Chapter 5: Government Regulation of Competition and Prices

Regulation, Free Enterprise, and Deregulation

Sometimes the demand response or market reaction is not rapid enough to prevent abuse and government steps in with regulations

Antitrust Laws

prevent barriers to market entry to price and production collusion

Regulation of Unfair Competition

Each state and federal government have regulations preventing unfair competition

Horizontal Restraints

Sherman Act: Price Fixing, Monopolization
Clayton Act: Mergers Among Competitors

Vertical Restraints

Robinson-Patman Act: Price Discrimination
Sherman Act: Exclusive Dealings & Territories, Resale Price Maintenance, Tying
Clayton Act: Mergers along the Supply Chain

Sherman Act

First federal action against monopolies, it was signed into law by Harrison and was extensively used by Theodore Roosevelt for trust-busting. However, it was initially misused against labor unions

Clayton Act

Act that minimally restricted the use of injunctions against labor and legalized peaceful strikes, picketing, and boycotts.

Robinson-Patman Act

prevents unfair price discrimination by ensuring that the seller offer the same price terms to customers at a given level of trade

Prohibition on Price-Fixing

any agreement to charge an agreed-upon price is per se a violation of the Sherman Act

Monopolization

Courts must determine whether the business has market power, the ability to control price and exclude competitors. Purposeful conduct to exclude competitors is a monopoly

Mergers Among Competitors

Clayton Act: prohibits mergers that will lessen competition or create a monopoly
Larger companies must give notice of mergers to the FTC and Department of Justice

Regulation of Prices

Prohibition on Price Fixing: any agreement to charge an agreed-upon price is per se a violation of the Sherman Act

Price Discrimination

Occurs when a seller charges different prices to different buyers for similar goods, resulting in reduced competition or a tendency to create a monopoly
Justified When:
A difference in grade, quality, or quantity
The cost in transportation
Good-faith effort to meet competition
Differences in marginal cost
Deterioration of goods or a close-out sale

Exclusive Dealing and Territories

Sole outlets are not per se violations
There are must be enough interbrand competition to justify no intrabrand competition

Resale Price Maintenance

An attempt by manufacturers to control the prices that retailer can charge for their good

Tying

When the seller makes a buyer who wants to purchase one product buy an additional product that he or she does not want

Mergers along the Supply Chain

Test is whether the vertical merger will foreclose or lessen competition

Sherman Act Penalties

Up to $100 million for a corporation
Up to $1 million and/or prison up to ten years for an individual

Civil Penalties

Individual treble damages
Class action suit by Attorney General