Chapter 7 - Antitrust law in the Environment of Business

Market Power

Ability of one or more firms to profitably maintain prices above competitive levels for a substantial time •Market Share is percentage of the Relevant Market Relevant Market is the - •Product Market AND •Geographic Market

Vertical Mergers

Mergers up and down the business chain

Horizontal Mergers

when two competitorsmerger

Major Antitrust Legislation

• •Sherman Antitrust Act of 1890 •Clayton Antitrust Act of 1914 •Federal Trade Commission Act of 1914

Horizontal Group Boycotts

• •This is when competitors refuse to deal with anothercompetitors to eliminate or discipline a competitor of the competitors •Per Se

Defenses to Price Discrimination

•Volume Discounts •Cost Justification •Changing Conditions •Meeting Competition

Judicial Interpretation of Sherman

•U.S. v. Standard Ohio of New Jersey •Establishes the Rule of Reason

Vertical Price Fixing

Cases - Dr. Miles Medical Company v. John D. Park and Sons Company - Leegin Creative Leather Products, Inc. v. PSKS, Inc. dbaKay's Kloset U Kay's Shoes makes this Rule of Reason

Other Types of Mergers

Market Extension Mergers •Geographic Market Extension Mergers •Product Market Extension Mergers •Both can be vertical or horizontal •Conglomerate or Diversification Mergers neither horizontal or vertical

How to Determine Market Power

Merger Guidelines - Issued by FTC and DOJ - Helps determines when can/cannot merger •First step is to determine Concentration of Market Power (Herfindahl-Hirschman Index) •Other factors as well-ease of entry into the market place, economic efficiency, financial condition of the merging firms and politics

Sherman Section 2

Monopolization (Anticompetitive Behavior) - Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony. Only outlaws attempt to monopolize, not the actual monopoly and not a legal tool for preventing monopolies before they arise, only punishes successful, anticompetitive attempts to create and sustain monopolies

Sherman Section 1

Restraints of Trade - Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal." •Criminal Felony to engage in any Contract to unreasonably restrain trade •Retraining Trade - any agreement between 2 or more parties that substantially reduces competition •Does require a contract and at least 2 parties

Mergers

Two firms coming together to form a new firm

Vertical Market Division

Types - Territorial Restraints-manufacturer tells retailer where they can sell product (distributorship) Customer Restrictions-restrictions on who you can sell to such as can only sell to wholesalers Rule of Reason

Horizonta

violations on the same plane/level, they are competitor, such as General Motors, Ford and Chrysler

Vertical

violations that are up and down the chain of competition such as wholesaler and retailer

Public Reaction to Sherman & Rule of Reason

• •Public dissatisfied •Big issue in 1912 Presidential RaceRace - Wilson (D) v. Taff (R, I) v. Roosevelt (P) v. Debs (S) Leads to •Clayton Antitrust Act of 1914 •Federal Trade Commission Act of 1914

Courts and Antitrust Analysis

•Two basic rules - Per Se - Rule of Reason •Critical question becomes - which rule is appropriate in what area of antitrust law?

Exclusionary Practices

•Tying Arrangements •Exclusive Dealing Contracts •Boycotts

Antitrust Enforcement/Penalties

•2 Agencies enforce - Department of Justice (DOJ) - Federal Trade Commission (FTC) •By Private Parties - Sherman and Clayton - Treble Damages •By Government (injunctions, civil, other) •Criminal Sanctions (Sherman)

Rule of Reason

•Allows some antitrust violations as long as they are reasonable •Much more flexible standard than Per Se •Many factors the court can consider •Can not be an unreasonable level of antitrust violation

Court Interpretation of Section 1

•At First, courts interpreted Section 1 narrowly •Were hesitant to undo contracts found to be unreasonably in restraint of trade since end result seemed not to harm society - Per Se - Rule of Reason

Horizontal Price Fixing

•Businesses in competition agree to fix prices •Sherman Section 1 violation Cases •U.S. v. Trenton Potteries •Appalachian Coal •United States v. Socony-Vacuum Oil •CBS v. Broadcast Music, Inc. •Arizona v. Maricopa County Medical Society •NCAA v. Board of Regents of the University of Oklahoma •FTC v. Superion Court Trial Lawyers

Federal Trade Commission Act 1914

•Catch-all Law •Creates the Federal Trade Commission Section 5 •Prohibits - - Unfair methods of competition - Deceptive Acts or Practices •Can regulate the anticompetitive acts not covered by Sherman or Clayton

Price Discrimination

•Clayton Section 2a •Amended by Robinson-PatmanAct •Definition-a manufacturer cannot sell the same product to different purchasers for different prices without justification •Very controversial, normally private cases •One type is Predatory Pricing

introduction to Antitrust

•Competition is the lifeblood of capitalism •Want a wide range of customer choices - Leads to better products - Efficiency •Individual firms want to reduce competition - Eliminate the competition - Gives rise to Monopolies •Leads to Antitrust Law

Horizontal Market Division

•Competitors dividing the market among themselves Division can be based on •Geography •Product •Some other manner (functional) •United States v. Suntar Roofing •Per Se Illegal

Origins of Antitrust Law, Part I

•Concern grew in the late 1800s •Due to entrepreneurs like John D. Rockefeller's Standard Oil Trust (oil) - •Ohio dissolved Standard Oil Trust in 1892 •Broken into several geographic companies - Standard Oil of New Jersey, now Exxon - Standard Oil of California , now Chevron

Exclusive Dealing Contacts

•Contracts between a buyer and a seller prohibiting a buyer from purchasing the seller's competitors' products •Clayton violation •Standard Oil Co. of California v. U.S. •Rule of Reason

Elements of Predatory Pricing

•Defendant must price the product below cost •Thereby be able to monopolize the market •Monopoly lasts long enough for the defendant to recoup losses suffered to drive competition out of business

Defenses-When Merger is Allowed

•Defendant must try to prove that the merger does not have anti-competitive affect, very difficult •Otherwise need a defense such as - Failing Firm Defense - Lack of Power in the Industry - Power-Buyer Defense •Government can always use Potential Competition to block merger

Proving a Section 2 Violation

•Firm must be shown to have acquired monopolistic power AND •Have engaged in willful attempts to acquire or maintain that monopolistic power

Required Pre-Merger Notification

•Hart-Scott-Rodino Antitrust Improvement Act of 1976 •Requires premerger notification to - FTC - Department of Justice •Purpose is to give government time to determine if oppose the merger on antitrust grounds •Applies to mergers over $70 million in value

Per Se Rule

•If violate the law, automatically held to be illegal •Cause is irrelevant •No defenses or justifications •Usually used in areas thought to be inherently anticompetitive

Government Response to Premerger Notifications

•If want to block the merger it is usually under Section 7 of Clayton as amended by Celler-Fefauver in 1950 •Trying to avoid mergers that substantially lessen competition •Usually done by determining Market Power

Antitrust Remedies

•Injunctions •Monetary (substantial civil penalties) Additional Remedies •Issue Cease and Desist Order •Prevent Mergers •Order to divest a subsidiary

Tying Arrangements Cases/Guidelines

•M v. United States •Northern Pacific Railway Company v. U.S. Government issued guidelines, per se if •Tied product and Tying product are separate •Seller has Market Power in the Tying Product •Evidence of substantial adverse effect in the tied product market Datagate, Inc. v. Hewlett-Packard Co

Exceptions to Antitrust Law

•Natural Monopolies Individual Exemptions: •Labor Unions •Agricultural Cooperative or Associations •State Action •Foreign Trade •Baseball •Political Action Committees

Sherman Antitrust Act of 1890

•Outlaws trusts (monopolies) •Empowered Federal Government to break up existing trusts Problems •Didn't protect consumers from anticompetitive practices •Judicial Interpretation

Major Provisions of Clayton

•Price Discrimination •Exclusionary Practices •Tying Arrangements •Mergers (See later) •Interlocking Directorates

Origins of Antitrust Law, Part 2

•Railroad Trusts •Railroad Barons could set price at will •Hurt Consumers, who demanded change •Congress passed the Interstate Commerce Act which created the Interstate Commerce Commission

Tying Arrangements/Tie-in Sale

•Sale of one product (tying product) conditioned upon the required purchase of another product (tied product) Are legal tying arrangements - Buy one, get one free - Buy a gallon of milk, get a dozen eggs free (2 different manufacturers)

Horizontal Exchanges of Information

•Trading information between two competing businesses Ask •Does it help or hurt the consumer? •Reduce waste and inefficiency? •Does it help business violate spirit of antitrust law? •Rule of Reason •Conspiracy to Restrain Information

Clayton Antitrust Act of 1914

•Was to supplement/correct Sherman and fill in the gaps of Sherman •Clayton is specific and preventative where Sherman was broad and punitive after the fact •Under Clayton only have toprove significant probability of reducing competition

Vertical Boycotts

•When basically any group conspires to prevent the carrying on of business or attempt to harm a business by refusing to conduct business with them •Eastern States Retail Lumber Dealers Assn. v. U.S. and FTC v. Superior Court Trial Lawyers Association •Per Se