all of the above.e. none of the above; the CAB

was abolished in 1984.

E. The CAB was established in 1938 to regulate airline fares and air routes.

76

14. Which of the following provides the basis for regulation? a. Natural monopoly.b. Externalities.c. Imperfect information.d. All of the above.e. None of the above.

D. In each of these cases, the argument in favor of regulation is market failure.

77

15. Consider a regulated natural monopoly. If the regulatory commission wants to establish a fair-return price, then it should set a price ceiling where the demand curve crosses the monopoly’s long-run a. marginal revenue curve..b. average revenue curve.c. marginal cost curve.d. average cost curve.

D. One method for regulators to establish a fair-return price is to set price equal to long-run average cost and the monopolist earns zero economic profit

78

END