h-m-m: has “hollywood” explored a “world” that has been taken over by those in power and...

H-m-m: Has “Hollywood” explored a “world” that has been taken over by those in power and

abusing the “powerless” citizens?Have you ever thought, “I’m being ‘ripped off’!”

Standard 12e.3Students analyze the influence of the federal government on the American

economy to prevent the powerFUL from abusing their power to control the

powerLESS EQ: How is “Big Business” regulated?

Anti-Trust Law

Specific TopicStandard 12e.3-1• Essential Questions: • How does the government attempt to

make markets more competitive?• How does the government protect

consumers' rights? • In other words, how does the

Government promote business growth in the economy yet protect the consumer?

Background of AntiTrust Law

• Although Americans generally are in favor of laissez-faire and government noninvolvement in business, there has simultaneously been a sentiment that fears “bigness” and monopoly.

Historical Case StudyStandard Oil• John D. Rockefeller's Standard Oil

Company was the first and largest trust.

• Standard Oil used its monopoly power to close refineries, raise prices, and limit the production of oil.

• These actions hurt consumers and competitors

Reaction to Trusts• Trusts (companies that acted as

one entity though not actually a monopoly) practiced collusion

• In addition to oil, in the 1870s and 1880s, trusts were being formed in railroads, steel, sugar and tobacco industries

• Public outrage grew with muckrakers exposure of trust’s practices

Anti-Trust Legislation

• The Sherman Anti-Trust Act• The Clayton Anti-Trust Act • The Federal Trade Commission Act.

Sherman Anti-Trust Act• “Every contract, combination in the

form of trust or otherwise, or conspiracy in restraint of trade or commerce ... is declared to be illegal ...”

• "Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce ... shall be guilty of a misdemeanor ..."

Clayton Anti-Trust Act• Outlawed price discrimination,

which is, selling identical goods to different customers at different prices.

• Outlawed tie-in contracts in which the buyer must agree to deal exclusively with one seller and not to buy goods from competing sellers.

Clayton Anti-Trust Act

• Outlawed interlocking directorships in which memberships of boards of directors of two or more firms are almost identical.

• Outlawed buying stock in a competitor's company when the purpose of buying that stock is to reduce competition.

Federal Trade Commission Act

• Made it illegal for firms to use "unfair methods of competition" and to engage in "unfair or deceptive acts or practices," whether or not those actions had any effect on competition.

• Today, focuses on false advertising

These and other laws direct Antitrust Policy:

• Antitrust policy is the government's policy toward the competitive process.

• Two viewpoints for judging whether or not a monopoly exists•Performance•Structure

Description--Judgment by Performance:

• We should judge the competitiveness of markets by the performance (behavior) of firms in the market.

• “Are they trying to gain monopolistic power in order to control the market and destroy competition?”

Description--Judgment by Structure:

• We should judge the competitiveness of markets by the structure of the industry.

• “Does the company dominate the particular market?”

Evaluation--Judging markets by structure: • Judging by structure seems inherently

unfair since the alleged wrongdoer is doing what it is supposed to be doing -- producing the best product at the lowest possible price.

• Supporters of this position recognize this problem, but they nevertheless favor the structure criterion because of its practicality.

Evaluation--Judgment by performance • Requires that each action of a firm must

be analyzed on a case-by-case basis.• Enormously expensive and time-

consuming.• Courts must find a way to limit the

cases they review.• The Supreme Court provides guidelines

to tell firms in what situations the Court will take a closer look at their performance.

• These guidelines invariably refer to structure.

Three Contemporary Cases

•The IBM Case•The AT&T Case•The Microsoft Case

IBM case

• 1. In 1967, the U.S. Department of Justice sued IBM for violation of antitrust laws charging that the company was unfairly bundling hardware, software, and maintenance services at a single price.

• 2. The government also charged that IBM was constantly redesigning its hardware, making it impossible for competitors to keep up.

IBM case• 3. IBM responded that the market was

much larger than the government claimed, and that fast-moving technology and customers' desires forced it to constantly upgrade its equipment.

• 4. In 1982, the government dropped its suit because mainframe computers were replaced by PCs, and the globalization of the computer industry made IBM’s dominance in the U.S. far less important.

IBM case• The IBM case was dropped by the U.S.,

but the prosecution likely led to IBM's problems in the 1990s. It won but it also lost

• NOTE: IBM refused to buy the DOS operating system from Microsoft because of the pending litigation, but allowed Microsoft to sell its DOS to anyone.

• The PC market swelled while the mainframe market was dying, making Microsoft the controlling force in the PC market.

The AT&T case

• Up until 1982, AT&T was a regulated monopoly and controlled most long-distance and local telephone services. It also produced telephones and other communications equipment.

• Law gave this natural monopoly -- an industry in which significant economies of scale make the existence of more than one firm inefficient – the exclusive right to a market.

The AT&T case• AT&T was required to provide universal

service so that it would not engage in cream skimming (providing service to low-cost areas and avoiding high-cost areas).

• In return for control, AT&T was regulated by the FCC and state utility commissions.

• AT&T's expectation of "fair returns" gave them a strong incentive to act as a lazy monopolist and to invest heavily in new equipment thereby increasing costs and, subsequently, profits.

The AT&T case• Technological change and competition

changed the natural monopoly character of the phone industry.

• The development of satellite transmissions and fiber-optic cable turned AT&T into a traditional monopoly, not a natural monopoly.

• Potential competitors sued because they felt AT&T was charging too much to gain access on their system.

The AT&T case

• In 1978, the Justice Department sued AT&T on antitrust grounds, with the suit being settled out of court in 1982.

• In 1984, AT&T agreed to be broken up into 22 operating firms called baby bells, while they kept their long-distance telephone service, their manufacturing arm and its research facilities

The AT&T case• In return, AT&T was subject to much

less regulation than before, including the right to enter any unregulated business it chose, such as data transmission and computers.

• This resulted in enormous upheaval in the industry: Local telephone rates doubled and tripled** and two major competitors -- MCI and Sprint -- developed.

• **Due partially to the fact that local rates had been kept artificially low while the higher rates for “long distance” made up for the lower local rates.

The AT&T case

• The communications market has changed since the AT&T case.

• The breakup of AT&T first resulted in seven Baby Bells that began to merge with each other, so that by 2003 only four Baby Bells remained. In 1995, AT&T divided itself into three separate corporations.

• Technological advances continued to change the nature of the telecommunications industry

The AT&T case

• In 1996, Congress passed the Telecommunications Act that deregulated the industry and allowed local, long distance, and cable TV firms to enter each other’s markets.

• In exchange for being able to compete for long-distance money, the Baby Bells were required to offer access to its local networks their competitors for a fee.

The AT&T case

• The Baby Bells made it difficult by setting hard-to-match technical standards for those who wanted access to their markets. The strategy worked: the Baby Bells still control about 90 percent of the local telephone markets.

The Microsoft case.

• Microsoft is the dominant player in the software industry, controlling over 50 percent of the world market for software and between 80 and 90 percent of the operating systems market worldwide.

• Since all software must be compatible with an operating system, Microsoft has an enormous competitive advantage for its other divisions.

The Microsoft case.• The reports of monopolistically abusive

acts by Microsoft led the U.S. Justice Department to charge Microsoft with an antitrust violation. It charged Microsoft with:

• a. Possessing monopoly power in the market for personal computing operating systems.

• b. Tying other Microsoft products to its Windows operating system

The Microsoft case.

• c. Entering into agreements that keep computer manufacturers that install Windows from offering software that competes with Windows software.

• Prosecutors were initially hesitant to bring charges until a judge offered the government an expedited process.

The Microsoft case.• Is Microsoft a monopoly in the

market for operating systems? • With its stable 90 percent market

share, it certainly is a monopoly.

The Microsoft case.• Is Microsoft a predatory

monopolist?• By directing the development of in-

house software to favor Windows, Microsoft strengthened the barrier to entry created by network externalities.

• Microsoft also penalized computer manufacturers who installed competing software.

The Microsoft case.• Is Microsoft a predatory

monopolist?• By packaging Internet Explorer as

part of Windows 95 at no additional cost to the buyer, Microsoft froze out Netscape Navigator.

• Sun Microsystems was developing Java, a software language designed to create software applications on a variety of platforms including Windows. Despite Microsoft agreeing to not alter Java, Microsoft did so

The Microsoft case.

• The Court decided that Microsoft engaged in anticompetitive practices. and should be broken up. However, the Appeals Court stated that despite the fact that Microsoft was a monopoly, it should not be broken up and disputes should be resolved by mediation.

What does the future hold?

• In order to achieve economies of scope and economies of scale, firms have been simultaneously breaking up and merging.• The law allows firms to break up any

way they like.• Mergers, on the other hand, must fall

within the law’s antitrust guidelines

International competition and antitrust policy

• This internationalization is changing the political climate in the U.S. by agreeing that the relevant market is the international market thus “relaxing” anti-trust fears.

• The policy focus of government is shifting

• From:• “Is U.S. industry internally

competitive so that it does not take advantage of the consumer?”

• To:• “Is U.S. industry internationally

competitive so that it can compete effectively in the world economy?”

Mergers, acquisitions, and takeovers

• Acquisitions and takeovers both result in the combining of firms.

• The term merger is a general term meaning the act of combining two firms. Two types of mergers are takeover and acquisition.


• A takeover is the purchase of one firm by a shell firm (a firm that exists to buy up other firms) that then takes control of the purchased firm's operations. Most takeovers change the control over the firm, but do not affect market concentration.


• Another type of merger is an acquisition -- a merger in which a company buys another company and the purchaser has the right of direct control over the resulting operation, but does not always exercise that right.


• Takeovers can be friendly or hostile.• A friendly takeover is one in which one

corporation is willing to be acquired by the other.

• A hostile takeover is a merger in which the firm being taken over does not want to be taken over. In a hostile takeover, the shareholders ultimately decide whether to sell their shares.


• There are three types of mergers: horizontal, vertical, and conglomerate.

• A horizontal merger is the merging of two companies in the same industry

• Most antitrust policy has centered on horizontal mergers.

• Almost all mergers of firms with substantial market shares in the same industry have been prohibited.


• A vertical merger is a combination of two companies that are involved in different phases of producing a product.

• If the merged firms are able to limit access of other buyers or sellers to the market, the merger would be in violation of the Clayton Act.


• A conglomerate merger is the merging of two companies in unrelated industries.

• Conglomerate mergers are generally approved by antitrust legislation under the assumption that they do not significantly restrict competition.


• There are five reasons why unrelated firms would wish to merge.

• (1) To achieve economies of scope.• (2) To obtain a quality company.• (3) To diversify.• (4) To ward off a takeover bid.• (5) To strengthen their political-

economic influence.


• Companies are continuing to sell off parts of their business where they do not think they have a competitive advantage. Sometimes regulators will not let mergers to go through without a deacquisition program – selling off either parts of a company it has bought or parts of itself.

THE END ! ! ! ! ! !

• It’s over• Hooray• Finally

h-m-m: has “hollywood” explored a “world” that has been taken over by those in power and...

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