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What worried microsoft?

products that may reduce barriers to entry cross platform middleware (browsers, java)

Philosophies: Promotion of economic efficiency includes these thoughts:

-Antitrust aimed at inefficient monopolies and cartels, when there is little actual or potential competition -Big businesses are often beneficial to society -Greater faith in markets -- less perceived need for antitrust enforcement

Administrative Agencies

-Antitrust division (cabinet) -Federal Trade Commission (independent)

Congress (Player in Anti-trust)

-Details in antitrust legislation -Appropriations to antitrust agencies (we will take your right away) -Senate approves nominees to courts and agencies -pressure on antitrust agencies (PGA example)

International Antitrust Authorities (Player in Anti-trust)

-European Union (Microsoft, Intel, Google)

Why did Colgate win the case?

-I can choose who to do business with -you technically had a choice

Continental T.V. vs G.T.E Sylvania

-Importance of economic efficiency -VNPR's judged under Rule of Reason Sylvania terminated Continental TV and Continental sued saying Sylvania was trying to monopolize the market, the SC upheld Sylvania's practice based on Rule of Reason//// Thus by 1967 the antitrust philosophy of the Supreme Court led it to prohibit all instances of vertical nonprice restraints, even in those situations where there might be clear short-term consumer economic benefits//// trend in the lower courts has been to uphold most vertical nonprice restraints under the rule of reason. ruled that it was fine

Microsoft:

-The government charged Microsoft with monopolizing, claiming that it employed anticompetitive practices to maintain its dominance in computer operating systems. -The government also alleged that Microsoft engaged in illegal per se tying arrangements by forcing equipment manufacturers to take its browser along with the operating system. -Network effects are present when a product's value to one user is related to how many other people are using the product. Telephone example -Thus, Microsoft feared that Internet browsers would effectively commoditize traditional operating systems and would become the key interface to run applications programs instead. -Browsers also threatened Microsoft because they could facilitate use of a universal programming system, called Java, which was designed to interface with several different operating systems. The beauty of Java is that applications programmers can make products that are compatible with Java and have them operate on multiple operating systems. -Microsoft used its market power in operating systems as leverage to exercise control over browsers. -In 1994, the Justice Department sued Microsoft, alleging that the company had engaged in anticompetitive practices with original equipment manufacturers (OEMs) -Microsoft began distributing Internet Explorer to OEMs in 1995 along with its operating system, which at that time was Windows 95. Microsoft required the OEMs that wanted to install Windows 95 on their machines to install Internet Explorer as well. - Microsoft engaged in unlawful tying by requiring OEMs to license and install Internet Explorer in order to put the Windows 95 operating system on their machines. Based on this allegation, Microsoft may not only have furthered its campaign to monopolize, but also have engaged in an illegal per se violation of the Sherman Act, Section 1 -Since more than 90% of new computers had the Windows operating system installed by OEMs, IAPs could gain an enormous marketing boost if they were permitted to advertise and distribute their services through an icon or folder on the Windows desktop. promote and distribute Internet Explorer nearly exclusively to their subscribers • eliminate links on their websites from which subscribers could download competing browsers • ship their access software with only Internet Explorer as the browser - Microsoft developed a Java system that worked specifically with Windows. Thus, a Java program written for the Microsoft system might not operate effectively with other operating systems Judge Jackson agreed with the government on almost every dimension of the case. He found that Microsoft had violated numerous aspects of the antitrust laws, including the following, which were central to the case: • Monopolizing. Microsoft violated Section 2 of the Sherman Act since the company had unlawfully used the power it enjoyed with Windows to maintain its dominance in the market for Intel-based PC operating systems. • Attempted Monopolizing. Microsoft ran afoul of Section 2 by attempting to take control of the browser market. • Illegal Per Se Tying. Microsoft violated Section 1 of the Sherman Act by unlawfully tying its browser to the operating system The court of appeals decision was at least a partial victory for Microsoft, because it did overturn all of Judge Jackson's remedies, including the dreaded breakup order. In addition, the appeals court reversed the conclusions that Microsoft had engaged in illegal per se tying and attempted monopolization of the browser market. On the other hand, to Microsoft's dismay, the court affirmed the conclusion that the company had violated Section 2 of the Sherman Act by implementing anticompetitive steps to maintain its market power in operating systems. Thus, Microsoft now faced two distinct kinds of legal battles in the United States

Market power

-ability to control prices or exclude competition (force behavior) -high market share -barriers to entry

Interbrand competition examples

-active dealer promotion of brand -reduces free-rider problem

Toys R US: A high- profile FTC VNPR case

-agreements with tow manufacturers to limit sales to warehouse stores, such as Costco -ruled unreasonable by the ALJ; decision affirmed by the FTC commissioners and the Court of appeals -Free-rider argument without merit -Manufacturers, not Toys R Us, promote toys -Does target have a stronger argument regarding show room status? In May 1996, the Commission filed an administrative complaint charging Toys "R" Us with using its dominant position as a toy distributor to obtain agreements from toy manufacturers to stop selling to warehouse clubs the same toys that they sold to Toys "R" Us. After an administrative trial, the ALJ issued an initial decision finding that Toys "R' Us' policy to stop carrying toys made by a manufacturer that sold the same toys to discount club stores had induced manufacturers to agree to stop supplying some toys to club stores in violation of the antitrust laws. In October 1998, the Commission issued its decision that Toys "R Us had orchestrated horizontal and vertical agreements with and among toy manufacturers to restrict the availability of popular toys to warehouse clubs, and ordered the company to stop pressuring manufacturers to limit supply or otherwise refuse to sell to discount club stores. Toys "R" Us appealed to the Seventh Circuit, and in August 2000, the appellate court upheld the Commission's order.

Benefits from increase in INTERBRAND competition:

1. Addresses free-rider problems from low-service discounters 2. New, relatively unknown company 3. complex technical product 4. Need for point-of-purchase

Leegin Creative Leather Products v. PSKS

-brighton brand product -Agreement to follow minimum prices to recieve marketing assistance from manufacturer (heart store program) -Supreme court decision -overrules dr. miles (dissent by 4 liberal judges) -Legal if reasonable under rule of reason -Deals with vertical price fixing and being per se illegal -Leegin owns Brighton which is distributed by various retailers. -Sets a minimum price that products can be sold at, otherwise stop supplying -Kay's owned by PSKS sells for discounted price, Leegin stops supplying -PSKS files for violation of Sherman Act -Court held vertical price fixing wasn't illegal per se, because it encourage interband competition while discouraging intrabrand competition

Other related microsoft events

-consumer class action lawsuit settled -suits by competitors settled -european union antitrust actions

Benefits of vertical/horizontal non restraints

-decrease intRAbrand competition: competition among retailers and trying to sell the same branded products to consumers. -may stimulate intERbrand competition: Competitions among brands (manufacturers) to sell their products Reduces free rider problems

Philosophies: Protect viability of small business includes these thoughts:

-distrust of big business in tight, cozy markets -markets are not always efficient -other social and political concerns are relevant -less faith in markets - greter percieved need for antitrust enforcement

Requirements in traditional markets (tying)

-market power in the tying product -separate product tied to the tying product

U.S. v Philadelphia National Bank

-merger creates firm of "undue size" (30% is defintely undue) -Merger significantly increases concentration of firms in concentrated market (based on four firm concentration ratio) The Philadelphia National Bank and Girard Trust Corn Exchange Bank are, respectively, the 2nd and 3rd largest of the 42 commercial banks with head offices in the Philadelphia metropolitan area. Were the proposed merger between PNB and Girard to happen, the resulting bank would be the largest in the area with 36% market share. After the merger the four largest banks in the area would have 78% market share. The proposed merger would have substantial anticompetitive effects in the Philadelphia metropolitan area, and the outcome in court found the merger to violate the Clayton act so it was prohibited.

Court of Appeals Ruling

-microsoft monopolized operating system market -Government did not prove attempted monopolization -Integration of browser is not illegal per se tying Platform software different than traditional products Due to inexperience with this market, courts should use rule of reason -Jackson's remedies vacated. No hearing to determine if they are socially beneficial Fewer offenses proven Structural remedies usually inappropriate for "unitary" companies

Civil Remedies

-money (to us gov) -injuctions -FTC may bring cases in FTC admin court

Accusations brought baout in the Microsoft debate

-monopolizing Operating System Market -Attempted Monopolization of browser market -Illegal per se tying of browser to operating system -several state attorneys generals also file suite against MS

Microsoft: Are there barriers to entry?

-network effects

Use of power to foreclose competition

-no legitimate business justification for conduct -practices cannot be justified on efficiency grounds -increased costs only to make sense in terms of long-term monopoly returns

Executive (Player in Anti-trust)

-nominations to courts and agencies -develops budget proposals for anti trust agencies -signs antitrust and budget legislation

Lorain Journal

-only newspaper in town -if you advertise with us you can't advertise with the radio station

Microsoft: What products are in the product market?

-operating systems for intel-compatible PCs

High market share

-product market (few direct competitors or close substitutions for product CELLOPHANE) Cross elasticity of demand: goods to which costumers will shift when the cost of a product rises. geographic market

Market structure includes:

-size of acceptable firms -number of competing firms

Aspen skiing company case

-ski company has three mountains -highlands has 1 In 1979, Jones sued the Aspen Skiing Company, alleging violations of the Sherman Act. Aspen Highlands and Aspen Skiing had, for several years, cooperated to sell an "all-Aspen" ticket that allowed a skier to visit Aspen Skiing's three mountains and Aspen Highlands. However, the rival companies were unable to agree on a means to administer this program and distribute proceeds. In 1978, Aspen Skiing decided to discontinue the all-Aspen ticket, and to instead sell only the ticket to the three Aspen Skiing mountains. Aspen Skiing also refused to sell Aspen Highlands any lift tickets to the Aspen Skiing mountains (even at full price), thereby preventing Aspen Highlands from offering its own multi-mountain package. The issue made it to the US Supreme Court and was decided as 472 U.S. 585 (1985) with Jones winning over $10 million in treble damages. Highlands sued Ski Co. alleging that Ski Co. monopolized in contravention of section 2 of the Sherman Act. The lower courts found that Ski Co. had monopoly power: The product market was defined as downhill skiing at destination ski resorts, and Aspen was the relevant geographic area. They also determined that Ski Co. used anticompetitive practices and awarded Highlands $7.5 million plus attorneys' fees. In addition, it entered an injunction requiring a four-mountain pass.

State Governments (Player in Anti-trust)

-state antitrust law -state attorneys general enforce federal and state antitrust laws for state citizens

Colgate Doctrine

-suggested proces -no agreement as to price (circumstantial evidence of agreement) -Recommendations (no threats or delays, dont reinstate quickly) manufacturers announce product prices and refuse to deal with those who fail to comply Colgate & Co. had a policy of refusing to deal with vendors who sold below suggested retail price. Colgate simply refused to continue to deal with a vendor that Colgate determined was not abiding by the rules. The Sherman Act §§ 1-7, 15 note, is intended to prohibit monopolies and combinations, which probably would interfere with the free exercise of their rights by those engaged, or who wish to engage in trade; but in the absence of any purpose to create or maintain a monopoly a manufacturer engaged in private business may exercise his discretion as to parties with whom he will deal, and may refuse to sell to those who will not maintain specified resale prices.[4] t may announce that it will stop dealing with any distributors that do not follow its suggestions. Announcing such a policy, and then terminating distributors that do not follow the suggested prices, does not by itself constitute a resale price-fixing agreement. This is so because simply announcing and enforcing such a policy does not constitute an agreement between the supplier and anyone else. This is so even if distributors follow the suggested resale prices because they fear they will be terminated if they do not follow the suggestions. ... To establish [unlawful] resale price-fixing in such a situation, the plaintiff must show that the distributor reached an agreement on price with the supplier, rather than merely followed the supplier's suggestion.

In restraint of trade

-the rule of reason -does the restraint, on balance promote or suppress "competition"

Market conduct includes:

-types of behavior considered wrongful

Harms from reduction in INTRABRAND competition

1. High relative range of exclusivity - to get better deal from other retailers selling same brand (effect of internet) 2. High market share - few alternative brands/close substitutes

Criminal Remedy

JUSTICE ONLY -Fines; Prison Sentences -Amnesty/ leniency program for first to squeal: first one to rat gets free out of jail card

Pre-merger notifications and enforcement

Approvals; or settlements with fix-it agreements and/or government monitoring; or file complaints to block merger

Sherman Act

Approved July 2, 1890, The Sherman Anti-Trust Act was the first Federal act that outlawed monopolistic business practices. The Sherman Antitrust Act of 1890 was the first measure passed by the U.S. Congress to prohibit trusts //////which serves as the cornerstone of antitrust policy and prohibits contracts, combinations, and conspiracies in restraint of trade. In addition, it states that monopolizing is unlawful.

Sherman Act, Section 1

Every contract, combination or conspiracy in restraint of trade is illegal

Horizontal

Competitors: Quaker to general mills to kellogs

Shift of political and economic power, from - to

From small farmers and shopkeepers to large industrialists DISTRUST OF BIG BUSINESSES

Judge Jackson's ruling

GUILTY FOR: monopolizing, attempted monopolizing, illegal per se tying, other offenses NEED TO: conduct remedies, structural remedies

Agency Guidlines

HHI (sum of squares analysis)

Pre-Merger Notification

Hart-Scott-Rodino Act (1976): requires companies to notify the DOJ and the FTC before completing mergers and acquisitions and establishes a 30-day post notification waiting period which gives the gov. time to evaluate the likely competitive effects of a proposed transaction -To prevent expense of "undoing" a completed merger -Required if value of transaction and size of parties meet specified thresholds. -Notification to FTC and Justice Dept. -Agencies may seek injunction in court to prevent merger, if necessary.

Geographic Market

How far will customer go to obtain product or service

Dr. Miled v John D. Park & Sons

Illegal Per Se producer of patented medicines sold the product to its wholesalers and required them to agree not the sell the product below a certain price -- court ruled that once a manufacturer sells their product, they have no control over the price -- considered vertical price fixing and per se illegal

Dr Miles

Illegal per se, they set minimum price of drugs,

Recent targets of antitrust investigation or lawsuits

Intel Google Facebook

Government settlements

Justice Department settles in November, 2001 [Bush Administration] All states eventually settle on same terms

Requirements for monopolizing

Market power Use of power to foreclose competition

Philosophies affect attitude toward:

Market structure Market conduct

Harms of vertical/horizontal non restraints

May hurt viability of small/new dealers viability:ability to survive or live successfully.

what happened in 2007 with vertical minimum price fixing

No longer illegal per se

Clayton Act, Section 7

Prohibits mergers which may substantially lessen competition -policed mostly by the FTC and Justice department applies to horiozntal, vertical and conglomerate mergers

The Washington Capitals (Players in Anti-trust)

Protect the public from monarchies, predators, and symbols of large insurance companies.

Vertical minimum price fixing-possible benefits

Protection of services that might stimulate interbrand competition an illegal arrangement in which parties at different levels of a system of production and distribution act to fix the market price of goods

Vertical Non restraints

Relationship between manufacturer and supplier Quaker to ralphs (put on third shelf)

Consent decrees:

SETTLEMENTS: agreement to settle down disputes. -no admission that company violated antitrust laws////// The key aspect of the consentdecree is that the company promises to do what the government wants, but withoutadmitting that it violated the law

Clayton Act

The Clayton Antitrust Act is an amendment passed by U.S. Congress in 1914 that provides further clarification and substance to the Sherman Antitrust Act of 1890 on topics such as price discrimination, price fixing and unfair business practices./////which deals with a number of practices such as price discrimination. However, its major thrust is its merger clause prohibiting mergers that may substantially lessen competition

Lorain

The Lorain Journal, the only daily newspaper published in Lorain, Ohio, refused to accept advertising from customers who also used radio advertising on the local station. The court interpreted the Journal's behavior as "bold, relentless, and predatory commercial behavior" whose only possible goal would be to drive its competitor out of business. The newspaper's right to chose potential advertisers is tempered by its responsibility to not engage in behavior designed to drive out potential competition. The publisher was engaged in an attempt to monopolize interstate commerce, in violation of § 2 of the Sherman Antitrust Act, and was properly enjoined under § 4 from continuing the attempt.

DuPont Cellophane Case

The antitrust case brought against DuPont in which the U.S. Supreme Court ruled in 1956 that while DuPont had a monopoly in the narrowly defined market for cellophane, it did not monopolize the more broadly defined market for flexible packaging materials. It was thus not guilty of violating the Sherman Act

Rule of Reason

The key aspect of the consent decree is that the company promises to do what the government wants, but without admitting that it violated the law////// If the likely harms to competition outweigh the benefits, then the transaction is unreasonable and unlawful; if the benefits outweigh the harms, then it is reasonable and lawful.

tying arrangements

These are situations in which a firm combines the sale of two different products so that a customer who wants one of the products has no choice but to purchase the other as well

Did Microsoft monopolize? Does MS have market power with windows?

WHat products are in the product market? what is the market share? Are there barriers to entry?

European anti trust actions

Windows media player and server compatibility issues EU Antitrust Commission orders unbundled version of Op. Sys. without media player; Disclosure of interoperability specs for servers Microsoft pays fines of around $2.4 billion

Market Share Analysis

_Product market -Geograhic market

Conglomerate Merger

all other mergers. least likely to be considered harmful

Some new slate laws and proposed federal legislation may

ban vertical minimum price fixing

Vertical Merger

between companies in buyer-supplier relationship. less likely to be considered harmful

Horizontal mergers

between competitors focus on market structures that may facilitate anticompetitive behavior -market share analysis

Horizontal merger

between competitors. Most likely to be considered harmful

Cross elasticity of demand

change in quantity x divided by change in price y

Real monopolies with little competition equals

economic inefficiency

Per so Illegality means

falling into disfavor

Product market

includes close substitutes

Per se Illegality (literally, illegal in and of itself)

one knows that the restraint is unreasonable without lengthy rule of reason inquiry (You did it, you lose. no not even try to explain that the practice is reasonable in your situation) the courts skip the weighing analysis and jump directly to the conclusion that they are unlawful. -seller ties two separate products (here, rods and reels). -The seller has market power in the tying product (here, the rods).

Micorsoft: What is the market share?

over 95% of intel-compatible PCs

Vertical equals what no matter what?

rule of reason

Guidelines for cases in Courts are brought about from:

statutory interpretation of vague language in legislation

injuctions

stopping an illegal practice or preventing a merger: (such as stopping an illegal practice or preventing a merger) MOST TYPICAL REMEDY

HHI

sum of all there percentages to the second power

If restraint is not per se illegal...

this does not necessarily mean that it is legal rather it is evaluated under the rule of reason

Amnesty

try to get people to come out and say they were working together

Colgate doctrine

vertical price fixing, how to prove


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