BUS 260- Exam 3 Notes.docx

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BUS 260
Ralph Switzer

I. Government Regulation of Business Activities A. Anti-Trust Laws – Sherman Act (1890) 1. Competitive System- Ethical Issues: Robber Barons? B. Reasons for competition 1. Prices reflect demand and cost for the most productive use of resources II. Anti-Trust Law: Sherman Act A. Competitive System B. Reasons for competition 1. Encourages price reductions 2. Encourages innovation in new products 3. Encourages a large number of competitors 4. Equitable Distributions of Income C. Purposes of Anti-Trust Laws 1. Prevent a monopoly 2. Provide workable competition 3. Prevent accumulation of economic power 4. Ethical Issues? a) Opposite of the “American Dream” – creating friction 5. Oligopoly: 2 or 3 competitors 1 III. Sherman Act A. Two basic provisions 1. Prevent a monopoly 2. Illegally enter into a contract in restraint trade a) Restraint Trade: prevent/impede someone from pursuing their trade, business, profession B. Sanctions 1. Criminal a) Pleas (1) Guilty (2) Not Guilty (3) Nolo Contendere (4) Plea of guilty or a conviction are prima facie cases for treble damages (a) Prima Facie: Decision from criminal case is evidence enough for civil case 2. Equitable a) Injunction: stop order b) Divestiture: divest part to competitors; complete divestiture 3. Law- Treble Damages By: a) Competitors- competitors suing each other b) Customers- suing suppliers for overcharging c) State Attorney General- layer that represents all state residents 2 IV. Price Fixing A. Rule of Reason (1911): Not every contract in restraint of trade is illegal 1. Only prevents those that are an “unreasonable” restraint of trade 2. Sherman Act applies to labor unions 3. Covenant not to compete B. Price Fixing- requires collusion 1. Illegal per se, whether prices are fair and reasonable or not 2. Includes dividing up market territories or limiting the supply; prices are elastic (increasing), sticky (decreasing) 3. Why is price fixing illegal per se? a) What is beneficial today might not be beneficial tomorrow V. Intro to Clayton Act (1914) A. Sherman Act (1890) 1. Must show actual monopoly 2. Not very specific 3. Applied to labor unions 4. Only Department of Justice can bring case 3 B. Clayton Act (1914) 1. Easier to prove a violation 2. Sanctions- injunction + treble damages- not criminal 3. Federal Trade Commission may enforce as well as the Justice Department 4. Anti-Trust laws do not apply to labor unions C. Clayton Act 1. More specific in defining practices 2. Where effect “might substantially lessen competition” or “tend to create a monopoly” 3. Need not to prove actually did lessen completion or tend to create monopoly D. Section 8: Interlocking Directories 1. May not be on the board of two corporations if one has capital in excess of $1B (in 1914); if are or have been competitors 2. Ethical Issues a) Sears-Goodrich: had one common director; could result in price fixing whether it had in the past or not E. Section 2: Price Discrimination 1. Unlawful for a seller to discriminate in price where effect might substantially lessen competition or tend to create a monopoly—not an effective section 2. The Robinson-Patman Act: Amended Section 2 of the Clayton Act- deals with price discrimination 3. Predatory Pricing: low prices to drive out the competition 4. Prohibited practices of A&P and others in forcing competitors out of business with meager practices 4 5. Gave equal opportunity to smaller businesses 6. Unlawful Sales at low prices to drive out competitors F. Example: FTC v. Borden 1. Evaporated milk under different labels at different prices a) Generic vs. brand name- both top & bottom of market 2. May not charge different prices unless cost is justified—could include quality control G. Clayton Act- Sections 8, 2 1. Affirmative Defenses a) Cost (1) Shipping costs (2) Manufacturing costs (a) Quantity Discount/Bulk Order (3) Administrative Costs (4) Changing Conditions (a) Perishable (b) Obsolete (c) Distress (Fire) b) Good faith meets competition- no collusion 5 H. Section 3: Tying Contracts 1. “Unlawful to sell or lease a product tied to another whether effect may be to “substantially lessen competition” or “tend to create a monopoly”” 2. Generally unlawful when one of the products is patented a) Ex) International Salt: Lease salt processing machines only if leasee would purchase salt from International Salt Company 3. “Full-Line Forcing”: Requires purchases to purchase full line of products in order to get major product a) Ex) Chicken Delight- don’t have to buy everything from corporation- franchise won the case I. Section 7: Mergers 1. “No company may acquire the stock or asset of another if…“might substantially lessen competition” or “tend to create a monopoly” a) Ex: Reynolds (Arrow) vs. FTC [government won the case] 2. Narrow down to product market 3. Narrow down to geographic area? a) How do you define geographic area? (1) Philadelphia National Bank (a) Defined as who is impacted by the merger (2) Government set precedent on (a) Product (b) Geographic Area 6 J. Conglomerate Merger 1. Conglomerate: A single company owning companies that don’t compete with each other a) ITT- Challenged & Settled (1) Why? – No precedent & afraid of setting a bad one (2) Nothing in Clayton Act about conglomerates (3) Ordered to divest of Avis, Levitt & Sons, Canteen Corp. & other companies w/ $1B in annual sales 2. Power is inherently suspect: Section 7 of the Clayton Act does not sp
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