10-Anti-Trust and Competition Policy

  1. The Federal Gov’t has the power to prevent monopoly and encourage competition
    1. The two main agencies to carry this out are the Federal Trade Commission(FTC) and the Department of Justice.
      1. The FTC is an independent agency
        1. Have five commissioners who are appointed by the president and confirmed by the senate
        2. No more than three can be from any political part
        3. They report to congress
      2. The Department of Justice does the actual prosecuting
      3. One of their main tasks is to make sure mergers don’t become monopolies, they review any merger where a firm involved has $100M in sales or more.
    2. Many thousands of merger requests per year
      1. A couple of hundred the Gov’t will ask for more info
      2. Possible outcomes from request are: denial, approval and conditional approval(usually making a part of the corporation to spin off in to a new firm
      3. Businesses can also engage in anticompetitive behavior without merging, so they must account for that.
  2. First they must measure competition within a market and then find how to deal with it
    1. Measuring Competition in a market can be done using a variety of methods
      1. Concentration ratio(Either noted byCR4 or CR8, depending on a four or eight firm ratio)
        1. Calculated by adding top four or eight firms share of a market
        2. Shows the degree to which an industry is oligopolistic
        3. Has many holes
          1. Just shows the oligopolistic nature of a firm and does not factor in competition at all
          2. Example. Market 1-Firm(1)-76% and firms (2-8) all have equal share
          3. Market 2-Firms(1-4) have 23% each and firms (5-8) have 2% each
      2. Herfindahl-Hirschman index
        1. Measure of the size of firms in relation to the industry and an indicator of the competition between
        2. It is the sum of all squares of the market shares of the 50 largest companies in an industry
        3. Ranges from 0-1
          1. Company A has 80% and 5 others have 2% run the numbers and you’d get .643
          2. But 6 companies adding up to that same 90%, but they each have 15% and you’d get an index of .136
          3. Which would show that the six companies have more of a balanced field
    2. Defining a market can be rather difficult, though
      1. Firms can claim they are a small fish in a big pond
        1. e.g. Office Depot sells office supplies which many different types of companies do, like Walgreens, Safeway and 7-11. But are they more a part of a separate category which only sells office supplies
        2. Does the int’l market count towards? Are GM and Ford a duopoly, when they have so many other companies to deal with?
      2. Gov’t claims usually run opposite of the former and sees markets more narrowly
      3. A cartels motto: Our competititors are our friends and our customers are the enemy
  3. Restrictive business practices are other ways firms can curb competition
    1. Price maintenance agreements-a wholesale firm can suggest but not demand that a retail firm sell at a certain price
    2. Exclusive deal agreement-Requires the dealer to sell products from one manufacturer(may or may not be legal)
    3. Tie-in- Items can only be bought if you buy another product
      1. Legal-Season tickets or computer software
      2. Illegal- a record store will only sell a certain CD only if you buy two others
    4. Predatory pricing- Cut prices to drive out competition only to raise prices again after the competition is eliminated
  4. Is the need for all this interference necessary?
    1. Some say competition will win out and any anti trust activity will be squashed and the market will win
    2. In addition the Gov’t can play favorites when choosing whom to punish(Microsoft)
    3. So with technology being where it is and where its going a very interesting argument can arise.



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