BUSINESS LAW CHAPTER 39
What is a Horizontal Merger? Why has the government aggressively sought to prevent Horizontal Mergers?
A horizontal merger involves companies that compete in the same market. Traditionally, the government has aggressively sought to prevent horizontal mergers that could lead to a monopoly or even a highly concentrated industry.
What is a Joint Venture? Will the government permit Joint Ventures between competitors?
A joint venture is a partnership for a limited purpose—the companies do not combine permanently, they simply work together on a specific project. The government will usually permit a joint venture, even between competitors with significant market power.
What is a Tying Arrangement? Is the practice legal? When does is become Illegal?
A tying arrangement is an agreement to sell a product on the condition that the buyer also purchases a different (or tied) product. A tying arrangement is illegal under §3 of the Clayton Act and §1 of the Sherman Act if: • The two products are clearly separate • The seller requires the buyer to purchase the two products together • The seller has significant power in the market for the tying product, and • The seller is shutting out a significant part of the market for the tied product.
What does it mean for a Company to Monopolize? Why are Monopolies bad for the consumer?
Aggressive competition is beneficial for consumers—up until the moment a company develops enough power to control a market. One purpose of the Sherman Act is to prevent this type of control. Under §2 of the act, it is illegal to monopolize or attempt to monopolize a market. To monopolize means to acquire a monopoly in the wrong way. Having a monopoly is legal unless it is gained or maintained by using wrongful tactics.
What are the consequences of Horizontal Cooperative Strategies?
Although the term "cooperative strategies" sounds benign, these tactics are often harmful to competition. Many horizontal cooperative strategies are per se violations of the law and can lead to prison terms, heavy fines, and expensive lawsuits with customers and competitors.
What is an Exclusive Dealing Agreements? When does one become illegal?
An exclusive dealing contract is one in which a distributor or retailer agrees with a supplier not to carry the products of any other supplier. Under §1 of the Sherman Act and §3 of the Clayton Act, exclusive dealing contracts are subject to a rule of reason and are illegal only if they have an anticompetitive effect.
Competition is an essential element of the American Economic System. What laws govern Competition?
Antitrust laws are the rules that govern that competition.
What is market division?
Any effort by a group of competitors to divide its market is a Per se violation of §1 of the Sherman Act. Illegal arrangements include agreements to allocate customers, territory, or products. For example, these business schools would be in violation if: • Georgetown agreed to accept only men and, in return, George Washington would take only women • Stanford agreed to accept only students from west of the Mississippi, leaving the east to Yale, or • Northwestern agreed not to provide courses in entrepreneurship, while the University of Chicago eliminated its international offerings.
Who has the authority to enforce antitrust laws?
Both the Justice Department and the Federal Trade Commission (FTC) have authority to enforce the antitrust laws. However, only the Justice Department can bring criminal proceedings; the FTC is limited to civil injunctions and other administrative remedies. In addition to the government, anyone injured by an antitrust violation has the right to sue for damages.
How are Refusals to Deal illegal?
Every company generally has the right to decide with whom it will or will not do business. However, a refusal to deal is a rule of reason violation of the Sherman Act, illegal if it harms competition. In a refusal to deal, a group of competitors boycotts a buyer, supplier, or even another competitor. For example, a group of clothing manufacturers agreed that they would not sell apparel to retailers who also bought from style pirates—companies that copied the manufacturers' designs. The Supreme Court held that this was an illegal refusal to deal because it was harming competition.
What types of cooperative strategies fall under Mergers?
Horizontal Mergers Vertical Mergers Joint Ventures
Which three types of Cooperative Strategies are potentially illegal?
Horizontal agreements Vertical Agreements Mergers and joint ventures
What was the Clayton Act 1914 passed?
In 1914, Congress passed the Clayton Act in part because the courts were not enforcing the Sherman Act as strictly as it had intended. The Clayton Act prohibits anticompetitive mergers, tying arrangements, and exclusive dealing agreements.
Why does the Supreme court disagree with Price-Fixing
In its view, prices should be set by markets, not by competitors—or judges. Moreover, "The reasonable price fixed today may through economic and business changes become the unreasonable price of tomorrow."
What types of cooperative strategies fall under Horizontal strategies?
Market Division Price Fixing Bid-rigging Refusal to deal
Describe a Per se violation as it pertains to antitrust laws
Per se violations are automatic. Defendants charged with this type of violation cannot defend themselves by saying, "But the impact wasn't so bad" or "No one was hurt." The court will not listen to excuses, and the defendants are subject to both criminal and civil penalties. Typically, the Justice Department has sought criminal sanctions only against Per se violators.
When does Predatory Pricing occur?
Predatory pricing occurs when a company lowers its prices below cost to drive competitors out of business. Once the predator has the market to itself, it raises prices to make up lost profits—and more besides.
What types of cooperative strategies fall under Vertical Strategies?
Reciprocal dealing Price Discrimination
What is Resale Price maintenance? Is it legal?
Resale price maintenance (RPM) (US) or Retail Price Maintenance (UK) is the practice whereby a manufacturer and its distributors agree that the distributors will sell the manufacturer's product at certain prices (resale price maintenance), at or above a price floor (minimum resale price maintenance) or at or below a price ceiling (maximum resale price maintenance). If a reseller refuses to maintain prices, either openly or covertly (see grey market), the manufacturer may stop doing business with it The Court ruled unanimously, however, that RPM is a Per se violation of §1 of the Sherman Act. A manufacturer may not enter into an agreement with distributors to fix prices
What is a rule of reason as it pertains the Sherman trust Act?
Rule of reason is a judicial doctrine of antitrust law which says a trade practice violates the Sherman Act only if the practice is an unreasonable restraint of trade, based on economic factors. In order to determine whether there is unreasonable restraint the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable.
Why does the the Clayton Acton demand that Companies with substantial assets notify the Federal Trade Commission before consummating a merger?
The Clayton Act prohibits mergers that are anticompetitive. Companies with substantial assets must notify the FTC before consummating a merger.9 This notification gives the government an opportunity to prevent a merger ahead of time, rather than trying to untangle one after the fact.
Why was the Robinson-Patman Act passed in 1936?
The Robinson-Patman Act bans price discrimination that reduces competition. It is an amendment to the Clayton Act. Rather than systematically reviewing the terms of each statute in order, this chapter focuses instead on the kinds of behavior that the antitrust laws regulate.
How does controlling distributors affect competition?
The goal of an aggressive strategy is to force competitors out of a market—by undercutting their prices or tying products together, for example. Controlling distributors and retailers is another method for excluding competitors. It is difficult to compete in a market if you are foreclosed from the best distribution channels
What is the goal of Aggressive Strategies?
The goal of an aggressive strategy is to gain an unfair advantage over competitors.
What must a Plaintiff prove to win a Predatory Pricing case?
To win a predatory pricing case, the plaintiff must prove three elements: • The defendant is selling its products below cost. • The defendant intends that the plaintiff go out of business. • If the plaintiff does go out of business, the defendant will be able to earn sufficient profits to recoup its prior losses.
Define Reciprocal Dealing Agreements and why they are illegal
Under a reciprocal dealing agreement, a buyer refuses to purchase goods from a supplier unless the supplier also purchases items from the buyer. Although these arrangements might have made business sense, the government took the view that they were also rule of reason violations of the Sherman Act; that is, they were illegal if they had an anticompetitive effect.
Under The Robinson-Patman Act what circumstances are Price Discrimination legal and illegal?
Under the Robinson-Patman Act, it is illegal to charge different prices to different purchasers if: • The items are the same, and • The price discrimination lessens competition. However, it is legal to charge a lower price to a particular buyer if: • The costs of serving this buyer are lower, or • The seller is simply meeting competition.
Describe a Rule of Reason violation as it pertains to antitrust laws
Upon its development some critics of Standard Oil, including the lone dissenter Justice John Marshall Harlan, argued that Standard Oil and its rule of reason were a departure from previous Sherman Act case law, which purportedly had interpreted the language of the Sherman Act to hold that all contracts restraining trade were prohibited, regardless of whether the restraint actually produced ill effects. These critics emphasized in particular the Court's decision in United States v. Trans-Missouri Freight Association, 166 U.S. 290 (1897), which contains some language suggesting that a mere restriction on the autonomy of traders would suffice to establish that an agreement restrained trade within the meaning of the Act
What are Vertical Cooperative Strategies?
Vertical cooperative strategies are agreements among participants at different stages of the production process.
What are the two categories of Antitrust Law Violations?
Violations of the antitrust laws are divided into two categories: Per se and rule of reason.
What kind of violations are Price-Fixing and Bid-Rigging?
When competitors agree on the prices at which they will buy or sell products or services, their price-fixing is a Per se violation of §1 of the Sherman Act. Bidrigging is also a Per se violation. In bid-rigging, competitors eliminate price competition by agreeing on who will submit the lowest bid
What was the Sherman Act passed in 1890
With the coming of the railroads, it became clear that large companies might be able to control other industries as well. To prevent extreme concentrations of economic power, Congress passed the Sherman Act in 1890. It was one of the first national laws 927928designed to regulate competition.
What three questions must be asked to determine if a defendant has illegally monopolized? Why must each be asked?
• What is the market? Without knowing the market, it is impossible to determine if someone is controlling it. • Does the company control the market? Without control, there is no monopoly. • How did the company acquire or maintain its control? Monopolization is illegal only if gained or kept in the wrong way
In developing a competitive strategy, managers can consider which two different approaches?
•Cooperative strategies that allow companies to work together to their mutual advantage •Aggressive strategies, designed to create an advantage over competitors
What are the major provisions of the antitrust laws?
•Section 1 of the Sherman Act prohibits all agreements "in restraint of trade." • Section 2 of the Sherman Act bans "monopolization".the wrongful acquisition of a monopoly. •The Clayton Act prohibits anticompetitive mergers, tying arrangements, and exclusive dealing agreements. •The Robinson-Patman Act bans price discrimination that reduces competition.
