Market Performance and Regulation

AG BM 102

Market Performance – how well does an industry do what society might reasonably expect it to do

Introduction

• This is what we really care about• Structure > Conduct > Performance• Multifaceted measure• Can’t maximize all at once

George Brandow on Performance of Food IndustryThe food industry should produce the selection of products that would be made by fairly informed consumers given a wide range of choices at prices just sufficient to cover necessary costs of making the products available

Elements of Performance

• Product presentation to buyers –bacon• Efficiency in processing & distribution• Progressiveness• Selling costs• Returns to factors of production – profits,

labor, management salaries, interest risk

Elements of Performance

• Stability of prices, output, and employment• Fair conduct• Price coordination• Externalities

Measuring Performance

• Overall it is tough – so many elements• Compare firms in an industry• Compare industries• Analyze particular markets• Compare countries

Problems

• Performance is relative & depends on norm – pure competition is harsh norm

• Overall performance a weighted average of many things

• Existing measures have a narrow focus• Measure only the past• Changes may not reflect what they appear

to reflect

Concluding Comments about Performance

• Performance is what we care about• Everything else is evaluated relative to

performance• Often improvement comes at a cost in

another element – so weights are important

• Hard to see

Regulation

• Sometimes performance is bad & gov’t tries to correct it

• Started in 1887 with Interstate Commerce Act regulating railroads

• 1890 - Sherman Antitrust Act• 1914- Clayton Antitrust Act• Lots more since

Regulations

• Government tries to improve performance through laws

• May be divided into regulation of structure • Regulations of conduct • Regulations of performance• Enforcement an issue• Some areas not addressed

Regulations and Politics

• Regulation is a political issue• One important issue in elections is role of

government• This evolves over time• Once common view was government had

small role• Over time role has increased• Opinions differ considerably

Issues in regulatory laws

• Who writes them?• What are goals?• Who enforces them?• Who pays the price?• Role of lobbyists• Dead weight losses• Any rule has costs and benefits

• The essence of any law is that the public must think that the benefits outweigh the costs

• Each individual has his or her own weights – depending on situation

• Farmer vs. consumer• Animal rights advocate vs. meat eater• …

Regulations of Structure• Sherman Act 1890

– Monopolization provisions –• possession of monopoly power in relevant market• willful acquisition & maintenance of that power 75% market

share magic number

• Clayton Antitrust Act 1914– Acquisition provisions of–

• can’t acquire another firm if it will substantially lessen competition

• hasn’t been enforced lately – Dean Foods & Suiza• JBS & Cargill• AB InBev & SAB Miller – Miller sold to Coors

Meat Packer’s Consent Decree (1920) & Packers & Stockyards Act (1921)

• Packers can’t own stockyards, cold storage plants, terminal railroads

• Can’t handle fish, vegetables, fruits, canned goods, fresh cream, milk

• Can’t operate retail meat markets• Submit perpetually to the jurisdiction of the U.S.

District Court under an injunction forbidding any combination or conspiracy or monopoly attempt with regard to food products.

Regulations of structure

• Interlocking directorate provisions of Clayton Act

• Standard Oil

Regulations of Conduct

• Regulations of Collusive or Restrictive Conduct

• Regulation of Unfair Trade Practices• Other Conduct Regulations

Regulations of Collusive or Restrictive Conduct

• Sherman Act - Restraint of Trade provisions

• Federal Trade Commission Act (1914) unfair trade practices – esp. price fixing

• Clayton Act – can’t sell on condition that buyer can’t sell competitor’s stuff – full line forcing

Regulation of Unfair Trade Practices

• Big item for food industry• Robinson Patman Act (1936) no price

discrimination unless justified by costs of serving buyers

• Lots of state laws

Other Conduct Regulation

• Federal Trade Commission• Truth in Packaging (1966)• Truth in Lending (1968)• Definitions of terms – juice vs. juice

products

Regulations of Performance

• Cases where competition won’t work but we like the structure– Public utilities – natural monopolies– Competition has too much instability –

production agriculture

Enforcement in Food

• Lots of price fixing & allocation of markets – esp. dairy & bakery – school bread contracts – low differentiated products

• Price fixing only an issue where price competition occurs

• Traditionally no horizontal mergers allowed – now very lax- Dean Foods & Suiza were allowed to merge

Areas not regulated well

• Differentiated products• Only truth in advertising – no

monopolization by differentiation• Monopsonies

Dodd–Frank Wall Street Reform and Consumer Protection Act

• Response to the financial crisis and bailout of many banks

• Changes regulations of banks, etc., with respect to risk taking

• Presumably makes institutions less risky• Considerably more reporting requirements• Especially burdensome on small banks• Example of trade-offs in regulation

generally

2015 Merger News

• Royal Ahold (Giant – both Carlisle & Landover – Martin’s) & Delhaize Group of Belgium (Food Lion and Hannaford)

• Sysco & US Foods – fell through in June 2015– FTC would not approve

Australia• Protection all round!• Competition Policy Review• Any law that interferes with market place• Dairy regulations• Sunday closing• …• If states don’t repeal laws they lose

national revenue equal to deadweight loss

Concluding Comments

• Regulation based on structure > conduct > performance model

• Evolves over time – lately very lax• Market power is real – some regulation is

necessary