Government regulation in business today is vital because it attempts to create a level playing field for companies competing against one another and regulate honest business practices toward the consumers. It is important to for any business to understand how government regulation affects their industry and how they intend to run their company.
Industrial regulation is the government regulation of an entire industry. The purpose of industry regulation is for a an entity to watch an industry’s prices and products to make sure that they do not create a monopoly or take advantage of consumers. There are basically two kinds of regulation, price regulation and social regulation. Price regulation is regulation directed towards industries that have tendencies that may produce a monopoly. The industries that price regulation agencies monitor are: the Federal Energy Regulatory Commission (FERC), which are basically responsible for monitoring gas and oil pipelines and other energy based industries; the Federal Communications Commission (FCC), who are supposed to regulate television, telephones, and other areas of communication; and the Securities and Exchange Commission (SEC), who regulates financial markets. Social regulation monitors the conditions where goods and services are produced, the safety of those items produced, as well how the production of those good might affect society.
The industries that social regulation agencies are worried about are: the Food and Drug Administration (FDA), Environmental Protection Agency (EPA), and the Equal Employment Opportunity Commission (EEOC). The main purpose behind these organizations is; to stop monopolies from being formed and to control the pricing of the products or services because these industries have elements that may potentially create a monopoly. The affect that government industrial regulation has on the market will vary depending on several different variables such as how antitrust laws are interpreted, the administration enforcing the laws, taxation, and how strictly the laws are enforced. The purpose of the government regulation is to ensure monopolies aren’t formed and to make sure that prices and products aren’t taking advantage of customers. They also want to make sure that oligopolies are not formed to make sure there is not too much power over pricing and also to promote fair and healthy market competition. Depending how the laws are enforced will help decide how much of an impact there is to a certain market. The idea is to strive for equality and integrity in certain industries.
Knowing how courts are interpreting antitrust laws and how they affect a firms specific industry is important to understand when making business decisions for a company along with knowing the boundaries for where regulatory agencies may consider a monopoly or oligopoly could potentially be formed by having too much control. Social regulation is served with monitoring the conditions under which goods and services are produced, the safety of the goods being produced, and any effects production may have on society. The social regulatory agencies are; the Food and Drug Administration (FDA), the Environmental Protection Agency (EPA), and the Equal Employment Opportunity Commission (EEOC). Social regulation is different from pricing regulation because social regulation applies to almost all firms and is not designed for the specific purpose of stopping a monopoly. One example would be when the Occupational Safety and Health Administration (OSHA) decide to issue a requirement that all workers have periodic break from work, it would apply to all firms in the United States who are under OSHA’s control. On the other hand, pricing regulation would not.
People who are opposed to social regulation believe that regulation carries a steep administrative cost and that those costs actually hurt consumers more than the regulation actually helps. They think this happens because the social regulation laws are often poorly written and very difficult to interpret or enforce. Those who back social regulation do agree with some of what the naysayers think but they believe that the benefits of social regulation are worth the high costs and that regulation just needs to be improved. They think that social regulation has made manufacturing a lot safer in the United States and reduced discrimination within the workplace. Both sides have valid arguments however to actually judge between these two views is very difficult because accurately figuring out the costs or benefits is pretty much impossible. (Colander 2010). A natural monopoly is an industry in which significant economies of scale make the existence of more than one firm inefficient. An example of a natural monopoly is AT&T. Up until 1982; AT&T was what was called a regulated monopoly. It had the exclusive right to provide telephone service in the United States.
AT&T controlled 90 percent of the telecommunications market: long-distance and local telephone service, and the production of telephones themselves as well as other communication equipment. AT&T was given this right because it was felt that economies of scale made supplying telephone service a natural monopoly. Telephone service required every house to be connected with lines. These lines had to be buried underground or strung overhead on poles so it didn’t make sense to have more than one company installing separate lines. The government also decided that telephone service should to be available to all everyone, even those who live in remote areas, where service costs more to provide. An unregulated company in a similar position probably would have practiced skimming, which in this case would have been to provide service to low-cost areas and avoiding high-cost areas. AT&T was allowed to continue as a monopoly but they were subject to regulatory control by the Federal Communications Commission. This government regulation was put in place in order to limit the company’s profit to a fair level and prevent AT&T from abusing its monopoly. AT&T’s business was also limited to telephone service.
Under AT&T’s monopoly, phone service in the United States was the best and cheapest in the world at the time. Even if phone service was more expensive than it actually needed to be, most agreed that the system worked well. (Colander 2010). Antitrust policy is essentially the government’s policy towards the competitive process. The United States antitrust laws were put in place by both federal and state governments in order to regulate corporations. These policies intend to keep companies from becoming too large and stop them from fixing prices. These laws also attempt to give businesses an equal opportunity to compete in a market. There are four major parts of legislation that are known as the antitrust laws. In the United States these laws basically began with the Sherman Antitrust Act of 1890. The Sherman Antitrust Act stopped limits on competitive trade and made it illegal to form a monopoly. The nest next antitrust act was the Clayton Act, which was passed in 1914. The Clayton Act protects against mergers or acquisitions that would either greatly decrease competition or offer the threat of becoming a monopoly. Another major piece of legislation was the Robinson-Patman Act from 1036, which made it illegal to practice price discrimination by allowing some businesses to purchase products at lower prices than other businesses.
The last of the four pieces of legislations to the antitrust laws is the Federal Trade Commission (FTC), which was formed in 1914. The FTC was created to enforce the country’s antitrust laws. Many of the antitrust laws are not very specific and can be hard to interpret. The FTC’s job is to interpret the laws and enforce them. The three main regulatory commissions of social regulation are: the Food and Drug Administration, the Equal Employment Opportunity Commission, and the Occupational Safety and Health Administration. These three commissions watch over social regulation in different ways. The FDA stops drugs from being sold until there is enough information about the effects of the drug can be determined. The FDA often takes a long time to test and go through the approval process. They FDA can take up to five or even ten years to approve a drug and it is a very costly process. Because this is such a lengthy and expensive process it usually means higher priced drugs for consumers. The next commission to discuss is the EEOC. This is the commission that regulates discrimination in the workplace.
The EEOC investigates discrimination complaints based on criteria such as: individual’s race, color, nationality, religion, sex, age, or disability. The final commission to look at is OSHA. OSHA is essentially responsible for regulating health and safety of workers within the workplace. The five primary federal regulatory commissions that govern social regulation are the Food and Drug Administration (FDA), The Equal Employment Opportunity (EEOC), the Occupational Safety and Health Administration (OSHA), the Environmental Protection Agency (EPA), and the Consumer Product Safety Commission (CPSC). The major functions of these agencies are to monitor the conditions under which goods and services are produced, the safety of those goods, and the side effects of production on society.
Colander, David C. Economics: Eighth Edition San Francisco: McGraw-Hill Irwin 2010.