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Econ 2 Lecture
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Lecture 25: Antitrust
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Economics 2 |
Lecture 25: Antitrust
anti-trust policy
Herfindahl index
United States vs. Microsoft
regulation of natural monopolies
Anti-trust Policy
Anti-trust policy is designed to control the growth of monopoly and to prevent undesirable business practices.
- Sherman Antitrust Act (1890)
- outlaws monopoly and restraint of trade
- Clayton Antitrust Act (1914)
- restricts mergers that limit competition
- bans anticompetitive price discrimination
- limits tying contracts
- restricts interlocking directorates
- Federal Trade Commission Act (1914)
- bans unfair methods of competition
phases of antitrust policy:
- rule of reason (1890-1914)
- to violate the law an action had to be anticompetitive and its effects had to be demonstrated
- per se rule (1914-1980)
- actions that even had the potential to be monopolizing were illegal
- rule of reason (since 1980)
- price fixing is the only inherently illegal activity
- lax enforcement under Reagan and two Bush administrations; tighter enforcement during Clinton adiministration
Herfindahl Index
Government policies tend to focus on large firms because the fewer the number of firms controlling production in an industry, the less competitive it is likely to be. The Herfindahl index is a measure of concentration, the degree to which a few firms dominate a market.
2 2 2
H = (S ) + (S ) + . . . + (S )
1 2 n
where S = market share of firm i
i
n = number of firms in the industry
The higher H is, the more concentrated the industry. The Department of Justice defines a market as highly concentrated when the Herfindahl index is greater than 1800; less than 1000 is considered competitive.
United States vs. Microsoft
The Department of Justices alleges that Microsoft monopolized the market for PC operating systems and leveraged this monopoly power in markets for complementary goods such as web browsers.
In particular, the allegations fall into three categories
- monopolization of the market for operating systems for PC's
- DOJ needs to show that MS used its monopoly power
- typically, this means charging a high price
- anti-competitive bundling of Internet Explorer with the Windows
operating system
- DOJ needs to prove that this has harmed consumers
- anti-competitive contractual arrangements with various vendors of related goods
The judge in the case made the following findings of fact:
- MS has a monopoly in PC operating systems
- MS has used its monopoly power and harmed competitors
- MS has hobbled the innovation process
- MS actions harmed consumers
- various MS contracts had anti-competitive implications
The judge ordered that Microsoft be broken up into two separate businesses: one with the operating system and one with everything else. Microsoft reached a settlement with the federal government agreeing to an independent panel to monitor the company's practices.
The agreed upon settlement does not prevent Microsoft from tying software like its Web browser, e-mail client and media player with its operating system but does require the company to provide software developers with the APIs used by Microsoft's middleware to interoperate with its operating systems, allowing developers to create competing products that can utilize the integrated functions Microsoft includes in its own software like MS Office. It also gives computer manufacturers and consumers the freedom to substitute competing software on Microsoft's operating systems.
The agreement also prohibits Microsoft from retaliating against any PC manufacturers or software makers for supporting or developing competing software. Additionally, it requires the company to license its operating systems to PC manufacturers on uniform terms for five years. It also bans Microsoft from entering into exclusive agreements.
Microsoft also agreed to ensure that non-Microsoft server software can interoperate with Windows on a PC the same way that Microsoft servers do.
Finally, as noted above, the settlement includes a provision for a panel of three independent monitors, which will work from Microsoft headquarters and have full access to the company's books, records, systems (including source code), and personnel for five years. The court and Microsoft agreed to extend that period for another two years.
The European Commission also has ruled that Microsoft violated anti-trust laws on two counts. One, by tying in its Media Player music and video playing software into Windows, Microsoft has put rival players at an unfair competitive disadvantage. And two, by withholding crucial information about how Windows works, the company has also disadvantaged competitors in the market for server software that runs networks of PCs. Microsoft's own server software works better with Windows on PCs than rivals' server systems.
In addition to paying a large fine, the EC wants Microsoft to reveal some of the computer code inside Windows in order to create a level-playing field in the server software market. To restore a level-playing field in the media player market, the Commission wants Microsoft to sell two versions of Windows: one with Media Player stripped out and sold separately, and the other with the software included.
Regulation of Natural Monopolies
The objective of antitrust policy is to enhance the competitive environment by controlling and limiting the abuse of monopoly power via regulation.
Regulation refers to government intervention in the activities of business.
- economic regulation - control of price and quantity for a specific industry
- social regulation - health, safety, performance, and environmental standards
In some cases the government regulates the production of a natural monopoly in order to promote economic efficiency.
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David A. Latzko Business and Economics Division Pennsylvania State University, York Campus office: 13 Main Classroom Building phone: (717) 771-4115 fax: (717) 771-4062 e-mail: 
web: www.yk.psu.edu/~dxl31 |
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