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Presentation Notes
Defining a trust
A firm with large market power that restricts competition-A trust is oftentimes considered synonymous with a monopoly, but any considerable concentration in market power reduces efficiency. As such, for the purpose of this presentation and many of the actual laws that we will cover, trusts are firms that have considerable market power, beyond what is beneficial to consumers.
Herfindahl-Hirschmann Index-The Herfindahl-Hirschmann Index is the sum of the squares of the market power percentages of the fifty largest firms in the market. A value of 0 indicates perfect competition, 2500 indicates oligopoly, and 10,000 indicates monopoly. The Justice Department has to approve mergers of companies that would increase the HHI above 1500.
Four firm concentration ratio-The Four Firm Concentration Ratio is the sum or the market share percentages of the top four firms. 0 is perfect competition, 40% is monopolistic competition, 60% is oligopoly, and 100% is monopoly.
Horizontal vs. vertical integration-So, manufacturing oftentimes takes many steps. For example, first is the production of raw materials, then the production of finished goods, then the transportation of these goods, and finally the retail of the goods. Horizontal integration is dominating a certain stage of this process. For example, Rockefeller owned almost all of the oil refineries in the United States. Vertical is owning the entire supply chain, with the firm controlling access to raw materials, producing the finished goods, and transporting the goods. Rockefeller integrated horizontally through purchasing oil wells and building pipes as well as owning other transportation mechanisms. Carnegie also significantly horizontally integrated, owning iron ore deposits and the steel factories.
The Laws
Sherman Anti-Trust Act (1890)-Sherman Antitrust Act bans nefarious business practices that seek to prevent competitors from entering the market or driving competitors out of the market to gain market share.
Federal Trade Commission Act (1914)-The Federal Trade Commission Act created the FTC to investigate and prevent nefarious business practices.
Clayton Act (1914)-Clayton Act banned monopolistic price discrimination, exclusive dealing arrangements, tying (when a consumer is forced to buy an unrelated good along with the desired good), and mergers or acquisitions that reduce competition.
Major Cases
Standard Oil-In Standard Oil v. US (1911), the Supreme Court found that Rockefeller’s Standard Oil Company violated the Sherman Antitrust Act and ordered that the company be broken up. Rockefeller owned stock all the new companies, and his net worth actually increased.
MicrosoftIn US v. Microsoft (2001), the Justice Department accused Microsoft of anti-competitive business practices because Microsoft bundled Internet Explorer search engine within Microsoft Windows, effectively preventing other search engines from being wanted by Windows users. This is an example of tying one product (search engine) to another (Windows).