In: Economics
Summarize the rules of thumb that are likely to be followed today in enforcing the parts of the
U.S. Antitrust Laws related to
a) price fixing, output limiting or market share fixing.
b) corporate mergers.
c) predatory pricing
d) refusals to deal
A. Price Fixing
Price fixing occurs when the price of a product or service is set
by a business intentionally rather than letting market forces
determine it naturally. Several businesses may come together to fix
prices to ensure profitability.
Say my company and yours are the only two companies in our industry, and our products are so similar that the consumer is indifferent between the two except for the price. In order to avoid a price war, we sell our products at the same price to maintain margin, resulting in higher costs than the consumer would otherwise pay.
For example, Apple lost an appeal regarding a 2013 U.S. Department of Justice ruling that found it guilty of fixing the prices of ebooks. Apple was found liable to pay $450 million in damages.
B. Mergers and Acquisitions
No introduction to antitrust legislation would be complete without
addressing mergers and acquisitions. We can divide these into
horizontal, vertical and potential competition mergers.
Horizontal Mergers: When firms with dominant market shares prepare to enter a merger, the FTC must decide whether the new entity will be able to exert monopolistic and anti-competitive pressures on the remaining firms. For example, the company that makes Malibu Rum and had an 8% market share of total rum sales, proposed buying the company that makes Captain Morgan’s rums, which had a 33% of total sales to form a new company holding 41% market share.
Meanwhile, the incumbent dominant firm held over 54% of sales. This would mean the premium rum market would be composed of two competitors together responsible for over 95% of sales in total. The FTC challenged the merger on the grounds that the two remaining companies could collude to raise prices and forced Malibu to divest its rum business.
Unilateral Effects. The FTC will often challenge mergers between
rival firms that offer close substitutes, on the grounds that the
merger will eliminate beneficial competition and innovation. In
2004, the FTC did just that, by challenging a merger between
General Electric and a rival firm, as the rival firm manufactured
competitive non-destructive testing equipment. In order to go
forward with the merger, GE agreed to divest its non-destructive
testing equipment business.
Vertical Mergers. Mergers between buyers and sellers can improve cost savings and business synergies, which can translate to competitive prices for consumers. But when the vertical merger can have a negative effect on competition due to a competitor’s inability to access supplies, the FTC may require certain provisions prior to the completion of the merger. For example, Valero Energy had to divest certain businesses and form an informational firewall when it acquired an ethanol terminator operator.
Potential Competition Mergers. Over the years, the FTC has challenged rampant preemptive merger activity in the pharmaceutical industry between dominant firms and would-be or new market entrants to facilitate competition and entry into the industry.
C. Predatory Pricing: Often hard to prove, and requiring a careful examination on the part of the FTC, predatory pricing can be considered monopolistic if the price cutting firm can cut prices far into the future and has enough market share to recoup its losses down the line.
D. Refusal to Deal: Like any other company, monopolies can choose who they wish to conduct business with. However, if they use their market dominance to prevent competition, this can be considered a violation of antitrust laws.
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