PA-233-01

Feb. 03, 2010

Group Members:
Dax Bahr
Rizelle Pecson
Nicole Garcia
Ronalyne Agpaoa
•Economic Regulation is a form of government
intervention designed to influence the behavior of firms
and individuals in the private sector. Defined as the
imposition of rules by a government backed by the use of
penalties attended to modify economic behavior.
•Antitrust Laws, Prohibits the practice of restricting free
trade and/or Competition between businesses. It also
prohibits abusive actions by firms such as price gouging,
refusal to deal, and predatory pricing. And is supervises
mergers of companies, to prevent actions that would harm
competition.
•State Level (most common) include, electric, gas,
telephone, and local cable television companies.
•Federal Level Control includes interstate air
transportation through Federal Aviation Administration,
interstate telephone rates/ broadcasting licenses through
Federal Communication Commissions, certain types of
banks through the Federal Reserve System, and
securities by Securities and Exchange Commissions.
•Electric Companies Began in the late 1870s as a street lighting and
electric railway business.
•Where given service territories and exclusive rights to sell
electricity within the territories.
•Vertically integrated, generation, transmission, and distribution.
•Federal government sells electric power as a by-product of
irrigation and flood-control projects. Aka dams.
•Federal government provides loans and grants for new state and
district power agencies and municipal electric systems.
•Mostly rate of return on investment regulated.
•One of the states regulatory commissions most
important functions is to determine the proper level of
return on investments, profit.
•To protect consumers against exorbitant charges.
•To set rates for services at levels that will afford the
companies an opportunity to earn a fair and reasonable
rate of return.
•Rate of return is the amount of money gained or lost
on an investment relative to the amount invested.
•Allowing varying rates within a price cap.
•Earnings Deadband, allowing companies to keep
profits it earned within a range “deadband”. In return
for a moratorium on initiating new rate adjustment
cases.
•Increased rates for additional earnings sharing.
•Rate freezing and profit sharing.
•Setting rates for specific categories; difficult
to both companies and regulatory agencies
• Suggestion for change- peak load rate
•Electricity pricing
•Invert the rates
•Electric utility industry restructured by legislative,
regulatory, organizational changes
•Competition in same markets
•Build and operate power plants
•Late 1990’s, California was facing retail electricity
prices
•“Perfect storm”- mid 2000
•Deregulation or bad luck
Competition is fundamental to a market system
and to the private enterprise activity.
Without vigorous competition, the private
enterprise system would not attract and maintain
enough support for its continuance.
In order to promote that objective, Congress
enacted three key antitrust statutes to outlaw
attempts at monopoly and agreements on the part
of private firms.
The term antitrust derives from a form of
business organization (the trust) that was
popular in the latter part of the nineteenth
century. The trust was a device for pyramiding
control over several operating companies.
Key examples: the sugar trust; the tobacco trust
and the best known oil trust (standard oil)
The grandfather of antitrust law in the United
States is the Sherman Act, passed in 1890.
The Sherman Act is enforced by the
Department of Justice, which initiates lawsuits
against alleged violators.
The real contribution of the Sherman Act has
turned to restraint trade and monopolization
into offenses against the federal government and
to require enforcement by federal officials.
Clayton Act is the second major antitrust law,
passed in 1914.
The Clayton Act is enforced by the Department of
Justice through direct court litigation or by the
Federal Trade Commission (FTC) through
investigative and hearing procedures.
It is illegal to engage in several important types of
business policies or conduct that may be conducive to
monopolization or restraint of competition.
oThese prohibited actions include price discrimination,
exclusive and typing contracts, and interlocking boards
of directors
The efficiency approach claims that the only
legitimate goal of antitrust is consumer welfare,
which is equivalent to economic efficiency.
The proponents of competitive approach believe the
intent of the Sherman Act is to establish the right for
buyers to pay no more than the competitive price.
Improved economic efficiency resulting from a
merger will result in either lower prices and increased
profits or if market power is enhanced in the process,
higher prices and small cost savings.
The objective of antitrust is to maintain
markets sufficiently to regulate themselves.
With varying degrees of enthusiasm, they
support laws controlling mergers and
attempts to monopolize, increasingly
questioning their need and effectiveness.
They defend internal growth results are in a more
concentrated market structure.
Some studies tend to show that profits related
closely to market share than to degree of
concentration of the market.
Large companies are increasing because they are
effective at meeting customers’ desires, not due to
accomplishments but by ripping off consumers.
Many structuralists believe that if companies grow
too large, they no longer subject the discipline of
competition.
The structuralists contend that large companies not
only produce adverse economic consequences but
exercise excessive social and political power.
Some of the structuralist economists find that the
large firms in concentrated industries earn higher
rates of return on investment.
From the structuralist’s point of view, antitrust
enforcement is not controlling the adverse effects of
concentrated industries.
• In 1982, the Antitrust Division of the Justice
Department introduced the Herfindahl Index.
•a measure of the size of firms in relation to the industry
and an indicator of the amount of competition among
them.
• A merger would be allowed if an industry with
• 4 equally sized competitors controlled 60% of the
market and the other 40 controlled 1% each.
• 1984 the Justice Dept revised its merger guidelines
• efficiency claims, imports, barriers to new entrants and the
problem of declining industries.
• 1992 DOJ and FTC issued a modest, revised Horizontal Merger
Guidelines of the ‘84 version.
• biggest change: reduce the chance that an agency would challenge
a proposed merger that is unlikely to injure competitions.
• In 1996 FTC objected a lot of proposed mergers, like Staples and
Office Depot
• the combinations would lead to higher prices for consumers.
• Late 90’s mergers hit it big because the companies were
working in the same sector. The largest merger was AOL and
Time Warner in a $156 billion deal.
· competition is encouraged by the knowledge of that potential
new entrants can match the positions of well-established
companies.
Entry is free and exit is costless. No business is perfectly
contestable.
· Strong consensus: horizontal price fixing is anti-competitive and
horizontal mergers in concentrated industries, protected by fringe
competitors, should be viewed with suspicion.
· Ex: Airline Market. Carriers could shift their equipment from one
airport to another. But, landing slots are limited so they would have
to buy a slot from an existing holder. Meaning, a firm can enter a
air-travel market only by obtaining a company that’s already in the
market.
• Competitive reality: larger U.S. firms are competing against
overseas giants as well as against smaller domestic companies.
• 1992-1997, pressure of increasing competition grew, the efficiency
of a firm’s operations assumes new weight as a reason for mergers
and other actions that are likely to result in demonstrated savings in
cost.
• Foreign competitions are no longer a part of the antitrust equation
because the imports are counted with the total of foreign firms’
share of the US.
• Antitrust agencies are undercut by three factors: the
internalization of production, the increased cross-border flows of
info, money, and technology, and the resultant rise of the
transnational enterprise.
• In 1994, the antitrust division has stepped up its trials on
international antitrust cases w/ foreign defendants and overseas
violations of the laws. Foreign govts think that it is unjustified
extraterritorial enforcement of the domestic laws of the US.
• Conflicts rises because individual nations have different types
of orders & may interpret them in various ways.
• US antitrust authorities said that the merger would have been
precompetitive and yet useful to consumers. The EU and the US
differed fundamentally: one focused on the effects on
consumers, the other on the effects on other companies in the
industry.