ECON1101 Chapter Notes - Chapter 12: Clayton Antitrust Act, Federal Trade Commission, Sherman Antitrust Act
Natasha Warrell
Chapter 12 – Antitrust Policy and Regulation:
Antitrust Policy:
Antitrust Policy: Government actions designed to promote competition among firms
in the economy; also called competition policy or antimonopoly policy
• Involves challenging and breaking up existing firms with significant market
power
• Preventing merges that would increase monopoly power significantly
• Prohibiting price fixing
• Limiting anticompetitive arrangements between firms and their suppliers
Antitrust Policy: Attacking existing Monopoly Power:
• Antitrust policy began → response to a massive wave of mergers and
consolidations
• Mergers were made possible by rapid innovations in transportation,
communication and management techniques → allowed manufacturing
facilities/sales officers to be placed in different population centres
Sherman Antitrust Act: A law passed in 1890 in the United States to reduce
anticompetitive behaviour; Section 1 makes price fixing illegal and Section 2 makes
attempts to monopolise illegal
A Brief History: From Standard Oil to Microsoft:
• In 1911 the Supreme Court ruled that Standard Oil monopolised the oil-
refining industry illegally
• Remedy the problem → Standard Oil had to be broken into a number of
separate entities
• Competition among these companies was slow to develop – one person still
controlled their shares
• But as shares were distributed to heirs and then sold, companies began to
compete against each other → oil-refining companies have much less
monopoly power
• As apart of the Supreme Court’s decision → developed a rule of reason
Rule of Reason: An evolving standard by which antitrust cases are decided, requiring
not only the existence of monopoly power but also the intent to restrict trade
• Required that not only a firm have monopoly power but also that it intend to
use that power against other firms in a way that would restrict competition
Predatory Pricing:
Predatory Pricing: Action on the part of one firm to set a price below its shutdown
point to drive its competitors out of business
• Attempt to monopolise
• Difficult to distinguish from vigorous competition → which is essential to a
well-functioning market economy
E.g. Walmart – accused of predatory pricing by smaller retailers who find it hard to
compete with Walmart’s low prices
- It is likely that in many cases Walmart is just more efficient
- Lower prices due to lower costs
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Antitrust policy: government actions designed to promote competition among firms in the economy; also called competition policy or antimonopoly policy. Involves challenging and breaking up existing firms with significant market power: preventing merges that would increase monopoly power significantly, prohibiting price fixing, limiting anticompetitive arrangements between firms and their suppliers. Sherman antitrust act: a law passed in 1890 in the united states to reduce anticompetitive behaviour; section 1 makes price fixing illegal and section 2 makes attempts to monopolise illegal. A brief history: from standard oil to microsoft: Walmart accused of predatory pricing by smaller retailers who find it hard to compete with walmart"s low prices. It is likely that in many cases walmart is just more efficient. If government can implement a merger policy that manages to prevent the formation of firms with substantial market power, then the need to break up firms because they have gained too much market power will be lower.
