Chapter 5- Government Regulation of Competition and Prices

Power to Regulate Business

-The federal government may regulate any area of business to advance the nation's national economic needs
-Under the police power, states may regulate all aspects of business so long as they do not impose an unreasonable burden on interstate commerce or any activity on the federal government

Milton Friedman

Government regulation of business interferes with the free enterprise system

Regulation

-Sometimes the demand response or market reaction to problems or services is not rapid enough to prevent harm, and government regulation steps in to stop abuses
-Antitrust laws step in when competitors create barriers to market entry or collude on prices or production in order to control prices

Regulation of Unfair Competition

-The Sherman Act
-The Clayton Act
-The Robinson-Patman Act
-The Federal Trade Commission Act

Sherman Antitrust Act

-A federal statute prohibiting combinations and contracts in restraint of interstate trade
-Control anticompetitive behavior among and between competitors
--Restraint of Trade
--Prohibits monopolization
-NO violations if they have advantage because of better products, services, or prices

Horizontal Restraints

Among competitors
-Price Fixing (Sherman Act)
-Monopolization (Sherman Act)
-Mergers among Competitors (Clayton Act)

Vertical Restraints

Throughout the supply chain
-Price Discrimination (Robinson-Patman Act)
-Exclusive Dealings and Territories (Sherman Act)
-Mergers along the Supply Chain (Clayton Act)
-Resale Price Maintenance (Sherman Act)
Tying (Clayton Act)

Price Fixing

-Sherman Act prohibits competitors from fixing prices and from exchanging price information
-Horizontal price fixing- agreement to charge an agreed-upon price or to set maximum or minimum prices between or among competitors are violations

Monopolization

-If the firm has market power
-Not necessarily having a large percentage of a market
-Sherman Act requires that the monopoly position be gained because of a superior product or consumer preference

Market Power

The ability to control price and exclude competitors

Divestiture Order

A court order to dispose of interests that could lead to a monopoly

Price Discrimination

-A seller charging different prices to different buyers for commodities of similar grade and quality without marginal cost differences
-Volume discounts are permissible because the marginal costs are different on the larger volume of goods
-Sellers cannot sell below cost to harm competitors or sell to one customer at a secret price that is lower than the price for other customers when there is no economic justification

Clayton Act

A federal law that prohibits price discrimination

Robinson-Patman Act

-A federal statue that prohibits price discrimination in interstate commerce
-Right of the seller to select customers and refuse to deal with anyone but it must be in good faith, not for the purpose of restraining trade

Price discrimination is permitted

1) a difference in grade, quality, or quantity
2) the cost of transportation involved in performing the contract
3) a good-faith effort to meet competition
4) differences in methods or quantities, marginal cost differences
5) deterioration of goods
6) a close-out sale of a particular line of goods

Resale Price Maintenance

-Attempt by manufacturers to control the prices that retailers can charge for their goods
-A "suggested retail price" is just a suggestion and is not a violation of the antitrust laws
-Minimum prices are justified in a competitive sense, because without them, some retailers would cut the price but not offer the customer service the manufacturer wants for the brand
-Retailers who charge more can be stopped by manufacturers who do not want to gouge consumers on prices

Tying

-The Anticompetitive practice of requiring buyers to purchase one product in order to get another
-Use of control over the typing product within the relevant market to compel the buyer to purchase the tied article that either is not wanted or could be purchased elsewhere on better terms

Mergers Along the Supply Chain

-Vertical mergers occur between firms that have buyer and seller relationships
-The test is whether the vertical merger will foreclose or lessen competition

Remedies for Anticompetitive Behavior

-Criminal Penalties
-Civil Remedies

Criminal Penalties

-Violation of either section of the Sherman Act is punishable by fine or imprisonment or both at the discretion of the court
-Max fine for a corporation is $100M
-Max fine for a natural person is $1M or imprisoned for a max term of 10 years or both

Civil Remedies

-The law provides for an injunction to stop the unlawful practices
-Any individual or company harmed may bring a separate action for treble damages
-Class-action suit to recover damages on behalf of those who have paid the higher prices

Treble Damages

Three times the damages actually sustained

Utah Pie Company

-Utah Pie is a Utah corp, for 30 years in the frozen pie business
-Continental Baking Comp, Pet Milk, and Carnation entered the pie market in Utah
-When these companies entered the Utah market a price war began and prices went down drastically
-Utah Pie filed suit charging price discrimination
-Decision- price discrimination occurred, since Pet was selling its pies in Utah through Safeway at prices that were lower than its prices in other markets
-Pet had predatory intent to injure Utah Pie and they spied to seek info
-Pet committed price discrimination, lessened competition, and violated the Robinson-Patman Act

Leegin Leather v. Kay's Kloset

-Leegin's president wanted to sell in small retailers since they treat customers better, provide customers more services, and make their shopping experience more satisfactory than larger retailers
--Leegin instituted a retail pricing policy which banished retailers that sold discounted Brighton goods below suggested prices
-Leegin discovered that Kay's Kloset had been marking down Brighton's entire line by 20%, and when Kay's would not stop marking down products prices, Leegin stopped selling to the store
-PSKS sued Leegin for violation of antitrust laws
-Decision- Not a violation for Leegin to require minimum prices, since resale price maintenance increases the choices consumers have by providing them with a full-service retailer