Chapter 13: Antitrust and Regulation

Antitrust policy Sherman Act (1890)

Outlaws contracts and conspiracies in restraint of trade

Forbids monopolization Does not describe what is prohibited

Clayton Act (1914) Bans price discrimination designed to limit

competition Prohibits tying and exclusive dealing contracts

Federal Trade Commission Act (1914) Established the FTC to administer antitrust laws

Antitrust enforcement 1890-1914 – little enforcement Through 1945 – “rule of reason” –

size alone was not sufficient evidence of an antitrust violation

1945 – Alcoa case – per se rule 1980s – return to rule of reason 1990s – stricter enforcement 2000 onward – less strict

enforcement

Herfindahl index Herfindahl index = sum of squared

market shares (as percentages) (varies from 0 to 10,000)

Justice Department guidelines < 1000 – highly competitive Between 1000 and 1800 – moderately

competitive > 1800 – highly concentrated

Global antitrust Growing volume of international

trade makes antitrust regulation more complex (due to different laws in different countries)

Other regulation Economic regulation

Antitrust laws Laws affecting price and output

Social regulation Health and safety standards Workplace safety Environmental standards Etc.

Costs and benefits of regulations Cost estimates are in the range of

$400 - $800 billions Benefits – gains to society

Deregulation airlines and trucking – 1970s Banking – 1980s

SEC Securities and Exchange

Commission – created in 1934 Requires reporting of annual financial

reports in standard format Sarbanes-Oxley Act of 2002

Auditing and consulting services must be provided by different firms.

Required the CEO to sign financial statements