Today: Overview of antitrust
Next class:
Later: "Hipster antitrust," regulation of certain industries, natural monopolies, public utilities, telecom., transport.
Antitrust law or competition law is designed to curb excessive market power and promote competition in markets
Statutory authority: Federal and State laws prohibiting various anticompetitive business activities
Enforcement via:
Private parties harmed by business (consumers, competitors, suppliers/buyers) can bring civil lawsuits against defendant to seek an injunction or recover damages
Plaintiffs can earn treble damages for successful antitrust claims (as opposed to normal damages under normal contract claims)
Private antitrust suits outnumber government suits by a factor of 20:1!
Chilling effects on business activities that might cause raised eyebrows
"Every violation of the antitrust laws is a blow to the free-enterprise system envisaged by Congress. This system depends on strong competition for its health and vigor, and strong competition depends, in turn, on compliance with antitrust legislation. In enacting these laws, Congress had many means at its disposal to penalize violators. It could have, for example, required violators to compensate federal, state, and local governments for the estimated damage to their respective economies caused by the violations. But, this remedy was not selected. Instead, Congress chose to permit all persons to sue to recover three times their actual damages every time they were injured in their business or property by an antitrust violation. By offering potential litigants the prospect of a recovery in three times the amount of their damages, Congress encouraged these persons to serve as 'private attorneys general.'"
Franchisee(s)/dealers sue franchisor/manufacturer on contractual vertical restraints:
Competitors sue a competitor for anticompetitive practices:
States Attorneys General can bring antitrust suits against businesses
Federal government is where most of the action is (interstate commerce)
Two enforcement agencies:
Enforcement actions:
Criminal penalities (through DOJ only):
Many mergers need prior approval from FTC and DOJ
U.S. has the first and most advanced antitrust laws in the world, many other countries have emulated U.S.
European Union next biggest antitrust enforcement agency in the world
In Medieval times, free laborers (i.e. not serfs who were bonded to their landlords) working in a trade were required to be part of a guild
Guild had exclusive monopoly privilege by the monarch to practice a trade
Lord Edward Coke
1552--1634
Chief Justice (King's Bench)
"A monopoly is an institution or allowance by the king, by his grant, commission, or otherwise...to any person or persons, bodies politic or corporate, for the sole buying, selling, making, working, or using of anything, whereby any person or persons, bodies politic or corporate, are sought to be restrained of any freedom or liberty that they had before, or hindered in their lawful trade."
"[A man lives] in a house built with monopoly bricks, with windows...of monopoly glass; heated by monopoly coal (in Ireland monopoly timber), burning in a grate made of monopoly iron...He washed himself in monopoly soap, his clothes in monopoly starch. He dressed in monopoly lace, monopoly linen, monopoly leather, monopoly gold thread...His clothes were dyed with monopoly dyes. He ate monopoly butter, monopoly currants, monopoly red herrings, monopoly salmon, and monopoly lobsters. His food was seasoned with monopoly salt, monopoly pepper, monopoly vinegar...He wrote with monopoly pens, on monopoly writing paper; read (through monopoly spectacles, by the light of monopoly candles) monopoly printed books," (quoted in Acemoglu and Robinson 2011, pp.187-188).
Hill, Christoper, (1961), The Century of Revolution
Smugglers, pirates, and interlopers fought mercantilist laws and trade restrictions
Boston Tea Party to protest the East India Company's monopoly
"it is the privilege of a trader in a free country, in all matters not contrary to law, to regulate his own mode of carrying it on according to his own discretion and choice. If the law has regulated or restrained his mode of doing this, the law must be obeyed. But no power short of the general law ought to restrain his free discretion."
Mitchel v Reynolds (1711) 1 P Wms 181
Businesses (and consumers) make contracts that have recourse & remedies in the courts under Contract Law:
Courts simply would not enforce "contracts in restraint of trade"
Implications for cartels:
Cartels, collusion, and price fixing are perfectly legal
But cartels are on their own to solve the prisoners' dilemma & problems with instability
Courts will not enforce cartel agreements or price-fixing
The "Gilded Age" (c.1880-1920)
New technologies and new business forms (the modern corporation) allow companies to grow to a massive, national scale for the first time
Rise of the "robber barons": millionaires who owned the big corporations
Many industries came to be dominated by few, big businesses, and formation of "trusts" (cartels)
Anticompetitive practices (?):
Not an antitrust law, but done to rein in alleged monopolistic & collusive practices of railroads
Act required railroad rates to be "reasonable and just" (but did not specify specific rates)
Created first regulatory agency: Interstate Commerce Commission (ICC) specifically to regulate railroads
Sherman Antitrust Act (1890)
§
§ 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 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 felony [...]"
26 Stat. 209, 15 U.S.C. (\S)
1–7
Addyston Pipe and Steel Co. v. United States, 175 U.S. 211 (1899)
One of the most impactful antitrust cases
Pipemakers formed a collusive agreement to rig bids:
Addyston Pipe and Steel Co. v. United States, 175 U.S. 211 (1899)
Could have sold pipe for a cost & modest profit of $17/ton, but cartel charged $24.25/ton
Pipemakers argued this is a "reasonable" restraint of trade
U.S. Supreme Court agreed it is impossible for the Sherman Act to prohibit every restraint of trade
Contracts in restraint of trade are legal only if the restraint of trade is "ancillary" to the main purpose of a lawful contract
Per se rule: certain contracts and business actions per se illegal
Rule of Reason: some business practices that restrain trade are reasonable
United States v. American Tobacco Company, 221 U.S. 106 (1911)
American Tobacco Company formed by 5 leading tobacco companies created a near monopoly on the sale of cigarettes
Government sued American Tobacco Company under section 2 of Sherman Act of "monopolizing"
Supreme Court agreed and forced American Tobacco Company to dissolve into 4 firms: American Tobacco Company, R. J. Reynolds, Liggett & Myers, and Lorillard
Important development: Section 2 of the Sherman Act does not ban monopoly, only the unreasonable acquisition or maintenance of monopoly
John D. Rockefeller's Standard Oil company sued by U.S. Department of Justice
Vertical integration of oil exploration, pumping, distribution, refinement, and retail into gas stations
Superior technology and quality, continual reinvestment of profits in expanding capacity
Undercut competitors in "anti-competitive" ways:
1 On the same day as the American Tobacco Company decision!
2 Note that most of these have since recombined into ExxonMobil, one of the top 10 largest firms in the world.
Supreme court interpreted an "unduly" contract "in restraint of trade" to mean a contract that results in "monopoly or its consequences":
Broke up Standard Oil into 34 firms1, 2
"Trust-busting" was major agenda item of Progressive presidents
Roosvelt famous for talking about "good trusts" vs. "bad trusts"
Businesses on edge about who is "good" and who is "bad"
Even today, very few antitrust cases are about violations of Sherman Act
Congress thought Supreme Court had narrowed Sherman Act too much
Even today, very few antitrust cases are about violations of Sherman Act
Congress thought Supreme Court had narrowed Sherman Act too much
Clayton Antitrust Act (1914)
Clayton Antitrust Act (1914)
Important exemptions to antitrust laws defined:
Notably, in Federal Baseball Club v. National League (1922), MLB was found not to be "interstate commerce" and hence exempt from antitrust laws
Clayton Act is major source of enforcement authority
Government can launch an antitrust case against companies that engage in these practices
Doesn't have to wait for a collusive agreement (Sherman Act §
Federal Trade Commission Act (1914)
Creates Federal Trade Commission (FTC), independent regulatory agency answerable to Congress (not the Executive branch!)
The "consumer watchdog" and the government's litigation practice against unfair and deceptive trade practices
Has rulemaking authority to define unfair and deceptive practices
Works in tandem with Sherman and Clayton Acts
"Under this Act, the Commission is empowered, among other things, to (a) prevent unfair methods of competition, and unfair or deceptive acts or practices in or affecting commerce; (b) seek monetary redress and other relief for conduct injurious to consumers; (c) prescribe trade regulation rules defining with specificity acts or practices that are unfair or deceptive, and establishing requirements designed to prevent such acts or practices; (d) conduct investigations relating to the organization, business, practices, and management of entities engaged in commerce; and (e) make reports and legislative recommendations to Congress."
National Industrial Recovery Act (1933)
Passed under FDR during the Great Depression as key part of the New Deal
Created the National Recovery Administration (NRA)
Sought to regulate "fair wages and prices" to stimulate economic recovery
Effectively stalled competition & created cartels in each major industry to raise prices and profits for depressed industries
Found unconstitutional in A.L.A. Schechter Poultry Corp. v. United States, 295 U.S. 495 (1935)
Robinson-Patman Act (1936)
Amendment to Clayton Act on price discrimination
Further regulates price discrimination to protect small retail shops against larger chain stores
Essentially fixes a minimum price for retail products to prohibits price discrimination that lessens competition
Exemptions for Co-ops
Celler–Kefauver Act (1950)
Amendment to Clayton Act on mergers (sometimes called the "Anti-Merger Act")
Closed a loophole in Clayton Act about mergers between non-competing companies (in different industries, i.e. a conglomerate merger)
Government can prevent conglomerate mergers that would substantially lessen competition
Hart–Scott–Rodino Antitrust Improvements Act (1976) sometimes called HSR Act
Amendment to Clayton Act on mergers, the major determinant of merger process today
Firms must pre-file for authorization from government (FTC, DOJ) for mergers between firms that meet any of the following thresholds:
Filing fee is between $45,000 - $280,000 by value of the transaction
Crandall, Robert W and Clifford Winston, 2003, "Does Antitrust Policy Improve Consumer Welfare? Assessing the Evidence," Journal of Economic Perspectives 17(4): 3-26
Economists' views on antitrust evolved over the 20th century
Antitrust laws and their interpretation in the courts & government agencies has similarly evolved
Much of the evolution came from changes in the theory and antitrust models used
Note: this "story" heavily adapted from Kovacic and Shapiro, 2000
Kovacic, William E and Carl Shapiro, 2000, "Antitrust Policy: A Century of Economic and Legal Thinking," Journal of Economic Perspectives 14(1): 43-60
Is "bigness" harmful per se?
Economic populism: public suspicion of large business
Are there justifications for allowing big businesses?
"Count the number of firms in an industry. If it's 1, it's a monopoly!"
"[E]conomic theory since [the Sherman Act] has proven remarkably fertile in pointing out how various actions by firms may be interpreted as either procompetitive or anticompetitive...Although economic theory can help organize analysis of the economic variables affected by antitrust policy, it often offers little policy guidance because almost any action by a firm short of outright price fixing can turn out to have procompetitive or anticompetitive consequences," (p.3)
Crandall, Robert W and Clifford Winston, 2003, "Does Antitrust Policy Improve Consumer Welfare? Assessing the Evidence," Journal of Economic Perspectives 17(4): 3-26
American economists were widely skeptical of Sherman Act!
Viewed it as either unnecessary or harmful
Few saw it as a tool to control abusive business conduct
Not to say that all economists were lassiez-faire or wanted no government intervention
Debate about whether competition endangered insutries with high fixed costs and low marginal costs
Clayton Act, the new FTC, and rule of reason dominates antitrust cases
Many saw WWI cooperation of Big Government and Big Business as a good thing to continue in peacetime
Use industrial trade associations with government to eliminate the "wastefulness of competition"
Great Depression led many to repudiate the competitive model as a workable ideal
New Deal focus on industrial planning, cartelization of industries
Supreme Court not as aggressively going after monopolies
Economists favored benefits of economies of scale
New Deal wearing off, more focus on return to competition
Renewed vigor for antitrust enforcement, deconcentrating industries, breaking up firms
Early Chicago School of economics: Simons, Viner, Knight
Courts & economists emphasizing the structure conduct performace (SCP) paradigm
High-water mark for the "perfect competition" model
Ideal was an industry with many firms, p=MC, no strategic behavior
Markets that were more concentrated, and business practices that deviated from P.C. viewed at with extreme suspicion
More per se rules prohibiting many of vertical constraints: exclusive dealing, tying, territorial restraints, resale price maintenance
By 1960s, pendulum swung too far, Justice Potter Stewart: "the government always wins" [in merger decisions]
Found "pro-competitive" efficiency explanations for lots of seemingly "anti-competitive" firm behaviors:
Revision of many per se rules to rule of reason, courts more permissive of mergers
Goal of antitrust is to maximize consumer welfare
Business activities that may look anti-competitive can actually increase consumer welfare, and should be allowed
Rise of game theory in IO
Predatory pricing and entry deterrence can be anti-competitive
Game theory can be used to show that some behaviors could be anti-competitive or could be competitive
Chicago School less dominant, but synthesis with rest of economics profession
Rise of New Empirical Industrial Organization
Merger analysis became more heavily economic
Increasing focus on innovation, intellectual property
"Hipster antitrust" of 2010s?
Today: Overview of antitrust
Next class:
Later: "Hipster antitrust," regulation of certain industries, natural monopolies, public utilities, telecom., transport.
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