Business Law: Ch. 16

Two categories of analysis to analyze potential violations of the Sherman Act

* The rule of reason: impose unreasonable restraint upon competitors. * Per se illegality: agreements or practices that are so plainly anticompetitive and so lacking in any redeeming values that they are conclusively presumed to be illegal

Who enforces antitrust laws

* federal governments *state governments *private parties

Antitrust laws apply to:

* small businesses *large businesses *large multinational corporations

4 legal sanctions of the Clayton Act

1. Violations may be subject to criminal FINES and INPRISONMENT 2. Violations may be enjoined by the COURTS 3. Injured parties may collect TRIPLE DAMAGES 4. Any property owned in violation of Section 1 of the Sherman Act that is being transported from one state to another is subject to a SEIZURE by and forfeiture to the US.

Good-faith meeting-of-competition defense

A bona fide business practice that is a defense to a charge of violation of the Robinson-Patman Act. This exception allows a seller in good faith to meet the equally low price, service, or facility of a competitor. The good-faith exception cannot be established if the purpose of the price discrimination has been to eliminate competition.

Exclusive dealing

A buyer agrees to purchase a certain product exclusively from the seller or the seller agrees to sell all of his or her production to the buyer.

Geographic extension merger

A combining of companies involved with the same product or service that do not compete in the same geographical regions or markets.

Reciprocal dealing

A contract in which two parties agree to mutual actions so that each party can act as both a buyer and a seller. The agreement violates the Clayton Act if it results in a substantial lessening of competition.

Tying contract

A contract that ties the sale of one piece of property (real or personal) to the sale or lease of another item of property.

Requirements contract

A contract under which the buyer agrees to buy a certain item only from the seller.

Cost justification defense

A defense to a price discrimination (Section 2 of the Clayton Act) case wherein the defendant seeks to justify charging different customers different prices due to that defendant's costs varying because of the differing quantities purchased by the customers.

Herfindahl-Hirschman Index (HHI)

A measure of market concentration commonly used in merger analysis. It is calculated by squaring the market shares of competing firms and summing the results.

Vertical merger

A merger of corporations where one corporation is the supplier of the other.

Product extension merger

A merger that extends the products of the acquiring company into a similar or related product but one that is not directly in competition with existing products.

Horizontal price fixing

A per se illegal agreement among competitors as to the price all of them will charge for their similar products.

Predatory pricing

A policy of lowering the price charged to customers for the purpose of driving competitors out of business. Typically, this policy involves prices that are below the seller's costs of the products sold with resulting losses to the seller.

Sherman Act

An 1890 congressional enactment designed to regulate anticompetitive behavior in interstate commerce. Encourages an efficient allocation of resources and stimulates efficiency and product innovation. Competitive system that allows easy entry to and withdrawal from the marketplace is consistent with individual freedom and economic opportunity.

Market extension merger

An acquisition in which the acquiring company increases its market through product extension or geographical extension.

Vertical price fixing

An agreement between a seller and a buyer (e.g., between a manufacturer and a retailer) to fix the resale price at which the buyer will sell goods. Attempts by manufacturers to control the ultimate retail price for their products

Horizontal restraint

An agreement between direct competitors that restricts their rivalry, particularly related to the goods or services they offer.

Price fixing

An agreement or combination by which the conspirators set the market price, whether high or low, of a product or service whether being sold or purchased. Most common contract in restraint of trade

Horizontal territorial agreement

An arrangement between competitors with respect to geographical areas in which each will conduct its business to the exclusion of the others. This type of agreement is illegal per se under the Sherman Act.

Full-line forcing

An arrangement in which a manufacturer refuses to supply any portion of the product line unless the retailer agrees to accept the entire line.

Identify the activities that violate Section 1 of the Sherman Act. (Check all that apply.)

An attempt by producers to extend the economic power of a patent or copyright to unrelated products or services An agreement among producers associated with territories of operation

Vertical restraint

An restrictive agreement between parties in the supply or distribution chain, such as between a manufacturer and retailer. relationships include: *manufacturers *distributers *retailers Deals with *pricing *supply *territory

Who controlled the steel industry?

Andrew Carnegie

Vertical territorial agreement

Arrangement between a supplier and its customers with respect to the geographical area in which each customer will be allowed to sell that supplier's products. This type of agreement is analyzed under the rule of reason to determine whether it violates the Sherman Act. Limitations on intrabrand competition may be permitted if there is a corresponding increase in interbrand competition. It is subject to the rule of reason. It is usually part of a franchise or license agreement.

Identify an example that illustrates horizontal competitors.

Cloud Inc. and Latitude Inc. are suppliers of electronic goods in East Hampton.

Who controlled the railroads?

Cornelius Vanderbilt

Sherman Act: Section 1

Every contract, combination or conspiracy in restraint of trade is illegal. DOES NOT * define trust, monopoly or restraint of trade. * make clear whether it applies to combinations of labor as well as capital.

In the context of the rule of reason, identify the factors that form the bases of unreasonableness. (Check all that apply.)

Evidences that contracts were intended to enhance prices and restrain trade The nature or character of contracts

Monopoly

Exclusive control of a market by a business entity.

T/F A horizontal territorial agreement is legal per se under the Sherman Act.

FALSE **Such an agreement is illegal per se under the Sherman Act.

T/F Analysis of horizontal agreements usually requires consideration of the rule of reason as opposed to being judged as per se illegal.

FALSE **history tells one the horizontal restraints or agreements are much more likely to satisfy the per se illegality standards.

Identify the characteristics of a vertical territorial agreement. (Check all that apply.)

It is subject to the rule of reason. It is usually part of a franchise or license agreement.

Who controlled the petroleum industry?

John Rockefeller

Clayton Act (1914)

Legislation passed in 1914 that exempts labor unions from the Sherman Act. This law expanded the national antitrust policy to cover price discrimination, exclusive dealings, tying contracts, mergers, and interlocking directors. * amendment to the Sherman Act and the Clayton Act of 1936,1950, & 1980

Resale price maintenance

Manufacturer control of a brand- or trade-name product's minimum resale price.

horizontal merger

Merger of corporations that were competitors prior to the merger.

Restraint of trade

Monopolies, combinations, and contracts that impede free competition. contracts: verbal or written agreements combinations: conduct conspiracies: estab. by agreement and followed up by some act of carrying out the plan

Federal Trade Commission Act

Passed in 1914, this legislation created the Federal Trade Commission (FTC) and authorized it to protect society against unfair methods of competition. The law was amended in 1938 (by the Wheeler-Lea amendment) to provide the FTC with authority to regulate unfair or deceptive trade practices. * Enforces the Clayton Act

Section 5 of the FTC Act

Prohibits unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce

Premerger notification

Requirement under the federal Hart-Scott-Rodino Act that requires firms involved in large mergers and acquisitions to notify the FTC and DOJ before they occur.

Clayton Act Section 7

Restricts horizontal, vertical, and conglomerate mergers when they would retain free competition. prohibits mergers which substantially lessen competition

T/F In the context of the Colgate doctrine, resale price maintenance by a manufacturer is legal only if there is no coercion or pressure other than the announced policy and its implementation.

TRUE

State action exemption

The Sherman Act exemption of the sovereign action of a state that replaces competition with regulation if the state actively supervises the anticompetitive conduct.

Robinson-Patman Act

The amendment to Section2 of the Clayton Act covering price discrimination. As originally adopted, the Robinson-Patman Act outlawed price discrimination in interstate commerce that might substantially lessen competition or tends to create a monopoly. eliminated the advantage that a larger buyer could secure over a small buyer solely because the larger buyer's quantity-purchasing ability.

Merger

The extinguishment of a corporate entity by the transfer of its assets and liabilities to another corporation that continues in existence.

Conglomerate merger

The merger resulting when merging companies have neither the relationship of competitors nor that of supplier and customer.

Noerr-Pennington doctrine

This doctrine exempts from the antitrust laws concerted efforts to lobby government officials regardless of the anticompetitive purposes. It is based on the First Amendment FREEDOM OF SPEECH

Concerted activities

Those activities involving an agreement, contract, or conspiracy to restrain trade that may be illegal under the Sherman Antitrust Act. Competitors sometimes attempt to share some activities or join together in the performance of a function.

Why do manufacturers try controlling the ultimate retail price for their products? (Check all that apply.)

To maintain adequate channels of distribution To maintain a high-quality product image

Dominated and divided the market and established price levels

Trusts

Per se illegality

Under the Sherman Act, agreements and practices are illegal only if they are unreasonable. The practices that are conclusively presumed to be unreasonable are per se illegal. If an activity is per se illegal, only PROOF of the activity is required, and it is not necessary to prove an anticompetitive effect. For example, price fixing is per se illegal.

Rule of reason

Under the Sherman Act, contracts or conspiracies are illegal only if they constitute an unreasonable restraint of trade or attempt to monopolize. An activity is unreasonable if it adversely affects competition. An act is reasonable if it promotes competition. The rule of reason requires that an anticompetitive effect be shown.

trust

a legal arrangement grouping together a number of companies under a single board of directors legal arrangement in which fiduciary holds legal title to property for benefit of another.

A feature of a vertical territorial agreement is that it _____.

assigns a distributor or dealer an exclusive area to continue trade

indirect price fixing

discussion of prices between competitors, illegal per se

The Sherman Act of 1890 was enacted in response to the reformers who demanded the federal government to break monopolies. According to these reformers, competition tends to _____.

encourage an efficient allocation of resources

horizontal competitors

firms that could compete for the same customers in the same market

In the 19th century, businesspeople used the trust device extensively to

gain monopolistic control of several industries.

Starz Corp. and Elegance Corp. are leading apparel manufacturers. When another potential apparel manufacturer, Blueline Corp., enters the market, Starz Corp. and Elegance Corp. jointly agree to reduce the price of their fall collection. In this scenario, Starz Corp. and Elegance Corp. have engaged in _____.

horizontal price fixing

Under what is commonly referred to as the Colgate doctrine, the U.S. Supreme Court recognizes that _____.

it is legal for a manufacturer to announce the retail price of its products and refuse to deal with those who fail to comply

antitrust laws

laws that prevent monopolies and promote competition and fairness "Bust" the trusts "workable copetition"

A feature of a horizontal territorial agreement is that it is _____.

made by competing businesses

The trust device allowed

majority or all stock of several companies to bye transferred to a trustee.

Robinson-Patman Amendment extends to

only transactions in inTERstate commerce NOT inTRAstate commerce

Sherman Act: Section 2

prohibits monopolizing or attempting to monopolize