Antitrust Laws

Published September 6, 2013 by Mayrbear's Lair

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Fair trade and competition is a significant component in how business leaders conduct commerce. Gellhorn and Kovacic (2004) assert that societies have adopted legal systems to control and regulate anti-competitive conduct for several millennia where an antitrust incident documented in Ancient Greece describes a case brought against the grain dealers cartel in Athens in 386 BC (Gellhorn & Kovacic, 2004). By understanding the origins of antitrust statutes authorities are better able to comprehend how to decode them. For this discussion post, we will examine the recent attempted merger of AT&T with the T-Mobile Corporation that was dropped after the Justice Department took an aggressive stance and sued to block the deal contending the merger would constitute a violation of antitrust laws.

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Antitrust laws are regulated by the federal government to manage anticompetitive practices. Hovenkamp (2011) contends that in order to comprehend antitrust policies, knowledge is required in two rudimentary regions of economics: price theory and industrial organization.  Price theory consists of the decision-making process that determines the quantity and the cost of goods. Industrial organization on the other hand, is the theory of how the framework of the organization and the market are established. In a perfectly competitive market, for instance, all participants have knowledge of price, output and other information. In other words, competitive equilibrium means that all sellers make a standardized product that consumers can purchase at the same price from any outlet. However there are other elements that can affect the market. For instance, supply and demand for products play a role as well. In addition, there are consumers that are willing to pay different amounts. Monopolies, however, create opportunities to increase output and raise profit margins. When profits in a market are high two things happen: (a) companies will produce more, and (b) new companies are formed. This momentum continues until it reaches a point where supply and demand intersect (Hovenkamp, 2011). From that point on, continuation to produce the product increases cost, resulting in too much supply. In addition, revenues decline because of the decrease in demand. Based on this model, the government was justified in believing that the AT&T/T-Mobile merger was a threat to fair competition in the cellular communication market.

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The US government has the authority to exercise its power to protect citizen rights. Merced (2011) reported that if the merger between communication giant AT&T and T-Mobile would have been allowed to occur, it would have created a duopoly between AT&T and Verizon Wireless leaving the two giants to control three-quarters of the cellular communications market (Merced, 2011). This would have ripened the field for the two giants to engage in anticompetitive practices that could have a profound affect on: (a) price manipulation; (b) restriction on the availability of products; and (c) agreements to fix prices that undermine the market. Seaquist (2012) purported that the Sherman Antitrust Act of 1890 which is based on common-law practices integrated with standards of conduct, regulates and punish businesses that engage in anticompetitive practices and was established to prevent mergers like these from occurring (Seaquist, 2012). In fact, just recently, the news reported that the government intervened yet again to stop another merger. This time between American Airlines and US Air, contending that the union would affect higher prices in airfare that would be unfair to citizens. In conclusion, consumers win when Antitrust Laws prevent mergers of large conglomerates because of: (a) higher prices to consumers, (b) they reduce innovative opportunities, and (c) they leave little room for competition. Without antitrust policies, the world would indeed be a very different place today.

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References:

Gellhorn, E., & Kovacic, W. (2004). Antitrust law and economics in a nutshell. St. Paul, MN: West Publishing Co.

Hovenkamp, H. (2011). Black letter outline on antitrust (Fifth ed.). St. Paul, MN: West Publishing.

Merced, M. D. (2011, December 19). AT&T ends $39 billion bid for T-Mobile. Retrieved August 19, 2013, from http://www.dealbook.nytimes.com: http://dealbook.nytimes.com/2011/12/19/att-withdraws-39-bid-for-t-mobile/?_r=0

Seaquist, G. (2012). Business law for managers. San Diego, CA: Bridgepoint Education, Inc.

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