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Mba1034 cg law ethics week 7 government regulations & markets 2013

Mba1034 cg law ethics week 7 government regulations & markets 2013



Regulation, Anti-trust

Regulation, Anti-trust



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  • Antitrust policy had its origins in the populist movement of the 1870s when a number of states enacted statutes to regulate economic activity and control the exercise of economic power.
  • These acts are broadly worded, employing such terms as monopolize, restraint of trade, and unfair practices. This has required the courts to interpret the acts in the context of the specifics of individual cases. Antitrust law is both statutory and interpretive.Subject of politics as interest groups, politicians, and public policy specialists attempt to influence the law.
  • Horizontal arrangements include monopolization, predatory pricing, price fixing, bid rigging, the allocation of customers, and group boycotts.The concern with horizontal arrangements is that they may increase market power, leading to lessened competition and higher prices.Vertical practices include the allocation of territories by a manufacturer among distributors or retailers, refusals to deal, exclusive dealing arrangements, resale price maintenance, reciprocal arrangements, and tying. Include the merger of a manufacturer and a supplier or distributor.
  • Their dual enforcement responsibilities led the DOJ and the FTC to reach an interagency liaison agreement in 1948. As a result of the agreement, cases are allocated primarily by industry and secondarily by the nature of the complaint.The Hart-Scott-Rodino Antitrust Improvements Act of 1976 amended Section 7 of the Clayton Act to enhance the enforcement of the antitrust laws pertaining to monopolization and restraint of trade through mergers.The 1974 Antitrust Procedures and Penalties Act classified as felonies violations such as price fixing and increased the allowable fines. Fines against corporations can be as high as $10 million per count in criminal cases.The Robinson-Patman Act prohibits price discrimination not justified by cost differences in serving customers.
  • Most antitrust lawsuits are brought under the Sherman Act, and cases pertaining to vertical arrangements represent a somewhat higher percent of the total than those pertaining to horizontal practices.The treble damages provision of the Clayton Act provides strong incentives for a private party to file an antitrust lawsuit. If a suit is filed against a firm by the DOJ, private parties often follow with private lawsuits. Treble damages are controversial. Their proponents argue that they provide an important incentive for private enforcement. Critics contend that treble damages provide an incentive to challenge the practices of competitors.
  • Per se violations are presumed to be unreasonable.The rule of reason was needed because much of the language of the antitrust laws is too sweeping and a literal interpretation would be harmful to competition and efficiency.A defendant has two defenses under a rule of reason.The first is the same as under a per se rule—the defendant did not commit the act in question. The second is that, although the defendant committed the act, it was not unreasonable to do so.
  • Views economic power as a function of the number of firms in the industry or their market shares. The smaller the number of firms, the more likely they are to restrict output to raise prices and worsen the performance of a market.
  • Does not conclude that conduct such as vertical arrangements should be legal. Concludes that vertical arrangements could be pro-competitive rather than anticompetitive.They should not be per se illegal but rather should be considered under a rule of reason.
  • The new IO perspective:Acknowledges that competition with only a few firms can be efficient in a one-time encounter.Recognizes that repeated encounters provide an opportunity for implicit collusion. Collusion is more likely the better each firm can monitor the actions of their competitors.Focuses on the objectives of static and dynamic efficiency.
  • Vertical arrangementsIn reasoning about vertical arrangements, the Chicago school distinguished between interbrand and intrabrand competition. Intrabrand competition refers to competition between sellers of the same brand, as in the case of two Toyota dealers competing against each other. Those dealers also compete against the sellers of other makes of automobiles—interbrand competition. If interbrand competition is vigorous so that a manufacturer does not have horizontal market power, restrictions on intrabrand competition will have little impact on the efficiency of the market.Predatory pricing and entry deterrenceThe traditional perspective on predatory pricing is that a firm can drive a competitor out of a market by cutting prices below the competitor’s costs. Collusion and price fixingAll schools of thought agree that collusion and horizontal price fixing are anticompetitive, and the DOJ has vigorously prosecuted price fixing and obtained large fines, criminal convictions, and prison sentences for those found guilty.The structural perspective on collusion and price fixing is that firms will collude when possible, so tight antitrust supervision is necessary.Mergers and merger guidelinesMergers can create horizontal market power or restrain competition in supply or distribution channels.Mergers can yield cost efficiencies and synergies that benefit consumers. Mergers can also remove ineffective management and eliminate inefficient cross-subsidization of one line of business by another.
  • Firms provide training and guidance to employees who may encounter situations in which antitrust concerns are present.A firm may find itself in a situation in which a contemplated practice falls in an area in which the antitrust laws and the court decisions interpreting them are unclear or changing. In addition to seeking the advice of counsel, the firm should examine whether the purpose of its practice is anticompetitive.
  • Government regulation can be traced to the 1100s when the English monarchy began to contract with private parties for the provision of services.
  • Regulatory agencies are of two basic formsIndependent commissionsExecutive branch agencies
  • Regulatory agencies operate in a complex environment, and “independent” regulatory commissions are subject to a variety of influences.
  • Theory of market imperfectionsPredicts that regulation will be instituted to correct market imperfections.Political theoryPredicts that interest groups seek regulation to serve their interests.
  • The classical theory of natural monopoly predicts that a monopolist will restrict its output, raising its price above marginal cost. The restriction of output causes economic inefficiency.This inefficiency is referred to as a deadweight loss (DWL), since an opportunity to achieve economic gains is forgone.
  • These externalities result in a divergence of private costs from social costs.Economic inefficiency results unless agents take into account the full social costs of their activities. Externalities provide an efficiency rationale for regulation to align private and social costs.
  • When a person consumes a private good such as an apple, it is not available for consumption by others. When a person consumes a good such as national defense or a radio broadcast, the amount of the good available for consumption by others is not diminished.
  • Regulation is one response to moral hazard problems, but regulation can also cause moral hazard problems, making the regulation itself less effective. The principal means of dealing with market hazard is to structure incentives.Moral hazard can be addressed by monitoring the behavior of individuals. Moral hazard is reduced by breaking the link between cost increases and the prices charged for services.
  • Fairness can also be sought in cases in which consumers do not or cannot easily take precautions.
  • The Federal Communications Commission (FCC) has been fearful that concentrations of ownership in the news media might stifle the full reporting of news or restrict the diversity of views expressed.
  • Preemption has attracted considerable nonmarket action as firms have sought to obtain explicit language in new legislation to provide preemption, and other interest groups such as trial lawyers and consumer groups have opposed such language.
  • Redistribution and cross-subsidizationRegulation can be used to redistribute income through cross-subsidization of one customer class by another.Cross-subsidization occurs when one group of customers pays more and another group pays less than the cost of providing their service.Inefficiency results on both sides of the cross-subsidization.Cross-subsidization is a common feature of the economic regulation of industries.Accomplishing through regulation what cannot be accomplished through legislationOrganized labor is one of the core constituencies of the Democratic Party.Unions collect dues from members that can be used to fund political activity, including advertisements, campaign workers, and campaign contribution almost all of which goes to Democrats.
  • This cost-of-service regulatory system has been blamed for inducing high costs and slowing the introduction of new technology in telecommunications.

Mba1034 cg law ethics week 7 government regulations & markets 2013 Mba1034 cg law ethics week 7 government regulations & markets 2013 Presentation Transcript

  • GOVERNMENT REGULATIONS AND MARKETS Stephen Ong, BSc(Hons) Econs (LSE), MBA International Business(Bradford) Visiting Fellow, Birmingham City University Visiting Professor, Shenzhen University MBA1034 GOVERNANCE, LAW & ETHICS
  • • Discussion: Family Groups and agency problems 1 • Regulators & Gatekeepers • Anti-trust & Regulation 2 •Case Discussion: The Microsoft Anti-trust Case3 Today’s Overview
  • 1. Open Discussion • Morck, Randall and Yeung, Bernard (2003) Agency problems in large Family Business Groups, Entrepreneurship: Theory and Practice, Summer 2003. Vol. 27, No. 4: pp. 367 – 382
  • Learning Outcomes • By the end of this lecture, you should be able to: 1. Evaluate the role of gatekeepers in ensuring that companies are run in the interest of their shareholders and other stakeholders 2. Critically assess the independence of gatekeepers – such as auditors and credit-rating agencies – vis-à-vis their client firms 3. Gauge the effectiveness of gatekeepers in preventing corporate fraud 4. Evaluate the danger of capture of gatekeepers by the economic actors they are supposed to supervise 5. Evaluate the relationship between stakeholders and regulators. 6. Judge the existing empirical evidence as to whether regulation acts a substitute or a complement for corporate governance.
  • The role of Regulators & Gatekeepers • While regulators are gradually reinforcing the importance of gatekeepers such as auditors and credit rating agencies to ensure that companies are well governed, the Enron scandal and the recent bank failures suggest that gatekeepers often lack the necessary degree of independence, judgment, competence and power to prevent corporate fraud and failure. • What is the role of gatekeepers in corporate governance? Such gatekeepers include among others stock-market listing authorities, auditors, credit-rating agencies and bank regulators. • The role of corporate governance in regulated industries, including the financial sector.
  • Introduction • Gatekeepers play an important role in corporate governance as they provide monitoring and certification services. • However, the various tend to suffer from a lack of incentives or conflicts of interests. • Hence, it is unlikely that investors will be able to rely on a single type of gatekeeper. • We will also look at industry regulation and whether it acts as substitute or complement for corporate governance.
  • The Role and Duties of Gatekeepers • John Coffee defines the role of gatekeepers as “assess*ing] and vouch[ing] for the corporate client’s own statements about itself or a specific transaction”. • Gatekeepers may be particularly important in corporate governance systems where there is a lack of shareholder monitoring. • They may also play a role ion corporate governance systems with large shareholders as there may be a need to monitor related-party transactions.
  • The Role and Duties of Gatekeepers (Continued) • Gatekeepers include – auditors, – investment banks, – lawyers, – financial analysts, – credit rating agencies, – corporate governance rating agencies, – commercial banks and other creditors, – insurers of directors’ and officers’ liability (D&O insurers) – stock markets, and – securities exchange regulators.
  • • Reinier Kraakman argues that gatekeepers should only be made liable if the primary sources of liability prove to be insufficient. • Third-party liability is justified if the gatekeeper is connected in such a way with the firm that this connection creates some responsibility in case the firm fails. • However, gatekeeper liability also raises three issues. The Role and Duties of Gatekeepers (Continued)
  • 1. It may be very difficult for the gatekeeper to discharge the legal duties. 2. The gatekeeper may have insufficient incentives to fulfil its legal duties and may even be tempted to collude with the firm. 3. Enforcement of gatekeeper liability may be difficult as it depends – not only on the type of gatekeeper and nature of its legal duties, but – also on the degree of culpability. The Role and Duties of Gatekeepers (Continued)
  • • Hence, gatekeeper liability may be complex and difficult to enforce. • The question arises as to whether there is a need to regulate gatekeepers given that they put their reputational capital at stake when dealing with clients. • The spectacular failures of Enron and Worldcom in the USA have renewed in gatekeeper liability and in particular auditor liability. The Role and Duties of Gatekeepers (Continued)
  • • The risk of losing the gatekeepers’ losing their reputational capital has done little to prevent corporate failures and conflicts of interests. • One of the main features of the Enron case was that its auditor, Arthur Andersen, ignored irregularities in the firm’s accounting practices to avoid the loss of lucrative consulting income. The Role and Duties of Gatekeepers (Continued)
  • • John Coffee blames the failure of Enron on – the commodification of auditing services, – the auditor’s capture by its client, and – the lack of competition among auditors. • Capture refers to the influence the client may have over its gatekeeper and may push the latter to serve the interests of the client rather than preventing malpractice. The Role and Duties of Gatekeepers (Continued)
  • • The lack of competition may reduce the risk of reputational damage caused by client failure, calling for regulation. • Another type of gatekeeper that failed to police Enron were financial analysts that kept on issuing buy recommendations, fuelling stock price increases. • Other countries such as the Netherlands and Italy have had their own Enron-style corporate failures. The Role and Duties of Gatekeepers (Continued)
  • • The Parmalat debacle in Italy can be blamed on its auditor and financial analysts, but also its creditors. • The recent subprime mortgage crisis can be blamed on the failure of another gatekeeper, i.e. credit rating agencies. • Regulators have responded by reinforcing the role and duties of gatekeepers. The Role and Duties of Gatekeepers (Continued)
  • The Ideal Attributes of a Gatekeeper • A gatekeeper should have the following seven attributes 1. It should be independent of the firms it is to supervise 2. It should have access to the information required to carry out its duties 3. It should not be subject to major conflicts of interests 4. It should have the necessary skills, in particular the necessary judgment and competence, to perform its duties 5. It should also have the right incentives.
  • The Ideal Attributes of a Gatekeeper (Continued) 6. It should have enough power to force its supervisees to disclose any information it requires to fulfil its duties and to force them to put a stop to malpractice and wrong-doing. It should also have the power and authority to penalise supervisees that fail to meet its requests. 7. It should provide meaningful and reliable third-party certification to investors and other users.
  • Types of Gatekeepers and Limitations to their Role • Recent corporate governance reforms have put a lot of emphasis on auditors as gatekeepers. • However, the efficiency of auditors may be severely limited for at least two reasons 1. Auditors rely on the information they are provided with by the company 2. Auditors may suffer from conflicts of interests. • However, auditors are likely to have the necessary power via e.g. the issue of qualified audit reports.
  • Types of Gatekeepers and Limitations to their Role (Continued) • Investment bankers are also likely gatekeepers given – the close relationships they have with companies, and – the information they collect via the provision of services such as underwriting and consultancy. • Both the theoretical and empirical literature suggest that they are third-party certifiers.
  • However, the subprime mortgage crisis suggest at least two reasons why investment bankers may not be credible gatekeepers. 1. Investment banks may be subject to conflicts of interests because of client capture or because of internal conflicts of interests. 2. Investment banks are strong lobbying groups that have been successful in keeping regulation of their activities at bay. Types of Gatekeepers and Limitations to their Role (Continued)
  • • Lawyers come in two versions – in-house legal counsels, and – outside lawyers dealing with particular or one-off transactions of the firm. • In-house counsels are likely to be well informed about the firm’s processes and dealings. • However, they may be too close to the firm and suffer from capture and behavioural biases. • In contrast, outside lawyers may not have enough information on the firm to detect wrong-doing. Types of Gatekeepers and Limitations to their Role (Continued)
  • • Financial analysts study the firm’s fundamentals and the forecast these for the near future. • They issue buy, sell or hold recommendations based on these forecasts. • However, financial analysts may suffer from conflicts of interests as they may be part of the same investment that is also underwriting the firm’s new equity issue. • They may also be suffer from behavioural biases. Types of Gatekeepers and Limitations to their Role (Continued)
  • • Credit rating agencies rate the credit worthiness of debt securities such as government and corporate bonds. • However, credit rating agencies are paid by the issuers themselves and issuers may be shopping around for the highest possible rating. • Credit rating agencies have also been accused of failing to predict the – Asian crisis of 1997, and – to be at least partly responsible for the subprime mortgage crisis. Types of Gatekeepers and Limitations to their Role (Continued)
  • • Similar to the auditing industry, the credit rating industry is highly concentrated and some dispute as to whether there is any danger of reputational loss. • Corporate governance ratings agencies are still a fairly recent phenomenon, but developing fast. • Corporate governance ratings agencies include – Deminor, – Standard & Poor’s, and – Governance Metrics International (GMI). Types of Gatekeepers and Limitations to their Role (Continued)
  • • These ratings have some use for interest parties, but they also have their limitations. • Typically, the indices are in the form of counters which are incremented by a value of one if a particular corporate governance device is present. • Hence, there is no detailed assessment about the conflicts of interests that are likely to prevail in a given firm. Types of Gatekeepers and Limitations to their Role (Continued)
  • • Commercial banks and other creditors may also act as gatekeepers. • Similar to (large) shareholders, it is in the interests of banks and other debtholders to monitor corporate managers. • However, large debtholders, via their close relationship with the firm and the information they collect, may acquire a monopoly position. Types of Gatekeepers and Limitations to their Role (Continued)
  • • Information about the directors’ and officers’ liability (D&O) insurance taken out by the firm may act as a powerful signal. • The insured amount as well as the reputation of the insurer may provide valuable information to the market as to the risk investors face. Types of Gatekeepers and Limitations to their Role (Continued)
  • • Stock markets are another important gatekeeper. • They impose entry requirements on firms seeking a stock-market listing as well as ongoing obligations on already listed firms. • For example, the London Stock Exchange (LSE) imposes the UK Corporate Governance Code on the firms that are listed on it. • Stock markets are frequently organised into segments that enable investors to distinguish between safer, mature firms and riskier firms. Types of Gatekeepers and Limitations to their Role (Continued)
  • • Securities exchange regulators, such as the SEC in the USA, are likely to play an important role given the lack of independence and incentives as well as the conflicts of interests other gatekeepers may suffer from. • James Fanto argues that the SEC should be the ultimate gatekeeper and perform much closer monitoring of corporations similar to the regulator in the banking industry. Types of Gatekeepers and Limitations to their Role (Continued)
  • • However, this would then require the securities exchange regulator to monitor all sorts of areas of corporate governance for which other gatekeepers may have greater competence. • Another limitation to its role as ultimate gatekeeper is that typically the law provides judicial immunity to the regulator. Types of Gatekeepers and Limitations to their Role (Continued)
  • • Hence given all of the above lacks of desirable attributes, investors and other stakeholders may have to rely on a range of corporate gatekeepers rather than a single gatekeeper. Types of Gatekeepers and Limitations to their Role (Continued)
  • Is Industry Regulation a Substitute for Corporate Governance? • David Becher and Melissa Frye argue that industry regulation as to the very least an indirect impact on corporate governance. • However, a priori it is not clear whether regulation is a substitute or complement for corporate governance. • On one hand, regulation may be a substitute given that the regulator monitors the firms. • On the other hand, industry regulators frequently push for improvements in corporate governance.
  • Is Industry Regulation a Substitute for Corporate Governance? (Continued) • The existing empirical evidence is also inconclusive • Studies on the effects of the 1980s and 1990s. deregulation in the US banking industry suggest that – there was an increase in CEO stock ownership, – there was an increase in the importance of variable pay, – but the overall effect on executive compensation was relatively small. • A likely reason for these changes was the increase in competition caused by the deregulation.
  • • Paul Joskow et al. find that US CEOs earn significantly less in regulated industries. • Pay is lowest in those industries where there is price regulation. • Joskow et al. propose two reasons for this 1. As a result of political pressure, regulation may keep salaries low to prevent public outrage 2. Regulation may have an indirect effect on executive pay by reducing managerial discretion and the returns from good management. Is Industry Regulation a Substitute for Corporate Governance? (Continued)
  • • Joskow et al. also find that pay is lowest in those industries with a single state regulator rather than multiple regulators. • They conclude that this is evidence that the first, direct effect of regulation on pay dominates. • All of the above studies suggest that regulation is a substitute for corporate governance. • Other studies suggest that regulation is a complement. Is Industry Regulation a Substitute for Corporate Governance? (Continued)
  • • For example, Charles Hadlock et al. find that CEO turnover in regulated industries is at least as sensitive to performance as in unregulated industries. • Joel Houston and Christopher James argue that the reason why CEO stock holdings and option- based pay are lower in banks is the fewer investment opportunities rather than regulation. • There is also consistent evidence that firms from regulated industries have higher proportions of independent directors. Is Industry Regulation a Substitute for Corporate Governance? (Continued)
  • Conclusions • The role of gatekeepers in corporate governance. • Corporate governance and industry regulation.
  • Stakeholders and Regulators • What is the relationship between stakeholders and regulators in corporate governance?
  • EXERCISE : So who are the stakeholders of Cadbury and Kraft?
  • Analysis Cadbury Internal Directors Management Staff External Government – National, Regional, Local Investors Bankers Customers (chocolate) Suppliers Local Community Charities – local (Bourneville/Chain) Unions Pressure groups Kraft Internal Directors Management Staff External Investors Bankers Customers (cheese plus) Suppliers Local Community Charities
  • Elsewhere Government sector Government Grant funders Regulators Bankers Customers Suppliers Directors Staff Local Community Media Charities Recipients of aid Donors Grant providers Regulator – Charity Commission Trustees Managers and staff Volunteers Suppliers Bankers Local Community
  • What are stakeholders looking for? • Profits/Surpluses • Goods/Services – quality, price, availability • Responsiveness and understanding • Ethical values • Reliability • Sustainability – long term reliability • Acceptance of social responsibility • Green agenda Therefore assurances and this leads to confidence/ reputation
  • UK External regulators EU? Government? Bank of England? Financial Services Authority (FSA)? Financial Reporting Council? Charities Commission Government Departments? Government Agencies – OFCOM, OFSTED Information Commissioner Institutional Groups – insurance and pensions? Professional bodies?
  • Meaning and impact of regulation • Expectations and standards (must do’s) - Compliance - Guidance • Manner - Inspection - Light touch - Self regulation but report for desk top review • Impact - Success/failure - intervention? - Forced closure/merger - Pressure on whole organisation - responsibility to ease
  • Relationship between stakeholders and regulators • Fundamental source of assurance • Does it work? - banking crisis - corporate failures - government sector issues – IT contracts, – Mid Staffs Trust – Rural Payments Agency Conclusion variable and depends upon approach.
  • Relationships Stakeholders, Regulators and Internal Audit • Again should be fundamental • But - knowledge and understanding of role - confidence in ability - issues on scope of work and fit to regulator need - IA responsibility to organisation – or is it IPPF 2440,2600? • Effective alignment should be through Governance Statement if appropriate evidence exists to demonstrate reliability.
  • Solution and Summary • Good corporate governance - Board role - 3 lines of defence • Effective risk management - Appetite transferred into policy and procedures - Embedded throughout the organisation • Underpinned by Controls Assurance Framework • Aligned with effective internal audit in compliance with professional standards
  • Overview • Introduction • Antitrust law • Enforcement of the antitrust laws • Antitrust thought • Examples of the differences in antitrust thought • Compliance • The politics of antitrust
  • Introduction • Antitrust policy is an amalgam of social policy, economics, law, and administrative practice
  • USA : Principal Federal Statutes • The Sherman Act • The Clayton Act • The Federal Trade Commission Act
  • Excerpts from the Antitrust Statutes 9-53
  • Excerpts from the Antitrust Statutes 9-54
  • Excerpts from the Antitrust Statutes
  • Antitrust in Europe • At first glance, the antitrust laws of the European Union are quite similar to those of the United States. Article 101 of the Treaty of the European Community concerns restraints of trade, much like Section 1 of the Sherman Act. • Article 102, which focuses on abuses of market power by dominant firms, is similar in many ways to Section 2 of the Sherman Act. • Finally, with respect to mergers, the European Merger Control Act is similar in spirit to Section 7 of the Clayton Act. • Nevertheless, there remain a number of procedural and substantive differences between antitrust laws in Europe and the United States. Merger evaluations typically are conducted more quickly in Europe. • Antitrust enforcement has grown rapidly through the world in the past decade, including China.
  • Practices Subject to Antitrust Scrutiny • Horizontal practice - Involves activities in the same industry –For example, a merger is horizontal if the two firms operate in the same industry • Vertical practice - Involve firms in a supply arrangement or a channel of distribution
  • Exemptions to Antitrust Laws • Economic activities of labour unions • Agricultural cooperatives • Certain activities of industries • Joint export trading activities • Partial exemptions for: –Joint research and development ventures –Baseball
  • Government Enforcement of the Antitrust Laws • Department of Justice (DOJ) and Federal Trade Commission (FTC) have the authority to enforce Sherman and Clayton Acts • Only the FTC can enforce the Federal Trade Commission Act
  • Private Enforcement of the Antitrust Laws • Most antitrust cases are the result of private lawsuits –Filed by competitors and dealers • Treble damages are provided by the Clayton Act
  • Per Se Violations and the Rule of Reason • The courts have held that: –There are some sufficiently egregious acts that on the face of it violate the antitrust laws • These acts are said to be per se illegal • The only defense allowed is that the defendant did not commit the act • In contrast, other cases are considered by the courts under a rule of reason –A restraint of trade is illegal if it is unreasonable
  • Antitrust Thought • The structural approach (structure-conduct-performance) • The Chicago school • The new IO approach
  • The Structural Approach • Performance of markets as determined by the conduct of market participants –Largely determined by the structure of the market, such as: •Number of competitors •Barriers to entry
  • The Chicago School • Views the objective of antitrust policy as economic efficiency – May be understood in its simplest form as: • The maximization of producers’ plus consumers’ surplus • Skeptical about the nature and scope of barriers to entry • Views collusion among firms as unsustainable – Sustainable when there is government protection • Views competition as the best means of achieving efficiency
  • The New IO Approach • Rejects the static equilibrium approach taken by the Chicago school –Focuses on the opportunities for strategic behaviour not initially considered by the Chicago School • Concerned with: –Potential for anticompetitive behaviour in markets characterized by network externalities –Where compatibility and standardization are required
  • Examples of the Differences in Antitrust Thought Vertical arrangements Predatory pricing and entry deterrence Collusion and price fixing Mergers and merger guidelines
  • Compliance • Compliance with the antitrust laws involves: – Procedures – Policy
  • The Politics of Antitrust • Antitrust policy has important distributive as well as efficiency consequences for firms and consumers • Most proposed changes in the antitrust laws fail because of: – The intensity of the ensuing politics – The complexity of the issues • Manifests itself in legislative action seeking exemptions or providing for affirmative defenses in antitrust lawsuits
  • Cases - Price Fixing in the Airways • Crude oil prices increased rapidly in the 2004–2006 period, and the increase in fuel costs placed a burden on airlines • Airlines began to add “fuel surcharges” to air fares, adding a new instrument of price competition • Competition Act of 1998 - provides immunity to firms that reveal illegal competitive activities • The objective of the leniency policy was to provide an incentive to disclose wrongdoing
  • Cases - The Microsoft Antitrust Case • The U.S. Department of Justice (DOJ) together with 19 state attorneys general filed an antitrust action against Microsoft Corporation under Sections 1 and 2 of the Sherman Act (the Act)
  • Cases - The Microsoft Antitrust Case • The DOJ specifically alleged four violations of the Act: 1. Microsoft engaged in “unlawful exclusive dealing and other exclusionary agreements” 2. Microsoft engaged in “unlawful tying” 3. Microsoft illegally maintained its monopoly of the PC operating systems market 4. Microsoft attempted to monopolize the Internet
  • REGULATION : Overview • Introduction • Periods of regulatory change • The constitutional basis for regulation • Regulatory commissions and agencies • Delegation, rule making, due process, and discretion • The nonmarket environment of regulatory agencies • Explanations for regulation • Market imperfections • The political economy of regulation • A nonmarket theory of regulation • Cost-of-service regulation • Deregulation
  • Introduction • Regulation takes place through a public process that is relatively open and allows participation by interested parties • Regulatory decisions and rule- making proceedings are extremely important to many firms, industries, and interest groups
  • Set of Interventions 1. Controlling prices 2. Setting floor prices 3. Ensuring equal opportunity 4. Regularizing employment practices 5. Specifying qualifications 6. Providing for solvency 7. Controlling the number of market participants 8. Limiting ownership 9. Requiring premarketing approval 10. Ensuring product safety 11. Mandating product characteristics and technology 12. Establishing service territories 13. Establishing performance standards 14. Controlling toxic emissions and other pollutants 15. Specifying industry boundaries 16. Allocating public resources 17. Establishing technical standards 18. Controlling unfair international trade practices 19. Providing information 20. Rationing common pool resources 21. Protecting consumers 22. Controlling risks
  • Periods of Regulatory Change • Four major periods of regulatory change –Populist era (late 1800s) –Progressive era and the New Deal –Social regulation (began in the 1960s) –Economic deregulation (began in the 1970s)
  • The Constitutional Basis for Regulation • The U.S. Constitution not only provides the authority for regulation –It also limits its application • Many legal principles of regulation in the United States have come from court decisions that draw on the common law • The Fifth and Fourteenth Amendments place limits on regulation
  • USA : Principal Federal Regulatory Agencies and Commissions
  • Delegation, Rule Making, Due Process, and Discretion • Article I, Section 1 of the Constitution grants Congress the sole power to enact laws – Does not authorize Congress to delegate policymaking to agencies • Congress enacted the Administrative Procedure Act (APA) of 1946 to: – Provide for public notice and comment prior to agency action • Agencies adopt their own rule-making procedures in a manner consistent with the APA
  • Delegation, Rule Making, Due Process, and Discretion • The APA grants parties right to sue for judicial review of an agency action – A basis for that review is failure to follow the procedures required for an action • Under the framework of procedural due process • The APA requires: – Agency actions not be “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law” • The courts review regulatory actions for whether they are arbitrary or capricious
  • Influences on Regulatory Agencies 10-81
  • Explanations For Regulation • Two theories to explain where regulation is and is not imposed: –Theory of market imperfections –Political theory
  • Market Imperfections • Natural monopoly • Externalities • Public goods • Asymmetric information • Moral hazard • Government imperfections
  • Natural Monopoly • A monopoly is natural if one firm can produce a given set of goods at lower cost than can any larger number of firms • Results when costs are decreasing in the scale of output or in the scope of the set of goods a firm produces
  • Monopoly and Deadweight Loss 10-85
  • Types of Externalities • Pecuniary externality –Present when the actions of one economic agent affect other economic agents through changes in the prices of goods and services • Nonpecuniary externality –Occurs when an action of one economic agent directly affects the preferences or production opportunities of another economic agent
  • Public Good •One whose consumption by one person does not reduce its availability for others
  • Asymmetric Information • If people have different (private) information at the time they act, markets may not perform efficiently, even when there are advantageous trades that could be made • Adverse selection - Occurs when sellers have incomplete information about customers
  • Moral Hazard • Refers to inefficient actions induced by policy instruments that cause people not to bear the full consequences of their actions
  • Government Imperfections • Market imperfections warrant government regulation –Only a necessary condition for regulation to improve economic efficiency
  • Capture Theory • Predicts that regulation initially will be found where there are market imperfections and over time will evolve to serve the interests of the regulated industry
  • Rent-Seeking Theory • Regulation not established to address market imperfections –Instead, it is established to benefit politically effective interests
  • Fairness • Regulation used to accomplish fairness goals • Can involve policies such as: –Lifeline rates for telephone service for low-income people –The provision of aid such as food stamps
  • Other Public Purposes: Media Ownership Rules • Regulation also used for other public purposes
  • Preemption • A major regulation issue is whether a decision by a federal regulatory agency preempts lawsuits in state courts
  • Political Economy Theory • Views regulation as shaped by market imperfections, institutions and their officeholders, and the nonmarket action of private interests
  • Cost-of-Service Regulation • Regulation in a number of industries has centered on cost- of-service pricing
  • Deregulation • Electric power • Auctions
  • Cases - Enron Power Marketing, Inc., and the California Market • Enron Power Marketing (EPM) deployed an array of electricity trading strategies to take advantage of imperfections in the design of the market for power in California • The Enron board of directors waived attorney–client privileges and confidentiality rights and turned the memos over to the Federal Energy Regulatory Commission (FERC)
  • Core Readings • Solomon, Jill (2010) Corporate Governance and Accountability 3rd Edition, Wiley, UK. Ch.4-5 • Goergen, Marc (2012) International Corporate Governance, Pearson. Ch.5, 9-10 • Larker & Tayan (2011) Ch.3-5,12 • Monks & Minow (2011) Ch.2 & 3 • Johnson, Scholes & Whittington(2008) Ch.4 • CIMA - Performance Strategy: Study Text (2011) BPP Learning Media Ltd. Part B : 5-6 • Baron, David P.(2013) Business and its environment, 7th Edition, Pearson
  • Additional Readings (1) • Byrd, J. W. and Hickman, K. A. (1992) ‘Do outside directors monitor managers?’, Journal of Financial Economics, 32, 195–221. • Donaldson, L. and Davies, J. H. (1994) ‘Boards and company performance—Research challenges the conventional wisdom’, Corporate Governance: An International Review, 2(3), July, 151–160. • Peel, M. and O’Donnell, E. (1995) ‘Board structure, corporate performance and auditor independence’, Corporate Governance: An International Review, 3(4), October, 207–217. • Milliken, F. J. and L. L. Martins (1996) "Searching for Common Threads: Understanding the Multiple Effects of Diversity in Organisational Groups", Academy of Management Review, 21, pp.402-433. • Core, J. E., Holthausen, R. W. and Larcker, D. F. (1999) ‘Corporate governance, chief executive officer compensation, and firm performance’, Journal of Financial Economics, 51, 371–406. • Thompson, S. (2005) "The Impact of Corporate Governance Reforms on the Remuneration of Executives in the UK", Corporate Governance: An International Review, Vol.13, No.1, January, pp.19- 25.
  • Additional Readings (2) • Berle, A. and Means, G. (1932) The Modern Corporation and Private Property, New York. • Monks, R. A. G. (1994) ‘Tomorrow’s corporation’, Corporate Governance: An International Review, 2(3), July, 125–130. • Nesbitt, S. L. (1994) ‘Long-term rewards from shareholder activism: A study of the “CalPERS effect”’, Journal of Applied Corporate Finance, 6, 75–80. • Stapledon, G. P. (1995) ‘Exercise of voting rights by institutional shareholders in the UK’, Corporate Governance: An International Review, 3(3), 144–155. • Stapledon, G. P. (1996) Institutional Shareholders and Corporate Governance, Clarendon Press, Oxford. • Smith, M. P. (1996) ‘Shareholder activism by institutional investors: Evidence from CalPERS’, Journal of Finance, 51(1), March, 227–252. • Agrawal, A. and Knoeber, C. R. (1996) ‘Firm performance and mechanisms to control agency problems between managers and shareholders’, Journal of Financial and Quantitative Analysis, 31(3), September, 377–397. • Mallin, C. A. (1996) ‘The Voting Framework: A Comparative Study of Voting Behaviour of Institutional Investors in the US and the UK’, Corporate Governance: An International Review, 4(2), April, 107–122. • Solomon, A. and Solomon, J. F. (1999) ‘Empirical evidence of long-termism and shareholder activism in UK unit trusts’, Corporate Governance: An International Review, 7(3), July, 288–300. • Faccio, M. and Lasfer, M. A. (2000) ‘Do occupational pension funds monitor companies in which they hold large stakes?’, Journal of Corporate Finance, 6, 71–110. • Solomon, J. F., Solomon, A., Joseph, N. L. and Norton, S. D. (2000) ‘Institutional investors’ views on corporate governance reform: Policy recommendations for the 21st century’, Corporate Governance: An International Review, 8(3), July, 217–226. • Mallin, C. A. (2001) ‘Institutional investors and voting practices: An international comparison’, Corporate Governance: An International Review, 9(2), April, 118–126. • Myners (2001) Institutional Investment in the United Kingdom: A Review (The Myners Report), London. • MacKenzie, C. (2004) "Don't Stop Rattling Those Boardroom Chains: Corporate Activists Are Key to Maintaining Shareholder Returns", Financial Times, 10th May, p.6. • National Association of Pension Funds (NAPF) (2005) Pension Scheme Governance - Fit for the 21st Century, NAPF Discussion Paper, July.
  • Next Week’s Ideas for Discussion • Foo Nin Ho, Wang Hui-Ming Deanna and Vitell, Scott J.(2012) A Global Analysis of Corporate Social Performance: • The Effects of Cultural and Geographic Environments, Journal of Business Ethics, 2012:107: pp.423–433