Chapter 7

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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


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