Ch. 12 - Antitrust Law

Vertical Marketing Relations: -Violations occur when: -Prohibited Practices:

Violations occur when: (1) manufacturers restrain the freedom of resellers to distribute its products (2) restriction on the freedom of buyers to purchase the product Prohibited Practices: •*Vertical Price Fixing* (Resale Price Maintenance) •Supplier and buyer agree to prices at which goods will be resold. •Manufacturer may want to maintain a certain price to keep up the exclusiveness of a product. •The rule of reason is applied to determine if a violation has occurred.

Restraint on Reselling: Franchising Territorial Limits

•Franchise is a license to sell another's product and/or use a brand name. •Can franchiser limit the number of outlets and divide territories?

Sherman Act, Section 2: What is it? What is Monopoly power? What is the two-step analysis courts use?

•Makes illegal any monopolization, attempted monopolization, or conspiracy or combination to monopolize. •*Monopoly power* is the power to control prices or exclude competition. •Courts use a two-step analysis: 1) Does the business have "monopoly power" in any market? 2) Was the leading position gained or maintained through improper conduct?

Enforcement of Antitrust laws

•Penalties can be civil and criminal. Enforcement: •1) Federal Government - *Federal Trade Commission* and the U.S Department of Justice Antitrust Division. •2) States may bring antitrust actions on behalf of individuals or the state to enforce federal antitrust laws or the state's antitrust laws. •3) Individuals and businesses may bring antitrust lawsuits.

Clayton Act, Section 7: Courts apply the rule of reason to the following mergers: What are interlocking directorates?

•Regulates corporate mergers. Courts apply the rule of reason to the following mergers: •A) *horizontal merger*: a merger or business consolidation that occurs between firms that operate in the same space •B) *vertical merger*: a merger between two companies that operate at separate stages of the production process for a specific finished product. •C) *conglomerate merger*: a merger between firms that are involved in totally unrelated business activities. **Interlocking directorates are prohibited (Section 8)* when a member of a board of directors is also on the board of a competing company

Rule of Reason: *Sherman Antitrust Act, Section 1* Two parts to establish a violation under the rule of reason

•Supreme Court decided that the Sherman Act does not prohibit every restraint of trade, only those that are *unreasonable*. (*Rule of Reason*) < on test •Whether an act is reasonable is a question of fact. Two part test to establish a violation under the rule of reason: 1. prove there was a contract, combination, or conspiracy in restraint of trade, and 2. prove that it was unreasonable

Restraint on Purchasing: Exclusive Dealing Arrangements

•Toys "R" Us tried to force toy manufacturers to only sell expensive combinations of toys. •Toys "R" Us would then continue to sell individually packaged toys ("Barbie", "Hot Wheels")

Tying Contracts in Franchises

•Tying contracts in franchises occur when a franchisor requires the franchisee to purchase products exclusively from the franchisor. •Apply the rule of reason. Consider the following cases: •Susser v. Carvel Corp. •Siegal v. Chicken Delight •Principe v. McDonald's Corp.

Restraints on Purchasing: Tying Contracts

•Tying contracts restrain consumer purchasing by requiring consumers to buy additional products as part of a package when the consumer only wants to buy one product. •Ex. Alice buys a computer that contains Microsoft Internet Explorer prominently on the screen. She prefers Netscape Navigator, but it is a small icon. Microsoft requires the prominent Explorer icon on the screen, or it will not sell other Microsoft programs. •Rule of reason applies to tying contracts. Supreme Court recognized that tying contracts are not per-se illegal. See Jefferson Parish Hospital District #2 v. Hyde.

What is the purpose for anti-trust laws?

•protect consumers •removes artificial barriers that prevents new competitors from entering the market

"Per Se" Illegal

1. *Horizontal Price Fixing* - Agreement between competitors to set the price of a product or service. Distorts competition and competitive pricing. 2. *Horizontal Division of Territory* - Competitors agree to divide territories. Distorts competition, customers only have one supplier of a good or service. 3. *Horizontal Group Boycotts* - Competing sellers prohibited from agreeing among themselves to boycott certain customers or resellers. Distorts competition by restricting goods or services available to consumers. 4. *Bid Rigging* - Two or more companies agree to set bid prices to avoid competitive bidding. Distorts competition and competitive pricing.

Three main Anti-trust laws

1. *Sherman Antitrust Act, Section 1* - Prohibits contracts, combinations or conspiracies that restrain trade. 2. *Sherman Antitrust Act, Section 2* - Prohibits monopolization. 3. *Clayton Act, Section 7* - Prohibits trade-restraining acquisitions (acquisitions that would "substantially... lessen competition, or... tend to create a monopoly").

Monopoly Power: Factors considered

Factors Considered: 1) *Product Market* - This is the percentage of the market for a single product controlled by the company. •United States v. E.I. du Pont de Nemours & Co (1956) 2) *Geographic Market* - This is the percentage of the market controlled by a company in a geographic area. 3) *Market Power* - Look at actions to reduce competition, market share, and size of other firms. 4) *Intention to Monopolize* - Has the company intentionally engaged in practices to create a monopoly for itself?

*Conscious Parallelism (TEST Q)

Monitoring the price of a competitor to match or beat the price.