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Market Failure and Government Intervention

which they are based are often set on the basis of prices or output in an earlier period where market forces dictated some semblance of rationality.  The passage of time makes such guidelines more ridiculous and harder to enforce.


Antitrust: Structure and Conduct

There are two federal antitrust agencies- the Justice Department and the Federal Trade Commission, which was established by the Federal Trade Commission Act of 1914.1  The Justice Department goes through the normal appeal channels of the District Court, Appeals Court, and Supreme Court, the Federal Trade Commission has its own procedure.  The Federal Trade Commission's appeal procedure must be exhausted before a case ever reaches the courts; this can prove costly in time and money.  However, many firms will drag out the appeals process as long as possible when the results of the antitrust actions appear to be going against them.

The antitrust agencies design the strategy of enforcement of the antitrust laws.  The antitrust agencies have two kinds of remedies for antitrust violations.  They can punish individuals for past conduct through criminal penalties or they can alter the structure of a firm through civil suits.  Civil suits allow injunctions to prevent mergers, acquisitions, or other actions that might lessen competition in the market place.  Because changes in the structure of a market are believed to result in changes of conduct, such civil suits have the greatest potential for preventing the reoccurrence of illegal conduct in the future.  If the case involves a criminal case, which is an action brought against a specific person for a criminal act that may involve a jail sentence, then it may involve as many as twelve jurors.  However, in a civil case, which involves the correction of a right such as a property right, a judge will normally decide the case and the penalties generally involve a financial or property penalty.  While civil penalties usually involve punishment for past acts, civil actions usually involve prescriptions from future behavior. Both civil and criminal procedures are costly in terms of money and time.  While Section 4 of the Clayton Act allows a plaintiff (the one who has the complaint and brings the case against the defendant) to recover legal costs, such recovery only occurs when the plaintiff wins the case.  Furthermore, the financial condition of the defendant may prevent the recovery not only of the legal costs but also the recovery of the damages.  To avoid such costs a plaintiff and a defendant may elect to settle out of court.  Settling out of court confers benefits on a defendant by preventing an undesirable precedent from being set, and by preventing damaging information from becoming public record.  It also subjects a firm to less damage to its image and lower damages than those that would be awarded if a trial were lost.

Antitrust violations can carry penalties significantly greater than the financial gain that might have been achieved by violating the law.  Section 4 of the Clayton Act states:

...any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue therefor ... and shall recover threefold the damages by him sustained, and the cost of suit, including a reasonable attorney's fee.

"Treble Damages" means that the results of collusive effort can be made negative.  Nevertheless, because some violators may never be detected, treble damages do not take away all of the incentive to break the law.

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