Chapter 7: Antitrust Law in the Environment of Business

Antitrust Enforcement/Penalties

-2 agencies enforce: Department of Justice & Federal Trade Commission -By Private Parties: Sherman and Clayton; Treble Damages -By Government (injunctions, civil, other) -Criminal Sanctions (Sherman): Injunction, monetary, etc.

Federal Trade Commission Act 1914

-Catch-all Law: regulates all forms of anti-competitive behavior -Creates the FTC -Section 5: Prohibits unfair methods of competition and deceptive acts or practices -Can regulate the anti-competitive acts not covered by Sherman or Clayton

Price Discrimination

-Clayton Section 2a -Amended by Robinson-Patman Act -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

-Competition is the lifeblood of capitalism -Want a wide range of customer choices: leads to better products and efficiency -Individual firms want to reduce competition: eliminate the competition, gives rise to monopolies -Leads to Antitrust law

Exclusive Dealing Contracts

-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. US -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

Required Pre-Merger Notification

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

Antitrust Remedies

-Injunctions -Monetary (substantial civil penalties) -Additional Remedies: issue cease and desist order; prevent mergers; order to divest a subsidiary

Market Power

Ability of one or more firms to profitability maintain prices above competitive levels for a substantial time. Market share is a percentage of the Relevant Market. Relevant Market is the Product and Geographical Market

Origins of Antitrust Law, Part 1

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

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 (a) Per se (b) Rule of Reason

Horizontal Market Division

-Competitors dividing the market among themselves -Divisions can be based on: geography, product, some other manner (functional) -US v. Suntar Roofing: Suntar Roofing and Roman's Roofing agreed to customer allocation plan to divide customers across Kansas City; government brought criminal charges against them, found guilty under per se approach -Per se Illegal: horizontal market divisions is per se illegal so long as it involves more than one company

Defenses: When Merger is Allowed

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

Vertical Price Fixing

-Dr. Miles Medical Company v. John D. Park and Sons Company 1911: Dr. Miles had patented medicines that they stated was to be sold at a certain price. Court maintained that manufacturers determined prices to sell, not producers, but after the product was sold the price could not be messed with -Leegin Creative Leather Products, inc. v. Kay's Closet: Kay's Kloset sold Leegin leather products at a discount in their store, Leegin said they would no longer sell to Kay's because they had a fixed price, Court ruled that vertical pricing was based on Rule of Reason and overruled Dr.Miles

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

Horizontal Restraint of Trade v. Vertical Restraint of Trade

-Horizontal: violations on the same plane/level. they are competitors, such as GM/Ford/Chrysler -Vertical: violations that are up and down the chain of competition such as wholesaler and retailer

Tying Arrangements Cases/Guidelines

-IBM v. US 1936 -Northern Pacific Railway Company v. US 1958 -Government issued guidelines, per se if: a. Tied product and Tying product are separate b. Seller has Market Power in the tying product c. Evidence of substantial adverse effect in the tied product market -Datagate, Inc. v. Hewlett-Packard Co.

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 anti-competitive

Government Response to Premerger Notifications

-If want to black 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

Other Types of Mergers

-Market Extension Mergers: 1. Geographical Market Extension Mergers: company merges with another company that sells same product but totally different geographical region 2. Product Market Extension Mergers: one company merges with a company that makes a similar product to the first one 3. Both can be vertical or Horizontal -Conglomerate or Diversification Merger: merger of two totally unrelated business; 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, anti-competitive attempts to create and sustain monopolies

Exceptions to Antitrust Law

-Natural monopolies: total production costs for a single firms serving a market are lower than total production costs for a group of competitive firms serving that same market -Individual Exemptions: a. Labor unions: are able to organize and conduct collective bargaining without hear of being accused of violating antitrust laws b. Agricultural Cooperative or Associations: are not for profit organizations that work to assist farmers by providing them with loans, price support, etc. c. State Action: action by states that lead to and/or regulate monopolies d. Foreign Trade e. Baseball f. 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 anti-competitive practices; Judicial interpretation

Major Provisions of Clayton

-Price Discrimination: charge different buyers different prices without justification -Exclusionary Practices: Where one firm is given the exclusive right, to the exclusion of others, to buy, sell , or trade another's product -Tying Arrangements: seller requires buyer a purchase a "tied" product as a condition of purchasing the desire tying product -Mergers: joining two or more companies into one -Interlocking Directorates: having the same people sit on competing corporations board of directors

Public Reaction to Sherman & Rule of Reason

-Public dissatisfied -Big issue in 1912 Presidential Race- Wilson v. Taff v. FDR v. Deb -Leads to: (a) Clayton Antitrust Act of 1914 (b) Federal Trade Commission Act of 1914

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

Tying/Tie-in Sale

-Sale of one product (tying product) conditioned upon the required purchase of another product (tied product) -Are legal tying arrangements: (a) Buy one, get one free (b) Buy a gallon of milk, get eggs free

Major Antitrust Legislation

-Sherman Antitrust Act of 1890: essentially outlaws trust in the US and empowered the federal government to break existing trust; did not protect consumers from anti-competitive practices -Clayton Antitrust Act of 1914: directly outlawed the "anti-competitive" practices, those leading to monopolization, addressed activities that could lead to trusts and monopolies -Federal Trade Commission Act of 1914: Created the FTC that regulates unfair methods of competition, deceptive acts as competition

Horizontal Group Boycotts

-This is when competitors refuse to deal with another competitors to eliminate or discipline a competitor of the competitors -Per se

Horizontal Exchanges of Information

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

Court and Antitrust Analysis

-Two basic rules: 1. Per Se Rule 2. Rule of Reason -Critical question becomes: which rule is appropriate in what area of antitrust law?

Exclusionary Practices

-Tying arrangements: Sale of one product conditioned upon required purchase of another -Exclusive Dealing Contracts: contracts under which a seller stops a buyer from purchasing the seller's competitors prices -Boycotts: When a group conspires to prevent the carrying on of business or to harm a business

Vertical Market Division

-Types: 1. Territorial Restraints: manufacturer tells retailer where they can sell product (distributorship) 2. Customer Restrictions: restrictions on who you can sell to such as can only sell to wholesalers -Rule of Reason

Judicial Interpretation of Sherman

-US v. Standard Ohio New Jersey -Establishes the Rule of Reason

Defenses to Price Discrimination

-Volume Discounts: One of the most common and most controversial defenses; Is the consumer hurt or helped by the volume of discounts -Cost Justification: Difficult to prove- it is virtually an accounting and economic impossibility -Changing Conditions: Deterioration of perishable goods, obsolescence of seasonal good, court ordered sale/judicial sale -Meeting Competition: when one company puts product on sale, can meet competition's prices

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 to prove 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 Ass. v. US and FTC v. SCTA -Per se

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

Anti-competitive

Anti-competitive practices are deliberate actions by firms to harm their competitors rather than improving their own products. Antitrust law is designed to prevent and punish anti-competitive practices

Horizontal Price Fixing

Businesses in competition agree to fix prices; Sherman Section 1 violation. Cases include: -US v. Socony-Vacuum 1940: Independent TX and LA oilmen were caught agreeing to fix prices due to the Depression; found in violation of price fixing -Arizona v. Maricopa County Medical Society 1982: 2 medical societies formed 2 foundations for medical care as an alternative to existing health insurance plans -FTC v. Superior Court Trial Lawyers Assoication 1990: SCTA refused to produce court appointed attorneys if they were not given raises, criminal court in DC went to turmoil, Supreme Court ruled in favor of the FTC saying SCTA was in violation of horizontal price fixing

Sherman Section 1

Restraints of Trade: Every contact, 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 -Horizontal Mergers: when two competitors merge -Vertical Mergers: mergers up and down the business chain