Government Policy Toward Business

1
Government Policy Toward Business

• Why does the government intervene in business
  activity?
• Why is this intervention subject to change over
  time?
• What is the difference between economic and
  social regulation?
• Why have governments deregulated and privatized
  certain lines of business?

2
How Does the Government Intervene?

• Antitrust Policy
• Monopoly is bad
• e.g. bank merger is subject to regulatory
  approval
• Microsoft is being sued for anti-competitive
  practices
• Regulation
• Economic Regulation
• Natural Monopolies
• Social Regulation
• Health, Safety and Environmental standards
• Other restrictions on the firms and individuals

3
Why does the Government Intervene?

• Public Interest Theory
• the government intervenes in business activity to
  benefit the general public
• Monopoly gt perfect competition means more total
  surplus
• Capture Theory
• the government intervenes in business activity to
  transfer wealth from one group to another to
  benefit a special interest
• Local Mayor stars in a TV ad featuring real
  estate development
• What is an interest group? Why do they form?
• Suppose you proposed a one-time transfer that
  would take a penny from everyone in the US and
  gave the proceeds to you

4
Antitrust Policy Targets

• Large Firms. Why?
• the smaller the number of firms in the industry
  (and hence the larger the firms), the greater are
  the chances for collusive and monopolistic
  behavior
• What is a Large Firm?
• Herfindahl Index
• a measure of concentration calculated as the sum
  of the squares of the market share of each firm
  in an industry
• Concentration
• the degree to which a few firms control the
  output and pricing decisions in a market

5
Market Concentration Examples

• 10 firms of equal size gt 10 market share each
• HI 102 102 102 1,000
• 4 firms of equal size gt 25 market share each
• HI 625 625 625 625 2,500
• Official Definitions
• HI below 1,000 Highly Competitive
• HI between 1,000 and 1,800 Moderately
  Competitive
• HI above 1,800 Highly Concentrated
• US Industry Examples
• Aircraft 108 firms, HI 1,358
• Womens dresses 5,489, HI 24

6
Antitrust Policy

• Definition
• government policies and programs designed to
  control the growth of monopoly and enhance
  competition
• Affects mergers, limits what big firms can do
• Cant fix prices, cant restrict competition,
  cant merge if the resulting firm would have too
  great of an influence
• Rules of Enforcement
• Rule of reason
• an action must be unreasonable in a competitive
  sense, and the anti-competitive effects must be
  demonstrated
• Per se Rule
• an action that could be anti-competitive is
  illegal

7
Antitrust Acts

• Sherman Antitrust Act (1890)
• Outlaws contracts and conspiracies restraining
  trade
• Forbids monopolization and attempts to monopolize
• Clayton Antitrust Act (1914)
• Bans price discrimination that substantially
  lessens competition or injures particular
  competitor
• Prohibits practices that might keep other firms
  from entering an industry of competing with the
  firm
• Outlaws mergers that substantially lessen
  competition
• Federal Trade Commission Act (1914)
• Prohibits unfair methods of competition and
  unfair or deceptive acts

8
Antitrust Enforcement

• 1890 - 1914
• Rule of Reason Lax Enforcement
• 1914 - 1980s
• Per se Rule Tight Enforcement
• 1980s - 1992
• Rule of Reason Lax Enforcement
• 1992 -
• Rule of Reason Attempt to Tighten

9
Antitrust Enforcement Procedures

• Action initiated by
• U.S. Department of Justice, Federal Trade
  Commission, or private plaintiffs
• Private Plaintiffs cant use FTC act
• Private Plaintiffs can receive triple damages
  from alleged monopolistic action
• Federal Government can impose penalties
• break up through dissolution or divestiture
• Civil and criminal actions can be filed
• Demonstrating Violations
• Find a specific violation that falls under one of
  the acts
• Calculate Herfindahl Index for an appropriate
  market
• Can be difficult to define the market. Why?

10
Concentration in a Global Perspective

• Need to take foreign competition into account
• Trade barriers raise domestic concentration
• Government policy toward business can be very
  different in other countries