Chapter 17: Monopoly and AntiTrust Policy Flashcards
Merger
Two formerly separate firms combine to become a single firm
Acquisition
One firm purchases another
How does the US Federal Trade Commission know when a major merger is occurring?
A merger where at least one of the firms is above a minimum threshold of sale, is required by law to notify the FTC
Antitrust Laws
Laws that give the federal government power to block certain mergers and break up large firms
(T/F) Government regulators agree that most mergers are beneficial to consumers.
True.
Why would the FTC (Federal Trade Commission) and US Dept of Justice block a merger?
When they determine it will hinder competition
US FTC
United States Federal Trade Commission
Why is it called “antitrust” laws?
In the late 1800s, large firms were legally consolidated into a “trust” through mergers and purchases, and run by a group of “trustees”. The Sherman Antitrust Act of 1890 was passed to limit their power.
When was the Federal Trade Commission created?
1914
What was the 1914 act that outlawed mergers/acquisitions that substantially lessen competition, price discrimination, and tied sales?
Clayton Antitrust Act of 1914
Concentration Ratio
Measures what share of the total sales in the industry are accounted for by the largest firms (top 4-8)
Market Share
Percentage of total shares in the market
Herfindahl-Hirschman Index (HHI)
Approach to measuring market concentration by adding the square of the market share of each firm in the industry
HHI Equation
Market Concentration = A%^2 + B%^2….
What were the primary technologies of the 2nd Industrial Revolution (3)?
- Steam boats
- Telegraph
- Railroads
What did the arrival of railroads do to the concept of “time” in the US?
Made standardized time necessary. Four time zones created.
First Industrial Revolution
- Mechanization
- Steam engine
- Flying shuttle (loom)
Feedback Loops
When a process causes a change, and that change affects the process itself, causing greater changes
Bundling
Multiple products are sold as one
Exclusive Dealing
(can be legal or illegal)
Agreement a dealer will sell only products from one manufacturer
Minimum Resale Price Maintenance Agreement
(typically illegal)
Agreement that requires a dealer who buys from a manufacturer to sell for at least a certain minimum price
Restrictive Practices
Practices that reduce competition but that do not involve outright agreements between firms to raise prices or reduce quantity produced
Tying Sales
Situation where a customer is allowed to buy one product only if the customer also buys another product
Is it legal for competitor firms to band together to make pricing and output decisions?
No. This is illegal, monopolizing, collusive behavior.
Is being a monopoly illegal, under US antitrust laws?
No
What is a common example of an industry that employs “bundling” of products?
Cable and internet companies
What was Microsoft accused of by antitrust regulators?
- Using its market power in operating systems to take over other parts of the software industry
- Anticompetitive form of exclusive dealing by not selling computer makers its operating system if they used Netscape internet browser
- Anticompetitive form of tying sales by bundling its Internet Explorer with its software
- Predatory pricing by giving away certain Windows software products to drive away competition
What was the result of the antitrust lawsuit against Microsoft?
Settlement reached for Microsoft to end its restrictive practices, instead of being broken into two competing firms
Cost-Plus Regulation
When regulators permit a regulated firm to cover its costs and to make a normal level of profit
Price Cap Regulation
When the regulator sets a price that a firm cannot exceed over the next few years
If regulators leave a monopoly alone, at what quantity (on a graph) will a firm produce?
Where MC = MR
Marginal Costs = Marginal Revenues
Price will be on the demand curve
What are options that regulators may employ when regulating a monopoly?
- Divide the company into competing firms
2. Set prices and quantities
Regulatory Capture
Firms supposedly being regulated end up playing a large role in setting the regulations they will follow
What Act (2002) was designed to increase confidence in financial information provided by public corporations to protect investors from accounting fraud?
Sarbanes-Oxley Act of 2002
What Act following the 2007-2009 financial crisis attempted major reforms of the financial system?
The Dodd-Frank Act
Cornelius Vanderbilt’s empire was built on
transportation, especially railroads
John D Rockefeller’s empire was built on
monopolies, especially Standard Oil
later broken up by the government
Andrew Carnegie’s empire was built on
Steel
Social Darwinism
Theory of “survival of the fittest” should be applied to people, and also that corporations were people
(big companies were big because they were the best, and governments should not regulate them)
Horizontal Mergers
Businesses buying out or otherwise combining with competitors that made the same product
Vertical Mergers
Businesses buying up their suppliers and distributors
Conglomerate Mergers
Businesses buying up unrelated product lines
Planned Obsolescence
Designing a product to have a limited useful life in order to encourage future sales
First Mover Advantage
The competitive edge a business gets from being the first to adopt a new technology that will become the standard
Economies of Speed/Throughput
Realizing lower costs by maintaining a high speed and volume of flow from raw materials to finished goods
Rule of Reason
Rule developed by Supreme Court to make the Sherman Act workable in an era in which businesses were organization and technologically compelled to restrain trade
