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Back to Subjects - Business

Antitrust

Antitrust Monopoly................................................................................3 Predatory Pricing....................................................................4 Conglomerate Mergers...........................................................5 Vertical Mergers....................................................................12 Horizontal Mergers................................................................14 Conclusion/Recommendations..............................................17 References.............................................................................18 What is a monopoly? According to Webster's dictionary, a monopoly is "the exclusive control of a commodity or service in a given market.” Such power in the hands of a few is harmful to the public and individuals because it minimizes, if not eliminates normal competition in a given market and creates undesirable price controls. This, in turn, undermines individual enterprise and causes markets to crumble. In this paper, we will present several aspects of monopolies, including unfair competition, price control, and horizontal, vertical, and conglomerate mergers. Barriers to Entry. In general, a monopoly by one company possesses the power to create barriers to entry for competing companies in a particular market. Also, once a company has achieved a loyal following, it then becomes easy for that company to maintain control of the market. Thus, leading to elimination of potential competition. Increasing Returns. In some markets, the profits for high volumes of goods are extremely exaggerated. For example, in the manufacturing industry, each product requires a certain material and labor cost to produce it. Large companies are often able to under-cut competitors’ prices, drive them out of the market, and then raise prices again.1 Consequently, this increased volume increases profit, allowing such companies an even greater power. Incomplete Information. Often, once a company gains control of a particular market, that company does not disclose complete information in regard to their products. Such is the case in the current Microsoft antitrust case. Microsoft not only does not disclose complete information on their software products, but also goes one step further by making their software products incompatible with other operating systems. As a result, the consumer has no choice but to buy Microsoft software products exclusively. Once a company has successfully dominated a business market, they can use that control to move into other markets by: · Acquiring additional companies, inside and outside, of the field Enforcement. The Antitrust Division of the Department of Justice is responsible for protecting the competitive process through enforcement of antitrust laws. The Division has challenged barriers to American companies' ability to compete in the market. They have broken up criminal conspiracies that increased consumers' prices for products. They have obtained civil consent decrees that will contribute to lower prices and improved quality for such products. In addition, they have also worked with businesses to restructure mergers in order to protect competition in the American marketplace. Predatory pricing is a tool that is used to achieve market power. It is the practice of pricing below cost. This can foster market power in three simple ways, by eliminating rivals, by disciplining rivals who refuse to cooperate in keeping prices at monopoly levels, or by depressing the market value of rivals' assets so that a predator can purchase these assets at below market prices. Predatory pricing does not allow the market to work freely. It is a way of There are three broad types of mergers: horizontal, vertical, and conglomerate. As the antitrust laws made Horizontal and Vertical Mergers more difficult, Conglomerate Mergers became more popular and are very common Conglomerate Merger - is the merger of firms in unrelated industries. If Coca-Cola mergers with a movie producer, that would be a Conglomerate Merger. An additional reason Conglomerate Mergers became popular is the view that the business cycle affects different industries at different times. Thus, a firm with operations in many different industries would have some divisions expanding when other divisions were experiencing sales downturns. Thus, keeping the overall business stable or growing. Corporate Mergers: Method or Madness? There is an easy way to tell when a person misses the fundamental point of economics: He or she discusses the subject in the metaphors of warfare and the animal kingdom. This is so common it goes unnoticed. But the significance of using terms of violence to describe voluntary exchange for mutual benefit should not be underrated. We're familiar with the terms cutthroat competition, predatory pricing and import invasion to describe processes in which people freely offer to trade their property at the best terms they can find. How ironic that such processes are couched in these metaphors, while actual violent processes are called "economic planning." Nowhere is this more vividly illustrated than in the coverage of and comment on the recent spate of corporate mergers. The Du-Pont/Conoco merger last summer set off an hysterical display of economic ignorance that still might find its way into law. Unfortunately, this ignorance is found not only in the writing of journalists and antimarket spokesmen, but in the articles and speeches of business spokesmen who themselves have fallen victim to the confusion. Typical of the way mergers have been discussed is this opening paragraph from Newsweek's July 27 (1981) cover story (the italics are mine): One prominent banker called it a "feeding frenzy," and last week, as the biggest takeover battle in American corporate history gained momentum, the description seemed right on the mark. Three giant companies - Du-Pont, Seagram and Mobil - were battling for control of Conoco, Inc., the nation's ninth largest oil concern, and the bidding was fast approaching the $6 billion level. Meanwhile, other cash-rich corporate giants were eying their own acquisition targets and frightened companies scrambled to protect themselves. By the end of the week, the hunters and their prey had stocked up war chests of bank credits worth more than $25 billion-enough to buy Detroit's Big Three automakers with $10 billion to spare-and many analysts predicted that the marauders were preparing for a long--term merger binge of unprecedented proportions. "Having had that first taste of blood," said Larry Goldstein, chief economist for the Petroleum Industry Research Foundation, "it is hard to believe they will pull back." To take this sort of writing seriously is to believe that firms are rabid bears preying on defenseless Bambis in a gentle forest, or Attila the Hun pillaging a placid hamlet. If language was ever used to obfuscate and mislead, here it is. Contrary to popular impression, a merger does not occur by one firm eating another against its will. Mergers occur when a firm buys a sufficient portion of another firm's stock to enable the first firm to determine the second's management and policies. The key word is "buys." Before a company can buy stock, the owners of the stock must be willing to sell; only the state and muggers think they may acquire property without the owner's consent. To complain about mergers, then, is to complain about the stockholders' freedom to sell their property as they like. But what about "hostile takeovers"? This misleading term describes mergers in which the management (or some stockholders) don't want a controlling share to be acquired by someone else. It certainly is not hostile to those who find bids on their stock attractive. Economic historian Robert Hessen made an important point about hostile takeovers when he testified in Congress about conglomerate mergers: If a company remains privately held, the owners thereby guarantee themselves against a hostile takeover. However if they go public, that is, if they allow shares of their stock to be traded on public exchanges, then they know that one of the inherent risks of being a publicly traded company is that someone or some coalition of people can buy enough stock to be able to elect one or more directors and ultimately to change the policies and personnel of that company... There is a variety of (private) options to keep a company, even a publicly traded company, from an adverse or hostile takeover without needing to ban conglomerate mergers... There are much more specific remedies which any good lawyer could recommend to a company to protect itself from the possibility of a takeover. Another thing about mergers that concerns some people is their effect on economic growth. Business Week, for instance, declared in a recent editorial that "mergers are not growth." Others say they do not create jobs or make better use of capital. The most fundamental answer to these complaints is, so what? In a free society, people should be at liberty to trade their property without having to justify it to anyone in any terms. But the answer in economic terms goes further. Two parties agree to swap their property only when each sees prospective benefits as a result - otherwise the exchange does not occur. Mergers entail the exchange of titles to capital goods, whose price is determined by the market's assessment of their capacity to produce what consumers want most. One company does not acquire the assets of another unless it expects them to be profitable, that is, produce things consumers will be willing to pay enough for. To believe that a transfer of capital goods from one person to another is unproductive is to miss the point of capital goods altogether. They are not merely physical things; in economic theory, the essential characteristic of a capital good is its role in someone's plan. As New York University economist Israel Kirzner writes, A capital good is not merely a produced factor of production. Rather it is a good produced as part of a multiperiod plan in which it has been assigned a specific function in a projected process of production. A capital good is thus a physical good with an assigned productive purpose. (The Foundations of Modern Austrian Economics, Edwin G. Dolan, ed., p. 137) It stands to reason that two persons or groups can have different plans for the same capital good; one may be more suited to future consumer demand, (that is, more productive for workers, among others), one less suited. We can't be certain prospectively, only retrospectively. But we do know that the market tends to reward entrepreneurs who successfully forecast future demand. Mere observers of the economic scene have little standing to say what is and is not productive activity. If they think they know better, let them bid for the resources and execute their superior plans. Another concern of merger opponents is conglomerates-firms that make many different products. They have yet to explain why anyone should worry about one firm producing both, say, luggage and yogurt. But in expressing this concern, they expose their hidden agenda. You'll note that these same people vigorously oppose companies' merging with other companies in their own or related industries. This is said to be anticompetitive. If a large company creates a new firm in an unrelated industry, it is likely to be accused of either wasteful duplication or unfair competition with the existing firms. In other words, anything a company does that breaks with the status quo will likely bring criticism and perhaps an antitrust investigation. And this is the point! Critics of mergers are defenders of the status quo and opponents of the dynamism inherent in the free market. This makes them, in essence, advocates of privilege, for they would freeze the economic system where it is today, shutting out the aspirants and sheltering yesterday's achievers. These critics will tell you they only want to preserve competition, but that is not what they will accomplish. Mergers are competitive by nature. Competition is the cooperative process in which entrepreneurs seeking profit try to predict future consumer demand and arrange productive resources accordingly. When the law stops or hampers this activity, it cripples the process and harms consumers. The critics' related worry about market concentration is also off the mark. The interests of workers and consumers do not depend on a specified number of firms or market structure. They depend on freedom of entry, uninhibited by regulation, taxation, inflation, licensing and patents. Moreover, the notion of concentration is inherently arbitrary. It implies that an observer categorizes products, then counts the number of suppliers in each category. But the observer's categories are irrelevant to how consumers, motivated by personal considerations, respond to the array of products before them. Unbeknownst to the observer, consumers may regard seemingly disparate products as substitutes for each other, yanking the rug out from under the concentration doctrine. Consumers, and no one else, ultimately determine the structure of markets; their shifting preferences guarantee that markets are always in flux and that temporary advantage is the most any producer can hope for. The reasons for the current wave of mergers are many and complex. Undoubtedly, inflation - which makes acquiring existing assets preferable to building new ones-has much to do with it. So does the thick web of regulations and taxes that inhibit smaller firms. So, no doubt, do Reagan administration hints of "leniency" on conglomerate mergers (but not on "horizontal mergers"). The exact reasons are not so important here. The important point is that the market is a decentralized, voluntarist information and decision making process in which people grapple with uncertainty in pursuit of their well-being. To interfere with this in the name of protecting the people is the cruelest hypocrisy. The term Vertical Merger is defined as a merger that integrates the operation of a supplier and a customer. A vertical merger may be the result of a company wanting to spread its product line, or it may be that a company has a desire to increase its marketing area. When dealing with vertical mergers there are very stringent guidelines that must be followed and reporting that must be met. The Federal Trade Commission, in 1976, enacted rules pursuant to the Hart-Scott-Rodino Antitrust Improvement Act. These rules require certain firms to notify the Federal Trade Commission as well as the Justice Department if a merger is proposed. This act gives the Federal Trade Commission as well as the Justice Department time to investigate any merger it finds to be anticompetitive. The merging parties must file the notification and then wait 30 days before proceeding. During the 30 day waiting period the government may sue and the case is entitled to accelerated treatment in the courts. With vertical mergers there are two different types of mergers that may take place. The first is a backward merger and the second a forward merger. An example of a backward merger may be a company that produces paint to purchase a chemical company that supplies to paint manufacturers. If this sale would cause the chemical company to no longer conduct business with other paint manufactures, the sale would be considered anticompetitive and the merger would be stopped. An example of a forward merger lets look at our own situation as students at the University of Phoenix. The University of Phoenix, until recently, used the standard text from the author and did not require a special edition text. Now the University of Phoenix requires the student to purchase the University of Phoenix special edition series, which is nothing more than a change of the text cover, and limits the purchase to only one supplier. The price is increased and the consumer's choice is restricted, thereby causing an anticompetitive market for the required text for school courses. A company may propose a merger to expand its geographical area if it does not sell a complimentary product. A merger may also be proposed if two companies in similar fields do not have overlapping sales. This would be called a market extension merger. Another type of market merger is the product market extension merger. In this merger a producer of furniture may merge with the producer of lighting products because the two companies do not directly compete. The legality of market extension mergers is closely examined under section 7 of the Clayton Act. A merger that does not fit into any of the previously mentioned areas of mergers may be considered a conglomerate merger. Conglomerate mergers are the mergers of large companies that would give unfair advantage, limit potential competition, and give the potential for reciprocity. An example of this may be the merger of Catalina Sailboat Company, a large sailboat production company, and Marine Textile Inc., a manufacturer of fiberglass and resin. This particular merger would give Catalina an unfair advantage because they would own the fiberglass manufacturer. It would limit the potential of other boat manufacturers to purchase the fiberglass. And last but not least it would give potential for reciprocity to a company that may contract to lay the hulls of the sailboats because Catalina could say unless you purchase our fiberglass we will no longer contract with you to lay our hulls. Guidelines outline the present enforcement policy of the Department of Justice and the Federal Trade Commission (the "Agency") concerning horizontal acquisitions and mergers. These Guidelines are designed primarily to articulate the analytical framework the Agency applies in determining whether a merger is likely substantially to lessen competition, not to describe how the Agency will conduct the litigation of cases that it decides to bring. Although relevant in the latter context, the factors contemplated in the Guidelines neither dictate nor exhaust the range of evidence that the Agency must or may introduce in litigation. Consistent with their objective, the Guidelines do not attempt to assign the burden of proof, or the burden of coming forward with evidence, on any particular issue. Nor do the Guidelines attempt to adjust or reapportion burdens of proof or burdens of coming forward as those standards have been established by the courts. Instead, the guidelines set forth a methodology for analyzing issues once the necessary facts are available. The necessary facts may be derived from the documents and statements of both the merging firms and other sources. Throughout the Guidelines, the analysis is focused on whether consumers or producers "likely would" take certain actions, that is, whether the action is in the actor's economic interest. References to the profitability of certain actions focus on economic profits rather than accounting profits. Economic profits may be defined as the excess of revenues over costs where costs include the opportunity cost of invested capital. Mergers are motivated by the prospect of financial gains. The possible sources of the financial gains from mergers are many, and the Guidelines do not attempt to identify all possible sources of gain in every merger. Instead, the Guidelines focus on the one potential source of gain that is of concern under the antitrust laws: market power. The unifying theme of the Guidelines is that mergers should not be permitted to create or enhance market power or to facilitate its exercise. Market power to a seller is the ability profitably to maintain prices above competitive levels for a significant period of time. In some circumstances, a sole seller (a "monopolist") of a product with no good substitutes can maintain a selling price that is above the level that would prevail if the market were competitive. Similarly, in some circumstances, where only a few firms account for most of the sales of a product, those firms can exercise market power, perhaps even approximating the performance of a monopolist, by either explicitly or implicitly coordinating their actions. Circumstances also may permit a single firm, not a monopolist, to exercise market power through unilateral or non-coordinated conduct --conduct the success of which does not rely on the concurrence of other firms in the market or on coordinated responses by those firms. In any case, the result of the exercise of market power is a transfer of wealth from buyers to sellers or a misallocation of resources. While challenging competitively harmful mergers, the Agency seeks to avoid unnecessary interference with the larger universe of mergers that are either competitively beneficial or neutral. In implementing this objective, however, the Guidelines reflect the congressional intent that merger enforcement should interdict competitive problems in their incipiency. The Guidelines describe the analytical process that the Agency will employ in determining whether to challenge a horizontal merger. First, the Agency assesses whether the merger would significantly increase concentration and result in a concentrated market, properly defined and measured. Second, the Agency assesses whether the merger, in light of market concentration and other factors that characterize the market, raises concern about potential adverse competitive effects. Third, the Agency assesses whether entry would be timely, likely and sufficient either to deter or to counteract the competitive effects of concern. Fourth, the Agency assesses any efficiency gains that reasonably cannot be achieved by the parties through other means. Finally the Agency assesses whether, but for the merger, either party to the transaction would be likely to fail, causing its assets to exit the market. The process of assessing market concentration, potential adverse competitive effects, entry, efficiency and failure is a tool that allows the Agency to answer the ultimate inquiry in merger analysis: whether the merger is likely to create or enhance market power or to No one company or individual should have exclusive control of a commodity or service in a given market. Prosperity in the high-technology economy of the 21st Century will depend on strict enforcement against monopolies that lessen competition along with continued encouragement of innovation. The Department of Justice must continue to open markets and ensure that they are competitive for the benefit of American businesses and Bibliography:

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