reducing competition. (In a tying agreement, the producer states it will sell a
customer a product only if the customer agrees to buy another product from
the producer.) The act also prohibits corporations from buying up competi-
tors’ shares of stock or having board members in common with competitors if
this practice will lessen competition. The Federal Trade Commission Act of
1914 outlaws “unfair methods of competition’’ and created the Federal Trade
Commission (FTC) to define and enforce this law. In addition, there are a num-
ber of other pieces of legislation designed to foster competition.
The government can bring suit to enforce the provisions of the various
antitrust laws. In addition, both the Sherman Act and the Clayton Act allow
private parties who are injured by anticompetitive behavior to bring suit for
damages. If successful, the suing party receives three times the value of the
actual injury. Suits by either the government or private parties have several
aims and results:1.Breaking Up Existing Monopolies. Relying on the Sherman Act, the
government may sue to break up a corporation that has attained a
monopoly or near monopoly in an industry. In 1911 the government
broke up Standard Oil of New Jersey (which controlled over 90
percent of the refining and sales of petroleum products) into 30
independent corporations. In 1982 AT&T, after being sued by the
government, agreed to be broken into 23 independent local
telephone companies. These operating companies became seven
regional phone companies offering local telephone service. The long-
distance service, Western Electric, and Bell Laboratories were
retained in the corporation that kept the name AT&T. Other suits by
the government have been less successful. The courts refused to break
up U.S. Steel in 1920 and IBM in 1982. In 2001, the Bush
administration abandoned attempts to break up Microsoft.
2.Preventing Monopolistic Practices. The government seeks to ban
practices that firms use (1) to acquire and defend monopoly power
and (2) to exploit monopoly power to the detriment of consumers.
Such practices include bundling and tying arrangements, price
discrimination, and predatory pricing.
Illegal predatory pricingoccurs when a large company sets price
below cost in order to drive smaller companies out of business. The
dominant firm then raises prices once the competitors are driven out.
(Companies do not reenter since they know that entry will lead to
another round of price cutting.) The problem for courts is to
distinguish predatory pricing from virtuous price competition. In
1993 the U.S. Supreme Court cleared Brown and Williamson Tobacco
Corporation of predatory pricing charges brought by the Brook
Group, a rival seller of generic cigarettes. The court raised the
standard for proving predatory pricing, requiring proof that the450 Chapter 11 Regulation, Public Goods, and Benefit-Cost Analysisc11RegulationPublicGoodsandBenefitCostAnalysis.qxd 9/29/11 1:34 PM Page 450