Antitrust Law in the Environment of Business

Concentration of Market Power Using the Herfindahl-Hirschman Index (HHI)

-determined by the Herfindahl-Hirschman Index (HHI) -it is determined by adding the squares of the percentage market shares in the relevant market -not a scale, based on % of power -10% = 100 on the index, 40% = 1600, total is 3000 -if pre merger HHI is les than 1,000 when the market is deemed not to be concentrated then the merger will usually be allowed -if between 1,000 and 1,800 then industry is moderately concentrated and the merger can be challenged -if over 1,800 then industry is highly concentrated and it will probably be challenged

Smithian Model

-developed by 1700 economist Adam Smith -self organized firms were preferred -did not think governmental authorities could make the best use of society's resources -SELF CORRECTIVE force of competition replaces and improves upon parental role of gov't in protecting consumers -Anti trust is one example of the need for the gov't to protect when competition is not present

Rule of Reason Violations of Section 1 of the Sherman Act

-does restrain trade and may lessen competition to some degree -may create benefits that outweighs the damage they do -courts reserve the right to weigh the evidence and determine whether the agreement is DEFENSIBLE on the grounds of its OVERALL BENEFIT TO SOCIETY

Sherman Antitrust Act of 1890 *Sections 1 & 2

-essentially outlaws monopolies (trust) in the United States and empowered the fed govt to break up existing trusts -did not protect consumers from anticompetitive practices -ineffective at dismantling well established trust due to Supreme Court interpretation of Sherman (broad terms) -fixing those issues required the Clayton AA and the FTC Act -this mainly addressed outcomes, the "trusts" and monopolies themselves -enforced by the DOJ

Parker Doctrine

-established by SC -actions by a state government are exempt if the state clearly articulates and actively supervises the policy behind its action

Boycotts

-exclusionary practice -boycott is when a group conspires to prevent the carrying on of business or to harm a business -groups can be consumers, union members, retailers, wholesalers, suppliers -often associated with price fixing schemes or other restraints of trade -usually per se if the group possesses market power and the boycott is intended to restrict or exclude a competitor

Exclusive-Dealing Contracts

-exclusionary practice -contracts under which a seller stops a buyer from purchasing the seller's competitors products -prohibited under Sec 3 of CATA if it "substantially lessens competition or creates a monopoly"

Tying Arrangements (tie-in sale)

-exclusionary practice -sale of one product conditioned upon required purchase of another product -legal ones include advertising techniques "buy one get one free or half price" -gov't says per se illegal if: *the tying or tied products are separate *market power *evidence of substantial adverse effect in the tied product

Agricultural Cooperatives or Associations

-exempt from anti trust law -not for profit organizations that work to assist farmers by providing them with loans, price supports, and a pool of mutually provided resources -exempt by CAFTA and Capper-Volstead Act of 1992

Labor Unions

-exempt from anti trust laws -common law interpretation is: doesn't effect interstate commerce -labor unions are able to organize and conduct collective bargaining without fear of being accused of violating anti trust laws (can go on strike/boycott entire industries or firms) -must act solely in the interest of their members -regulated by National Labor Relations Act

Determining Monopolistic Power

-first requires proof of market power *first determination of the relevant market (what is the product and where is it sold *then alleged monopolist must have the ability to price above the competition level for a significant period of time -difficult to prove nonetheless

Business Electronic Co. v Sharp Electronic Co 1988

-gave manufacturers the freedom to have wide control in selecting dealers to distribute their product -firmly establishes the rule of reason unless there is a conspiracy or direct price fixing is involved

Interlocking Directorates (violating CATA) *Section 8*

-having the same people sit on competing corporations' board of directors -this is prohibited based on: profits of the competing companies or on the competitive sales totals of the two companies -amounts are set by the FTC

Government Response to Pre-merger notification

-if gov't files suit to block merger, it is usually under Sec 7 of CATA, as Amended by Celler-Kefauver in 1950 -Determination of market power is the key

Competition

-lifeblood of capitalism -rely upon the maintenance of a healthy state of competition within the economy -competitive markets therefore are in the bet interest of the economy -individual firms want to reduce competition

Predatory Pricing

-major type of price discrimination -manufacturer sells low in one geographic area to drive out competition in that area, then raise prices once the competition is gone from the market -difficult case to win (under Sec 2a or Sec 2 of Sherman) because the issue is whether or not it is predatory or aggressive competition

Section 1 of the Sherman Act

-makes it a criminal felony to engage in any contract to restrain trade -does not cover unilateral actions to restrain trade -does not require a contract -divided violations into Per se Violations and Rule of Reason Violation

U.S. Business that operate globally

-may be subject to international anti trust regulation under US law -EU has been aggressive: in 1991 blocked merger on antitrust grounds 2 US companies (Gen Electric & Honeywell) -EU can do this because they operate in the EU -Companies need to be increasingly mindful of global antitrust regulation

Market Extension Mergers (MEMs)

-merger between two firms in similar fields but no in the same exact field -Geographic MEMs: mergers between two firms in the same product market but not in the same geographic market (Blue Bell of Brenham merges with Purple Bunny of Idaho to produce ice cream) -Product MEMs: mergers between two firms in similar fields of business but not in the exact business field (Blue Bell and an ice cream cone manufacturer)

Conglomerate/Diversification Mergers

-mergers between firms that operate in distinct and unrelated markets -mere threat of competition -diversification -EX: tobacco co merges with nabisco

Rule of Reason in Court Analysis of Anti Trust laws

-much more flexible standard -allows some antitrust violations as long as reasonable -can not be unreasonable level of anti trust violation -many factors the court can consider

Elements to Price Discrimination

-must price the product below cost -defendant was then able to monopolize the market -monopoly lasted long enough for the defendant to recoup losses suffered to drive out competition out of business

Volume Discount defense

-one of the most common and controversial defenses -is customer hurt or helped by the volume discounts?

Section 2 of the Sherman Act [not a legal tool for preventing monopolies before they arise, instead is a means of punishing successful, anticompetitive attempts to create and sustain monopolies]

-only outlaws any attempt to monopolize -doesn't outlaw monopolies, only outlaws anticompetitive means in achieving or creating a monopoly -requires that the alleged violator has monopolistic power in the relevant market -proving violation requires that the firm has in someway acquired monopolistic power and engaged in willful attempts to acquire or maintain that "monopolistic power"

Clayton Anti Trust Act of 1914 (CATA)

-outlawed SPECIFIC activities that lead to monopolistic behavior -outlawed SPECIFIC acts that are anticompetitive -specific and preventative -only proof of significant probability of reducing competition -civil monetary damages -enforced by the FTC of DOJ -has 4 major violations

Per Se Violations of Section 1 of the Sherman Act

-price fixing, group boycotts, refusal to deal, some market divisions -violations are strong -relatively deficient deterrents of the most egregious anticompetitive actions

Interstate Commerce Act

-purpose was to regulate railroads -first step towards protecting consumers and small businesses -preserved competitive markers but only in railroads

Hart-Scott-Rodino Anti Trust Improvement Act of 1976

-requirement of notification prior to merger to: FTC, DOJ -purpose is to give government time to decide to oppose said merger on anti trust grounds -applies to merges over $70 million in value -30 day time period after notice before proceeding any further with merger -Gov't can sue to stop the merger during the trime period

Meeting competition defense

-seller can meet, not beat, the competitor's price -must be in good faith, can start a price war

Tying Arrangements (violation of CATA) *Section 3*

-seller requires a buyer to purchase a "tied" product as a condition of purchasing the desired tying product -forces buyers to make an all or nothing purchase -only apply to exchanges of goods, not services

There are two types of Vertical Market Divisions

-territorial restraints: where the manufacturer tells the retailer where they can sell product (EX: distributorship, if sell outside the territory, then grounds to revoke franchise) Location clauses -customer restrictions: restrictions on who can sell to, such as wholesalers only

Mergers (violation of CATA) *Section 7* {not all}

-the joining of two or more companies into one -can only be prevented when they substantially lessen competition or tend to create a monopoly in any line of commerce in any section of the country -which mergers actually threaten competition (Firm Concentration, Barriers to entry)

Exclusionary Practices

-the principal concern of anti trust law is to be sure that firms with market power cannot control the markets in which they do business -Statutory provisions include: Section 1 of Sherman (Products and Services), Section 3 of CATA (Products- sale of commodities NOT services) -includes: tying arrangements, exclusive-dealing contracts, and boycotts

Horizontal Restraint of Trade

-this occurs when businesses operate at same level and generally in same market -businesses are on the same plane in the product marker -businesses are competitors -EX: a cartel. rival firms come together to purposely restrain trade, like OPEC -can be rule of reason or per se

Vertical Restraint of Trade

-this occurs when two or more firms in the distribution chain enter into a contract or conspire to restrain trade -involves vertical chain, such as distributor to wholesaler to a retailer to customer -can be rule of reason or per se

White Motor Co v US 1963

-vertical market division example -white's restrictive practices to sell only in exclusive territory around their dealerships which sold directly to gov't entities thereby keeping other dealers from selling to them -White argues it was a small company, and that the actions were necessary to force its dealers to concentrate on the competition and not with eachother -Company's actions were upheld based on RULE OF REASON approach

Price Fixing

-when firms are selling the same product and agree to fix prices it is almost certain a violation of Sherman, the issue comes when determining per se violation or rule of reason.

Exclusionary Practices/Exclusive Dealing (violation of CATA) *Section 3*

-where one firm is given the exclusive right, to the exclusion of others, to buy, sell, or trade another's product (Section 3) -courts recognize however, that some exclusive dealing arrangements help firms reduce selling and advertising costs -therefore those situations are only a threat when the arrangement applies to a substantial share of the products in a particular market

Geographic Market

-where the product is sold: local, state, regional, national, international -also influenced by the price of the product -product buyers: what and how the consumer purchases the product, the more expensive the product the larger area you are willing to search for better prices

Definition of Trusts

groups of companies that agreed to eliminate competition among them

Product Market

interchangeable products (can even be future use or potential use) having enough producers so that one firm cannot affect the market for the products

Restraint of trade

is any agreement between two or more parties that substantially reduces competition in the marketplace -rival firms must compete -EX: two firms cannot contract to fix prices on their products to eliminate competition

Market Power

is the ability of one or more firms profitability to maintain prices above competitive levels for significant period of time

Horizontal Mergers

mergers between firms that compete in the same market -Texaco and Getty

Market Share

percentage of the relevant market controlled by the firm

Natural Monopolies

total production costs for a single firm serving a market are lower than total production costs for a group of competitive firms serving that same market -anti trust laws do not apply -it can sustain itself by charging lower prices than its competitors not excluding through anticompetitive practices -are controlled by various governmental/public utility commissions that normally set prices

Vertical Mergers

two firms in the same chain of production and distribution combine into one firm (supplier-customer merger) EX: apparel manufacturer and department store merger. this might forbid other types of apparel being sold in the department store. which the result would be to remove exiting competitors from the market.

Federal Trade Commission Act of 1914 *Section 5 importance

-created the Federal Trade Commission (FTC) -regulates unfair methods of competition -also regulates deceptive acts or practices of competition -unfairly eliminating or excluding competitors from the marketplace is condemned -can be used to regulate all forms of anticompetitive behavior not covered by Sherman/CATA

Courts interpretations of Anti Trust law

-ANTI TRUST LAW IS DYNAMIC, changing as business and society change -two basic rules: per se, rule of reason

Per Se Rule in Court Analysis of Anti Trust laws

-Automatically held to be illegal -cause is irrelevant -no defenses or justifications can justify action -found in anti trust areas thought to be inherently anticompetitive -if per se, only issue remaining is the type and amount of damages

Price Discrimination

-Clayton Section 2 ALWAYS RESTRICTED PRICE DESCRIMINATION -although it is unclear in its application and has several major loopholes -Robinson-Patman was enacted to fix these -A manufacturer cannot sell the same product to different purchases for different prices without justification

Criminal Sanctions Under Anti Trust Law

-DOJ, Anti Trust division is the only one that can bring criminal cases -3 yrs in prison or $350,000 -> $10,000,000 -private individuals cannot bring criminal actions

Enforcing Anti Trust Laws

-Department of Justice (DOJ) & Federal Trade Commission (FTC) -individuals or businesses have right to sue alleged violators of the Anti Trust laws (90% are private lawsuits) ----- If they do sue, they normally get treble damages, attorney fees, and court costs -private parties cannot bring action under FTC

Cost Justification defense

-Ex: difference in transportation costs -difficult to prove because it is virtually an accounting and economic impossibility to assign specific costs of production to individual products

Merger Guidelines

-FTC & DOJ have guidelines for when you can and cannot legally merges -updated regularly and discuss factors that will be utilized by government in deciding if the merger should be allowed -concentration of market power needs to be determined -as well as ease of entry into the market place, economic efficiency, financial condition of the merging firms, and politics

Conspiracy to Restrain Information

-FTC v Indiana Federation of Dentists, 1986 -Indiana had a rule that dentists could not share info with insurance companies, including X rays -sometimes insurance companies wanted to view X rays to see if dental work was necessary -SC ruled that Indiana Federation of Dentists Rule was illegal based on a rule of reason approach because there was no procompetitive reason for the ban on sharing information -high burden Rule of Reason

Horizontal Group Boycotts

-Group boycott is a refusal to deal -Horizontal Boycott if two competitors agree to not deal with other competitors on the same level of competition; purpose is to eliminate or discipline a competitor of the boycotting group -SC is clear: if the boycott involves horizontal agreements among direct competitors, the rule is per se

Four Types of Mergers

-Horizontal Mergers -Vertical Mergers -Market Extension Mergers -Conglomerate or Diversification Mergers

Remedies Available under Anti Trust law

-Injunctions -Monetary -Additional remedies can include ordering a targeted company to divest, or get rid of, a given subsidiary to avoid antitrust problems

Standard Oil Trust

-John D Rockefeller -the larger Standard Oil got, the easier it was to force competition out of the market -controlled 82% of the world's oil industry by 1882 -Ohio SC dissolved the trust in 1892

Individual Exemptions to Anti Trust Legislation

-Labor Unions -Agricultural Cooperatives or Associations -State Action Exemptions -Public transportation -Insurance and other state regulated industries

CATA violation areas

-Price Discrimination -Exclusionary practices/Exclusive Dealing -Tying Arrangements -Mergers

Horizontal Price Fixing Case Law

-United States v Socony-Vaccum Oil Co 1940 *ruled a per se violation -Famous Footnote 59 rule -Arizona v Maricopa County 1982 *ruled that fee schedules were per se illegal, Section 1 -FTC v Superior Court Trial Lawyers 1990 *per se illegal

Miles Medical Company v John D Park & Sons Company 1911

-Vertical Price Fixing -Resale Price Maintenance (RPM) court case -RPMs are where the manufacturer requires the buyer to agree not to sell their products below a certain price -In this case, the SC ruled that a manufacturer can sell his product for whatever price he desires; but once sold the manufacturer should have no control over price --- any attempt to do so would be Per Se illegal *later overturned by Leegin v PSKS to be rule of reason

Defenses

-Volume Discounts -Cost justification -Changing conditions -Meeting competition

Horizontal Market Division Example

-What if three automobile manufacturers get together and divide up the sales area in a geographic manner? -This would be unfair, and could create monopolies in each of three areas -Functional: divide up by customer such as one firm sell only to retailers and another firm sell only to wholesalers -Horizontal market divisions are per se illegal so long as it involves more than one company

State Action Exemptions

-actions by states that lead to and or regulate monopolies -ex: granting liquor licenses, logging rights, firearm dealerships, MLB Baseball, foreign trade, political action committees -Sherman gives a "state action" exemption

Power Buyer Defense

-allows all businesses in certain industry to merge into 2,3,4 major companies nationwide to compete directly -ex: Coca Cola and Pepsi

Robinson-Patman Act 1936

-amends CATA, Section 2a to be: a manufacturer cannot sell the same product to different purchasers for different prices without justification -it is one of the most controversial areas in anti trust law -original intent was to protect the small stores from the large chain stores -government has been reluctant to enforce Section 2a -Majority are private cases (private lawsuits = treble damages)

Horizontal Exchanges of Information Good or Bad?

-business exchanging information can be good or bad, determines if the consumer is harmed or benefited with better products. -is it reducing waste and inefficiency? -does the sharing of info help the business in violating the spirit of anti trust laws? -Ex: companies exchanging info to create an ebola vaccine

Price Discrimination (violation of CATA)

-charge different buyers' different prices without justification -supplemented by the Robinson-Patman Act of 1936

Section 7 Prima Facia Case

-defendant must prove that the merger does not have anticompetitive affects which is very difficult to prove or that there is a defense -Defenses: when mergers are allowed -A failing firm defense (going out of business anyways) -A lack of power in industry defense (nobody else wants it so let me have it)

Changing Conditions defense

-deterioration of perishable goods -obsolescence of seasonal goods -court ordered sale or judicial one

Anticompetitive

-competition is the best when it is the fiercest, "no holds barred" -if the extreme efforts do not lead to better products and/or more efficient production methods are anticompetitive, they go against the perpetuation of healthy competition -antitrust law is designed to prevent and punish anticompetitive practices -business has to have rules and referees to stop activities that remove the benefits of competition

Barriers to entry in the relevant market

Has more complex criteria determining whether a merger reduces competition. Any characteristics of the relevant market that make it particularly difficult for new firms to enter and thereby compete with established firms. Barriers to entry include: licensing requirements, large scale investments, access to scarce resources

Railroad Trusts

-1880s were dominated by trusts -used market power to increase prices almost at will -resulted in the Interstate Commerce Act -more was needed, resulted in the Sherman Antitrust Act

Famous Footnote 59 rule

Essentially this states that any form in any way no matter what the economic justification that is made to make price-fixing agreements legal -- all practices banned because of their actual or potential threat to the central nervous system of the economy.

Standard Oil of New Jersey is ___________ Standard Oil of California is ___________

Exxon-Mobil Chevron

Relevant Market is the _____________ plus the ____________________

Product Market + Geographic Market = Relevant Market

Firm Concentration

Proportion of the relevant market served by the largest firms in the market. The higher the concentration of market share in the hands of a few firms, then the more they violate Sec 7 regarding Mergers.