In American history, there have been four major laws passed by Congress to regulate and control monopolistic behavior in business (McConnell, Brue, and Flynn, 2012).
The first was the Sherman Act in 1890. This law came about because of increasing collusion among rapidly growing firms after the Civil War while many markets were growing to national proportions. This seminal antitrust law made it illegal to collude for the purpose of fixing prices or dividing markets as well as outlawing the creation of monopolies.
In time, the Sherman Act proved too ambiguous in many areas and allowed multiple interpretations, so Congress enacted the Clayton Act in 1914 to clarify the core principles of the Sherman Act. The Clayton Act sharpened many definitions of antitrust policy. Among its key provisions were outlawing price discrimination, tying contracts, acquiring stock of competing corporations, and making it illegal for individuals to serve more than one corporation at a time when the result would be decreased competition.
That same year, Congress created the Federal Trade Commission Act. This act put in place the Federal Trade Commission, which created an entity for enforcing antitrust laws in conjunction with the Justice Department.
These laws were sufficient for 36 more years when the final major antitrust Act was adopted. The Celler-Kefauver Act was passed into law in 1950. This legislation eliminated a loophole in the Clayton Act that allowed firms to bypass the rule against stock ownership in competing companies. Corporations had instead been simply acquiring the physical assets of a competing firm. The new act put an end to this loophole.
The primary purpose of industrial, or economic, regulation is to ensure that markets function as close to allocative efficiency as possible, which means the economy is producing at the same level as its needs. The need for industrial regulation started in the wake of the Civil War as industries started growing into national markets, diminishing competition within. As this went on, the firms involved began taking on the characteristics of monopolies, creating deadweight loss and disrupting allocative efficiency.
In the case of oligopoly, where only a few companies dominate an entire market, the main purpose of industrial regulation is to prevent collusive price structuring among the firms involved and ensure that the handful of firms that constitute the oligopoly remain competitive.
Pure monopolies, by definition, destroy competition within a market. Without regulation, most industries would come to be dominated by monopolies. Regulation exists for the purpose of ensuring a competitive environment for all but natural monopolies and maintaining oversight on those to ensure fair pricing.
Three primary entities regulate industries that are natural monopolies. Two exist at the federal level and one at the state (McConnell, Brue, and Flynn, 2012).
- Federal Energy Regulatory Commission, started in 1930, covers electricity, gas, oil and gas pipelines and water-power sites.
- Federal Communications Commission, started in 1934, covers telephone, television, cable, radio, CB, and Ham operators.
- State public utility commissions, actually comprises at least 50 separate entities, covers electricity, gas and telephones within statewide jurisdictions.
All of these entities operate under the “public interest theory of regulation” (McConnell, Brue, and Flynn, 2012). In effect, what all these agencies do is protect the public from monopolistic price structures in natural monopolies. Typically, this is done by mandating and enforcing price controls that are set where price is equal to average total cost, commonly called the “fair return” price.
While industrial regulation is concerned with price and efficiency, social regulation physically protects the public and the environment from industrial abuse. It provides rules and enforcement for protection of workers, product safety, environmental regulation and equal opportunity. Social regulation applies to all industries equally and exists to ensure businesses conduct themselves in an ethical manner and are held accountable when they do not.
Five main entities address social regulation; each of them has a national jurisdiction (McConnell, Brue, and Flynn, 2012):
- Food and Drug Administration, formed in 1906, as its name implies, oversees production of food, drugs, and cosmetics to ensure safety and quality.
- Equal Employment Opportunity Commission, formed in 1964, covers issues such as discrimination in employment, advancement and termination of employees.
- Occupational Safety and Health Administration, formed in 1971, covers every industry in America to ensure a standard level of health and safety in the workplace.
- Environmental Protection Agency, formed in 1972, studies and implements rules regarding industrial pollution in the ground, water and air.
- Consumer Product Safety Commission, also formed in 1972, regulates safety standards for all other consumer products not covered by the Food and Drug Administration.
McConnell, C. R., & Brue, S. L., Flynn, S. (2012). Economics (19th ed., pp. 375-389). McGraw-Hill.