Regulation of Business
This domain asks why governments regulate, which agencies and statutes do it, and how to reason about a merger, a pricing practice, or a safety rule. Expect questions that name a statute or agency and test whether you know its scope, plus scenarios that require applying antitrust or consumer-protection logic.
Why governments regulate
- Market failure: externalities such as pollution, public goods such as defense, natural monopoly in utilities, and information asymmetry in securities and pharmaceuticals.
- Protecting parties with unequal bargaining power: consumers, workers, small investors.
- Promoting competition and spreading the cost of systemic risk.
Competition law
- Sherman Act 1890: §1 prohibits contracts, combinations, or conspiracies in restraint of trade and requires concerted action; §2 prohibits monopolization and attempts to monopolize, which requires exclusionary conduct - merely holding monopoly power is not itself illegal.
- Clayton Act 1914: targets price discrimination, tying, exclusive dealing, and mergers whose effect may substantially lessen competition. The Robinson-Patman Act 1936 amended the price-discrimination provisions.
- FTC Act 1914 created the FTC and bans unfair or deceptive acts or practices.
- Horizontal price fixing is illegal per se; most other conduct is judged under the rule of reason, and merger review uses concentration measures such as the HHI.
Social regulation
SEC (1934), FDA, EPA (1970), OSHA (1970), CFPB; Sarbanes-Oxley 2002 (CEO/CFO certification, auditor independence); Dodd-Frank 2010. Competing theories: public interest, regulatory capture, and public choice.
Worked example
Two hospitals in one metro each hold 30 percent of the market and propose a merger. The post-merger HHI lands in the highly concentrated band, so the agencies presume harm. Defenses include the failing-firm argument, efficiencies that flow to consumers rather than shareholders, and evidence of likely entry. The ethical layer: the deal may raise prices yet improve quality, and regulators are instructed to weigh consumer welfare, not the community-benefit rhetoric in the press release.
Traps that cost marks
Believing monopoly is automatically illegal; confusing §1 concerted action with §2 unilateral conduct; assuming all price discrimination is unlawful (cost-justification and meeting-competition defenses exist); and asserting capture theory as if it were proven fact.