| 1. |
The term industrial concentration
as used in this chapter
means a situation in which a small number of firms control all or
a substantial percentage of the total output of a major industry. Business firms may be
large in either an absolute or a relative sense
and in many cases they are larger in both
senses. Chapter 32 is concerned with firms large in both senses.
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| 2. |
Whether industrial concentration is beneficial
or detrimental to the U.S. economy is debatable. A case can be made against industrial
concentration
but industrial concentration can also be defended.
- Many argue that industrial concentration results
in a misallocation of resources; it is not needed for firms to achieve the economies of
scale
and it does not lead to technological progress. It contributes to income inequality
in the economy
and it is politically dangerous.
- But others argue that industrial concentration is
often faced by interindustry and foreign competition
offers superior products
large
firms are necessary if they are to achieve the economies of scale in producing goods and
services
and concentrated industries promote a high rate of technological progress.
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| 3. |
Government policies toward industrial
concentration have not been clear and consistent; legislation and policy
however
for the
most part have been aimed at restricting concentration and promoting competition.
- Following the Civil War
the expansion of the
U.S. economy brought with it the creation of trusts (or industrial concentration) in many
industries; the fear of the trusts resulted in the enactment of antitrust legislation.
- The Sherman Act of 1890 was the first antitrust
legislation and made monopolization and restraint of trade criminal offenses.
- In 1914 the Clayton Act outlawed a number of
specific techniques by which monopolies or oligopolies had been created.
- During the same year Congress passed the Federal
Trade Commission Act
which established the Federal Trade Commission (FTC) to investigate
unfair practices that might lead to the development of monopoly power. In 1938 it amended
this act by passing the Wheeler-Lea Act to prohibit deceptive practices (including false
and misleading advertising and misrepresentation of products).
- In 1950 passage of the Celler-Kefauver Act
plugged a loophole in the Clayton Act and prohibited mergers that might lead to a
substantial reduction in competition.
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| 4. |
The effectiveness of antitrust laws in
preventing monopoly and maintaining competition has depended on judicial interpretation of
the laws and enforcement of these laws by Federal agencies.
- Two issues have arisen in the judicial
interpretation of the antitrust laws.
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- The first issue is whether an industry should be
judged on the basis of its highly concentrated structure or on the basis of its market
behavior. Today
most economists and antitrust enforcers adopt a rule of reason approach
that bases antitrust action on market behavior
not structure.
- The second issue is whether to use a broad or
- narrow definition of the market in which firms
sell their products.
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- An enforcement issue is the potential conflict of
antitrust policy with other desirable economic goals
such as maintaining a balance of
trade
supporting the defense industry
or encouraging new technologies.
- Whether the antitrust laws have been effective is
a difficult question to answer. The application of the laws to existing market structures
to the three types of mergers
and to price fixing has ranged from lenient to strict:
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- for existing market structures
it has been
lenient;
- for horizontal
vertical
or conglomerate
mergers
it usually varies by the type of merger and the particulars of a case
but merger
guidelines are based on the Herfindahl index (the sum of the squared values of market
shares within an industry);
- for price fixing
it has been strict
and as a
consequence price fixing is now often done in secret or through the use of informal
collusion in the form of price leadership or cost-plus pricing.
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| 5. |
In addition to the enactment of the antitrust
laws
government has undertaken to regulate natural monopolies.
- If a single producer can provide a good or
service at a lower average cost (because of economies of scale) than several producers
competition is not economical and a natural monopoly exists. Government may either produce
the good or service or (following the public interest theory) regulate private producers
of the product for the benefit of the public.
- The effectiveness of the regulation of business
firms by regulatory agencies has been criticized for three principal reasons.
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- It is argued that regulation increases costs and
leads to an inefficient allocation of resources and higher prices.
- It is also contended that the regulatory agencies
have been “captured” by the regulated industries and protect them rather than
the public.
- It can be argued that some of the regulated
industries are not natural monopolies and would be competitive if they were not regulated.
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- The legal cartel theory of regulation is that
potentially competitive industries want and support the regulation of their industries in
order to increase the profits of the firms in the industries by limiting competition among
them.
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| 6. |
The three criticisms of the regulation of
industries and the legal cartel theory of regulation led
beginning in the 1970s
to the
deregulation of a number of industries in the United States: airlines
trucking
banking
railroad
natural gas
television
and telecommunications.
- Critics of deregulation contended that it would
result in higher prices
less output
and poorer service. Concerns were also raised about
increasing industrial concentration and instability in business.
- The overall evidence
however
shows deregulation
to be generally positive for U.S. consumers and the economy. Prices and production costs
have fallen and output has increased.
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| 7. |
Beginning in the early 1960s
social regulation developed and resulted in the creation of additional regulatory
agencies.
- This regulation differed in several ways from the
older regulation of specific industries and aimed to improve quality of life in the United
States.
- While the objectives of the new regulation are
desirable
the overall costs for both program administration and compliance costs can be
high; most of the costs
however
are compliance costs
which are about 20 times
administrative costs.
- Critics argue that this social regulation is
inefficient because
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- regulatory standards and objectives are poorly
drawn and targeted;
- the rules and regulations are made based on
limited and inadequate information;
- there are unintended secondary effects from the
regulation that boost product costs;
- regulatory agencies tend to attract
“overzealous” workers who believe in regulation.
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- The economic consequences of social regulation
are that it increases product prices
it may slow the rate of product innovation
and it
may lessen competition.
- The defenders of social regulation contend that
it is needed to fight serious and neglected problems
such as job and auto safety or
environment pollution
and that the social benefits
if they can be measured
will over
time exceed the costs.
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| 8. |
Industrial policy — actions taken by
government to promote the economic health or interests of firms or industries — has
been considered in recent years.
- There are many historical examples of industrial
policy such as granting free land to railroads to promote rail building and westward
expansion
and the subsidies given to U.S. agriculture.
- Recent examples of industrial policy include
loans and trade restrictions to help the auto industry
the synfuels program of the 1970s
to encourage development of alternative fuels
loans to foreign buyers of U.S. products
through the Export-Import Bank
the formation of Sematech for production of
semiconductors
and government aid to businesses producing flat-glass panels for
microcomputers.
- Industrial policy is controversial. Critics
contend that industrial policy is not needed: Foreign experience shows it to be
ineffective
and government is not capable of picking winners and losers in industry and
will wind up subsidizing certain businesses or industries at taxpayer expense. Supporters
of industrial policy believe that it reduces the risks of developing new technology and
ultimately enhances dynamic efficiency.
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