Chapter 10

Antitrust, Mergers, and Competition Policy

McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, All Rights Reserved.

Ch. 10: Key Learning Objectives Understanding the dilemmas corporate power presents in

a democratic society Knowing the objectives of antitrust and competition laws Recognizing the key issues in contemporary antitrust

policy Analyzing the reasons for mergers and acquisitions, and

how have they affected the relationship between business and its stakeholders

Assessing how competition policies compare around the world, and what impact globalization has had on antitrust enforcement

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The Dilemma of Corporate Power Corporate power

The capability of corporations to influence government, the economy, and society, based on their organizational resources

Power can be a function of size and world’s largest corporations are very big Figure 10.1 shows 10 largest global corporations

Corporate powerThe capability of corporations to influence government, the economy, and society, based on their organizational resources

Power can be a function of size and world’s largest corporations are very big Figure 10.1 shows 10 largest global corporations

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Figure 10.1 The 10 Largest Global Corporations, 2005-2006

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The Dilemma of Corporate Power

Economic power is evident when compare largest corporations’ annual sales revenue with countries whose GPD (gross domestic product) is at same level Figure 10-2 shows this comparison

The dilemma of corporate power concerns how business uses its influence, not whether it should have power in the first place

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Comparison of Annual Sales with GDP for Selected Transnational Companies and Nations, 2004

Figure 10.2

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Antitrust Laws

AntitrustLaws that prohibit unfair, anti-competitive practices by business

Term derives from trust, the old-fashioned word for groups of companies that joined together to divide up markets and limit competition New term for trust is cartel

The term antitrust law is used in the U.S., most other countries use the term competition law

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Objectives of Antitrust and Competition Laws

The protection and preservation of competition To protect the consumer’s welfare by prohibiting

deceptive and unfair business practices To protect small, independent business firms from

the economic pressures exerted by big business competition

To preserve the values and customs of small-town America

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The Sherman Act

Prohibits contracts, combinations, or conspiracies that restrain trade and commerce

Prohibits monopolies and all attempts to monopolize trade and commerce

Provides for enforcement by the Justice Department, and authorizes penalties for violations

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The Clayton Act

Prohibits price discrimination by sellers Forbids requiring someone to buy an unwanted

product or service in order to get another one they want

Prohibits companies from merging if competition is lessened or a monopoly is created

Outlaws interlocking directorates in large competing corporations

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The Federal Trade Commission Act

Created the Federal Trade Commission to help enforce antitrust laws

Prohibits all unfair methods of competition Gives more protection to consumers by forbidding

unfair business practices

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The Antitrust Improvements Act

Requires large corporations to notify the Justice Department and the Federal Trade Commission about impending mergers and acquisitions

Expands the Justice Department’s antitrust investigatory powers

Authorizes the attorneys general of all 50 states to bring suits against companies that fix prices and to recover damages for consumers

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Antitrust Law Exemptions

Some organizations are not covered For example, Major League Baseball

Others not covered Labor unions Agricultural cooperatives Insurance companies (regulated by State law) Business transactions related to national defense

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Antitrust Enforcement at the Federal LevelFigure 10.3

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Key Antitrust Issues - Monopoly

Does domination of an industry or a market by one or a few large corporations necessarily violate antitrust laws?

Should the biggest firms in each industry be broken up?

The courts have found that monopoly per se is not illegal If a company dominates the market because it offers a

superior product or service, has invented something unique, or even because it is just lucky, that is not against the law

If, however, a firm uses its market dominance to restrain commerce, compete unfairly, or hurt consumers, then it may be found guilty of violating antitrust laws

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Key Antitrust Issues - Innovation

In early days of antitrust law, regulators promoted competition in order to provide consumer choice and keep prices down

Today, in the fast-paced economy, regulators have increasingly promoted competition to foster technological innovation

Quote from Federal Trade Commission Chairman: “Innovation is more and more the central arena in which

competition plays out. [It] is the hot issue for the foreseeable future.”

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Key Antitrust Issues – High Technology Businesses

Economy has changed from when antitrust laws were crafted in the late 19th and early 20th century

We are now in the information age, where primary currency is intellectual property

Some argue that the basic principles of antitrust law are not applicable today Monopolies in high-tech businesses are inherently unstable

with low barriers to entry and dynamic technological change constantly changing basis of competition

Courts are struggling to resolve ways antitrust laws apply to high tech industries

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Corporate Mergers Corporate merger

A combination of one company with another Vertical mergers

Occur when the combining companies are at different stages of production in the same general line of business

Horizontal mergers Occur when the combining companies are at the same stage or

level of production or sales Conglomerate merger

Occurs when firms that are in totally unrelated lines of business are combined

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Three Different Types of Corporate Mergers

Figure 10.4

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Forces Driving Mergers in the 1990s and 2000s

Technological change Major companies jockeyed for position in rapidly evolving

technologies Changes in regulatory environment

Examples include telecommunications deregulation and changes in health care industry laws

Globalization Companies found they needed to be big to operate on the

global stage Stock price appreciation

Bull market in late 1990s gave some companies the means to purchase others

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Value of mergers and acquisitions, 1990 – 2005

Figure 10.5

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Consequences of Corporate Mergers

What stakeholders will be helped and what stakeholders will be hurt by wave of corporate mergers?

Mergers bring benefits to the firm, like economies of scale and access to new technologies

Sometimes, however, undermine responsibility to some stakeholder groups Examples include employees losing their jobs and

communities negatively impacted by companies moving out Shareholders can lose if the merger is not well

thought out or acquisition was overpriced

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Comparative Competition Policies

Europe has lagged behind U.S. in antitrust regulation, but is catching up

EU today has complete set of competition policies, however enforcement emphasis is different Attention paid to market domination by former state-run

enterprises Concern with price discrimination across borders Strong inclination to protect small business

Developing nations have moved to adopt their own competition policies

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Globalization and Competition Policy Rapid globalization of business has created challenges for

antitrust enforcement: Should a government permit mergers, or joint ventures, even

if they reduce competition, if they enhance the ability of domestic businesses to compete internationally?

Should a country government move to break up monopolies, if the global marketplace for the products offered is highly competitive?

Should regulators try to enforce antitrust laws against foreign companies if they operate subsidiaries within their borders?

What steps can governments take to create a level playing field, so that corporations operate under a common set of antitrust rules and regulations wherever they do business?

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Antitrust Enforcement and National Competitiveness Regulators have dilemma when goal of competitive

market conflicts with goal of strong economy, relative to other countries

Since mid-1980s U.S. has permitted cooperative activities among firms where appropriate to enhance their competitiveness in the global economy The 1984 National Cooperative Research Act (NCRA)

sought to balance cooperative R&D with competition by instructing the courts to use a “rule of reason”

European regulators have similarly permitted joint R&D aimed at improving the competitiveness of their industries

Regulators have also loosened rules governing joint production agreements to permit economies of scale

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Enforcing Antitrust Laws against Foreign Firms

In recent years, regulators have been more willing to address possible violations of antitrust law by foreign companies Example - requiring merged Swiss drug companies Sandoz

and Ciba-Geigy to divest product lines in the U.S. to avoid being a monopoly

European regulators have become more active in enforcement against U.S. companies Example – European court in 2005 upheld EU’s veto of

General Electric’s acquiring of Honeywell

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Harmonization

Harmonization is process being used to coordinate laws and enforcement of competition policies across countries

Several bilateral treaties are in place OECD has worked to coordinate antitrust enforcement EU and U.S. now jointly review global mergers EU also coordinating more closely with Japan Fair Trade

Commission Despite these efforts, lack of common standards creates a

problem for cross-border mergers Brookings Institution report has called for multi-country effort to

harmonize competition policies