[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Before one large company can acquire or merge with a competitor, it must convince
the government that the acquisition would not seriously interfere with the
overall competitiveness of the market.
CURBING RESTRICTIVE PRACTICES
In addition to promoting competition by limiting the degree of concentration within
an industry, the government works to limit restrictive practices. The history here
begins with the 1914 Federal Trade Commission Act. The first ten words of the act
read: “Unfair methods of competition in commerce are hereby declared unlawful.”
President Woodrow Wilson defined the purpose of the new commission as being to
“plead the voiceless consumer’s case.” Since then, a number of laws have been passed
by Congress to specify what is “unfair.”
Many of the restrictive practices targeted by the government involve the relations
between a firm and its distributors and suppliers. Such practices include tie-ins,
exclusive dealing, and price discrimination. We have already encountered all three
in Chapter 12. Tie-ins require a consumer to purchase additional items when she
buys a product. In exclusive dealing, a producer says to a firm that wants to sell its
product, “If you sell my product, you cannot sell that of my rival.” Price discrimination
entails charging different customers different prices on grounds unrelated to
the costs of serving those customers. The Robinson-Patman Act of 1936 strengthened
the provisions outlawing price discrimination, making it easier to convict firms
engaged in the practice. Other practices discussed in Chapter 12 designed to deter
entry or promote collusion are illegal as well.
The precise definition of an illegal restrictive practice has changed over time with
varying court interpretations of the antitrust laws. Some practices are illegal per se—
firms conspiring to fix prices, for example. In 1961, General Electric, Westinghouse, and
other producers of electrical equipment were found guilty of such conspiracy. More
recently, several huge price-fixing cases were prosecuted successfully, most notably
one against ADM (Archer Daniel Midland) involving lysine, citric acid, and highfructose
corn syrup. The corporations paid more than $100 million in fines, and some
of their officials went to prison. Most practices, however, are not so clear-cut, and today
a “rule of reason” prevails: they are acceptable if they can be shown to be reasonable
business procedures, designed to promote economic efficiency. The efficiency
gains are balanced against the higher prices resulting from the reduced competition.
Consider the example of Budweiser beer, which delivers its product through distributors.
In any area, there is only one distributor, and the distributors are not
allowed to compete against one another. The New York attorney general has argued
that this system, by restricting competition, raises prices. Anheuser-Busch has
replied that the system of exclusive territories enhances the efficiency with which
beer is delivered and is necessary to ensure that customers receive fresh beer. They
have maintained that their distribution system satisfies the rule of reason, and thus
far their view has prevailed in the courts.
States have also been accused of adopting laws that restrict competition in ways
designed to favor in-state firms. In December 2004, the U.S. Supreme Court heard
304 ∂ CHAPTER 13 GOVERNMENT POLICIES TOWARD COMPETITION