Free Business Book Summaries
I. Understanding monopoly power
A. Society is concerned with the abuse of monopoly power which is the ability to control market activity.
B. The economic effects of monopoly power are higher prices, a smaller quantity sold, and economic rent to owners.
C. Measuring the amount of industry concentration
1. Standard industrial classifications (SIC) divide industries into homogeneous concentrations such as apparel (23), male (3),
and nightwear (2), resulting in an SIC of 2332. FOR MORE READ 1997 NAICS and 1987 SIC Correspondence Tables.
2. Concentration ratios measure the % of total industrial activity in areas such as sales and employment for oligopoly industries
a. Four company industries are the most common.
b. Evidence is mixed as to whether concentration ratios are changing .
c. Increased inter-industry mergers and international competition make analysis difficult.
d. Concentration rations are available from the US Census Bureau.
D. Types of business integration (mergers)
1. Horizontal integration results from a merger of competing companies. U.S. Steel was formed with the merger of competing
2. Vertical integration results when companies that have supply dealings merge. Standard Oil combined refineries and oil
E. A brief history of the merger movement
1. The late 19th century brought trusts (controlling corporations by controlling their boards of directors) and the need
for antitrust laws to regulate the many horizontal mergers of America's Gilded Age.
2. The 1920's brought vertical mergers as antitrust laws had made horizontal mergers difficult
3. The 1960's and early 1970's was the time of conglomerates, which combined unrelated businesses.
4. The 1980's brought corporate raiders who broke up conglomerates, many using junk (high risk) bonds to finance
leverage (high debt) buyouts.
5. The 1990's brought a return to mergers, many of them combining international companies.
F. B. Price fixing from Wikipedia
|II. Antitrust laws
A. Sherman Antitrust Act of 1890 made monopolies and attempts to monopolize illegal. Combinations,
contracts, and conspiracies in restraint of trade were made illegal.
B. Clayton Act of 1914 prohibited tying contracts (tying the purchase of product A to the purchase of product B), price
discrimination, and stock ownership of competitors which would substantially lessen competition.
C. Federal Trade Commission Act of 1914 created the FTC to control deceptive business practices.
D. Robinson-Patnan Act of 1936 made predatory pricing illegal
E. The Wheeler-Lea Act of 1938 amended the FTC Act to make unfair and deceptive trade illegal.
F. Celler-Kefauver Antimerger Act of 1950 made the purchase of assets of another company illegal if the purchase
would substantially lessen competition.
the principal author of the Sherman Antitrust Act.
III. The changing role of government regulation
A. Before there was regulation there was ANDREW JACKSON who took on the
eastern bankers because he felt it had excessive power.
B. Important regulating agencies
1. Interstate Commerce Commission (ICC)-rails and trucking
2. Federal Aviation Administration (FAA)-air travel
3. Federal Communications Commission (FCC)-airways
4. Securities and Exchange Commission (SEC)-issuers of financial instruments
such as stocks and bonds
C. A move toward deregulation began by Margaret Thatcher in the 1970's spread to
the United States and Western Europe in the 1980's.
1. Many felt federal government regulation represents a costly and inefficient
misallocation of economic resources.
2. Railways, trucking, airlines, and financial institutions were deregulated in the late
1970's and 1980's.
a. Some deregulation activities were very costly (financial institutions bailout
of the late 1980's)
b. Overall, the jury is still out on the success of deregulation.
D. Regulators are redirecting efforts away from maintaining competition toward
1. Government regulation of industry has changed direction.
a. International competition requires companies work together to develop
technology and share in its high costs.
b. Many feel government should foster cooperation among competitors with an
c. Others feel the market system should be left to direct resource (factor)
2. Regulation protecting individuals has become more prominent.
a. Environmental Protection Agency (EPA) protects individuals from
pollution (air, water, noise).
b. Consumer Protection and Safety Commission (CPSC) protects
consumers from unsafe products.
c. Food and Drug Administration (FDA) protects consumers from
dangerous food, drugs, cosmetics, etc.
d. Federal Trade Commission (FTC) protects the consumer from unfair
trade practices such as deceptive advertising.
e. Occupational Safety and Health Administration (OSHA) protects
people while at work.
f. Equal Employment Opportunity Commission (EEOC) attempts to
eliminate workplace prejudice.
g. National Labor Relations Board (NLRB) regulates activities between
business and unions.
1. Red tape rising<>The regulatory state is expanding sharply. But Barack Obama hints that there may be moderation ahead. from1/22/11 issue of the Economist Magazine
3. Henry David Thoreau concerning
IV. Antitrust prosecutions
B. THEODORE ROOSEVELT took on the corporate monopoly Trusts
that control railroad rates and routes and thus destroyed small towns and farms
C. Rule of Reason
1. Applied by the Supreme Court in a 1911 antitrust case against Standard Oil
of New Jersey and the American Tobacco Company
2. Court stated that behavior must be unreasonable in a competitive sense and
anti-competitive effects must be demonstrated.
3. Both companies were found guilty.
4. The Court ruled that bigness alone was not against the law in1921 when it ruled
that U.S. Steel was not a monopoly even though it controlled 50% of the market.
5. Bigness alone was prosecuted by the Supreme Court in 1945 as it broke up Alcoa
because it controlled 90% of the aluminum market.
D. Tight enforcement, which began in 1914, ended in the early 1980's.
E. For more information read
1. Rule of reason - Wiki
2. Executive Summary Of The Anti Trust Laws
F. Econintersect Video on No Recent Prosecution of Financial Fraud
A. Who Makes the Rules 4/13 Economics Intersection
B. Democratic Capitalism vs. Capitalistic Democracy
C. Documentary-of-the-week-FINRA-madoff-history video 1/5/14
D. Rich world needs to cut red-tape and encourage business 2/22/14 See chart
E. Why Regulation Goes Astray 5/21/14
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