Regulation of the Market Economy

In the new millennium, managers must be sensitive to regulatory policies both at home and abroad. If there was ever any doubt about the far-reaching importance of foreign regulatory bodies, that doubt was eliminated on July 3, 2001, when the European Commission turned thumbs down on the proposed acquisition of Honeywell, Inc., by General Electric Co (GE).

According to the commission, GE's dominant position in the markets for jet engines, combined with its financial strength and vertical integration into aircraft leasing, gave GE significant market power. At the same time, Honeywell is a leading supplier of avionics products and jet engines for corporate aircraft. The commission found that a merged entity would be able to leverage the respective market power of each company. Market dominance would have been created or strengthened as a result of horizontal overlaps in some markets as well as through the extension of GE's financial power and vertical integration to Honeywell activities. According to the commission, a merger between GE and Honeywell would foreclose competition and adversely affect product quality, service, and consumers' prices.1

What is captivating about this case is that the European Commission and the U.S. Department of Justice worked together during the investigation but reached different conclusions. Ironically, the Justice Department voted to allow the GE-Honeywell merger. This chapter considers the economic and social rationale for regulation, and explains the reasons behind conflicting opinions on government regulation in the market economy. Regulators must balance efficiency and equity considerations. This is a fascinating and controversial process.

1 See Andy Pasztor and JoAnne Lublin, "Skeptics Wonder if Honeywell CEO Will Revive, Expand Firm's Business," The Wall Street Journal Online, February 21, 2002 (http://online.wsj.com).

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