20. Antitrust Law and Regulation

For a detailed list of helmet laws by state, see the Web page of the Bicycle Helmet Safety Institute at http://​www.​bhsi.​org/​mandator.​htm.

This means that it must be produced without chemical fertilizers, insecticides, chemical herbicides, or given growth hormones or antibiotics. For a discussion of US Department of Agriculture (USDA) regulations, see http://​www.​fsis.​usda.​gov and http://​usda-fda.​com.

Although we focus primarily on efficiency issues in this chapter, as discussed in Chaps.​ 1 and 19 both equity and efficiency are important to society.

Comparing market outcomes with and without a government policy that ignores the cost of government is called the “nirvana” approach to public policy analysis by Demsetz (1969). Noll (1989a, b) argued that ideally (1) a corrective policy is enacted only when genuine market failure exists and after an optimal policy is identified; (2) the policy is rescinded once it is no longer socially beneficial.

When discussing public policy, we restrict our attention to issues involving antitrust and regulation. We do not discuss “industrial policy,” which is aimed toward supporting domestic firms in one or more key sectors of the economy to gain a strategic advantage over foreign competitors.

For those interested in further discussion of law and economics, see Cooter and Ulen (2012) and Harrison and Theeuwes (2008).

Discussion in this section derives from Wacks (2006), Murphy (2007), Cooter and Ulen (2012), and Harrison and Theeuwes (2008).

These include Aquinas (1225–1274), Rousseau (1712–1778), and Finnis (1949-).

Horowitz (2009) argued that a similar problem exists on college campuses. He is concerned that the majority of college professors are liberal, which makes it difficult to hire conservatives and leads to a lack of intellectual diversity.

When considering two alternatives x and y (e.g., different baskets of goods or different legal options), preferences are complete when they clearly identify whether x is preferred to y, y is preferred to x, or that x and y are equally valued. When we add a third alternative (z), preferences are transitive when the following condition holds: if x is preferred to y and y is preferred to z, then x is preferred to z. Monotonicity implies welfare does not decline with the increase of a good.

For an excellent summary of welfare economics and of Arrow’s Impossibility Theorem, see Varian (2010, Chap. 33).

We do not want to over generalize, however. As Cooter and Ulen (2012) pointed out, US states have adopted a set of codes for commercial business (the Uniform Commercial Code), which is in keeping with civil law. In addition, La Porta et al. (2008) pointed out that French courts have gained greater discretion over time.

For example, see Demsetz (1967), Alchian and Demsetz (1972), Priest (1977), Rubin (1977), and Posner (1980). For a summary of this argument, see Harrison and Theeuwes (2008).

Recall that this means that everyone could use the land, and no one could be excluded from use.

The literature is too extensive to list here. For a review of the evidence, see Dam (2006), La Porta et al. (2008), and Roe and Siegel (2009).

Not all agree with the simple interpretation and with La Porta et al.’s argument that the common law system is more flexible than the civil law system today. For alternative viewpoints, see Dam (2006), Fairfax (2009), and Roe and Siegel (2009).

Glaeser and Shleifer (2002, 1194) concluded that “[o]n just about any measure, common law countries are more financially developed than civil law countries.”

For further discussion of these trade-offs as they relate to antitrust enforcement, see Beckner and Salop (1999) and Baker and Bresnahan (2008).

For example, Heart (1994) argued that discretion is especially valuable in the “penumbra,” or grey areas of the law, where a judge may use the entire body of legal knowledge to make a decision and set a precedent.

The Robinson-Patman Act (1936) amended Section 2 and gave greater protection to small retailers who were battling the growing chain-store movement in the USA.

This information is obtained from Andrew E. Ebere, “Private Antitrust Cases Decreased in 2009,” Princeton Economics Group, available at http://​econgroup.​com/​peg_​news_​view.​asp?​newid=​40&​pageno=​1, accessed October 13, 2010.

For example, Elzinga (1969) investigated 39 cases involving divesture and found that only 25% were successful.

Reviews of important antitrust cases, including those discussed in this chapter, can be found in Asch (1983), Waldman (1986), Breit and Elzinga (1989), Scherer and Ross (1990), Posner (2001), Hovenkamp (2008), Sherman (2008), Blair and Kaserman (2009), and Kwoka and White (2009).

This new Chicago critique is clearly expressed by Milton Friedman, a leader of the Chicago School, who said: “Because we all believed in competition 50 years ago, we are generally in favor of antitrust…. We’ve gradually come to the conclusion that, on the whole, it does more harm than good. [Antitrust laws] tend to become prey to the special interests.” This quote is taken from an interview for the Wall Street Journal by Sieb (1998).

Furthermore, Posner (2009), a Chicago economist and legal scholar, argued uncharacteristically that the recent crisis is due to insufficient government involvement in financial markets. See Wright (2009) for an alternative viewpoint.

However, McGee (1958) argued that Standard Oil did not gain market share through predatory pricing tactics.

Quote taken from Breit and Elzinga (1989, 138).

These are sometimes called “bright-line rules,” because behavior is per se illegal when it crosses a clear and distinct line.

Quote taken from Breit and Elzinga (1989, 145).

An important issue was the definition of the market for aluminum. As in all antitrust cases, a first step in determining whether or not a firm has a monopoly position is to correctly define the market. In practice, this is a difficult task, and the courts have sometimes chosen a broad definition and in others a narrow definition of the market. In the Alcoa case, the company’s market share was 90% of US ingot production but only 33% of ingot and scrap aluminum production (not including aluminum retained for its own use). Thus, the company argued in favor of a broad definition and the government argued in favor of a narrow definition of the market. The courts chose a narrow definition, which implied that Alcoa had market power. See Scherer and Ross (1990) for further discussion of this issue and its effect on antitrust rulings.

Alcoa was not broken up though. A final remedy was postponed until 1950 when aluminum plants built by the government during World War II and operated by Alcoa were sold at public auction. Alcoa was barred from bidding, and winning bidders formed two new competitors, Reynolds Aluminum and Kaiser Aluminum.

For a detailed discussion of this case, see Fisher et al. (1983).

This led to the creation of seven regional phone companies, or “baby bells”: NYNEX, Bell Atlantic, Bell South, Ameritech, Southwestern Bell, US West, and Pacific Telesis.

For similar views, see Brozen (1971) and McGee (1971).

For a review of the potential costs and benefits of breaking up Microsoft, see Elzinga et al. (2001). For a more detailed account of Microsoft’s success and run-ins with antitrust authorities, see the Microsoft case study in Chap.​ 21.

Quote taken from Waldman (1986, 139).

The Guidelines are available at http://​www.​justice.​gov/​atr/​public/​guidelines/​hmg.​htm#22.

Quote taken from Waldman (1986, 152).

In Sugar Institute, Inc. v. United States (1936), the Sugar Institute was found guilty of violating Section 1 of the Sherman Act because of the steps it took to eliminate price cutting, whereas in Tag Manufacturers Institute v. Federal Trade Commission (1949), the Tag Manufacturers Institute (of business tags) was found innocent of price fixing. Even though members were required to report prices, they were encouraged to set prices independently. Thus, the Institute collected market information but did not facilitate price fixing.

For a complete list of antitrust exemptions that apply to many different industries, see von Kalinowski (1982).

For a review of court precedents on the decision to view a league as a “single entity”, see Lehn and Sykuta (1997).

For a more detailed discussion of this case, see LaFraniere (1991) and Austin (2006). The Ivy League schools are Brown University, Columbia University, Cornell University, Dartmouth College, Harvard University, Princeton University, the University of Pennsylvania, and Yale University.

LaFraniere (1991, A3).

Quote taken from Waldman (1986, 91).

Quote taken from Scherer and Ross (1990, 177).

Similarly, Bok (1960, 299) argued that “there is much to be said for a simple standard which can at least be fairly and inexpensively administered in a fashion that is understandable to the businessman contemplating merger.”

The 1968 Guidelines are available at http://​www.​justice.​gov/​atr/​hmerger/​11247.​htm.

Quote taken from Breit and Elzinga (1989, 170).

Additional information on this premerger notification program can be found at http://​www.​ftc.​gov/​bc/​hsr/​index.​shtm.

Given the high cost of a trial, this is socially desirable as long as government enforcement is consistent with the law and court precedent. The National Association of Attorneys General Antitrust Enforcement (1993) questioned the desirability of giving so much power to the DOJ and the FTC, claiming that they put too much weight on efficiency and too little weight on consumer welfare and the incipiency precedent.

For further detail of this complex agreement, see V. Tremblay and C. Tremblay (2005).

For a more complete discussion of this case, see McAfee et al. (2009).

The main difference between the 1982 and 1984 Merger Guidelines is that the 1984 Merger Guidelines clarify the efficiency defense.

The 1982 Guidelines are available at http://​www.​justice.​gov/​atr/​hmerger/​11248.​htm; the 1984 Guidelines are available at http://​www.​justice.​gov/​atr/​hmerger/​11249.​htm.

Recall from Chap.​ 18 that when firms 1 and 2 are in the same industry and have respective market shares of ms₁ and ms₂, their merger will cause HHI to increase by 2·ms₁ · ms₂. For example, consider a market with 4 firms, 1 through 4, that have the following market shares in percent: ms₁ = 5, ms₂ = 20, ms₃ = 40, and ms₄ = 45. If firms 1 and 2 merge, this increases HHI by 100 points (2 · 5 · 10). That is, before the merger HHI = 3,750 = 5² + 10² + 40² + 45², and after the merger HHI = 3,850 = 15² + 40² + 45².

The 1992 and 1997 Guidelines are available at http://​www.​justice.​gov/​atr/​hmerger/​11251.​htm.

The 2010 Guidelines are available at http://​www.​justice.​gov/​atr/​public/​guidelines/​hmg-2010.​html.

For a discussion of the methods of measuring UPP, see Farrell and Shapiro (2010). For further discussion, see Schmalensee (2009), Carlton (2010), Epstein and Rubinfield (2010), and Willig (2011).

The 2010 structural standard for a highly concentrated industry is that HHI cannot increase by more than 200 points. However, because the cutoff for a highly concentrated industry differs (is 1,800 in the 1982–1984 Guidelines and 2,500 in the 2010 Guidelines), the 2010 constraint is reduced by 38.9% for consistency. This implies that a merger would be challenged in 2010 if HHI increases by more than 144 points, 200·(1,800/2,500).

For example, see Meadows (1981), Adams and Brock (1988), Krattenmaker and Pitofsky (1988), and Baker and Shapiro (2007).

Although there is no support for the political cycle using merger cases, Ghosal (2007) did find support for the political cycle when the sample includes all civil cases.

For a more complete discussion of antitrust enforcement in brewing, see Elzinga and Swisher (2005, 2011), V. Tremblay (1993), and V. Tremblay and C. Tremblay (2005).

Another factor that complicated the analysis is that the beer market was regional in scope until the 1970s.

Moral hazard is the tendency of firms and consumers to exert less effort and diligence when their investments are insured against loss, damage, or theft.

These agencies were also given greater power to oversee or regulate consumer loans, bank executive bonuses, and the percent of their investments in derivatives and hedge funds. The Federal Reserve Bank is also given the power to break up excessively large financial institutions. For additional discussion, see Davidson et al. (2010), Gordon (2010), and Paletta and Hitt (2010).

Recall that cartels were legal until 1890. Porter found that railroad companies used a trigger strategy to support collusion. Given the cost of detecting cheating, collusion occasionally broke down, resulting in a temporary punishment phase of tougher competition. In addition, railroads have very high fixed costs, causing them to compete in price during periods of low demand to reduce excess capacity and help cover these costs. Thus, prices were unstable.

This was amended by the Motor Carrier Act of 1935 to regulate bus lines, trucking, and common carriers.

Since the seminal work by Stigler and Friedland (1962), there have been hundreds of studies on the economic effect of government regulation. For a review of the evidence, see Jordon (1972), Joskow and Rose (1989), Winston (1993, 1998), and Viscusi et al. (2005).

See Noll (1989a, b) for a review of the political causes of regulation.

In other words, individual consumers and voters have little influence on the political process. As Noll (1989, 1263) notes, “The central problem of a citizen in dealing with government is powerlessness.”

This does not mean that there must be economies of scale throughout the entire region of market demand. It simply means that industry costs are minimized when there is just one producer. When this occurs, the cost function is said to be subadditive (Baumon 1977; Braeutigam 1989; Viscusi et al. 2005, 404–408).

Along similar lines, Robinson (1933) proposed the following solution. Much like a Piguovian tax (Pigou 1920), the regulatory authority provides the monopolist with a per-unit subsidy sufficient to induce the firm to produce the socially optimal level of output. This eliminates the deadweight loss. To prevent the monopolist from profiting from the subsidy, the regulatory authority imposes a lump-sum tax that is sufficient to reduce the firm’s profit to zero. The drawback with such a policy is that it requires knowledge of the appropriate subsidy and tax. An alternative solution would be for the firm to engage in perfect price discrimination. This too would eliminate all deadweight loss but would favor the producer over the consumer (Braeutigam 1989).

Demsetz (1968) showed that this outcome could also be reached if there was competitive bidding to serve the market, with the winner being the firm that offered to serve the market at lowest price. Sufficient competition would then drive the winning bid to average cost.

We derive this rule in Appendix 20.A.

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For a more complete discussion, see Takayama (1969) and Sherman (1992).

To review the evidence, see Stevenson (1982), Jones and Biases (1983), Joskow and Rose (1989), Winston (1993, 1998), and Viscusi et al. (2005).

A number of types of incentive regulations have been proposed, with some being more practical than others. For a review of the literature, see Vogelsang (2002), Viscusi et al. (2005), and Sherman (2008).

This idea derives from Baumol (1967), who observed that a regulatory lag (i.e., the lag between the time in which a regulated price can change) creates an incentive for the firm to minimize its costs. During the period between regulatory meetings, any cost reduction leads to higher profits which will persist until the next regulatory meeting.

It is important to realize, however, that although there was a general trend toward deregulation, government restrictions on business persisted to varying degrees throughout the economy. Not only did antitrust enforcement continue, but there has also been a trend toward increased social regulation of health, safety, and the environment (Gruenspecht and Lave 1989). In addition, Gattuso (2010) reported that the Obama administration has increased government regulation and red tape dramatically in response to the 2008–2009 financial crisis.

These estimates ignore the additional benefit that would occur if unregulated markets were to behave optimally.

According to Noll (1989a, b) and Winston (1993), the evidence also shows that labor generally benefited from deregulation.

For a more complete discussion of the economics of social regulations, see Asch (1988), Gruenspecht and Lave (1989), Greer (1992), Viscusi et al. (2005), and Sherman (2008).

In addition, since 1994 the Food and Drug Administration has required firms to list basic food facts on their labels. The Nutrition Labeling and Education Act (1990) extended labeling requirements to dietary supplements.

To see the details of state laws, see http://​ts.​nist.​gov/​WeightsAndMeasur​es/​pricinglaws_​guide.​cfm.

For a more complete discussion, see the White House Fact Sheet, Reforms to Protect American Credit Card Holders, available at http://​www.​whitehouse.​gov/​the_​press_​office/​Fact-Sheet-Reforms-to-Protect-American-Credit-Card-Holders/​.

For a discussion of concerns with the behavioral policy approach, see Wright (2007), Werden et al. (2010), and Salinger (2010). Wright argues that paternalism will reduce learning and the incentive to behave rationally, which makes for less effective consumers in the long run.

Thaler and Sunstein (2008) argued that this approach applies to all consumer decisions that are complex. For example, they advocate that if senior citizens are required to enroll for a drug benefit program, they should be given a limited number of options and the default should be a sensible one.

For further discussion, see the FTC’s statement on the cooling-off rule at http://​www.​ftc.​gov/​bcp/​edu/​pubs/​consumer/​products/​pro03.​shtm.

For a more complete discussion of the politically incorrect marketing actions of US beer companies, see V. Tremblay and C. Tremblay (2005, 2007).

For the remainder of the chapter, we will discuss problems associated with information and advertising. For those interested in issues of product safety, see Asch (1988).

Failure to disclose relevant information can be just as misleading as providing false information. For example, if a used car salesperson knew that a car needed new brakes within the next month and failed to disclose this information to a buyer, this would be considered deceptive.

Targeted groups could include the terminally ill or children. Regarding ads targeted at children, a higher standard is used because of the “limited ability of children to detect exaggerated or untrue statements” (“The ABCs at the FTC: Marketing and Advertising to Children,” at http://​www.​ftc.​gov/​).

For a more complete discussion of regulatory issues involving advertising, see Pitofsky (1977).

Unfortunately, the evidence shows that higher taxes lead to higher prices and less alcohol consumption but not less alcohol abuse (V. Tremblay and C. Tremblay 2005; Cooper and Wright, 2010).

In addition, the Master Settlement Agreement of 1998 between the tobacco industry and most state governments prohibited most outdoor and transit advertising and the use of cartoon characters in cigarette ads (Chaloupka 2007). In 2009, Congress passed the Family Smoking Prevention and Tobacco Control Act, which required that warning labels cover the top 50% of the front and back panels of the package. See Curfman et al. (2009) for a discussion of the law. The complete transcript can be found at http://​www.​govtrack.​us/​congress/​bill.​xpd?​bill=​h111-1256.