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ANTI-TRUST LAWS
Term Paper ID:18428
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from micro-economic perspective. Laws' effects on markets, sellers, consumers. History, purposes, court decisions.... More...
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Paper Abstract:
from micro-economic perspective. Laws' effects on markets, sellers, consumers. History, purposes, court decisions.
Paper Introduction:
In 1890, Congress passed the Sherman Act which instituted anti-trust policies and made possible trade restraints. The act was far-reaching and has been used in the intervening century to protect competition within the private sector. The rationale behind the legislation was that large companies operated in a manner which posed barriers to new companies trying to enter the market, thus limiting their opportunity. Congress was also concerned that companies which controlled a given industry could indulge in employment practices, such as child labor, which were not in the public's best interests. There was also the feeling that such companies would be able to exact higher than acceptable prices for their commodities. This research focuses on the prevailing attitudes among proponents and opponents of anti-trust legislation, and examines the effect such legislation has had on
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Aside from the issue of "cut-throat" pricing, or competitorsseeking to undersell each other, proponents of anti-trust legislation fearthat monopolies will overcharge the consumer. The cornerstone of anti-trust law is the Sherman Act. 199 ): 13-15.Jorde, Thomas M. Simon Patten, an economist writing in 1889, suggested: The concentration of capital does not cause any economic disadvantage to the community. Divestiture could expand the number ofcompetitors in this instance without necessarily sacrificing economies ofscale. 1988): 423- 435.Grimes, Warren. These can take the form of tyingarrangements, exclusive dealing and territorial contracts. Clayton focuses onmergers and whether they lead to a monopolistic market. There is a question as to what constitutes monopolistic behavior andwhat should be done about it. "The Competition Laws." Corporate Board 11 (Jan.-Feb. In addition to monopolies and mergers, anti-trust policy is alsoconcerned with vertical restrictions. Other types of barriers include leasing contracts and exclusivedealing. and Jack C. Managerial and entrepreneurialtalent is also thought to thrive in large organizations (DiLorenzo and High426). Likewise, the established company has built a market and has areputation that is recognized by consumers, factors that take time toestablish. The Sherman Act isconcerned with behavior among two or more organizations in Section 1. Opponents of anti-trust claim that the established company must alsoinvest in advertising to offset that undertaken by the new competitor andthat the result does not merit the anti-trust intrusion. Pricecutting does not always produce beneficial results, either for the producernor the consumer. and Thomas A. and David J. Balmer. Those who favoroutlawing all vertical restrictions suggest that vertical restraintsultimately restrict output through increased costs. In 189 , Congress passed the Sherman Act which instituted anti-trustpolicies and made possible trade restraints. Industries with large sunk capital, for example, couldwatch as competition forced prices beneath the average production cost.While the most obvious result from this is a loss absorbed by themanufacturer, the discouragement of capital investment eventually injuresconsumers as well. At theheart of anti-trust theory is the idea that since large firms "imply,obviously, a small number of competitors" (DiLorenzo and High 425),competition is inhibited. Nomitigating circumstances would be permitted, and no exceptions would bebrooked (Jorde and Teece 3 ). Proponents of anti-trust policy suggest that suchpolicies are of short duration and serve to weed out competitors who wouldhave failed for other reasons. Merger policy includes vertical mergers, as well. Those producers who seek protection through combinations are much more efficient than were the small producers whom they displaced (426). Proponents of anti-trust policy suggest that market forces are notsufficient to overcome the entrenched power of one firm or a few firms'dominant position in some markets. . Thisresearch focuses on the prevailing attitudes among proponents and opponentsof anti-trust legislation, and examines the effect such legislation has hadon American business. In addition, there is anaccelerated information flow between production stages (Curran 764). Congress was alsoconcerned that companies which controlled a given industry could indulge inemployment practices, such as child labor, which were not in the public'sbest interests. Harold Demsetz approaches the problem from the other side: To break up a superior team merely because it is successful is fraught with the danger of destroying the source of such productivity . Frank Taussig wrote in 1917: The trust must be always on its mettle, on the watch against interlopers. High. The problem is indetermining at what point, if any, the size of the competition in a marketcease to provide a perfect competition model. "Market Concentration, Efficiency, and Antitrust Policy: Demsetz Revisited." Quarterly Journal of Business and Economics 27 (Autumn 1988): 3-19.Audretsch, David B. They are neither to be deprecated by scientists nor suppressed by legislators (Samuelson and Balmer 8 ). M. In addition, suchvertical agreements also raise a barrier to new entrants to the market, whomust now find other providers of the vertical services. "On Democracy and Economics." The Antitrust Bulletin 33 (Winter 1988): 753-777.DiLorenzo, Thomas J. Itshould be noted here that having a monopoly is not illegal, but rather thatthe attempt to acquire a monopoly is unlawful. What concerns those who favor anti-trust legislation is exclusionarypractices conducted by businesses. For the purposes of this paper, anti-trust policy isconsidered to include monopolistic controls, mergers and verticalrestraints. B. Long-term advertising agreements, such as those enjoyed byAnheuser-Busch and Miller Brewing Company with the National Football Leagueand the National Basketball Association are also viewed as barriers. The Robinson-Patman Act prohibits pricediscrimination. Large scale economies and themarketing advantages enjoyed by established firms provide two fundamentalbarriers. Teece. Arguments can be made that anti-trustpolicy is a restraint on free competition and inhibits the "invisible hand"of the market, or that anti-trust policy actually encourages competition byeliminating the dominance of one or a few companies within a market.Entering into collusion for the express purpose of manipulating the marketto mutual benefit remains the one area that economists do not expresslydisagree upon. They also suggest that since largeconglomerates are better able to survive such tactics, anti-trust policyhelps to avert this practice (Amato and Wilder 9). Opponents of anti-trust legislation suggest that large enterprisesthrive for a number of reasons, including economies of scale. Today's interpretation of the goals of anti-trust policy is broad andincludes not only allocative efficiency, but also income distribution andthe decentralization of aggregate concentration (Audretsch 138). The other key legislation associated with anti-trust is the ClaytonAct, which prohibits anticompetitive mergers, tying arrangements andexclusive dealing agreements. It permits a firm to elevate its price over long-run costs, perhaps by a substantial margin (Audretsch 138). Perfect competition in economics focuses on theproperties of equilibrium; competition implies rivalry. Economies inmanagement are thought to be generated by vertical consolidation as arereductions in sales and distribution costs. "Antitrust and Competition, Historically Considered." Economic Inquiry XXVI (Jul. Limitingthe ability of those large companies to conduct business does not enhancethe attractiveness of the market, according to opponents, and it may infact hamper the level of benefit rendered to consumers. Modern economists generally support anti-trust policy. Those who favor relatively uncontrolled mergers suggest that suchcombinations enable producers to take advantage of scale economies and tobenefit from the managerial and entrepreneurial talent of both firms.Reductions in the combined workforce or closing of facilities would be aresult of better use of resources, not a plan to eliminate competition.Price hikes are unlikely and, in fact, prices would be more apt to fall inthese cases (Curran 762). Two viable firmscompeting in a given market have little reason to consider a merger unlessthey intend to increase prices or decrease one or the other's productionlevels after the merger. Oliver Williamson writes: Integration by an established firm into a second stage will rarely make access to a potential entrant into either stage easier; and impeded entry, generally has disadvantageous welfare consequences (Curran 764). Such an approach does not address the issue of what led the companyto establish such a dominant position in the first place. Some items which are viewed as exclusionary by proponents of anti-trust policy are seen as competitive by opponents. Wilder. Theseeconomies include the inherent savings realized by large-scale facilities,savings in advertising and selling, and the ability to take advantage ofquantity discounts offered by suppliers. "Competition and Cooperation: Striking the Right Balance." California Management Review 31 (Spring 1989): 25-36.Samuelson, Susan S. There was also the feeling that such companies would beable to exact higher than acceptable prices for their commodities. Proposals to deconcentrate industries whose structures have remained concentrated are likely to penalize consumers (Jorde and Teece 29). In fact, F. Opponents of anti-trust legislation and enforcementcite so-called "cut-throat" pricing practices as a detrimental result ofunchecked competition. Entry barriers are createdbecause potential entrants must acquire additional capital and increasedknowledge of the production process. One of the most detrimental is erectingbarriers to those entering the market. . Scherer writes: No amount of semantic waffling can paper over the fact that the possession of a well-received brand image is a form of monopoly power. Either consequence leads to a loss of consumerbenefit, according to opponents. Those who oppose intervention argue that vertical integration leadsto efficiency gains and an increase in competition. The prevailing economic wisdom at the turn of the century suggested: Combinations have their roots in the nature of social industry and are normal in their development and their practical working. Section 1prohibits all agreements in restraint of trade. The act was far-reaching andhas been used in the intervening century to protect competition within theprivate sector. Competition and anti-trust discussions focus on prices and pricefixing. "Antitrust Revisited-- Implications for Competitive Strategy." Sloan Management Review 3 (Fall 1988): 79-87.----------------------- 1 Once criminal manipulation is eliminated from thediscussion, economists are left debating the results of anti-trust policy.It has become a fundamental part of the American business environment,however, and companies are well-advised to heed the anti-trust sentimentwhich is prevalent and avoid the appearance of trust activities. Merger control is considered by some to be the strongest component ofanti-trust policy (Grimes 14). Clark, "actual competition consists invariably inan effort to undersell a rival producer" (Samuelson and Balmer 8 ). For example, proponentsof anti-trust policy argue that advertising expenditures by companiesentering a monopolistic market are unrealistically high since they mustovercome the brand and recognition associated with the established company. Companies which have large operations enjoy the benefits oflower costs per unit than would smaller competitors just entering themarket. Advocates of this policy contend that itprevents high levels of concentration in a market and they tend to favor astrict prohibition against such horizontal acquisitions. Once the eggs are scrambled it is hard to unscramble them (Audretsch 156). Opponents to anti-trust policy suggest that innovation and thepromise of profits will encourage competitors to enter markets regardlessof whether those markets are dominated by a few large companies. Proponents of anti-trust policy concede that it is generally betterto stop numerous mergers than to have to divest or dissolve existentcompanies: To stop a merger before it is consummated means at most quenching an opportunity, while tampering with an already integrated monopolistic organization is sure to cause considerable pain and might even lessen efficiency. In asurvey conducted in 1984, 83 percent of the economists responded that"antitrust laws should be used vigorously to reduce monopoly power from itscurrent level: (DiLorenzo 423). "An industry which does not have acompetitive structure will not have a competitive behavior" (Audretsch138). If anti-trust isto succeed, according to its proponents, structural changes must also takeplace along with divestiture or dissolution in order to prevent otherorganizations from achieving the same results. Through verticalintegration, market control can be extended either upstream or downstream,according to proponents of anti-trust policy. "Divergent Views in Antitrust Economics." The Antitrust Bulletin 33 (Spring 1988): 135-16 .Curran, William J. Without competition to comein and offer products at a lower price, producers are free to charge ahigher than equilibrium price for their products. Opponents of anti-trustsuggest that competition will find a way to compete, even on a small scale. In addition to the Sherman Act, the Clayton Act is also used todiscourage monopolistic behavior among companies. According to J. Section 2 prohibitsmonopolization defined as the wrongful acquisition of monopoly power. One economist suggests divesting ordissolving firms possessing a market share in excess of 5 percent. The rationale behind the legislation was that largecompanies operated in a manner which posed barriers to new companies tryingto enter the market, thus limiting their opportunity. Clayton has beenused to prevent mergers, including a proposed 1989 merger of supermarketchains in the Southern California market (Grimes 14). Works CitedAmato, Louis and Ronald P. These may be browbeaten or bought up; but new ones will constantly appear if the profits are very high (DiLorenzo 428).
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