Ch 10 Antitrust Law and Business

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Ch 10 -Antitrust Law and Business

• Todays agenda
• Guidelines for Exam 1
• Deregulation
• Antitrust law
• Microsoft case discussion

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Ch 10 -Antitrust Law and Business

• Guidelines for Exam 1
• 1 page of notes
• 2 caselets on ethical decision-making, similar to
  assignment and discussion cases
• 2 essay questions
• Content Everything till Reform in the regulatory
  arena, Chapter 9
• Focus will be on matters discussed in class
• Questions will involve tests of conceptual
  understanding, and not memorization
• Grading criteria will be similar to those used
  for assignments usage of concepts, data, writing
  skills, analytical ability. Grades are not curved
• Bring answer books, please
• Sample questions
• Partial revision next week

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Ch 10 -Antitrust Law and Business

• Sample essay questions
• List and explain three reasons why firms are
  under increasing pressure to be socially
  responsible
• List and explain three reasons why firms might
  resist the pressure to be socially responsible
• List and explain three rationales for regulation
• Distinguish between duty-based and outcome-based
  theories of ethics
• List and explain three harmful effects that MNCs
  can have on host countries
• Explain the effects of a protectionist
  international trade policy on the US economy

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Ch 10 -Antitrust Law and Business

• Antitrust laws
• Aimed at curbing anti-competitive trade practices
• Explained by countervailing power theory
• Early concerns related to the adverse impact on
  consumers
• Today, antitrust law is also concerned with
  effects of market power on innovation and
  employment. How and why?
• This law is a good example of stakeholder theory
  in action. While collusion among, say, airline
  companies whilst setting prices may benefit
  shareholders and employees, it has an unfair
  impact both on service prices and on fair traders

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Ch 10 -Antitrust Law and Business

• Antitrust laws
• Free-market opponents of regulation say there is
  no need for antitrust regulation. If firms in an
  industry practice unfair practices such as
  monopolization, they will earn higher profits. In
  the long run, the higher profitability of the
  industry will attract new entrants who will
  undercut incumbents, and thus restore
  competitiveness. Government regulators have no
  understanding of the realities of the global
  marketplace, and will cause more harm than good
  moreover, we need to also consider the economic
  costs of regulation. What do you think of this
  view?

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Ch 10 -Antitrust Law and Business

• Major Laws
• Sherman Antitrust Act
• Applies to
• Interstate commerce
• US nationals abroad engaged in trade
• Provisions
• S.1 Prohibits conspiracies to restrain trade
  (agreements between firms)
• S.2 Anti competitive conduct by individuals /
  groups (misuse of monopoly power by an individual
  firm)

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Ch 10 -Antitrust Law and Business

• Court Interpretation
• Rule of Reason principle
• Post Standard Oil case
• Purpose, power effects of the action are
  considered when deciding whether an action is
  legal or otherwise
• Per se Rule
• Socony oil case, 1940
• Certain practices are treated as anticompetitive
  by themselves (per se) firms have no defenses in
  their favor
• Price Fixing, Group Boycott, Horizontal Market
  Division

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Ch 10 -Antitrust Law and Business

• Enforcement of the law
• By the Justice Department
• Proof of
• Injury to business activities of a competitor or
  to consumers
• Cause effect relationship

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Ch 10 -Antitrust Law and Business

• S.1 Violations
• Horizontal Restraints
• By Competitors
• Price Fixing
• Two supermarkets agree that one will charge 3.50
  for a gallon of milk, and the other 3.60. Both
  prices are fair in the locality
• Group Boycott
• Bargain Basement, Inc., is a discount retailer.
  It buys brand name products from various
  manufacturers and sells them at below the
  suggested retail price. This practice has
  angered some of those manufacturers who believe
  that their products are high quality and should
  not be sold at bargain basement prices. Several
  of those manufacturers agree that they will no
  longer sell their products to Bargain Basement.
  Illegal
• Arlee owns a fast food franchise. He purchases
  his supplies from various distributors around the
  area. Arlees soft drink distributor decides not
  to deal with Arlee anymore, because Arlee is too
  demanding and always pays his bills late.
  Several other distributors individually reach the
  same decision. Legal

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Ch 10 -Antitrust Law and Business

• S.1 Violations
• Horizontal Restraints
• By Competitors
• Horizontal Market Division
• Dell and HP agree to sell computers only in the
  West and East of the US respectively
• Association
• Joint Venture

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Ch 10 -Antitrust Law and Business

• S.1 Violations
• Vertical Restraints
• Distribution process
• Resale Price Maintenance
• Lexus tells its dealers that their dealership
  will be revoked if they sell their cars below a
  price of 70,000
• When would such an arrangement make business
  sense?
• When quality of service is paramount
• Refusal to deal

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Ch 10 -Antitrust Law and Business

• S 2 Violations
• Monopolization
• No Conspiracy requirement
• Monopolization aggressive exclusion of
  competition
• Elements
• Monopoly Power
• Willful acquisition of that power
• Exceptions
• Historical accident. E.g. VHS v. Betamax
• Business acumen. E.g. Patents
• Industry characteristics. E.g. Ebay

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Ch 10 -Antitrust Law and Business

• Clayton Act
• Complement to Sherman Act
• Enforced by Justice Department/Federal Trade
  Commission
• S2 Price Discrimination
• Illegal when not due to cost differences, and
• Results in lessened competition
• No selective under cutting except in good faith
• Courts no longer treat price discrimination as an
  antitrust activity

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Ch 10 -Antitrust Law and Business

• S.3- Exclusionary Practices
• Exclusive dealing
• Lexus threatens to revoke a dealership if the
  dealer also sells Ford cars
• Tying sales
• A manufacturer makes two products, Axobos and
  Belandos. Axobos are in very high demand, but
  Belandos are not. The manufacturer requires
  everyone who wants to buy any Axobos to also buy
  some Belandos
• A printer manufacturer will sell you a printer
  only if you agree to buy paper manufactured by
  them
• A printer manufacturer will sell you a printer
  only if you agree to buy cartridges manufactured
  by them. Is this the same as the previous
  illustration?

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Ch 10 -Antitrust Law and Business

• S 7- Mergers
• Horizontal
• Mergers between competitors
• Legality depends on
• Level of industry concentration
• Competitive effects
• Financial distress
• Vertical
• Mergers involving forward or backward integration
• Firms acquiring suppliers or distributors
• Illegal if
• Excludes competitors from any business segment
• Conglomerate
• Legality determined on a case-by-case basis

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Ch 10 -Antitrust Law and Business

• Monopolies and consumers
• Constrained by substitutes and budgets
• Anti competitive behavior
• Is the power the result of willful acquisition
  and maintenance?
• Patent-based market power permissible
• Natural Monopoly
• Intent
• Predatory pricing
• The relevance of market structure
• Mergers and consumers
• Concentration, e.g. Big 6
• Enforcement
• Penalties, imprisonment, blockage of alliance

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Ch 10 -Antitrust Law and Business

• Antitrust Dilemmas in Foreign Trade
• Lack of antitrust enforcement by foreign
  countries may place US firms at a disadvantage
• Keiretsu and Chaebol (Japanese and Korean
  cartels)
• European consortiums (Airbus)
• Foreign enforcement
• Limits of antitrust laws - time, market
  definition, etc
• Impact of globalization
• Size does matter. E.g. banking industry
  consolidation
• Effects

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Ch 10 -Antitrust Law and Business

• Microsoft Case
• What evidence does the DOJ present to prove its
  case against MS?
• What valid defenses did/could MS present?
• On balance, do you think MS has an adverse or
  beneficial impact on consumers, competitors and
  innovation? Was MSs conduct in this case
  socially responsible?

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Should MS be subjected to antitrust law?

• Key question is there evidence of unfair
  business practices that were injurious to
  competitors and, ultimately, to competitors?
• The evidence
• Exclusionary agreements
• Tying sales
• Monopolization of operating systems
• Monopolization of browsers
• Predatory pricing
• Evidence of monopolization
• Building incompatibility into products
• Removing IE from Add/Delete menu
• Withholding APIs
• Internal memos and correspondence

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Should MS be subjected to antitrust law?

• But was the behavior injurious to consumers?
• Yes, reduced choice
• No, look at the economics of the industry. Its a
  natural monopoly, indicated by the presence of
  network externalities. The greater the market
  share of one players product, the more valuable
  it is to the consumer. In this case, reduced
  choice is, counterintuitively, good for the
  consumer
• Also, look at the pace of change and the extent
  of competitiveness in the industry
• But the bottomline question remains, if the
  product is of value to the customer, what is the
  need for the seller to engage in unfair
  practices?

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Should MS be subjected to antitrust law?

• What happens to innovation as a result of such
  conduct?
• Should efficiency considerations trump notions of
  fairness and business ethics?
• The result of the case
• MS got away with a slap on the wrist
• Reason While the letter of the regulation is
  unambiguous by itself, the courts were not
  confident of their ability to apply it to an
  industry as complex as the technology sector
• Also, the adverse impact of structural remedies
  could be catastrophic for the economy
• A typical illustration of regulation which is
  necessary but often ineffective

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The dilemma of regulation

• As business becomes more complex, the greater is
  the need for regulation, and the corresponding
  costs
• The evidence the present government has
  increased spending by 27
• So while the costs of regulation are increasingly
  beyond control, the effectiveness of regulation
  appears to be diminishing, making the US a
  high-cost economy but not necessarily a
  high-return one

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The dilemma of regulation

• What are the solutions?
• Decrease the need for regulation through
• Greater degree of ethical behavior
• Better corporate governance