Government Antitrust and Regulation Policy

The firms in an oligopolistic industry, more so than in a purely competitive or a monopolistically competitive industry, are susceptible to collusion aimed at lessening or eliminating competition among them so that each can earn a higher profit. The government policy that deals with this threat to public interest is called antitrust policy. It includes all government action aimed at maintaining or restoring competition.

In reaction to a large amount of monopolization during the quarter of a century after the Civil War, the first federal antitrust law, the Sherman Antitrust Act, was passed in 1890. It prohibited the restriction of competition, monopolization, and attempts to monopolize.

In order to be more specific about firms' actions that are likely to restrict competition, Congress passed the Clayton Act in 1914. It dealt with four types of potentially anticompetitive business practices: (a) price discrimination, (b) mergers, (c) exclusive dealing and tying arrangements, and (d) interlocking directorates. Two of the sections of the act were beefed up in later amendments-the price- discrimination section in the Robinson- Patman Act of 1936 and the merger section in the Celler- Kefauver Antimerger Amendment of 1950.

The third major piece of antitrust legislation, the Federal Trade Commission Act, was also passed in 1914. It prohibited unfair methods of competition among firms, and after. the Wheeler Lea Amendment in 1938, it also covered unfair and deceptive practices toward consumers. In addition, the act set up a second enforcement agency. The Federal Trade Commission was added to the already established (1903) Antitrust Division of the Justice Department. 

The Sherman Antitrust Act prohibited monopolization or attempts to monopolize, but it was left to the courts to interpret just what that meant. From the time of the Standard Oil case in 1911 until the Alcoa case in 1945, the Supreme Court adopted a "rule of reason, " which focused on intent and conduct rather than on the presence or absence of substantial monopoly control. The Alcoa case and several others that followed in the late 1940s and early 1950s overturned the "rule of reason" and made monopolization itself illegal. Since then some backtracking toward a rule of reason has occurred.

Mergers that substantially lessen competition are illegal under the Clayton Act, but due to certain loopholes the act had limited power until the Celler-Kefauver Antimerger Amendment in 19 5 0. During the 19 5 Os and 1960s the government impressively won a number of horizontal and vertical merger cases. However, the Supreme Court was not given a good opportunity to make a definitive statement regarding conglomerate merger. Attempts in the 1970's to pass new legislation that would pre vent huge firms from making acquisitions failed. In the first half of the 1980s the "big is bad" philosophy was pretty well discarded, and acquisitions by huge firms of other huge firms were given the government's blessings.

Ever since the passage of the Sherman Antitrust Act in 1890, the courts have ruled that price fixing-the agreement among competing firms to restrict output in order to maintain high prices-is illegal. The Supreme Court's blanket condemnation of price fixing has been consistent.

A cartel is a collusive arrangement among sellers to fix output and prices. Cartels are inherently unstable. It pays for individual members to cheat because they can sell additional output at monopoly prices. However when cheating be comes widespread, the level of industry output in creases so much that monopoly prices can no longer be maintained. The best-known cartel is OPEC. For the decade beginning with 1973 it was quite successful in restricting the supply of crude oil and raising its price. Since that time the combination of lower demand, lower market share, and cheating by various OPEC members has seriously   eroded OPEC's ability to control the world oil market.

Some industries, called "regulated industries, " are granted monopoly status by the government. In return they are regulated so that they are not able to take advantage of their monopoly power. Such "monopoly regulation" is in addition to the usual "social regulation, " to which most firms are subject.

Most regulated industries are diagnosed as natural monopolies. A natural monopoly is a market in which a single seller is required for efficient production. Economies of scale are so great in relation to the quantity demanded in the market that only one firm can take full advantage of them. If more than one firm operated in a natural monopoly market, price competition among them would cause all but the strongest firm to leave the market.

The government attempts to recognize an industry as a natural monopoly before firms begin operation and ruinous competition takes place. In such instances the government may establish a public enterprise, but more likely it will grant a private firm public utility status and then regulate it. Regulation takes place by both state and federal regulatory commissions. The four most prominent federal regulatory commissions are the ICC, FCC, SEC, and FERC.

Regulatory commissions concern them selves mainly with the prices that public utilities charge. They regulate both the level of rates and the structure of rates. They seek to set a rate level that gives public utility firms a fair return on a fairly valued rate base. This is usually interpreted as nor-mal profit on the replacement cost of a firm's capital. Regarding the structure of rates, firms have an incentive to charge different rates according to the class of customer, the quantity purchased, and the time of delivery. Regulatory commissions encourage price differentials based on cost differences, but try to prevent price discrimination.

Until the 1960s few economists and government officials questioned the appropriateness of regulation. But in the 1960s and more so in the 1970s, suggestions to deregulate were frequently heard. Because of technological change, some industries no longer were natural monopolies. Some natural monopoly industries were recognized to be contestable markets, in which regulation actually  prevented new firms from entering and offering better service and lower prices. The public also be came more disenchanted with regulation because of high prices and a greater recognition that regulated firms had in many cases captured their regulators Beginning in the late 1970s various degrees of deregulation occurred in many public utility industries, the outstanding example being the domestic airline industry.