Okay this is chapter 15, call this part two.
Still dealing with monopoly, but it's
actually more broadly applicable.  This
presentation is going to cover sort of a
crash course in antitrust,  and we are
going to talk about the laws that
prevent monopoly power from developing, 
some of the practical considerations of
how to apply those laws, and then we're
going to talk about merger analysis.  As
it often happens antitrust law pops up
in the news when firms want to merge
together.  People are worried about
monopolies so that's why we're going to
stick it in this chapter.
Okay let's start out with the laws. Antitrust law is really just competition
law.  It's about preserving competition.
The bedrock of the u.s. system is the
Sherman Act and the Clayton Act. The
Sherman Act was the first piece of
legislation, and it was passed in
response to collusive behavior that was
popping up in the late 1800s.  Firms were
actively fixing prices and quantities..
you can think about this almost like a
cartel... and there were also a few big
firms that had taken over entire
industries.  You might have heard of the
Rockefellers.  They were in control of oil. 
Carnegie by the end of the century was
more or less in control of steel.  These 
folks were often referred to as robber
barons.  The public was a little upset
about the monopoly power that was
developing and the Sherman Act came in
response.  The Sherman Act actually
outlawed attempts to monopolize, this
shows up in Section two of the law,  and
it also made it illegal to restrain
trade.  So what they were worried about
was people who were actively trying to
fix prices and quantities.  They were
trying to prevent competition
and these laws evolved over time.  I
just want to give you a brief flavor of
them now.  The Sherman Act
despite its prohibition on monopolizing
and restraining trade was actually
silent about firms merging together, so
if they couldn't form cartel-like
arrangements, then they will just buy
each other out until there's only one
firm.  This of course is really
problematic, so in response to a wave of
mergers that kicked off the Clayton Act
was actually passed... and the Clayton Act
tries to tighten up the Sherman Act.  It
names some behaviors that are
problematic, but the one that we're going
to focus mostly on.. is it tried to
regulate mergers.  It wasn't okay to just
merge your way into a monopoly.. And
nowadays this is represented in section
7 of that law. These are the two major
laws.  I'll give you a little bit more
flavor on them in the upcoming slide.
Before we get into some of the specific
to the laws though or how they're
enforced I want you to actually think
about the difference between passing a
law and enforcing it.  You can pass a law,
but if it doesn't have any teeth there's
no one who's actually going to make sure
that people obey it.  It doesn't really
make a whole lot of difference in other
words.  It's one thing to pass a law... it's
quite another to uphold it.  The
government nowadays relies on the
Department of Justice's Antitrust Division
and the Federal Trade Commission to
decide when to prosecute people for
violating the Sherman Act and the
Clayton Act.  The problem is that these
folks can't keep track of every single
firm in the United States, so they've got
to find a way to set priorities.  They all
have very realistic constraints like
staff and budgets.   Some presidential
administrations have been very very
stingy because they don't value
regulation, so they've gutted some of these
folks at
and left them short-handed.  Without
straying too far off track I want you to
realize that even in the best of times
these agencies have essentially got to
figure out who to pay attention to if
they're worried about protecting
competition.  If you take a common-sense
approach it doesn't make a whole lot of
sense to waste resources monitoring
fruit stands or nail salons--why not???--market structure,  essentially.
These are
very competitive industries.  By the
characteristics that we're seeing you're
probably not going to worry about
monopoly power in those areas or one
firm buying out another firm.  So who are
you going to pay attention to?  You're
going to pay attention to big firms.
Firms with significant market power.  It
really matters if big firms merge
together.  It also is really really easy
sometimes for big firms to start to use
their position to squeeze out smaller
firms.  So is it a sin to be big in and of
itself?   Actually no.  From the early 1900's
there was a doctrine in place called the
rule of reason and essentially if you've
got to a large position, perhaps even a
monopoly, but you did it through fair
competitive practices they tended to let
you slide on that.   Now in the 50s and 60s
they started to actually break up some
monopolies just based on size itself. 
ALCOA is probably the most famous
example.  ALCOA was a fabulous aluminum firm 
that basically monopolized all the
aluminum
because they were just that good.  They
got broken up and split into a bunch of
different pieces in order to increase
competition, but a lot of folks look at
that and they're sort of like it doesn't
seem quite right. 
These folks started to influence the way
that the law was interpreted and it led
to an overall increase in the value of
performance,  you can think about this as
a firm's behavior... essentially what are
they actually doing in terms of price
and quantity... right?... did they get there
through fair practice over time???  The
modern Antitrust Division and the FTC
are really starting to use structure to
try and figure out who to pay attention
to, but just because you're big doesn't
necessarily mean that you're going to be
broken up.  What they're worried about is
how you're performing...  What is the actual
behavior of those firms???   The same kind of
logic applies nowadays for merger
analysis.  It might be OK for two big
firms to merge if in fact they behave in
a way it's going to be beneficial for
society.  Okay so how does application of
these laws actually work?  The spirit of
antitrust is really about protecting
competition.  The Sherman Act is invoked
when they're worried about some behavior
or agreements between firms.  If two firms
that are competitors make an agreement
that's oftentimes very very scary,
because if they're doing any kind of
price fixing or bid rigging or anything
like that, cartel like activity, it's a
complete restraint of trade and it is
per se illegal.  per se means the fact
that they tried to restrain trade at all
makes it illegal.  It doesn't even matter if
they're successful.  Those are the sort of
hot-button issues.  Vertical
agreements up and down the supply chain
between input providers, producers, and
retailers these are often no problems as
long as they don't destroy competition...
rule of Reason analysis would
guide this. As far as the Sherman Act outlawing
the attempt to monopolize the DOJ is
primarily concerned with firms that are
abusing a dominant position.  So Microsoft
was alleged to be using their dominant
position in operating systems to punish
PC manufacturers that were making PCs
that had any other kind of operating
system.  To the extent that that behavior
was going on they would have been
abusing a dominant position in order to
present competition from say like a
Linux or some other kind of operating
system.  If firms are using their position
to prevent competition this is an abuse
of a dominant position.  This is going to
draw the attention of the authorities.
When the Clayton Act is invoked more
often than not it's about mergers and
they're trying to figure out whether or
not mergers are going to be allowed.  Is
it problematic if two firms get together
and one buys the other one out?  Well if
they're competitors it has a tendency to
be more problematic.  It depends on the
size of those firms.  We'll talk about
that in a minute, but horizontal mergers
directly destroy competition. The real
question is ..is there still enough firms
around that competition is healthy?
Horizontal mergers attract a lot of
attention, particularly amongst big firms
in concentrated industry.  Vertical
mergers on the other hand oftentimes
don't attract much attention at all.  The
only time that they really do is if
they're tying up a critical resource
that other firms are going to need...
because that of course is going to
create a monopoly over time.   Another
thing that can be problematic is if you
have a merger that makes a firm large
enough that you get yourselves into
price leadership or tacit collusion
being more possible, if that's the case it
leads to less competitive outcomes and
the government may have an interest in
preventing that merger
So let's go real quickly through merger
analysis.  I want to make sure that you've
read your chapter... the merger
guidelines based on the Herfindahl-Hirschman
Index are listed in your textbook...
you can think about the Herfindahl-
Hirshman index and the merger guidelines
as being based on structure...It's telling
firms when they're getting big enough
that the government is likely to pay
attention to any kind of merger activity. 
That being said structural alone is
oftentimes not enough for the government
to stand in the way.  What they're going
to want to look at is performance or
likely performance after the merger.  In
order to start figuring this out they're
going to go through a merger analysis
and the four things that the DOJ and the
FTC currently give the most attention to
are market definition, barriers to entry,
competitive effects, and efficiencies.
These bottom two are strictly about
performance.   The first two are fairly
obvious, in order for you to start
figuring out how much market power
someone has you have to figure out who
that firm competes with.  Are they
competing locally,  regionally,  nationally, 
globally.... what's the relevant market for
consumers?  if you have a small firm that
is quite big locally, but firms globally
can easily compete with them, then it
doesn't really matter if that small
local firm buys up another small local firm... okay?... Market definition is going
to basically give you a sense of how
much power they have.   Barriers really can
be reduced down to one issue,  is the
market contestable?  If it's easy for other
folks to enter, then it's hard to get too
worried about any merger.... because if a firm
gets large, but they still can't prevent
other people from entering other firms
will enter as long as there's economic
profits to be made.   That seems like a
competitive environment.   There has to be
a compelling barrier in order for the
government to generally worry about any
merger.   Competitive effects are going to
revolve around what's likely going to
happen once a merger is in place.  Will
a merger lead to more tacit collusion?... or
will it create a dominant firm that has
the ability to engage in price
leadership (they pick the price everyone
follows along... really just another
version of tacit collusion)... or will they
make monopolization more likely...
will that one firm now have an advantage
that they'll be able to essentially
slowly squeeze the other firms out just
by being super competitive by having
better cost structure.   This might be a
reason to worry.
The last one is efficiency.  What we're
really asking about here is once the
mergers in place is it possible that
average total cost and hence marginal
cost dropped by so much that the public
actually ends up better off.  Would we get
better P and Q outcomes with a merger in
place.   If you'll recall AT&T tried to
sell the government on a merger with
T-mobile based on the idea that they
were going to be able to lower cost and
it would be better for the public in
general.  the government blocked that merger
because they were pretty convinced that
AT&T was not going to be able to deliver
on the kind of performance or behavior
that would have made that merger more
sensible.  It more or less looks like they
were trying to eliminate one of the most
competitive firms that was pushing for
low prices.  These four things are going
to guide whether or not the government
decides to go to court in an effort to
block a merger.  Hopefully this is giving
you a little bit of an overview of how
the Sherman Act and the Clayton Act are
applied, in loose terms at least, and what
some of the guiding principles are for
whether or not firm
are going to be allowed to merge...which
of course is section 7 of the Clayton
Act.
