Antitrust Regulation
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The Sherman Act - 1890 Title 15, Chapter 1, Sec. 1: Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $100,000,000 if a corporation, or, if any other person, $1,000,000, or by imprisonment not exceeding 10 years, or by both said punishments, in the discretion of the court. J. Parman (College of William & Mary) Regulation of Markets, Spring 2017 February 6 and 8, 2017 1 / 56 The Sherman Act - 1890 Title 15, Chapter 1, Sec. 2: Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other 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, and, on conviction thereof, shall be punished by fine not exceeding $100,000,000 if a corporation, or, if any other person, $1,000,000, or by imprisonment not exceeding 10 years, or by both said punishments, in the discretion of the court. J. Parman (College of William & Mary) Regulation of Markets, Spring 2017 February 6 and 8, 2017 2 / 56 The Sherman Act - 1890 Image from http://ehistory.osu.edu/osu/mmh/1912/trusts/NorthernSecurities.cfm J. Parman (College of William & Mary) Regulation of Markets, Spring 2017 February 6 and 8, 2017 3 / 56 The Clayton Act - 1915 Title 15, Chapter 1, Sec. 13: It shall be unlawful for any person engaged in commerce, in the course of such commerce, either directly or indirectly, to discriminate in price between different purchasers of commodities of like grade and quality... J. Parman (College of William & Mary) Regulation of Markets, Spring 2017 February 6 and 8, 2017 4 / 56 The Clayton Act - 1915 (A Quick Aside) We've modeled the dangers of standard monopoly pricing It leads to a loss in total surplus (inefficiency) and a shift of surplus from consumers to monopolist (not equitable if you're a consumer) But what about price discrimination? Sounds bad, but why is it bad? J. Parman (College of William & Mary) Regulation of Markets, Spring 2017 February 6 and 8, 2017 5 / 56 The Clayton Act - 1915 (A Quick Aside) Economists typically use three categories of price discrimination: First degree: sellers can charge different prices on different units, those prices can vary across customers Second degree: sellers can charge different prices on different units, schedule of prices must be offered to all customers Third degree: sellers must charge same price for each unit, that per unit price can vary across customers J. Parman (College of William & Mary) Regulation of Markets, Spring 2017 February 6 and 8, 2017 6 / 56 The Market for Super Bowl Tickets J. Parman (College of William & Mary) Regulation of Markets, Spring 2017 February 6 and 8, 2017 7 / 56 The Market for Super Bow Tickets J. Parman (College of William & Mary) Regulation of Markets, Spring 2017 February 6 and 8, 2017 8 / 56 The Market for Super Bowl Tickets J. Parman (College of William & Mary) Regulation of Markets, Spring 2017 February 6 and 8, 2017 9 / 56 The Market for Super Bowl Tickets J. Parman (College of William & Mary) Regulation of Markets, Spring 2017 February 6 and 8, 2017 10 / 56 The Clayton Act - 1915 Except as provided in subsection (b) of this section, any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue therefore in any district court of the United States in the district in which the defendant resides or is found or has an agent, without respect to the amount in controversy, and shall recover threefold the damages by him sustained, and the cost of suit, including a reasonable attorney's fee. J. Parman (College of William & Mary) Regulation of Markets, Spring 2017 February 6 and 8, 2017 11 / 56 The Clayton Act - 1915 So why are the treble damages important? Think about the expected profit from colluding The expected cost of colluding is the probability of being caught, p, times the amount the firm pays out in a settlement, S The expected benefit of colluding is the probability of not being caught, 1 − p, times the profits from successfully colluding, πcollude E(π) = (1 − p) · πcollude − p · S J. Parman (College of William & Mary) Regulation of Markets, Spring 2017 February 6 and 8, 2017 12 / 56 The Clayton Act - 1915 E(π) = (1 − p) · πcollude − p · S What the government wants to do is deter collusion What will stop firms from colluding is if the expected profits from collusion are negative The government has two things under its control to accomplish this, p and S Increasing p reduces the expected benefits and increases the expected costs Increasing S increases the expected costs The big difference between the two: increasing S is essentially costless J. Parman (College of William & Mary) Regulation of Markets, Spring 2017 February 6 and 8, 2017 13 / 56 Prosecution of Antitrust Cases 20 $70,000,000 18 $60,000,000 16 14 $50,000,000 12 $40,000,000 10 8 $30,000,000 6 $20,000,000 4 $10,000,000 2 0 $0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Number of Corporations Fined Ave Corporate Fine J. Parman (College of William & Mary) Regulation of Markets, Spring 2017 February 6 and 8, 2017 14 / 56 Prosecution of Antitrust Cases $700,000 30 $600,000 25 $500,000 20 $400,000 15 $300,000 10 $200,000 $100,000 5 $0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Ave Individual Fine Number of Individuals Fined J. Parman (College of William & Mary) Regulation of Markets, Spring 2017 February 6 and 8, 2017 15 / 56 Prosecution of Antitrust Cases 1000 40 900 35 800 time 30 jail 700 (days) 25 600 length receiving 500 20 400 senctence 15 individuals of 300 10 Average mber 200 u N 5 100 0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Ave Sentence Length (days) Number of Individuals Sentenced to Incarceration Time J. Parman (College of William & Mary) Regulation of Markets, Spring 2017 February 6 and 8, 2017 16 / 56 Per Se vs. Rule of Reason There are two broad categories of antitrust cases, per se and rule of reason cases per se - cases where a practice has no beneficial effects and only harmful effects, only need to prove behavior existed (e.g., price fixing by a cartel) rule of reason - court must examine the `inherent effect’ and the `evident purpose' of potentially anti-competitive actions, much more involved cases (this goes back to the 1911 American Tobacco case: \the words `restraint of trade'...only embraced acts...which, either because of their inherent nature or effect or because of the evident purpose of the acts, etc., injuriously restrained trade") J. Parman (College of William & Mary) Regulation of Markets, Spring 2017 February 6 and 8, 2017 17 / 56 Per Se vs. Rule of Reason Justice Marshall on the rationale for a per se category (US v. Container Corp. of America, 1969): Per se rules always contain a degree of arbitrariness. They are justified on the assumption that the gains from imposition of the rule will far outweigh the losses and that significant administrative advantages will result. In other words, the potential competitive harm plus the administrative costs of determining in what particular situations the practice may be harmful must far outweigh the benefits that may result. If the potential benefits in the aggregate are outweighed to this degree, then they are simply not worth identifying in individual cases. J. Parman (College of William & Mary) Regulation of Markets, Spring 2017 February 6 and 8, 2017 18 / 56 American Tobacco Company et al v. United States (1946) Basic facts of the American Tobacco case: On June 30, 1931, Reynolds increased wholesale price for 1,000 cigarettes from $6.40 to $6.85. American and Liggett & Myers followed within 24 hours (leaf prices and labor costs were falling at the time). In November 1932, the Big Three dropped prices to $5.50 forcing economy brands out of business. The Big Three bought large amounts of low-grade tobacco even though it wasn't used in their cigarettes. The Big Three would participate in leaf tobacco auctions only if all three were present. J. Parman (College of William & Mary) Regulation of Markets, Spring 2017 February 6 and 8, 2017 19 / 56 American Tobacco Company et al v. United States (1946) These facts were sufficient for the court to infer the existence of a conspiracy This was a big step in how the court established illegal conspiracies This has softened over time to an approach of `parralelism plus' Tacit collusion is tough to prosecute, modern cases tend to focus on more overt collusion J. Parman (College of William & Mary) Regulation of Markets, Spring 2017 February 6 and 8, 2017 20 / 56 DRAM pricing (2002) One of the biggest recent cases has been price fixing by manufacturers of DRAM chips Hynix, Infineon, Micron Technology, Samsung, and Elpida have all pled guilty to price fixing The list of charges from the Samsung plea: Participating in meetings, conversations, and communications...with competitors to discuss the prices of DRAM to be sold to certain customers Agreeing, during those meetings, conversations and communications, to charge prices of DRAM at certain levels to be sold to certain customers Issuing price quotations in accordance with the agreements reached Exchanging information on sales of DRAM to certain customers for the purpose of monitoring and enforcing adherence to the agreed-upon prices J.