Georgetown UniversityGeorgetown University

The Efficiency Properties of The Efficiency Properties of CompetitiveCompetitive MarketsMarkets

Q

$/q$/qS

D

MCATC

P

P=MC Allocative efficiencyP=minAC Productive efficiency

IndustryFirm

Dynamic efficiency (?)J. Schumpeter’s Theory of Creative Destruction

Market FailuresMarket Failures

Fill In – what market failures can you think of?Fill In – what market failures can you think of?

Natural MonopolyNatural Monopoly

Contrived monopolyContrived monopoly

Public GoodsPublic Goods

ExternalitiesExternalities

Asymmetric InformationAsymmetric Information

Monopoly: Monopoly: Profit MaximizationProfit Maximization

$

Q

P(Q)

MRQM

PMPROFIT

ATC

ATCMC

““Antitrust laws in general, and the Sherman Act Antitrust laws in general, and the Sherman Act in particular, are the Magna Carta of free in particular, are the Magna Carta of free enterprise. They are as important to the enterprise. They are as important to the

preservation of economic freedom and our free preservation of economic freedom and our free enterprise system as the bill of rights is to the enterprise system as the bill of rights is to the

protection of our fundamental personal protection of our fundamental personal freedomsfreedoms.”.”

Thurgood MarshallThurgood Marshall

Supreme Court JusticeSupreme Court Justice

Antitrust effectivenessAntitrust effectiveness StatutesStatutes

OriginsOrigins GoalsGoals LanguageLanguage

Enforcement Institutions and AgenciesEnforcement Institutions and Agencies

Case LawCase Law

Origins of the Antitrust LawsOrigins of the Antitrust Laws

Rise in methods of mass productionRise in methods of mass production Reduced transportation costReduced transportation cost Outbreaks of price warsOutbreaks of price wars Formation of trustsFormation of trusts Political opposition from consumers, Political opposition from consumers,

farmers and political satiristsfarmers and political satirists

Goals of AntitrustGoals of Antitrust

The goal of antitrust is to ensure that firms The goal of antitrust is to ensure that firms compete to serve the needs of consumers, compete to serve the needs of consumers, … even when vigorous competition is … even when vigorous competition is contrary to the interests of powerful and contrary to the interests of powerful and entrenched suppliers.entrenched suppliers. Carl ShapiroCarl Shapiro May 2009May 2009

Sherman Act (1890)Sherman Act (1890)

Section 1 “Any contract, combination or Section 1 “Any contract, combination or conspiracy in restraint of trade ...is hereby conspiracy in restraint of trade ...is hereby declared illegaldeclared illegal.” [akin to Article 81 in EC].” [akin to Article 81 in EC]

Section 2 Section 2 ““Every person who shall Every person who shall monopolize or attempt to monopolize or attempt to monopolize ...any part of trade or monopolize ...any part of trade or commerce among the several states shall commerce among the several states shall be guilty of a felonybe guilty of a felony.” [akin to article 82 in .” [akin to article 82 in EC]EC]

Clayton Act (1914)Clayton Act (1914)

Price Discrimination [Sec. 2]Price Discrimination [Sec. 2] Section 2(a) permits Section 2(a) permits ““cost justification defensecost justification defense”” Section 2(b) permits Section 2(b) permits ““good faithgood faith”” meeting of competition meeting of competition

Exclusionary practices [Sec. 3] Exclusionary practices [Sec. 3] (e.g., exclusive dealing; territorial restrictions; tying)(e.g., exclusive dealing; territorial restrictions; tying) Mergers [Sec. 7] Mergers [Sec. 7]

• [Hart-Scott-Rodino (1976)][Hart-Scott-Rodino (1976)]

That it shall be unlawful for any person engaged in That it shall be unlawful for any person engaged in commerce ...to commerce ...to ACTACT ...where the effect ...may be to substantially ...where the effect ...may be to substantially lessen competition or tend to create a monopoly in any line of lessen competition or tend to create a monopoly in any line of commercecommerce

Federal Trade Commission Act Federal Trade Commission Act (1914)(1914)

Section 5(a) (1) Unfair methods of Section 5(a) (1) Unfair methods of competition in or affecting commerce, and competition in or affecting commerce, and unfair or deceptive acts or practices in or unfair or deceptive acts or practices in or affecting commerce, are hereby declared affecting commerce, are hereby declared unlawful.unlawful.

Article 81Article 81 1. The following shall be prohibited as incompatible with the 1. The following shall be prohibited as incompatible with the

common market: all agreements between undertakings, decisions common market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within or effect the prevention, restriction or distortion of competition within the common market, and in particular those which:the common market, and in particular those which:

(a) directly or indirectly fix purchase or selling prices or any other (a) directly or indirectly fix purchase or selling prices or any other trading conditions;trading conditions;

(b) limit or control production, markets, technical development, or (b) limit or control production, markets, technical development, or investment;investment;

(c) share markets or sources of supply;(c) share markets or sources of supply;

(d) apply dissimilar conditions to equivalent transactions with other (d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;trading parties, thereby placing them at a competitive disadvantage;

(e) make the conclusion of contracts subject to acceptance by the (e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject according to commercial usage, have no connection with the subject of such contracts.of such contracts.

Article 82Article 82 Any abuse by one or more undertakings of a dominant position Any abuse by one or more undertakings of a dominant position

within the common market or in a substantial part of it shall be within the common market or in a substantial part of it shall be prohibited as incompatible with the common market in so far as it prohibited as incompatible with the common market in so far as it may affect trade between Member States.may affect trade between Member States.

Such abuse may, in particular, consist in:Such abuse may, in particular, consist in:

(a) directly or indirectly imposing unfair purchase or selling prices or (a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;other unfair trading conditions;

(b) limiting production, markets or technical development to the (b) limiting production, markets or technical development to the prejudice of consumers;prejudice of consumers;

(c) applying dissimilar conditions to equivalent transactions with (c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive other trading parties, thereby placing them at a competitive disadvantage;disadvantage;

(d) making the conclusion of contracts subject to acceptance by the (d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject according to commercial usage, have no connection with the subject of such contracts. of such contracts.

Antitrust EnforcementAntitrust Enforcement

Antitrust Division of the U.S. Department Antitrust Division of the U.S. Department of Justiceof Justice Sherman Act (criminal cases)Sherman Act (criminal cases) Some Clayton ActSome Clayton Act

Federal Trade CommissionFederal Trade Commission FTC ActFTC Act Some Clayton ActSome Clayton Act

State Antitrust AgenciesState Antitrust Agencies Private EnforcementPrivate Enforcement

Antitrust effectivenessAntitrust effectiveness

Clayton Act, Section 4Clayton Act, Section 4““Any person who shall be injured in his Any person who shall be injured in his business or property by reason of anything business or property by reason of anything forbidden in the antitrust laws may sue in forbidden in the antitrust laws may sue in any district court of the United any district court of the United States ...and shall recover States ...and shall recover threefold the threefold the damagesdamages by him sustained, and the cost by him sustained, and the cost of the suit, including a reasonable of the suit, including a reasonable attorney‘s feesattorney‘s fees.”.”

U.S. Antitrust ExemptionsU.S. Antitrust Exemptions LaborLabor – Clayton Act (Section 6) – Clayton Act (Section 6) ““the labor of a human being is not a the labor of a human being is not a commodity or article of commercecommodity or article of commerce””

(e.g., employer unions; NFL scout teams)(e.g., employer unions; NFL scout teams)

Agricultural cooperativesAgricultural cooperatives

PatentsPatents

The State Action DoctrineThe State Action Doctrine Parker v. Brown (1943)Parker v. Brown (1943)

Noerr-Pennington DoctrineNoerr-Pennington Doctrine Eastern Railroad Presidents‘ Conference v. Noerr Motor Freight (1967)Eastern Railroad Presidents‘ Conference v. Noerr Motor Freight (1967)

Trade occuring outside the U.S with foreign nationsTrade occuring outside the U.S with foreign nations Foreign Trade Improvements Act (1982) exempts “trade or commerce (other than import Foreign Trade Improvements Act (1982) exempts “trade or commerce (other than import

trade and commerce) with foreign nations“trade and commerce) with foreign nations“

Competition Policy in the larger Competition Policy in the larger socio-economic contextsocio-economic context

Economic freedomsEconomic freedoms Protection of small businessProtection of small business Political ideologyPolitical ideology Antitrust in a distressed industry/economyAntitrust in a distressed industry/economy

Shapiro (2009)Shapiro (2009)

Antitrust in the Current EconomyAntitrust in the Current Economy

Percent Change in Real GDP, U.S.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

perc

ent

Antitrust in the Current EconomyAntitrust in the Current Economy

Single Family Home Sales, U.S.

0

200

400

600

800

1,000

1,200

1,400

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Th

ou

san

ds

Antitrust in Distressed IndustriesAntitrust in Distressed Industries

Recent economic times have led some Recent economic times have led some (many) pundits to challenged the (many) pundits to challenged the fundamental propositions of the beneficial fundamental propositions of the beneficial effects of markets and a more cooperative effects of markets and a more cooperative model of firm behaviormodel of firm behavior What has been the historical response to of What has been the historical response to of

policymakers with respect to competition policymakers with respect to competition policy in times of economic downturn?policy in times of economic downturn?

Did efforts such as the NRA in the Great Did efforts such as the NRA in the Great Depression help the recovery process?Depression help the recovery process?

The likely political push pointsThe likely political push points

Pressure on enforcersPressure on enforcers ExemptionsExemptions We are all for competition, but…We are all for competition, but… Expansion of failing firm defense (mergers)Expansion of failing firm defense (mergers)