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CHAPTER 5
GOVERNMENT REGULATION OF
COMPETITION AND PRICES
CHAPTER OUTLINE
A. POWER TO REGULATE BUSINESS
 The Constitution empowers the federal government to regulate virtually all aspects of interstate
commerce. Any rule required by "the economic needs of the nation" is permitted.
 Subject to the federal government's power to regulate business, each state may exercise its police
powers to regulate all aspects of business conducted within its boundaries.
1. REGULATION, FREE ENTERPRISE, AND DEREGULATION
 In recent years some deregulation of business has occurred.  Examples:
Regulation of transportation charges by airlines and trucking firms has been eliminated. Also, the
Telecommunications Act of 1996 reduces regulation in the national telecommunications industry.
LIMITATION.
 In some industries, deregulation caused undesirable results and regulation has
been reinstated.  Example: Deregulation of certain aspects of the banking and savings and loan
industries contributed to various unsound lending practices, prompting adoption of new regulations,
such as the Financial Institutions Reform, Recovery, & Enforcement Act (FIRREA).
STUDY HINT.
Government regulation directly conflicts with the concept of free enterprise.
GENERAL RULE.
2. REGULATION OF PRODUCTION, DISTRIBUTION, AND FINANCING
 The federal government can regulate all types of interstate activities involving
transportation, production of goods, financing (such as the Farm Credit Reform Act of 1996), and
communication. Examples: The federal government can regulate standards for foods and drugs, the
quantity of goods that a company may produce, and the prices for which goods can be sold.  By
virtue of its police powers, a state can also generally regulate intrastate activities (that is, activities
that occur within the state).
STUDY HINTS
 The power to regulate includes the power to regulate the quality of goods and
the power to require parties to acquire a license in order to deal in certain goods.  The federal
government's power to regulate interstate commerce gives it the right to regulate all modes of
communication, including cable television, and doing so does not violate the free speech guarantee of
the First Amendment.
GENERAL RULES.
3. REGULATION OF COMPETITION
 The Federal Trade Commission Act declares illegal all "unfair methods of
competition" and this Act is enforced by the Federal Trade Commission (FTC). The FTC has
prohibited a wide range of activities, such as boycotting, obtaining and using confidential information
of others, and false and deceptive advertising.  States also commonly forbid various forms of unfair
competition.
STUDY HINT.
An act may be unfair competition because it is harmful to competitors or
GENERAL RULES.
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consumers.
4. REGULATION OF PRICES
(a)Prohibited price discrimination
GENERAL RULE.
The Clayton Act of 1914 prohibits price discrimination in interstate or foreign
commerce if the discrimination may substantially lessen competition or may create a monopoly.
STUDY HINTS.
 Price discrimination is charging different customers different prices for the
same goods.  Discriminatory pricing disguised as advertising allowances or other valuable
benefits that are given to some, but not all, buyers may violate federal antitrust law.
(b) Permitted price discrimination
 Price discrimination is allowed if different prices are justified by a: (1) difference in grade,
quality, or quantity of goods sold; (2) difference in the cost of goods, such as different
transportation costs; (3) closeout sale of goods; (4) good faith attempt by a seller to meet the
competition in a particular competitive market by lowering the price charged in that market; or
(5) deterioration of goods.
 The Robinson Patman Act of 1936 allows a seller to refuse in good faith to deal with anyone
provided that such refusal is not intended to restrain trade.
5. PREVENTION OF MONOPOLIES AND COMBINATIONS
(a)The Federal Antitrust Act (Sherman Antitrust Act)
 Prohibited conduct:
 Section 1 of the Sherman Antitrust Act: This section forbids a conspiracy or agreement by
two or more persons to unreasonably restrain trade (i.e., to unreasonably limit competition),
which includes agreements to fix prices. Because a violation of Section 1 requires an
agreement by two or more parties, an agreement between a corporation and its employees or
officers does not to violate this law.  Horizontal price fixing (agreement between
competitors) and vertical price fixing (e.g., agreement between a manufacturer and retailer
on the resale price of a good) are both prohibited.  Tying arrangements (i.e., a seller refuses
to sell one product to a buyer unless the buyer also purchases a second product from the
seller) are generally forbidden.
 Section 2 of the Sherman Antitrust Act: This section prohibits an unlawful monopolization or
attempt to monopolize an industry by one or more persons or companies.
 Scope of the Act:  The Act applies to: (1) most persons engaging in interstate commerce,
including sellers and professionals; and (2) most activities, including manufacturing and
production.  The Act protects all persons, including consumers and competitors.
 Exempted conduct and parties:  The Act does not forbid: (1) a city from imposing rent limits;
(2) a manufacturer's agreement to distribute goods through only one dealer; (3) large
businesses, simply because they are big, or (4) domination of a market by a company because of
its superior product or business judgment.  Certain industries are exempt from antitrust laws,
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such as associations of exporters, farm cooperatives, and labor unions.
 Penalties/remedies: (1) Imprisonment; (2) fines of up to $1 million for companies and
$100,000 for individuals; (3) civil suit by persons harmed for treble damages (three times
actual damages suffered); and (4) a state may file a class action on behalf of its citizens
(parens patriae action).
(b) Clayton Act
 The Clayton Act forbids a company from acquiring an interest in the assets, ownership, or
control of another firm if doing so will substantially lessen competition or may create a
monopoly. Before large firms can merge, they must first give a premerger notification to the
FTC so this agency can block improper mergers before they are completed.  If necessary, a
court may enter a divestiture order that requires a party to give up a prohibited interest in
another company or its assets.
(c) Takeover laws
 The federal government and four-fifths of states regulate takeovers (i.e., mergers or
consolidations of two companies).  However, a state's regulation of corporate takeovers
generally apply only to takeover activities that occur within the state's jurisdiction.
6. Right of Person to Sue
When a statute imposes a regulation but does not state whether private persons may sue to enforce it,
courts take one of two different approaches to resolve this question: (1) legislative intent approach (no
right to sue unless expressly stated); or (2) Restatement (Second) of Torts approach (right to sue if the
court believes that this right is appropriate or needed.
B. LIMITATIONS ON STATE POWER TO REGULATE
7. CONSTITUTIONAL LIMITATIONS
A state cannot impose a regulation upon business if the regulation: (1) violates an individual's
constitutional rights; (2) discriminates against interstate commerce; or (3) imposes an unreasonable
burden on interstate commerce.
8. FEDERAL SUPREMACY
GENERAL RULE.
A state regulation is invalid if it: (1) directly conflicts with federal law (federal
supremacy); or (2) the subject has been preempted by the federal government (preemption).
STUDY HINTS.
 In general, any federal law (including administrative regulations) prevails over
any conflicting state law.  If federal law regulates a subject, the entire subject may be preempted
even if all aspects are not regulated. In this event, a state is forbidden from regulating any matters
relating to that subject.
9. STATE AND LOCAL GOVERNMENTS AS MARKET PARTICIPANTS
 When a state or local government is acting as a market participant, it is not
subject to constitutional limitations that normally restrict actions by a governmental body. But when
a state or local government does act as a market participant, it is subject to all laws that are applicable
to ordinary persons, such as the requirement to pay minimum wages.
GENERAL RULES.
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 A state is a market participant if it is only buying or selling goods for itself or it
is only engaging in business activities as opposed to regulating business activities.  Example: A
state is merely a market participant when it is contracting to have a state building constructed or it is
operating a municipal bus line.
STUDY HINT.
REVIEW OF TERMS AND PHRASES
MATCHING EXERCISE
Select the term or phrase that best matches a statement or definition stated below. Each term or phrase is the
best match for only one statement or definition.
Terms and Phrases
a. Clayton Act of 1914
b. Divestiture order
c. Federal Trade Commission (FTC)
d. Federal Trade Commission Act
e. Parens patriae action
f. Premerger notification
g. Restraint of trade
h. Sherman Antitrust Act
i. Takeover laws
j. Treble damages
Statements and Definitions
____ 1.
____ 2.
____ 3.
____ 4.
____ 5.
____ 6.
____ 7.
____ 8.
____ 9.
____10.
Federal agency that enforces certain federal laws that prohibit unfair competition.
Federal law that prohibits price discrimination that may substantially lessen competition.
Lawsuit by a state on behalf of citizens who paid higher prices due to others' antitrust violations.
Federal law that generally prohibits various forms of unfair competition.
Federal law that prohibits monopolies and agreements that unreasonably restrain trade.
Court decree compelling a party to give up a prohibited interest in a company.
Three times the actual damages suffered.
Federal and state laws regulating acquisition of ownership of one company by another company.
Restriction of competition in business.
Notice that certain larger companies must give before they merge into one company.
COMPLETION EXERCISE
Fill in the blanks with the words that most accurately complete each statement. Answers may or may not
include terms used in the matching exercise. A term cannot be used to complete more than one statement.
1. The federal law that generally declares unlawful all forms of unfair methods of competition in interstate
commerce is the _______________ _______________ _______________ _______________.
2. An example of _______________ _______________
customers different prices for the same goods.
is a manufacturer's charging different
3. An agreement by two or more competitors to fix the prices that they charge for competitive goods or
services is called _______________ _______________ _______________.
4. An agreement between a manufacturer and a retailer whereby the retailer agrees not to resell the
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manufacturer's goods below a certain price is called
_______________.
_______________
_______________
5. A party who suffers a loss due to a violation of the Sherman Antitrust Act may sue the wrongdoer and
recover _______________ _______________.
REVIEW OF CONCEPTS
Write T if the statement is true, write F if it is false.
____ 1. The federal government can generally regulate any aspect of interstate commerce.
____ 2. A state has no power to regulate business within its boundaries if the business is also regulated by
the federal government.
____ 3. The federal government comprehensively regulates the rates that are charged by airlines and
trucking firms.
____ 4. Deregulation of industry is consistent with the concept of free enterprise.
____ 5. Deregulation of certain industries has sometimes produced negative, undesirable results.
____ 6. Deceptive advertising in connection with interstate commerce is one form of unfair competition
that is generally prohibited by the Federal Trade Commission Act.
____ 7. In general, government may regulate the prices charged for any goods or services, including rents
that are charged by a landlord and interest that is charged on loans.
____ 8. Subject to certain exceptions, price discrimination is unlawful in connection with interstate
commerce.
____ 9. A manufacturer cannot charge different customers different prices for the same goods even if the
different prices can be justified by a difference in the cost of shipping the goods to the customers.
____ 10. The Sherman Antitrust Act only applies to conduct by sellers or buyers of goods; it does not apply
to professionals or others who merely render services.
____ 11. A state cannot regulate or restrict takeovers of corporations within the state because the federal
government has preempted this entire field.
____ 12. A state regulation cannot violate an individual's right that is guaranteed by the U.S. Constitution.
____ 13. Federal administrative agency rules prevail over conflicting state laws of any nature.
____ 14. A state is acting as a market participant if it merely goes out into the marketplace to buy goods or
services for its own use.
____ 15. A state is not subject to constitutional limitations if the state is acting solely as a market
participant and it is not acting in its capacity as a governmental body.
REVIEW OF CHAPTER - APPLICATION OF CONCEPTS
MULTIPLE CHOICE QUESTIONS
____ 1. The federal government has the power to adopt which of the following business regulations?
a. Regulation that requires automobile manufacturers to install dual front seat air bags in every
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new automobile that is sold in the United States.
b. Regulation that forbids the interstate sale of vitamins unless they satisfy certain quality
standards.
c. Regulation that requires interstate cable television systems to carry certain educational stations.
d. All of the above.
____ 2. Reality+ has created a virtual-reality game that dominates the video market. Reality+ has recently
entered the video rental market. In order to gain market share in the rental market and to hurt its
competition, Reality+ refuses to sell its virtual-reality game to any competitors. Has Reality+ violated
Section 1 of the Sherman Act?
a. Yes, Reality+’s conduct is an unreasonable restraint of trade.
b. Yes, Reality+’s conduct is an illegal tying arrangement.
c. Yes, Reality+’s conduct is an illegal boycott.
d. No, a single company, acting alone, cannot generally violate Section 1 of the Sherman Act.
____ 3. Which of the following actions violates the Sherman Antitrust Act?
a. Avco Inc. is a large business that owns 50% of the oil refinery business in the United States.
b. Manufacturer gives Oliver the exclusive right to sell Manufacturer's products in a certain area,
but this agreement does not substantially lessen competition.
c. Acme Co. manufactures earth moving equipment. Acme Co. and its distributors agree that the
distributors will not resell Acme Co.'s equipment below certain minimum prices.
d. San Francisco imposes certain residential rent limitations.
____ 4. LubeTech manufactures 1Lube, a universal lubricant that works on all engines and moving parts, in
any temperature, and in all conditions. 1Lube is also cheaper than comparable lubricants. Because of
1Lube, LubeTech controls 80 percent of the lubricant market. Has LubeTech violated federal antitrust
law?
a. Yes. LubeTech controls more than 70 percent of the lubricant market.
b. Yes. LubeTech has an illegal monopoly.
c. No.
d. a and b.
____ 5. Which law provides that no corporation shall acquire the assets of another corporation if the effect of
such acquisition may substantially lessen competition?
a. Section 1 of the Sherman Act.
b. Section 2 of the Sherman Act.
c. Robinson-Patman Act.
d. Clayton Act.
____ 6. CompuTron manufactures the Micro Data Storage Unit (MiDSU), the hottest new data storage
system that dominates the personal computer market. In order to maximize its profits, CompuTron will
not sell its MiDSU unless the buyer also purchases 20 Computron disks. These disks are good, but disks
made by other manufacturers work just as well in the MiDSU. Has CompuTron violated federal antitrust
law?
a. Yes, this is illegal price fixing.
b. Yes, this is an illegal tying arrangement.
c. Yes, this is an illegal boycott.
d. No.
____ 7. Several manufacturers of brand-name vitamins were concerned about competition from generic
brands. The manufacturers agreed to temporarily set prices below the price of generic brands in an effort
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to drive out the generic brands. Under these facts:
a. The manufacturers’ conduct is illegal horizontal price-fixing.
b. The manufacturers’ conduct is illegal vertical price-fixing.
c. The manufacturers’ conduct is legal because they are just trying to be competitive.
d. The manufacturers’ conduct is legal because consumers are benefitted by their conduct.
____ 8. Palisade Co. and Eagle Inc. both engage in interstate commerce and they are two of the largest
makers of medical equipment in the U.S. Both firms are formed under the laws of State X. All
shareholders of Eagle Inc. reside in State X, and its corporate offices and plants are also in State X.
Palisade Corp. is proposing taking over and merging with Eagle Inc. Under these facts:
a. The proposed merger of Palisade and Eagle may violate the Clayton Act if the effect of the
merger is to substantially lessen competition or may tend to create a monopoly.
b. State X cannot regulate any activity relating to this proposed takeover even if it occurs within
State X because only the federal government can regulate corporate takeovers.
c. Palisade may have to file a premerger notification with the FTC before merging with Eagle.
d. a and c.
____ 9. ChickFry makes ready-to-eat fried chicken dinners. ChickFry and its main distributor, Poultry
Pluckers, agreed that Poultry Pluckers would not resell the chicken dinners for less than $4 per dinner, a
reasonable price. Under these facts:
a. This agreement is an illegal tying arrangement.
b. This agreement is an illegal vertical price-fixing arrangement.
c. This agreement is a legal because the parties agreed to charge a reasonable price.
d. This agreement is a legal because antitrust law does not apply to this type of pricing
arrangement.
____10. Perfecto, a major apparel manufacturer, wanted to get an order from the Grant Department Store
chain. Perfecto got the contract by selling its clothes to Grant for 40 percent less than it sold the same
goods to other stores in the same market. As a result, Grant enjoyed a major competitive advantage
over other area stores. Under these facts:
a. Perfecto engaged in illegal price discrimination in violation of federal antitrust law.
b. Perfecto engaged in illegal price-fixing in violation of federal antitrust law.
c. Perfecto engaged in legal price discrimination in compliance with federal antitrust law.
d. Perfecto acted legally because its conduct is not subject to federal antitrust law.
____ 11. Heifer Co. and other meat producers agree to fix the prices that they charge for their competitive
meat products that are sold in interstate commerce. Under these facts:
a. Heifer Co. may be liable for three times the actual damages caused by its price fixing.
b. Heifer Co. may be subject to fines of up to $10 billion.
c. Individuals who are guilty of this price fixing may be fined, but they cannot be imprisoned.
d. No one can be sued, fined, or imprisoned for their conduct in this case because price fixing is
generally legal under the Sherman Antitrust Act.
____ 12. Which of the following agreements may violate the Sherman Antitrust Act?
a. Members of Union Local 412 agree that the base wage that they charge will be $10 per hour.
b. Members of the Iowa Farmer's Cooperative agree on a uniform, reasonable price for which the
Cooperative will store corn.
c. Ten manufacturers of sheet metal agree on a uniform price that they will charge for their
product.
d. a and c.
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____ 13. Select the correct answer.
a. States cannot regulate antitrust matters; this area has been preempted by the federal
government.
b. States can regulate antitrust matters, but state antitrust laws are invalid if they directly conflict
with federal antitrust law.
c. States can regulate corporate takeovers that occur within their jurisdiction.
d. b and c.
CASE PROBLEM
Answer the following problem, briefly explaining your answer.
Compu Co. manufactures computers, and it sells its computers to retail stores throughout the U.S. Compu
is considering various pricing plans. Would the following plans be unlawful under federal antitrust laws?
Plan A: Compu will sell its X computer to its best customers for $1,800. It will sell the same computer
to less-favored customers for $3,000. This pricing plan will substantially lessen competition.
Plan B: Compu will sell its Z computer to stores in one competitive market for $800, but it will sell the
same computer to stores in a different market for $600. The lower price is charged in the second market in
order to match the price that a competitor charges for a comparable computer in that market.
RIDING THE INTERNET
The City of Joy, a large metropolis, uses a few physicians to provide medical care for poor persons. The
city pays these physicians only $20 per hour, and it has refused to increase their wages. These independent
physicians, who do not belong to a union, agreed among themselves to boycott the city and refused to provide
any further services until the city agreed to pay each of them $50 per hour.
The city claims that the physicians’ action is an illegal boycott and illegal price-fixing in violation of
federal antitrust law. The physicians claim their conduct is not illegal because they do not possess any
market power
1. Using the Internet, locate the U.S. Supreme Court’s decision in FTC v. Superior Court Trial Lawyers
Assn., and state the search string that you used to find this case.
2. Evaluate the legality of the physicians’ conduct and the validity of their defense by referring to the decision
in FTC v. Superior Court Trial Lawyers Assn.
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