SUBDOMAIN: 309.1 -­‐ ECONOMICS Competency 309.1.3: Competition The graduate analyzes a firm’s competitive environment to determine whether the market exhibits characteristics of perfect competition, monopoly, oligopoly, and monopolistic competition. Objective 309.1.3-­‐06: Describe how the need for governmental price regulation differs for firms in different competitive environments.

Date: February 9, 2015

A) The Anti-­‐Trust Laws

Sherman Act (1890) The Sherman Act came about due to a growing public resentment of trusts. The antitrust legislation is broken down into two parts: • Section 1 “Every contract, combination in the form of a trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations is declared to be illegal.” Section 2 “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any person or persons, to monopolize any part of the trade or commerce among the several states, or with foreign nations, shall be deemed guilty of a felony” (Brue, Flynn, & McConnell, 2012)

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Some results of the Sherman Act include the banning of various restraints of trade and monopolization. Another result was that it seemed to set a foundation for government action against monopolies, but the courts unfortunately castraighted the act by creating ambiguity in the law. This caused the business community to look for a more clear decision as to what was considered legal versus illegal. Clayton Act (1914) The Clayton Act was the legislatures response to business for clarification on what was considered legal versus illegal based upon the Sherman Act. To provide for strength and a more defined intent, the Clayton Act contained the following four (4) sections, among others: • Section 2 seeked to ban price discrimination not based on cost differences and reduces competition. • Section 3 seeked to ban tying contracts where a producer requires that a buyer purchase other products in order to receive a desired product. • Section 7 seeked to ban the receipt of stocks of competing corporations when the outcome would mean competition is lessened. • Section 8 seeked to ban the creation of interlocking directorates, which is situations where a director of one firm is also a board member of a competing firm, in large corporations if the effect would be reduced competition. (Brue, Flynn, & McConnell, 2012) Another goal of the Clayton Act was to ban methods used by firms to develop a monopoly, where section 2 of the Sherman Act was designed with breaking up existing monopolies in mind.

Federal Trade Commission Act (1914) The Federal Trade Commission Act created the five-­‐person Federal Trade Commission – or FTC. The FTC has primary responsibility in the US Department of EGT1 Task 3 – Competition Page 2 of 7 Scott Head (#219323)

Justice to enforce antitrust laws. It does so by investigating unfair practices whether self identified or requested by other businesses.

The FTC Act was amended in 1938 by the Wheeler-­‐Lea Act, which gave the FTC the additional responsibility of policing acts or practices in commerce that are deemed to be deceptive. This allows the FTC to protect the purchasing public from misrepresentation of products and false advertising.

Celler-­‐Kefauver Act (1950) The Celler-­‐Kefauver Act was introduced in order to amend section 7 of the Clayton Act. Prior to this amendment a business could take advantage of a loophole in the section by acquiring the physical assets of a company as opposed to stock. This act effectively closed that loophole by making it a violation to do either act when the result was found to constitute an anticompetitive merger. B) Industrial Regulation Because society seeks fair market outcomes, industrial regulation is used to reduce the market power of oligopolies, prevent collusion, and increase market competition. So where the antitrust legislation outlined above were designed to prevent monopolies, industrial regulation was designed to regulate pricing within competitive markets.

There are four market structures on the industrial regulation continuum, but only two that have any real control over pricing. Oligopoly An oligopoly occurs when a market is controlled by a small number of companies that manufacture a particular product or provide a particular service. Each firm in the oligopoly has its own ability to determine its own price and production levels required to maximize its profit. This is referred to as strategic behavior. But because the number of rival companies would be relatively few there would be a risk of them colluding together to control pricing, a practice known as mutual interdependence. This basically means that a firm in an oligopoly bases its decisions on how it thinks its rivals will react. An example would be the current pricing wars going on in the cellular telecommunications industry between AT&T, Sprint and T-­‐ Mobile.

There are entry barriers that exist when considering oligopolies. Once such barrier would be the requirement of economies of scale. Lets use the wireless telecommunications industry as an example. Currently there are four main players – Verizon, AT&T, Sprint and T-­‐Mobile. These four firms have each had good market share and are competitive in price because their networks are already built out and supply chains already developed. If another firm were to try to engage, the cost to obtain devices could be deemed too expensive for them to survive.

A second barrier of entry is closely related in large expenditure for capital. Using the above example this would entail the costs of developing their own network versus the monies already spent by the big four carriers. And without a solid network for the firm to operate off the firm would surely have a hard time succeeding.

Industrial regulators want to promote competition by reducing barriers of entry and creating rules and consequences preventing collusion. They can use the Sherman Act of 1890 as their basis for protection against oligopoly. If they are unsuccessful at this they could treat them like a monopoly and govern price. Monopoly A pure monopoly exists when a single firm is the sole producer of a product that does not have close substitutes. It is distinguished by five main characteristics: • A single firm is the only provider of a product or service. • The product or service is unique with no close substitutes. • The firm has considerable control over price due to full control over total quantity of product or service to be made available. • Entry into market is totally blocked due to barriers such as economic, technological or legal constraints. • The product or service may be either standardized or differentiated. If standardized the firm engages in public relations advertising. If differentiated it would advertise attributes of the product or service. There are instances where the government (local or federal) would want to block or allow a monopoly to exist. Any instance where a monopoly would be seen as having a negative impact on society, such as only having one gasoline provider for automobiles nationwide, could be addressed through the Clayton Act and the Celler-­‐ Kefauver Act, which amended the Clayton.

However instances do exist where a monopoly could be seen as a good thing. An example of this could be in the energy sector. It is not uncommon to have local municipalities set an approved electricity provider for their area. In this situation the high investment of capital to build a power grid would make it very unlikely that competition could ever exist. Therefore the government would use the Federal Trade Commission Act to ensure that pricing remains fair for the consumers.

C) Federal and State Regulatory Commissions Federal Energy Regulatory Commission was established in 1930 as the Federal Power Commission to provide jurisdiction over the electricity and gas industries. This included gas and oil pipelines and water-­‐power sites. It was renamed to its current name in 1977.

Federal Communications Commission was established in 1934 to provide jurisdiction over telephones, television, cable television, radio, telegraph, CB radios and ham operators.

Various State Public Utility Commissions have been established through the years since the above two commissions in order to provide a more local control over impacted jurisdictions.

D) Social Regulation

Social regulation is government regulation of the conditions under which goods are produced, the physical characteristics of said goods, and the impact of the production and consumption of said goods on society. It deals with the “broader impact of business” on consumers, workers, environment, and third parties whereas industrial regulation is concerned with prices, output and profits in specific industries.

First, social regulation affects a much larger audience than industrial regulation, and is therefore often applied to firms in all industries. It tends to have a greater effect on more producers.

Second, social regulation interrupts the day-­‐to-­‐day production process to a greater extent than industrial regulation. Where industrial regulation is primarily concerned with costs and profits, social regulation looks more into the design of the products, conditions under which work is accomplished, and the process surrounding reproduction of the product.

Finally, social regulation has expanded at a rapid pace during the same time period where industrial regulation has declined. Recently we have seen Congress create more and more social regulations that would be enforced by already existing regulatory agencies. An example would include the Equal Employment Opportunity Commission which oversees the enforcement of laws against employment discrimination, but has also been given the added responsibility of enforcing the Americans with Disabilities Act of 1990 in which firms were instructed to provide reasonable accommodations for qualified workers which were handicapped by some form of physical or mental disability. E) Primary Federal Regulatory Commissions The Food and Drug Administration was established in 1906 to provide for the safety and effectiveness of food, drugs and cosmetics. The Equal Employment Opportunity Commission was established in 1964 to provide for protection of employees in the areas of hiring, promotion, and termination. EGT1 Task 3 – Competition Page 5 of 7 Scott Head (#219323)

The Occupational Safety and Health Administration was established in 1971 to ensure firms were providing for safe and healthy working environments for their employees. The Environmental Protection Agency was established in 1972 to provide for the protection of our natural resources – air and water – as well as protection against noise pollution. The Consumer Product Safety Commission was established in 1972 to ensure the safe manufacturing of consumer products. Its goal was to ensure that faulty products did not injure consumers.

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Works Cited

Brue, S. L., Flynn, S. M., & McConnell, C. R. (2012). Economics, 19th Edition. New York, NY, USA: McGraw-­‐Hill Irwin.

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