The Role of The Role of GovernmentGovernment

Why do we need it?

• Control the market power; Control the market power; prevent large firms from taking prevent large firms from taking overover

• To prevent cartels, mergers, or To prevent cartels, mergers, or predatory pricingpredatory pricing

• Predatory Pricing: set the market Predatory Pricing: set the market price below their costs for the price below their costs for the short term to drive competitors short term to drive competitors out of business.out of business.

The Two Groups that Control Anti-Trust Legislation:

1. Federal Trade Commission

2. Department of Justice (Antitrust Division)

What is the purpose of anti-trust legislation?

To make sure that businesses do not unfairly force out its competitors

Five Major Anti-Trust Laws

Anti-Trust LegislationAnti-Trust Legislation

1. 1. Sherman Anti-Trust ActSherman Anti-Trust Act (1890): outlawed (1890): outlawed mergers & monopolies that limit trade mergers & monopolies that limit trade between statesbetween states

• Gave gov’t power to regulate industryGave gov’t power to regulate industry

• Stop firms from forming cartels or Stop firms from forming cartels or monopoliesmonopolies

• Break up existing monopoliesBreak up existing monopolies

2. 2. Clayton Anti Trust ActClayton Anti Trust Act (1914): Outlawed (1914): Outlawed practices that limit competition or lead to practices that limit competition or lead to monopolymonopoly

3. 3. Federal Trade Commission ActFederal Trade Commission Act (1914): (1914): Established the FTC to regulate unfair Established the FTC to regulate unfair methods of competition in interstate methods of competition in interstate commerce by issuing cease & desist orderscommerce by issuing cease & desist orders

4. National Recovery Act (NRA)-(1933-1935): designed to strengthen trade associations, and raise prices, profits and wages at the same time.

5. The Robinson-Patman Act -1936 sought to protect local retailers against the onslaught of the more

efficient chain stores, by making it illegal to discount prices.

Government Regulation of Mergers:

The government can block mergers (prevent) in order to avoid the creation of a monopoly.

Public Disclosure LawsPublic Disclosure Laws

• Require companies to give Require companies to give consumers important consumers important information about their information about their productsproducts

• Ex. Fuel efficiency labels on Ex. Fuel efficiency labels on new carsnew cars

• Consumers use information to Consumers use information to evaluate aspects of a productevaluate aspects of a product

Goals of Gov’t RegulationGoals of Gov’t Regulation

• regulate industries whose goods & regulate industries whose goods & services affect the well-being of the publicservices affect the well-being of the public

• environmental protection rulesenvironmental protection rules

Negative Effects of Gov’t Negative Effects of Gov’t RegulationRegulation

• Costly to implement=cutting into profits, Costly to implement=cutting into profits, slowing growth, & forcing businesses to slowing growth, & forcing businesses to charge unnecessarily high pricescharge unnecessarily high prices

• Stifle competitionStifle competition

• Raised gov’t spendingRaised gov’t spending

SECSEC

SEC

FCC

FDA

EPA

NLRB

FTC

ICC

Abbreviation Name Function

SEC     

FCC     

FDA     

NLRB  

National Labor National Labor Relations BoardRelations Board

  

FTC     

ICC     

EPA     

Securities & Exchange Securities & Exchange CommissionCommission

Federal Federal Communications Communications CommissionCommission

Food & Drug Food & Drug AdministrationAdministration

Federal Trade Federal Trade CommissionCommission

Interstate Commerce Interstate Commerce CommissionCommission

environmental environmental Protection AgencyProtection Agency

Regulates & supervises the sale of listed and unlisted securities and the brokers, dealers, & bankers who sell them.

Licenses & regulates radio & television stations & regulates interstate telephone rates & services.

Enforce laws to ensure purity, effectiveness and truthful label of drugs, food, and cosmetics.Administers federal labor-management relations laws; settles disputes; prevents unfair labor practices.

Administers anti-trust laws forbidding unfair competition, price-fixing, and other deceptive practices.Regulates rates & other aspects of commercial transportation by railroad, highway, and waterway.

Coordinates federal environmental programs to fight air and water pollution.

Corporate Leadership

on Trial

Executives from companies that were among the brightest stars in the 1990s will be fighting to defend their reputations and to stay out of prison in jury trials scheduled in the next few months of 2004.

Tyco International Ltd.

Jury selection began Sept. 29 and the trial is likely to continue through this month in State Supreme Court in Manhattan.

Defendants: L. Dennis Kozlowski, 56, former chief executive; Mark H. Swartz, 43, former chief financial officer.

Charges include grand larceny and enterprise corruption.

Potential sentence: Each faces up to 30 years in jail.

Judge: Michael J. Obus, a former public defender who has overseen a fraud case involving a Broadway producer.

Lead prosecutors: Gerard Murphy, who prosecuted the head of a New York brokerage firm accused of a $175 million stock scam; Kenneth Chalifoux, who helped prosecute Canadian lawyer Harry Bloomfield for a stock scam that bilked investors out of millions of dollars.

Key issues/evidence: Kozlowski and Swartz argue the $600 million in cash and loan forgiveness from Tyco was approved by board members and blessed by independent auditors.

Martha Stewart

Jury selection begins Jan. 20 in U.S. District Court in Manhattan.

Defendants: Martha Stewart, 62, founder and chief creative officer of Martha Stewart Living Omnimedia; Peter Bacanovic, 41, Stewart's former broker at Merrill Lynch & Co.

Charges include making false statements, obstructing an SEC proceeding and conspiring to lie about the reasons for Stewart's personal sale of ImClone Systems Inc. stock in December 2001; Bacanovic is charged with perjury; Stewart faces securities fraud charges for allegedly lying to investors in her company about her stock sales.

Potential sentence: Stewart faces up to 30 years in prison; Bacanovic faces up to 25 years.

Judge: Miriam Goldman Cedarbaum, who recently oversaw a high-profile civil case over rights to the name and dances of the late Martha Graham.

Lead prosecutors: Karen Patton Seymour, head of the criminal division of the U.S. Attorney's office; Michael Schacter prosecuted former ImClone chief executive Samuel D. Waksal for insider trading.

Key issues/evidence: Stewart and Bacanovic are charged with a coverup, but neither has been charged criminally for the underlying alleged insider trading. Stewart's lawyers plan to argue that her stock sales were legal and that she is being prosecuted for asserting her innocence.

WorldCom Inc.

Jury selection begins Feb. 4 in U.S. District Court in Manhattan.

Defendant: Scott D. Sullivan, 42, former chief financial officer of WorldCom.

Charges include conspiracy, securities fraud, bank fraud and false filings with the SEC. Prosecutors allege Sullivan and others at WorldCom improperly reported operating expenses as capital expenditures to pump up the company's bottom line.

Potential sentence: More than 100 years in prison.

Judge: Barbara S. Jones, who presided over an federal antitrust lawsuit against credit card issuers Visa and MasterCard.

Lead prosecutors: David Anders, who is also prosecuting investment banker Frank P. Quattrone; Bonnie Jonas, who prosecuted the executives of Aurora Foods.

Key issues/evidence: Sullivan's lawyers have said they intend to argue that other telecommunications firms also treated so-called "line costs" as capital expenses.

Adelphia Communications Corp.

Jury selection begins Feb. 23 in U.S. District Court in Manhattan.

Defendants: John J. Rigas, 78, founder and former chief executive of Adelphia; Timothy J. Rigas, 46, John's son and former chief financial officer; Michael J. Rigas, 48, John's son and former vice president of operations; and Michael C. Mulcahey, 45, a former director of internal financial reporting.

Charges include misappropriating hundreds of millions of dollars of corporate funds.

Potential sentence: Each faces up to 100 years in prison.

Judge: Leonard B. Sand, who presided over the case of four men convicted of the 1998 bombings of U.S. embassies in Africa.

Lead prosecutors: Christopher J. Clark, who prosecuted several securities fraud cases; Richard D. Owens, chief of the fraud section in the U.S. attorney's office in Manhattan; Judd C. Lawler, who has worked on the Adelphia bankruptcy and terrorism law cases.

Lead defense attorneys: For Rigas, Peter Fleming Jr., whose clients have included boxing promoter Don King.

For Mulcahey, Steven M. Cohen, a former prosecutor and SEC lawyer who now represents Napster.

Key issues/evidence: Lawyers for several of the defendants have said they will argue that loan programs and other steps were done with the blessing of accountants and lawyers