Chapter 7
FTC Act Section 5
"catch all law" because it can literally be used to regulate all forms of anticompetitive behavior not covered by the Sherman or Clayton acts
Leegin Creative Leather Products v. PSKS
- 2007 case that makes vertical minimum price restrictions no longer illegal per se but now evaluated under rule of reason!!! (Overrules Dr. Miles (5-4 opinion - dissent by 4 liberal justices)
Clayton Antitrust Act
1914 act designed to strengthen the Sherman Antitrust Act of 1890 as the Sherman act was deemed at times ineffective at dismantling trusts. It directly outlawed anti competitive practices
market power
Ability of one or more firms profitably to maintain prices above competitive levels for a significant period of time
exclusive dealing contracts: restricted by section 3 of the Clayton act and are generally prohibted if the effect of the contract is to substantially lessen competition or tend to create a monopoly
Contracts under which a seller stops a buyer from purchasing the seller's competitors products
Smithian Model
Created by Adam Smith in the late 1700s that says that individual choice and self organized firms rather than the gov. could make the best use of society's scare resources. By relying on self interest and profits to motivate businesses, capitalism would bring about the fastest possible pace of technological advance. The automatic self corrective force of competition replaces and improves on the parental role of gov.
it is per se illegal so long as it involves more than one company
Does horizontal market divisions break antitrust?
It falls under rule of reason (FTC v. Indiana Federation of Dentist)
Does the Conspiracy to Restrain information break antitrust?
Federal Trade Commission Act (1914)
Established the Federal Trade Commission to monitor business practices, false advertising, and dishonest labeling
Lack of Power in the Industry
Firms Merging have negligible effect on overall Market and so combining them would not affect Competition
Sherman Antitrust Act (1890)
First federal action against monopolies, it was signed into law by Harrison and was extensively used by Theodore Roosevelt for trust-busting. However, it was initially misused against labor unions
per se illegal
Horizontal price fixing is...
per Se illegal
How are horizontal group boycotts handled?
-originally ruled to be per se illegal -small businesses argue that RPM help them compete with bigger companies
How have courts viewed vertical price fixing or RPM?
IBM Corporation v. United States
IBM leased automated tabulation machines to customers and then also required the customers to purchase cards to run the machines from IBM. IBM tried the technology requirement defense but it did not work
failing firm defense
If one of the firms involved in a merger is facing bankruptcy or other circumstances that threaten the firm, the Court will look more favorably upon the merger
conglomerate (diversification) merger
Merger of firms outside of the first 3 types which is normally the merger of 2 totally unrelated business
vertical restraint of trade
Occurs when two or more firms in the distribution chain enter into a contract or conspire to restrain trade
product market extension merger
One company mergers with another company that makes a similar, but not exactly the same, product to the first company
relevant market
Product market + geographic market
Section 1 of the Sherman Act
Prohibits all agreements "in restraint of Trade" (anything that impedes trade, transport and related activities.
Section 2 of the Sherman Act
Prohibits the act of monopolization and attempts or conspiracies to monopolize trade.
firm concentration
Proportion of the relevant market served by the largest firms in the market
Northern Pacific Railway company v. US
Railroad sold land to people below market price if they agreed to ship goods on railroad if they could not find a cheaper option. Was ruled a tying arrangement
United States v. Suntar Roofing
Roofing companies agreed to divide up costumers and government brought criminal charges under section one of Sherman and the 10TH CIRCUIT (NOT SC) said that this was PER SE ILLEGAL do to Horz market division
Standard oil company of california v. US
Standard Oil entered into contracts with independent stations in several western states and constituted 16% of all retail outlets and 7% of all retail gas sales in the area, along with another competitor which totaled the market to being 65% controlled by these companies. The Court found these contracts illegal
Chevron
Standard oil (california) eventually became?
Exxon Mobile
Standard oil of New Jersey is
1. horizontal mergers 2. vertical mergers 3. market extension mergers 4. conglomerate mergers
The Clayton Act applies to what 4 kinds of mergers?
Standard Oil Company of New Jersey, California, Indiana, etc.
The Ohio Supreme Court broke up standard oil into what
interlocking directorates
The practice of having executives or directors from one company serve on the Board of Directors of another company. J. P. Morgan introduced this practice to eliminate banking competition in the 1890s. --outlawed by Clayton Act
geographic market extension
Two firms in the same product market, but not in the same geographic market, decide to merge
examining firm concentration and barriers to entry
Used to make distinction between lawful and unlawful mergers
1. Contracts to restrain trade are deemed blatantly anticompetitive and are always considered anticompetitive (per se violations) 2. Other contracts work to restrain trade but do not fall under the per se categories (Rule of Reason)
What 2 categories is section 1 of the Sherman Act broken into?
-Section 1 of the Sherman Act: exclusionary practices with both products and services -Section 3 of the Clayton act: products and attempt to lessen competition
What are statutory provisions that deal with exclusionary practices?
1. geographic market extension mergers 2. product market extension mergers
What are the 2 different types of market extension mergers?
1. tying arrangements or tie in sales 2. exclusive dealings contracts 3. boycotts
What are the three major types of exclusionary practices?
-geographic market extension merger -product extension merger
What are the two kinds of market extension merger?
-lack of power in the industry -failing firm
What are the two main defenses to mergers?
1. define the relevant market 2. show that the alleged monopolist has the ability to price above the competitive level for a significant period of time
What do the courts require from economic tests for monopolistic power
The court must show that the alleged violator has monopolistic power
What is a feature of section 2 of the Sherman Act that makes it a means of punishing successful anticompetitive attempts to create and sustain monopolies and NOT a legal tool to prevent monopolies before they arise?
-Section 2 only outlaws ATTEMPTS to monopolize not the existence of monopolies -It does not outlaw ALL monopolies, just ones who use anticompetitive means of achieving it or those attempting to do so
What is an important feature of section 2 of the Sherman Act
It requires a contract on behalf of the parties (it does not include unilateral actions to restrain trade)
What is an important feature of the 1st section of the Sherman Act
The Clayton Act only requires that actions have a significant probability of reducing competition, whereas the Sherman Act requires that competition has already been reduced
What is the main difference between the Sherman act and the Clayton Act?
-ease of entry into the marketplace -economic efficiency -the financial condition of the merging firms -politics
What is used along with HHI to examine premergers?
Tying arrangement
When a seller requires buyers to purchase a "tied" product as a condition of purchasing another, typically more desirable, "tying" product.
between 1000 and 18000
When is HHI considered to be moderately concentrated and may be challenged depending on the circumstances?
exclusionary practices
Where one firm is given the exclusive right, to the exclusion of others, to buy, sell, or trade another's product if the effect: substantially lessens competition or tends to create a monopoly --Contractual attempts by a seller to prevent a buyer from considering competitive bids from other sellers
geographic market
Where the product is sold
they are often associated with price fixing schemes or other restraint of trade situations. If the group possess the market power and the boycott is intended to restrict or exclude a competitor then per se rule will be imposed ex: when horizontal competitors use boycotts to force a change in the nature of a vertical relationship
Why are most boycotts per se illegal?
Robinson-Patman Act
a 1936 law that makes illegal any price discrimination if it injures competition. It is a bit controversial however and so it is often not enforced
Ohio V. American Express
a United States Supreme Court case regarding the nature of antitrust law in relationship to two-sided markets. The case specifically involves policies set by some credit card banks that prevented merchants from steering customers to use cards from other issuers with lower transaction fees, forcing merchants to pay higher transaction fees to the banks. While Visa and MasterCard settled with the United States Department of Justice in 2010, American Express defended its practice by arguing that the anti-steering policies benefited its cardholders, the higher transaction fees helping to maintain member services. While the Department of Justice and several states prevailed during a District Court trial in 2015 citing harm to the merchants, the Appeals Court reversed the District Court's ruling by 2016 arguing that the plantiffs had not shown harm to both sides of the two-side market, a novel test in anti-trust law. This decision led to some of the states to appeal to the Supreme Court. The case was heard by the Court in February 2018. The Court issued its decision on June 25, 2018, affirming the Appeals Court's ruling that steering provisions do not violate antitrust laws
HHI Index
a measure of market concentration that is used to determine the potential for antitrust violations. = (100 x market share of each)²
market extension merger
a merger between two companies in similar fields whose sales do not overlap
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
predatory pricing. these are difficult to prove
a price discrimination in which a manufacturer sells its product for a lower price in one geographic area to drive the competition out of business in that geographic area, and then raises the price once the competition is removed from the market
group boycott
a refusal to deal
per se rule
all the government has to prove is that the company violated antitrust law, the company cannot defend itself
Rule of reason rule
allows some contracts that restrain trade, but they cannot reach an unreasonable level
Trust Buster Act
another name for the Sherman Antitrust Act
Restraint of trade
any agreement between two or more parties that substantially reduces competition in the marketplace
barriers to entry
any characteristics of the relevant market that make it particularly difficult for new firms to enter and thereby compete with established firms
Rule of Reason
before ruling on the legality of certain business practices, a court examines why they were undertaken and what effect they have on market competition
FTC and DOJ
can enforce antitrust laws
Per se violations
collusive actions, such as attempts by firms to fix prices or divide a market, that are violations of the antitrust laws, even if the actions themselves are unsuccessful
anticompetitive practices
deliberate actions by firms to outperform their competitors by harming them rather than by improving their own products and services
-volume discounts -cost justification -changing conditions
exceptions of price discrimination
-natural monopolies -labor unions -agricultural cooperatives or associations -state action exemptions
exemptions to major antitrust laws
rule of reason
how are vertical market divisions handled?
-buy one get one free or on sale -technical reasons for needing the accessories(sometimes)
legal tying arrangements
vertical market divisions
manufacturer tells a retailer where they can sell a product such as in a distributorship. Also could be who the distributor can sell to
market extension mergers
mergers between two firms in similar filed of business but not in the exact business field
geographic market extension merger
mergers between two firms in the same product market but not in the same geographic market
conglomerate mergers (diversification mergers)
neither horizontal nor vertical, rather, they involve mergers between two firms that operate in distinct and unrelated markets
agricultural cooperatives
not for profit orgs that work to assist farmers by providing them loans, price supports, and a pool of mutually provided resources
Hart-Scott-Rodino Antitrust Improvement Act
requirement of notification prior to a merger to FTC, DOJ in order to give government time to decide of they will oppose the merger on antitrust grounds. Rule applies to mergers of $70 million or more.
Horizontal merger. The illegal ones are ones that significantly raise market concentration
the combination of two or more firms competing in the same market with the same good or service
Interstate Commerce Act
the first government attempt to regulate business. (1887) required railroads to charge fair rates and to publish those shipping rates.
John D. Rockefeller and Standard Oil
the first time the government tried to preserve competitive markets was in response to
product marker
the market of interchangeable products
market share
the percentage of the relevant market controlled by the firm
Intent to Monopolize
the willful acquisition of and/or maintenance of monopoly power. This is used in Section 2 of the Sherman act to differentiate between which monopolies violate section 2
horizontal group boycott
two competitors who agree not to deal with other competitors on the same level of competition
vertical merger
two or more firms involved in different stages of producing the same good or service
1. Price Discrimination 2. exclusionary practices 3. tying arrangements (tie in sales agreements) 4. Mergers
what are the 4 provisions of the clayton act?
boycott
when a group conspires to prevent the carrying on of business or to harm a business and can include anyone including consumers, union members, retailers, wholesalers, and suppliers.
Horizontal restraint of trade
when businesses operate at the same level of competition and generally in the same market. ex: price fixing
Horizontal market division
when competitors divide up the different markets based on geography, product, or some other term.
price discrimination
when firms charge different buyers different prices for the same good, and the difference in prices cannot be explained by differences in cost justifications. This is done when firms will charge prices high in areas where they are the only producer and use those over inflated prices to offset the losses they sustain by undercharging in competitive environments
less than 1000
when is the market deemed to not be concentrated under HHI?
greater than 1800
when the HHI is considered highly concentrated and the merger will be challenged
resale price maintenance (RPM)
when the manufacturer of a product tells the buyer that they must sell the product for a stated amount. This is also vertical price fixing.
natural monopoly: local utilities
when total production costs for a single firm serving a market are lower than total production costs for a croup of competitive firms serving that same market
tying arrangement (tie-in sale)
where a seller sells one product conditioned upon the requirement that the buyer also purchase another product
