Q. 27.5 LO An years past, firms around the ... [FREE SOLUTION]

Chapter 27: Q. 27.5 LO (page 600)

An years past, firms around the world have secretly engaged in collusive agreements to restrain production and push prices above competitive levels.
Evidence compiled by government officials investigating such agreements has revealed that conspiring firms often utilize similar methods of establishing and enforcing collusive restraints of trade. Most agreements, for instance, assign to each firm an allowed market share, a permitted region of operations, or an approved set of customers. In addition, participating firms commonly are required to exchange sales information so that they can monitor adherence to their agreements to restrain trade. In this chapter, you will learn why firms that typically utilize these techniques to formulate and maintain collusive agreements engage in secret conspiracies: Such agreements are illegal under U.S. antitrust laws.
Understand the foundations of antitrust regulations and enforcement

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Given information

Antitrust rules prohibit fraudulent acquisitions and economic realities in aggregate, deciding to leave it up to the courts to assess which facts are unconstitutional relevant facts at each trial. From waggon to digital, interpreting and enforcing the Sherman Antitrust Act to changing circumstances.

Explanation

Just within a few months after the Hertz-Dollar Thrifty merger, the car-rental rose by more than $5 %$ . This may possibly be because of following reasons:

1) The merger created monopolistic structure in which the merged firm gained market power to influence the car-rental on the upside. Due to limited car-rental service to choose from and higher demand, car-rental rose by more than $5 %$

2) The Advantage Rent a Car brand - originally owned by Hertz, which was supposed to be operating as a national competitor to Avis, Hertz (post merger with Dollar Thrifty) and Enterprise as held by UntdSts antitrust authorities at the time of approving merger between Hertz and Dollar Thrifty, declared bankruptcy and put its operations up for sale. This further increased industry concentration and reduced competition thereby leading to upside pressure on car rentals.

3) Failure of UntdSts antitrust authorities to ensure economic viability of Advantage Rent a Car brand to give competitive edge to Avis, Hertz (post merger with Dollar Thrifty) and Enterprise on a long term basis.

4) Due to winding-up of Advantage Rent a Car brand, the increased expectation of car rental rise on nation-wide scale culminated into actual car rental price rise.