Question

what the key provisions of major anti-trust laws is as well as the definitions for things like: predatory pricing, limit pricing, loss leader pricing, bundle pricing, tie-in contracts, types of mergers etc.

Answer 1

Antitrust laws also referred to as competition laws, are statutes developed by the U.S. government to protect consumers from predatory business practices. They ensure that fair competition exists in an open-market economy.

The Big Three Antitrust Laws

Let’s take a brief look at the main antitrust laws in the United States. The core of U.S. antitrust legislation was created by three pieces of legislation: the Sherman Anti-Trust Act of 1890, the Federal Trade Commission Act—which also created the FTC—and the Clayton Antitrust Act.

1. The Sherman Anti-Trust Act intended to prevent unreasonable "contract, combination or conspiracy in restraint of trade," and "monopolization attempted monopolization or conspiracy or combination to monopolize." Violations against the Sherman Anti-Trust Act can have severe consequences, with fines of up to $100 million for corporations and $1 million for individuals, as well as prison terms up to 10 years.

Key provisions of The Sherman Anti-Trust Act

• One of the act’s main provisions outlaws all combinations that restrain trade between states or with foreign nations. This prohibition applies not only to formal cartels but also to any agreement to fix prices, limit industrial output, share markets, or exclude competition.
• A second key provision makes illegal all attempts to monopolize any part of trade or commerce in the United States. These two provisions, which constitute the heart of the Sherman Act, are enforceable by the U.S. Department of Justice through litigation in the federal courts.

1. The Federal Trade Commission Act bans "unfair methods of competition" and "unfair or deceptive acts or practices." According to the Supreme Court, violations of the Sherman Anti-Trust Act also violate the Federal Trade Commission Act. Therefore, even though the FTC cannot technically enforce the Sherman Anti-Trust Act, it can bring cases under the FTC Act against violations of the Sherman Anti-Trust Act.

Key provisions of The Federal Trade Commission Act

The Federal Trade Commission Act is the primary statute of the Commission. Under this Act, as amended, the Commission is empowered, among other things, to

(a) prevent unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce;

(b) seek monetary redress and other relief for conduct injurious to consumers;

(c) prescribe rules defining with specificity acts or practices that are unfair or deceptive, and establishing requirements designed to prevent such acts or practices;

(d) gather and compile information and conduct investigations relating to the organization, business, practices, and management of entities engaged in commerce; and

(e) make reports and legislative recommendations to Congress and the public. A number of other statutes listed here are enforced under the FTC Act.

1. The Clayton Antitrust Act addresses specific practices that the Sherman Anti-Trust Act may not address. According to the FTC, these include preventing mergers and acquisitions that may "substantially lessen competition or tend to create a monopoly," preventing discriminatory prices, services and allowances in dealings between merchants, requiring large firms to notify the government of possible mergers and acquisitions, and imbuing private parties with the right to sue for triple damages when they have been harmed by conduct that violates the Sherman and Clayton acts, as well as allowing the victims to obtain court orders to prohibit further future transgressions.

Key provisions of The Clayton Antitrust Act

• Intended to strengthen earlier antitrust legislation, the act prohibits anticompetitive mergers, predatory and discriminatory pricing, and other forms of unethical corporate behavior.
• The Clayton Antitrust Act also protects individuals by allowing lawsuits against companies and upholding the rights of labor to organize and protest peacefully.

Predatory pricing

Predatory pricing, also known as undercutting, is a pricing strategy where a dominant firm deliberately reduces prices of a product or service to loss-making levels in the short-term. The aim is that existing or potential competitors will be foreclosed from the market, as they will be unable to effectively compete with the dominant firm without making a loss. Once competition has been eliminated, the dominant firm can then raise prices to monopoly levels in the long-term to recoup their losses.

Limit Pricing

Limit Pricing is a pricing strategy a monopolist may use to discourage entry. If a monopolist set its profit maximising price (where MR=MC) the level of supernormal profit would be so high it attracts new firms into the market. Limit pricing involves reducing the price sufficiently to deter entry. It leads to less profit than possible in short-term, but it can enable the firm to retain its monopoly position and long-term profitability.

Loss leader pricing

A loss leader is a product or service that is offered at a price that is not profitable, but it is sold to attract new customers or to sell additional products and services to those customers. Loss leading is a common practice when a business first enters a market.

Essentially, a loss leader introduces new customers to a service or product in the hope of building a customer base and securing future recurring revenue.

Bundle pricing

The act of placing several products or services together in a single package and selling for a lower price than would be charged if the items were sold separately. The package usually includes one big ticket product and at least one complementary good. Bundled pricing is a marketing method used by retailers to sell products in high supply.

Tie-in contract

A contract in which a vendor conditions the sale of a desirable product on the purchaser's willingness to also buy a less desirable product.The products are said to be tied to each other.The definition includes lenders,who might express a willingness to loan money for a development project at very attractive interest rates and terms, but only if the developer will purchase a piece of foreclosed real estate in the lender's inventory.The slang expression for this practice called trash for cash.It is illegal under banking regulations and under the Sherman Antitrust Act.

Type of mergers

There are five commonly-referred to types of business combinations known as mergers: horizontal merger,Vertical Merger, market extension merger,product extension merger and conglomerate merger.

Horizontal Merger

A merger occurring between companies in the same industry. Horizontal merger is a business consolidation that occurs between firms who operate in the same space, often as competitors offering the same good or service. Horizontal mergers are common in industries with fewer firms, as competition tends to be higher and the synergies and potential gains in market share are much greater for merging firms in such an industry.

Vertical Merger

A merger between two companies producing different goods or services for one specific finished product. A vertical merger occurs when two or more firms, operating at different levels within an industry's supply chain, merge operations. Most often the logic behind the merger is to increase synergies created by merging firms that would be more efficient operating as one.

Market Extension Mergers

A market extension merger takes place between two companies that deal in the same products but in separate markets. The main purpose of the market extension merger is to make sure that the merging companies can get access to a bigger market and that ensures a bigger client base.

Product Extension Merger

A product extension merger takes place between two business organizations that deal in products that are related to each other and operate in the same market. The product extension merger allows the merging companies to group together their products and get access to a bigger set of consumers. This ensures that they earn higher profits.

Conglomerate Merger

A merger between firms that are involved in totally unrelated business activities. There are two types of conglomerate mergers: pure and mixed. Pure conglomerate mergers involve firms with nothing in common, while mixed conglomerate mergers involve firms that are looking for product extensions or market extensions.