Government Policies Towards Competition

Antitrust Legislation

• The government has enacted antitrust legislation to:
  • Prevent monopolies from forming.
  • Break up existing monopolies.

Rockefeller and Standard Oil

• John D. Rockefeller monopolized the oil industry in America.
• He achieved this through the creation of interlocking directorates.

Interlocking Directorates

• Definition: When a company's board of directors also serves on the board of directors of a competing company.
• In the case of Standard Oil, the same individuals who controlled Standard Oil's board also sat on the boards of competing oil companies.
• This eliminated competition, fostered collusion, and allowed control over oil prices.

Sherman Antitrust Act of 1890

• Response to monopolies like Standard Oil.
• Provisions:
  • Prevented the formation of new monopolies or trusts.
  • Broke up existing monopolies.

Clayton Act of 1914

• Purpose: to clarify the Sherman Antitrust Act's laws by prohibiting or limiting specific business practices.
• Key provisions:
  • Ended the practice of creating interlocking directorates.
  • Outlawed price discrimination.

Price Discrimination

• Definition: Selling the same good to different companies at different prices.
• Objective of Antitrust Legislation
  • Break up monopolies.
  • Increase competition in industries.

Mergers

• Antitrust legislation aims to restrict the harmful effects of mergers.
• Merger Definition: A combined company that results when one company purchases at least half the stock of another company, thereby controlling it.
• The amount of mergers in the U.S. shows a trend towards corporate expansion.

Federal Trade Commission (FTC)

• The FTC reviews mergers to ensure they do not substantially lessen competition.

Types of Mergers

• Horizontal Merger:
  • Merging of two companies in the same business or competing firms.
  • Example: If Pepsi and Coke merged.
• Vertical Merger:
  • Merging of two corporations in the same chain of supply.
  • Example: A car company merging with a steel manufacturer and a tire company.
• Conglomerate:
  • Merging of at least two corporations involved in four or more unrelated businesses.
  • Merging of businesses that are not in the same industry.
  • Example: Procter and Gamble, which owns Crest, Gillette, Pampers, Tide, and peanut butter brands.

Visual Representations of Merger Types

• Horizontal Merger: Juan's Garden Shop merging with Shannon's Home and Garden and Lee's Fix It Dig It shop.
• Vertical Merger: A gas station merging with oil wells and an oil refinery.
• Conglomerate: Gigantic Corporation merging paint supplies, office supplies, snacks, insurance, soaps, and cosmetics businesses.

Regulatory Agencies

• The government establishes laws regarding business pricing and product quality.
• Regulatory agencies oversee various industries and services to ensure compliance with these laws.

Deregulation

• Definition: When the government removes its regulations to increase competition.