Page 322 - Encyclopedia of Business and Finance

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Finance

The Federal Trade Commission Act of 1914 (and the Congress for antitrust issues has a significant impact on
provisions of the antitrust acts that preceded it) promotes enforcement.
free and fair trade competition by investigating and pre- SEE ALSO Antitrust Legislation
venting violations of the law. Key areas covered by the act,
as well as other antitrust laws, include:
BIBLIOGRAPHY
Garman E. T. (2005). Consumer Economics Issues in America
Price fixing: There are two types of price fixing: vertical (8th ed.). Mason OH: Thomson Custom Solutions.
and horizontal. Vertical price fixing occurs when manu-
Meier, K. J., Garman, E. T., and Keiser, L. R. (2003). Regulation
facturers make express or implied agreements with their
and Consumer Protection: Politics, Bureaucracy and Economics
customers obligating them to resell at a price dictated by
(4th ed.). Mason, OH: Thomson Custom Solutions.
the manufacturer. Manufacturers can suggest retail prices
but not fix them by agreement. Few sellers are caught ver-
tically fixing prices; instead, they intimidate retailers by Phyllis Bunn
cutting off sales (Garman, 2005). Horizontal price fixing Laurie Barfitt
occurs when competitors make direct agreements about
the quantity of goods that will be produced, offered for
sale, or bought. According to Garman (2005), in one
case, an agreement by major oil refiners to purchase and FEEDBACK
store the excess production of small independent refiners SEE Communications in Business; Job Enrichment; Opera-
was found to be illegal because the purpose of the agree- tions Management; Performance Appraisal; Standard-
ment was to affect the market price for gasoline by artifi- Based Work Performance
cially limiting the availability of supply. The government
can take action, civil and/or criminal, in cases of price fix-
ing.
FINANCE
Unfair competition: The FTC and antitrust policies that Corporate or Business Finance is basically the methodol-
preceded it are in agreement on concepts of unfair com- ogy of allocating financial resources, with a financial
petition. Examples of unfair competition are larger busi-
value, in an optimal manner to maximize the wealth of a
nesses using their size or market power to gain lower
business enterprise. There are three major decisions to be
prices from suppliers or a manufacturer granting dis- made in this allocation process: capital budgeting, financ-
counts for the same products sold to larger firms without ing, and dividend policy. Capital budgeting is the decision
granting similar discounts to smaller businesses when sell- regarding the choice of which investments are to be made
ing costs do not vary. with the resources that have been brought into the busi-
ness or earned and retained by the business. The choice
Merger prohibition: A merger is the acquisition of one depends on the returns to be made from the investment
company by another. The FTC established guidelines and exceeding the cost of capital. The method used to do this
criteria that challenge mergers that lessen competition. is the discounted time-value of money of the cash flow
The judgment of the courts is that a restraint of trade from the investment. This value is the internal rate of
occurring through a merger must be undue and unreason- return (IRR), a measure of return on investment. When
able before it is held illegal. the IRR exceeds the required return, which is equal to the
cost of the funds invested (see weighted average cost of
Deceptive practices: False advertising is one example of capital, below) then the investment should be made. If
deceptive practice. The FTC considers an advertisement such a required return is used as the discount rate, then
deceptive if it contains misrepresentation or omission that that is the same as saying the investment will yield a pos-
is likely to mislead consumers acting reasonably under the itive net present value (NPV). If there are two or more
circumstances to their detriment. investments that can be made, but they are mutually
Even though there are differences of opinion as to the exclusive, then they must be ranked, and the one with the
effectiveness of antitrust policy, everyone (consumers, highest NPV should be chosen. If there is a limited
competitors, and prospective business owners) benefits amount of funds to be invested, then some bankers or
from a more competitive economy. Thus, antitrust policy advisers who obtain additional funds for a business may
is an important element in public policy regarding busi- require that the business choose among the investments so
ness. Unfortunately, there are limits to what is accom- as not to exceed the limited level of funds available. This
plished mainly because the amount of funds provided by selection process, which is called capital rationing, should

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