Abstract
Mergers have grown in number and magnitude in recent
decades, exponentially increasing the work of the Department of Justice in depth
& width bringing previously unknown frontiers etcetera for example the
ability to recognize monopolization tactics dressed up as economies of scale in
a merger proposals and other colorful ways, industry players trying to
circumvent laws for capital gains all in a bid to fight antitrust laws. The
Antitrust Law, which is the weapon of choice in the D.O.J.’s quiver, in the
late 19th century, the first antitrust was enacted, the financial
profits and actions of 21st
century’s firms were inconceivable. With consumer protection foremost on its focus
and subsequent direction. Clearly in some instances a sizable number of firms’
practices have caused increases in market concentration leading to either a
decline in competition(negative) or a rise in economies of scale(positive).
This paper reviews successes and failures of antitrust laws’ handling of
mergers in U.S. with regards to failed merger attempts, existing mergers
especially those that should not exist.
Introduction
Oligopoly
It is market model where there is more than one market
player, yet where each firm is large enough to affect selling price as there are
a small number of firms in this market that has substantial barriers to entry for
other firms, hence very limited entry. It is closer to reality than most other
models/theories describing market, for example Perfect Market, even Monopolies
(Gruber, 2010). Predominant examples of oligopolies are the automobile, phone,
soft drink, airplane manufacturing industry etcetera. Oligopoly comes in two
kinds- A. Pure oligopoly- includes organizations that produce homogenous
products/services like the steel industry, the only source of power for such
companies is lack of competition. B. Impure oligopoly- is also lacking in
competition but offers differentiated products/services, which are the sources
of power for these organizations. Oligopoly’s two patterns are, first when firms
within the industry cooperate and decide outcomes through “predetermined”
amount to produce or supply and through pricing as well, this is also known as
a Cartel prominent example is O.P.E.C. these actions are intself illegal. The
other behavior being, firms in an oligopoly behaving non-cooperatively, this
covers most oligopolistic industries as these firms compete; those can be
explained with Game Theory. Though despite the power(s), oligopolies still must
worry about competitors and competitor’s actions.
Duopoly is a heightened version of oligopoly with less
organizations in the industry, that is; just two organizations. Sometimes, it
is instigated by the two dominating organizations, either by buying smaller
organizations (vertical mergers), absorbing or shutting these firms down or
edging them out (predatory pricing, dumping etcetera) or consolidations of
various firms until there are a few remaining and with continued actions down
this path, until there are only two left. Note, it could start with horizontal
mergers that became big enough to achieve the above. Perfect example of duopoly
is the airplanes manufacturing market dominated by Airbus and Boeing.
The afore
mentioned types of market are present in this topic of focus, these market
structures can evolve over various lengths of time. Oligopoly and Duopoly both result
in a negative position for end-users as consumers are at the whim of these
dominating firm(s) and it may become nearly impossible for new competitors to
break into the industry (Glen, 2013). And since there is scant of the industry left
to compete, new entrants rarely succeed (“Oligopoly, What Is”, n.d.).
According to Milgrom and Roberts, asymmetric
information plays a central role in explaining anticompetitive practices such
as limit and predatory pricings in the theory of oligopoly (as cited by
Bonatti, Cisternas & Toikka, 2016, Pp1)
In this market, there are different
Oligopoly Models, and these are;
1.
“Cournot Model: the firms produce the same good,
and they choose the production quantity simultaneously.
2.
Stackelberg Model: the firms produce the same.
3.
Bertrand Model: the firms produce the same good,
and they choose the price” (Chia-Hui, 2007).
Historical Trends
From the Salt Commission (China Late 1st
century), to Thorn and Taxis Mail (Italy, Late 15th century), to
Dutch East-Indian Company (Early 17th century), to De Beers (S.A.
Late 19th century), to Standard Oil, to The American Sugar Refining
Company, to US Steel (U.S. Early 20th century) (Selwyn=Holmes, 2009)
there have been dominant firms and nations in some industries calling the
shots, but the 2nd half of the 20th century has seen the
rise many markets increasingly churning out oligopolies -turned-duopolies even
later turned “multi-firm” monopolizing monopolies; for all intents and
purposes, they can be defined as Oligopolies but these firms wield
monopoly-like grip/power on the various markets or at least they are working
towards it. There are policies meant to mitigate the amassing of power by some
firms at the detriment of others especially consumers. In the eventuality of
some of these firms achieving the amassing of significant market power, the
department of justice seeks throughs courts etcetera to return the industry to
competitive capacity.
What Antitrust policies do:
“Antitrust laws seek
to prohibit anticompetitive behavior and unfair business practices while
encouraging competition in the marketplace” (Kilingsworth, 2010).
“The antitrust laws proscribe unlawful mergers and
business practices in general terms, leaving courts to decide which ones are
illegal based on the facts of each case” (“FTC: The Antitrust Laws”, n.d.).
“Market power is a separate element of the offense
under U.S. antitrust law; with a couple of refinements, U.S.
antitrust law makes it illegal to cause an increase in market power by conduct that is not competition on the merits. For
this purpose, competition on the merits means conduct that on balance increases
output. Conduct can increase output by reducing costs or (quality-adjusted)
prices or by increasing product quality or diversity and thereby shifting the demand
curve to the right” (Melamed, 2017).
The Laws
Federal antitrust laws:
The Sherman Antitrust Act: it criminalizes the
monopolization of interstate commerce, outlaws unreasonable restrain on foreign
trade or restrains on competition through the fixing of prices, bids etcetera.
Though the highest court in the US has interpreted and restricted restraint of
trade to mean “only restrains that are unreasonable” (Kilinsworth)
The Clayton Act: prohibits mergers that restrain competition
without the criminalization element of The Sherman Act. Mergers of a certain
high amount requires notification of the Antitrust Division and Federal Trade
Commission. It lists other prohibited conducts not specified under Sherman for
example, tying agreement, dealing exclusively, price discrimination etcetera.
The Federal Trade Commission Act: “This Act prohibits unfair
methods of competition in interstate commerce but carries no criminal
penalties. It also created the Federal Trade Commission to police violations of
the Act” (Antitrust Laws and You”, 2017).
The Robinson-Patman Act AKA AntiPrice Discrimination Act,
Hart-Scott-Rodino Antitrust Improvements Act (upgrades of the Clayton Act
between 1914-2000) etcetera.
Though the antitrust law started as far back as 1890-1 in
the US, with the most prominent of the earliest moves being initiated by the Department
Of Justice (D.O.J.),
through courts in 1910s, 1920s and 1930s resulting in big advances in modern
corporation’s competitive behavior and in economic theory, though the D.O.J.
actions did not all end in wins, in the various bids to curb flagrant economic
abuse done by dominant firm(s); actions like price fixing, untoward trade
activities, tie-in sales, group boycotts, patent restriction, price
discrimination and exclusive dealing which undermined free competition (Brodley,
1967).
Decades down the line, with more
innovative ways surfacing, government through the D.O.J. has increasingly found
more colorful ways to go on the offensive to try to curb these anti-competitive
practices of various firms, for example the Kodak Eastman 1921 Consent Decree
which prevented the monopolistic practices of Kodak in the amateur photography
industry (Beckett, 2014) or 8 years earlier the Kingsbury Commitment with
AT&T.
One crucial aspect of any antitrust
action is, establishing the proposed merger action will be promoting
anti-competitiveness in its conduct, another aspect is the D.O.J.’s determination
of the relevant market in which to analyze complained-of conduct (Manne & Rinehart,
2013).
Argumentatively, according to Crandall and Elzinga using the
Safeway, GM, Blue Chip Stamp, Kodak, AT&T, United Shoe Machinery, Std, Oil
of California, IBM, United Fruit and Jerrold case(s); the Sherman-Act-gladiator-reputation
has not been earned, as conduct remedies (stopping anticompetitive behavior)
seem to be happening more often than structural relief. Stating that generally,
behavioral relief has had no consequences outside the cost of litigation and
compliance to these firms and at times may have reduced consumer welfare
(2016).
In 1981 under the Reagan administration, the government
inadvertently created cartels through the Voluntary Export Restrain (V.E.R.),
this was during recession, in a bid to avoid imposing a quota, the Japanese automobile
sellers were then suggestively asked to initiate a reduction in cars being
brought into the U.S., this immediately led to a cartelization among Japanese
automobile companies exporting to the U.S. for one it led to a reduction in
Japanese cars available in the U.S. which drove up demand and then drove up
prices, hence giving the Japanese a cartel enforcing device for which the U.S.
consumers bore the brunt. (Gruber). There have been some off-target shots taken
by government and later redressed which sometimes undermine the strength and
togetherness of the antitrust pursuits by the D.O.J. for example The Virginia
State Bar Association, which is a not for profit that caters to people of the
same profession and a public service sector entity, was found guilty of various
anticompetitive practices.
Mergers
This allows the number of firms in an industry to shrink. It
is by and large allowed by the government except those that are investigated by
government and deemed unfit to merge.
Though sometimes mergers are discouraged, Department of
Justice needs to know if the savings from economies of scales is larger than
the cost of increasing merged firms’ market power. And in some cases,
increasing the market power of a firm through merger could increase competition
in the field.
Despite the current global economic hardships, oligopolies
are experiencing record high profits, which means they have the money to fund
judicial battles and walk away unscatted even with the steep the fines. Which
does not affect them like it ought to have, also counting times of
back-breaking dues for example The Shell BP Corporation, that was fined billion
to clean Gulf oil spill, yet the organization did not go under Knight, 2018)
Reasons for Merger- Debunked
Economies of Scale- Multiple competing firms in the same industry,
producing inefficiently that is, at a loss and running at below capacity. For
example, Beth Israel and Deaconess in Boston used the “economies of scale”
defense in 2010 but the hospitals kept their infrastructure and operations the
same and just charged more, making the merger approval wrong or at least
doubtful in retrospect.
To top it off for the healthcare industry in Boston, recently
Lahey hospitals announced further-merger proposal covering thirteen major
hospitals in Boston which Lahey said, “would
create a health network to compete with Partners HealthCare” which is relatively
predominant in the state of Massachusetts (Ryan, 2018) “Proponents say the
merger would benefit patients, but opponents worry it would increase costs and
reduce access to health care” (McCluskey, 2018).
Single entity- under Section I of Sherman Act, where a
single entity cannot prevent itself from competing or break antitrust laws on
itself. In the “Copperweld Corp. v.
Independence Tube Corp. (1984) 467 U.S. 752, the Supreme Court
"held that a parent corporation and its wholly owned subsidiary were not
legally capable of conspiring with each other under section 1 of the Sherman
Act” (Williamson, 2006). In American Needle v. NFL, the consideration and
defense were that NFL and its teams are a single entity, especially as it
concerns exclusive contracts and rights with one apparel company Reebok, under
the same section one, which was upheld by the seventh circuit (McCann, 2010).
Marginal Cost reduction can be attained when a merger is
allowed; sometimes, this lowers the price. This is untrue, and a defense often
used but many times to the detriment of the consumer
It has been found that
1. Monopoly- is often the
eventuality for oligopolies, a plan to create monopoly in the individual
industries, in a globalized world, firms are not held back by borders or local
restrictions as before, hence monopolizing markets are getting easier. An un-displayed
reason for breaking antitrust laws and/or merging is most times in a bid to increase
firm’s market power,
2. There are crippling issues
like, no real or enough good data for Department of Justice to investigate and
evaluate as the information is controlled by the market.
Merger Gone Wrong:
Even with the clarity in what antitrust laws are and what
they are supposed to do, there are ambiguities that are often exploited in its
application and courts viewing this in a skewed manner, that is “legal
perspective” not from an economic angle which is where the astronomical gains
are to be had (Searing, 2013).
Even with the clearly sometimes strongly worded 7th Section of the
Clayton Act, 5th Section of the Federal Trade Act and Section1 and 2
of the Sherman Act which oversees the with antitrust tendencies, every D.O.J. loss
increases the confidence of the overpaid fortune 500 executives and the legal
teams to make policies that go against these acts in the hope that courts will
rule in the firm’s favor (Chipty & Sendonaris, 2015)
A major example is the Live-Nation and Ticketmaster Merger: The
ticketing market was an oligopolistic industry, in which the 2010 merger
between the world’s largest promoter (concert), Live Nation and the largest
ticket provider, Ticketmaster intensified the monopoly powers of these two
companies, unlike the Staples-Office Depot merger that was blocked, the Live
Nation-Ticketmaster merger could sail through under the Obama administration.
The merged company Live Nation-Ticketmaster the preceding
year to the merger had over 80% of market share. “Post-merger has grown even
larger, acquiring other ticket companies, promoters and festivals, including
Lollapalooza and Bonnaroo. The company is now worth 9 billion dollars, with
record high ticket prices using the promotion aspect of the business to support
the ticket side” (“Op-Ed: Everyone’s Worst Fears”, 2018).
Breaking Patterns
One thing to note is that these oligopolies no longer stay
in one industry or even one field, their tentacles run far and wide, most of
the time leaving the D.O.J. to play “catch-up”. This is reiterated by Tim Wu, a Columbia Law professor and former FTC
adviser, when he said, “Today we don’t so much have single companies
dominating an entire industry as much as a handful of extremely powerful ones.
Over the past few decades, the number of markets consolidated by a few
mega-companies has skyrocketed (as cited by Stein, 2016)
A solid example is the
ticketing and beer industries, with two companies selling 80% and 75%
respectively. The first (Live Nation and TicketMaster) amassed its power
through a court approved merger and the second are two foreign companies (Molson Coors and Anheuser Busch).
Wu further stated, last century, antitrust laws were
made to mitigate and/or kick against monopolies, today there are between one
and four firms dominating, hence the laws are less equipped for the 21st
century scenarios.
This is not to expect that Antitrust laws are designed
to break up companies that grow large because of its success, or destabilize
natural monopolies to bring in competition, or insist on divesture because a
large firm became dominant, there are other laws responsible for such.
Antitrust laws are to prevents the above listed and others from participating in
anticompetitive actions, erection of entry barriers, monopolization,
Can antitrust law be
reasonably expected to transition from consumer protection law, to solver of
income and wealth inequality, NO. In that light, some cases D.O.J. clamped down
on sure seemed that way or at least a waste of tax payers money while D.O.J.
groped in the dark; the Bar Association issue comes to mind, because even
though they won, it was later redressed, which was not the first time. D.O.J.
for all its trials and errors have preemptively blocked some market suffocating
antitrust actions by some firms the U.S v. De Beers ending diamond monopolization
in the US market with AT&T and Time Warner merger slipping through the
fingers of the D.O.J., the antitrust crusaders are preparing the line Comcast
& NBC up next (Kosman, 2017).
The constant reviewing and updating of the Acts are the only
ways to retain as the 19th-20th century laws will in no
way suffice against the maneuvering tactics of today’s markets and firms.
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