Government Policies

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Government Policies
In this last lecture, various forms of mergers
and government regulations are discussed. The
impact of government policies are illustrated by
using an example of the sugar industry. OBJECTIVE
S 1. Define the mergers 2. Explain anti-trust
law. 3. Analyze the impact of government
regulations. TOPICS Please read all the
following topics. MERGERS ANTI-TRUST
REGULATIONS THE IMPACT OF GOVERNMENT POLICY - AN
EXAMPLE
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Mergers
When two companies combine under single ownership
of control, we say that the two companies have
merged. There are three basic types of
mergers Horizontal Merger is a merger between
firms that are selling similar products in the
same market. The bank merger of 1980s and the
merger of HP and Compaq are examples of
horizontal merger. A horizontal merger decreases
competition in the market. Vertical Merger is a
merger between companies in the same industry,
but at different stages of production process. In
another words, a vertical merger occurs between
companies where one buys or sells something from
or to the other. For example, Pepsis merger with
restaurant chains that it supplies with beverages
is a vertical merger. E-Bay buying PayPal is
another example. Conglomerate Merger is a merger
between companies in different industries.
Phillip Morris and Miller Brewing merger is an
example. The government looks more carefully at
proposed horizontal mergers because they are more
likely to increase concentration and reduce
competition. Vertical mergers are usually ignored
unless they are between the two firms who are
each in highly concentrated industries. However,
in 1949 case, it was shown that DuPont had
acquired controlling interest in GM, and the
court ordered DuPont to sell its shares severing
the relationship. Conglomerate mergers have
generally been permitted.
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Anti-Trust Regulations
ANTI-TRUST POLICIES The historical background of
anti-trust laws is rooted in the decades
following the Civil War. When the corporate form
of business began to develop and monopolies were
formed in industries such as petroleum,
meatpacking, railroads, sugar, etc., questionable
tactics were used by these firms, and popular
sentiment turned against them. Regulatory
agencies were formed to control natural monopoly.
Antitrust legislation was passed to inhibit the
growth of monopolies in other industries. The
Sherman Act of 1890 was the first major law and
is still the cornerstone of antitrust
legislation. It contains two major provisions 1.
Contracts or combinations in restraint of trade
or commerce among the several states or with
foreign nations are illegal. 2. Every person who
shall monopolize or attempt to monopolize any
part of the trade or commerce among the states or
with foreign nations shall be deemed guilty of
misdemeanor. Firms found violating either
provision could be ordered dissolved by the
courts or prohibited from unlawful practices.
Fines and imprisonment were possible, and injured
parties could sue for damage.  
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Anti-Trust Regulations Cont.
The Clayton Act of 1914 is an elaboration of the
Sherman Act, which was often not explicit enough
to be effective. The Clayton Act strengthened the
Sherman Act in several ways. 1. It outlaws
anti-competition price discrimination among
purchasers when the price differentiation is not
based on cost. 2. It forbids exclusive or tying
contracts in which a producer forces purchasers
of one of its products to acquire other products
from the same seller or producer. 3. Acquisition
of stock in competing companies is forbidden if
it lessens competition. 4. Interlocking
directorates are not allowed where directors of
one firm are also on the board of a competing
firm. In the same year as the Clayton Act,
Congress passed the Federal Trade Commission Act
(FTC). FTC enforces antitrust laws and the
Clayton acts in particular. Celler-Kefauver Act
of 1950 amended Section 7 of the Clayton Act,
which prohibits firms from acquiring the stock of
competitors when this would reduce competition.
This section had a loophole whereby firms could
accomplish their purpose by acquiring the
physical assets rather than stock of a competing
company, the Celler-Kefauver bill closed this
loophole. For natural monopolies, government
uses price regulation, profit regulation, and
output regulation. However, these regulations may
distort incentive as profit becomes zero. Not all
regulated industries are natural monopolies, in
fact, most are not. Some non-natural monopolies
are regulated in order to ensure service to
customers and some because the service is
considered too essential to be determined by
market price. Social regulations are concerned
with the conditions under which goods and
services are produced and the safety of these
items for the consumers. The most important
government agencies that provide this regulation
are the Occupational Safety and Health
Administration (OSHA) and the Consumer Product
Safety Commission (CPSC), and the Environmental
Protection Agency (EPA). Opponents of social
regulation say that the economic costs of social
regulation are high, but proponents say that the
benefits of regulation exceed their costs. If the
EPA imposes pollution controls on a firm which,
in turn, fires a worker because of the extra
costs that the EPA has imposed upon it, the
worker may oppose this regulation. But if the
pollution would have caused the worker cancer,
the costs of continuing on the job would have
been high. Economists are not necessarily for or
against regulation, but analyze its costs and
benefits.
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Impact of Regulations
THE IMPACTS OF GOVERNMENT POLICES AN
EXAMPLE Price supports for 15,000 U. S. sugar
producers has kept U.S. sugar prices at almost
double the world price for an estimated cost to
consumers of 1 billion per year. The effect was
regressive because poor households spent a larger
percentage of their income on food than do
high-income households. Also, sugar growers
received benefits that were estimated to be twice
the nations average family income. Thirty-three
farms obtained more than 1 million in benefits
in 1991. Import quotas had been imposed to keep
low-priced foreign sugar out of the U. S. market
so that price supports could be maintained. In
1975, 30 of U. S. sugar was imported, 1999
imports was about 3-4 . From both a domestic and
global perspective, agricultural resources have
been distorted. Overallocation has occurred in
the less efficient American production areas
underallocation has occurred in the low-cost
production areas of the world. Apart from the
higher prices, jobs have been lost in the U.S.
because of refinery closing due to the decline of
sugar imports. Brach Candy Co. moved some 3500
jobs to Canada, where sugar prices were lower.