Ethics Chapter 10
Which of the following is not a consideration when antitrust law confronts intellectual property? A) Patents and copyrights drive innovators out of the market. B) Patents and copyrights are considered as shields to guard the legitimate property interests of innovators. C) The stimulus of antitrust-protected competition is needed to maximize consumer welfare. D) The shelter of intellectual property rights is intended to encourage innovation and investment.
A Antitrust law, designed for smokestack industries, must now be applied to our contemporary, knowledge-based economy. Patent and copyright laws encourage innovation and protect creators' legitimate property interests. The stimulus of antitrust-protected competition to lower prices and maximize consumer welfare, but we also need the shelter of intellectual property rights to encourage innovation and investment.
Which of the following is a vertical restraint of trade? A) Maintenance of sale prices B) Predatory pricing of goods C) Tying arrangements with customers D) Dividing territories among competitors
C Tying arrangements (sometimes called "bundling") are a form of nonprice vertical restraint. Typically, tying arrangements permit a customer to buy or lease a desired product (the tying product) only if the customer also buys or leases another, less desirable product (the tied product). Predatory pricing involves pricing below cost until a competitor drops out and then raising those prices to supracompetitive levels.
Which of the following does not occur through an exclusive dealing contract? A) An exclusive deal results in market foreclosure. B) Exclusive dealing contracts are typically lawful. C) Competitors are denied a source of supply or a market for sale. D) The buyer does business with several competing sellers.
D An exclusive dealing contract is an agreement in which a buyer commits itself to deal only with a specific seller, thereby cutting competing sellers out of that share of the market. By its nature an exclusive deal results in market foreclosure; that is, competitors are denied a source of supply or a market for sale.
A threshold requirement for proving price-fixing and all other Sherman Act Section 1 violations is to establish proof of a contract, combination, or conspiracy. Such proof may be established by all but which of the following? A) Agreement based on mutual observation B) Agreement without direct evidence C) Agreement with direct evidence D) Agreement based on unilateral observation
D Proof of a contract, combination, or conspiracy is a threshold requirement for proving price-fixing and all other Sherman Act Section 1 violations. Such proof may be established by agreement with direct evidence, agreement without direct evidence, 3) agreement based on a tacit understanding, and 4) agreement based on mutual observation.
Injured parties may sue for injunctive relief but not damages under the Clayton Act.
False Civil enforcement of the Clayton Act is similar to the Sherman Act in that injured parties may sue for injunctive relief and treble damages. In general, criminal law remedies are not available under the Clayton Act.
Vertical territorial and customer restraints are to be resolved under the rule of reason.
True The GTE Sylvania case established the position that vertical restrictions are to be judged case-by-case, balancing interbrand and intrabrand competitive effects while recognizing that interbrand competition is the primary concern of antitrust law. Thus, the rule of reason is to be applied to vertical territorial and customer restraints.
Which of the following involves selling substantially identical goods at reasonably contemporaneous times to different purchasers at different prices, where the effect may substantially lessen competition or tend to create a monopoly? A) Predatory pricing B) Price discrimination C) Resale price maintenance D) Cost-savings agreement
B Price discrimination involves selling substantially identical goods (not services) at reasonably contemporaneous times to different purchasers at different prices, where the effect is to harm competition. A seller may resist a Robinson-Patman charge by establishing defenses by claiming that the price change was made in response to a changing market.
Which of the following statements is true of the Clayton Act, 1914? A) It provides for criminal remedies. B) It generally does not allow criminal penalties. C) It allows bundling. D) It prohibits horizontal monopolies.
B The Clayton Act forbids price discrimination, exclusive dealing, tying arrangements, requirements contracts, mergers restraining commerce or tending to create a monopoly, and interlocking directorates. Injured parties may sue for injunctive relief and treble damages. In general, criminal law remedies are not available under the Clayton Act.
Price discrimination involves selling substantially identical goods at reasonably contemporaneous times to different purchasers at different prices.
True Price discrimination involves selling substantially identical goods (not services) at reasonably contemporaneous times to different purchasers at different prices, where the effect is to harm competition. Prices might lawfully be altered for seasonal goods or perishables.
Conscious parallelism, which is allowed under the Sherman Act, arises from competitors pursuing parallel paths because their business judgment led them to those paths.
True So-called conscious parallelism is fully lawful because the competitors have not agreed either explicitly or by implication to follow the same course of action. Rather, their business judgment has led each to independently follow parallel paths.
Predatory pricing A) involves pricing below cost until a competitor drops out and then raising those prices to supracompetitive levels. B) involves collusion with competitors to raise the price of goods. C) is a violation of the Clayton Act. D) imposes price restraints on the resale price of a good.
A Predatory pricing involves pricing below cost until a competitor drops out and then raising those prices to supracompetitive levels. Resale price maintenance occurs when manufacturers and distributors seek to specify the price at which their customers may resell their products.
Section 2 of the Sherman Antitrust Act, 1890 forbids: A) conspiracies to monopolize. B) price discrimination. C) interlocking directorates. D) forced monopolization.
A Section 1 of the Sherman Antitrust Act forbids restraints of trade, and Section 2 forbids monopolization, attempts to monopolize, and conspiracies to monopolize. The Clayton Act forbids price discrimination, exclusive dealing, tying arrangements, requirements contracts, mergers restraining commerce or tending to create a monopoly, and interlocking directorates.
Mark sells office and medical supplies. He agrees to sell an x-ray machine to Dr. Williams if she agrees to purchase 50 reams of copy paper. Mark is trying to create a ________. A) nonprice vertical restraint B) horizontal price restraint C) free rider D) a predatory pricing arrangement
A Tying arrangements (sometimes called bundling) are another form of nonprice vertical restraint. Typically, tying arrangements permit a customer to buy or lease a desired product (the tying product) only if the customer also buys or leases another, less desirable product (the tied product). Predatory pricing involves pricing below cost until a competitor drops out and then raising those prices to supracompetitive levels.
Which of the following is false regarding horizontal price fixing? A) Its occurrence must be proven. B) It is to be resolved under the rule of reason. C) It involves collusion between competitors. D) Its mere existence constitutes unlawful conduct.
B Some antitrust violations, such as horizontal price fixing, are so injurious to competition that their mere existence ordinarily constitutes unlawful conduct. In horizontal price fixing, competitors collude, conspire, or agree among themselves in ways that unreasonably harm competition, Plaintiffs must prove that the violation in question occurred, but they need not prove that the violation caused, or is likely to cause, competitive harm. These per se violations are simply unlawful on their face. The rule of reason essentially provides that the Sherman Act forbids only unreasonable restraints of trade. It requires proof the defendants' agreement or conspiracy caused anticompetitive effects and a balancing of the pro- and anticompetitive effects of the restraint of trade to determine whether it unreasonably harms competition.
A basic tying arrangement test includes all but which of the following prongs? A) The existence of separate products is required. B) Two components of one product is necessary. C) The purchase of one product must be conditioned on the purchase of another product. D) Market power in the tying product is needed.
B The basic tying violation test includes the following elements: 1) The existence of separate products. That is, there are two products present rather than two components of one product, or two entirely separate products that happen to be elements in a single transaction. 2) A requirement that the purchase of one of the products (the tying product) is conditioned on the purchase of another product (the tied product). 3) Market power in the tying product. 4) Substantial impact on commerce in the tied product market. Proof of all four of those elements establishes per se illegality. When all four elements cannot be satisfied, the analysis may proceed on a rule of reason basis, weighing pro- and anticompetitive considerations.
The various horizontal restraints of trade are governed by the ________. A) Robinson-Patman Act B) Sherman Act C) Clayton Act D) Wagner Act
B When competitors collude, conspire, or agree among themselves, they are engaging in horizontal restraints of trade. The various horizontal restraints are governed by Section 1 of the Sherman Act, which forbids contracts, combinations, or conspiracies in restraint of trade.
A(n) ________ is one in which a seller agrees to supply all of a buyer's needs, or a buyer agrees to purchase all of a seller's output, or both. A) tying arrangement B) exclusive dealing contract C) requirements contract D) conscious parallelism
C A requirements contract is one in which a seller agrees to supply all of a buyer's needs, or a buyer agrees to purchase all of a seller's output, or both. Exclusive dealing and requirements contracts typically are lawful, but antitrust problems can arise depending on harm to competition.
By its nature a(n) ________ results in market foreclosure; that is, competitors are denied a source of supply or a market for sale. A) vertical restraint of trade B) tying arrangement C) exclusive deal D) horizontal restraint of trade
C Exclusive dealing and requirements contracts typically are lawful, but antitrust problems can arise depending on harm to competition. By its nature an exclusive deal results in market foreclosure; that is, competitors are denied a source of supply or a market for sale.
Which of the following is a horizontal restraint of trade? A) Tying arrangements B) Resale price maintenance C) Price fixing D) Free riding
C When competitors collude, conspire, or agree among themselves, they are engaging in horizontal restraints of trade. Instead of competing to drive prices down and quality up, they may be fixing prices, restricting output, dividing territories, and the like. Tying arrangements (sometimes called bundling) are another form of nonprice vertical restraint. Manufacturers and distributors often seek to specify the price at which their customers may resell their products, which is formally called resale price maintenance.
When competitors collude, conspire, or agree among themselves, they are engaging in ________. A) vertical restraints of trade B) predatory pricing C) horizontal restraints of trade D) price discrimination
C When competitors collude, conspire, or agree among themselves, they are engaging in horizontal restraints of trade. Instead of competing to drive prices down and quality up, they may be fixing prices, restricting output, dividing territories, and the like. Vertical restraints ordinarily are imposed by suppliers on their buyers. Predatory pricing involves pricing below cost until a competitor drops out and then raising those prices to supracompetitive levels. Price discrimination involves selling substantially identical goods (not services) at reasonably contemporaneous times to different purchasers at different prices, where the effect is to harm competition.
________ is fully lawful because competitors have not agreed either explicitly or by implication to follow the same course of action. A) Nonprice horizontal restraints B) Bundling C) Price discrimination D) Conscious parallelism
D Conscious parallelism is fully lawful because the competitors have not agreed either explicitly or by implication to follow the same course of action. Rather, their business judgment has led each to independently follow parallel paths. Bundling (tying arrangements) are an illegal form of nonprice vertical restraint. Price discrimination involves selling substantially identical goods (not services) at reasonably contemporaneous times to different purchasers at different prices, where the effect is to harm competition.
A horizontal group boycott is a situation where competitors agree not to deal with a supplier, customer, or another competitor.
True A horizontal group boycott is a situation where competitors agree not to deal with a supplier, customer, or another competitor. Such arrangements so thoroughly subvert the market that they ordinarily are per se violations of Sherman I. As a result, they do not require a detailed evaluation of competitive harm and benefits, although a showing of market power by those in the group may be required.
In the 2007 Leegin case, the Supreme Court ruled that agreements which specify minimum resale prices must be analyzed using the rule of reason.
True In the 2007 Leegin case, the Supreme Court overturned a nearly 100-year-old precedent in the Dr. Miles case to rule that agreements which specify minimum resale prices must also be analyzed using the rule of reason; that is, those agreements are no longer per se violations of the law. Rather, they must be considered on a case-by-case basis weighing their pro- and anticompetitive effects.
The rule of reason refers to the Supreme Court's position that the Sherman Act forbids only unreasonable restraints of trade.
True In the Standard Oil decision of 1911, the U.S. Supreme Court articulated what has come to be known as the rule of reason. In essence, the Court held that the Sherman Act forbids only unreasonable restraints of trade. The reasonableness of a restraint of trade is largely determined by a detailed balancing of the pro- and anticompetitive effects of the situation.
The U.S. Supreme Court has ruled that patents should not automatically be treated as monopolies.
True The U.S. Supreme Court has ruled that patents should not automatically be treated as monopolies. Abuse of the market power conferred by a patent, therefore, must be proven rather than presumed. And even if market power is established, an antitrust violation does not occur unless some competitive wrong is identified.
A policy of conscious parallelism is not a violation of the Sherman Act.
True The policy of conscious parallelism is fully lawful because the competitors have not agreed either explicitly or by implication to follow the same course of action. Rather, their business judgment has led each to independently follow parallel paths.
When competitors collude, conspire, or agree among themselves, they are engaging in horizontal restraints of trade.
True When competitors collude, conspire, or agree among themselves, they are engaging in horizontal restraints of trade. Instead of competing to drive prices down and quality up, they may be fixing prices, restricting output, dividing territories, and the like.
Vertical restraints are those imposed by suppliers on their buyers.
True While vertical restraints ordinarily are those imposed by suppliers on their buyers, horizontal restraints are those that arise from an agreement among the competitors themselves then they agree not to deal with a supplier, customer, or another competitor.
Which of the following is a difference between vertical restraints and horizontal restraints? A) Vertical restraints, in general, are based on tacit understanding while horizontal restraints, in general, are based on mutual observation. B) Vertical restraints eliminate competition, while horizontal restraints promote competition. C) Vertical restraints are those arising from an agreement among competitors themselves, while horizontal restraints ordinarily are those imposed by suppliers on their buyers. D) Vertical restraints, in general, are resolved under the rule of reason while horizontal restraints, in general, are per se unlawful.
D Horizontal restraints are those arising from an agreement among competitors themselves, while vertical restraints ordinarily are those imposed by suppliers on their buyers. Horizontal restraints, in general, are per se unlawful while vertical restraints, in general, are to be resolved under the rule of reason.
When competitors agree not to deal with a supplier, customer, or another competitor, it is referred to as a ________. A) vertical group boycott B) conscious parallelism C) bundling restraint D) horizontal group boycott
D In a horizontal group boycott, competitors agree not to deal with a supplier, customer, or another competitor. Such arrangements so thoroughly subvert the market that they ordinarily are per se violations of Sherman I and thus do not require a detailed evaluation of competitive harm and benefits, although a showing of market power by those in the group may be required. Conscious parallelism is lawful because the competitors' business judgment has led each to independently follow parallel paths. Tying arrangements (sometimes called bundling) are another form of nonprice vertical restraint.
Many businesses in competition meant that none of them could corner economic, political, or social power. Which of the following goals of antitrust law best describes the above statement? A) The preservation of competition B) The preservation of small businesses C) An expression of political radicalism D) The preservation of democracy
D In order to preserve democracy, antitrust laws supported competition. The Sherman Antitrust act forbids restraints of trade, monopolization, attempts to monopolize, and conspiracies to monopolize. Many businesses in competition meant that none of them could corner economic, political, or social power.
The reasonableness of a restraint of trade is largely established by all but which of the following? A) A detailed balancing of the pro- and anticompetitive effects of the situation B) Proof of the defendants' agreement or conspiracy that has caused anticompetitive effects C) Establishing unreasonable harm to competition by the alleged restraint of trade D) A per se violation of the Sherman Act
D In the Standard Oil decision of 1911, the U.S. Supreme Court articulated what has come to be known as the rule of reason. In essence, the Court said that the Sherman Act forbids only unreasonable restraints of trade. The reasonableness of a restraint of trade involves proof that the defendants' agreement or conspiracy caused anticompetitive effects, a detailed balancing of the pro- and anticompetitive effects of that restraint of trade to determine whether it unreasonably harms competition.
Which of the following statements is false of vertical territorial and customer restraints? A) Manufacturers may prevent distributors from selling to some classes of customers. B) Those restrictions typically afford an exclusive sales territory to a distributor. C) Such arrangements necessarily retard or eliminate intrabrand competition. D) The rule of reason is not to be applied to such restraints.
D Manufacturers commonly impose nonprice restraints, including where and to whom their product may be resold. Those restrictions typically afford an exclusive sales territory to a distributor. Manufacturers also may prevent distributors from selling to some classes of customers. These types of arrangements necessarily retard or eliminate intrabrand competition. Because price and service competition among dealers in the same brand ordinarily benefits a consumer, the courts have frequently struck down such arrangements. Still, those territorial and customer allocations also have merits. Thus, the rule of reason is to be applied to vertical territorial and customer restraints.
Which of the following is forbidden under Section 1 of the Sherman Antitrust Act, 1890? A) Price discrimination B) Attempts to monopolize C) Exclusive dealing D) Restraints of trade
D Section 1 of the Sherman Antitrust Act forbids restraints of trade, and Section 2 forbids monopolization, attempts to monopolize, and conspiracies to monopolize. The Clayton Act forbids price discrimination, exclusive dealing, tying arrangements, requirements contracts, mergers restraining commerce or tending to create a monopoly, and interlocking directorates.
The Federal Trade Commission, which is an independent agency designed to devote its full attention to the elimination of anticompetitive practices in American commerce, uses as its primary enforcement device ________. A) mandatory arbitration B) voluntary mediation C) the imposition of criminal penalties D) the cease and desist order
D The Federal Trade Commission (FTC) proceeds under the Sherman Act, the Clayton Act, and Section 5 of the FTC Act itself, which declares unlawful "unfair methods of competition" and "unfair or deceptive acts or practices in or affecting commerce." The commission's primary enforcement device is the cease and desist order, but fines may be imposed.
Which of the following statements is true of antitrust violation of intellectual property rights? A) The U.S. Supreme Court has ruled that patents automatically confer market power. B) Abuse of the market power conferred by a patent must be presumed and need not be proven. C) Patent and copyright laws discourage innovation. D) Antitrust violations of intellectual property do not occur unless some anticompetitive conduct is identified.
D The U.S. Supreme Court has ruled that patents should not automatically be treated as monopolies and do not automatically confer market power. Abuse of the market power conferred by a patent, therefore, must be proven rather than presumed. And even if market power is established, an antitrust violation does not occur unless some anticompetitive conduct is identified. Patent and copyright laws encourage innovation and protect creators' legitimate property interests.
________ permits a customer to buy or lease a desired product only if he/she also buys or leases another, less desirable product. A) The Clayton Act B) Section 1 of the Sherman Act C) A free riding arrangement D) Bundling
D Tying arrangements (sometimes called "bundling") are a form of nonprice vertical restraint. Typically, tying arrangements permit a customer to buy or lease a desired product (the tying product) only if the customer also buys or leases another, less desirable product (the tied product).
Which of the following statements is true of vertical restraints? A) They typically arise from restraints by buyers on their suppliers. B) They are resolved under the rule restraint of trade. C) They are per se unlawful. D) They may either be harmful or beneficial to competition.
D Vertical restraints ordinarily are those imposed by suppliers on their buyers while horizontal restraints are those arising from an agreement among competitors themselves. Horizontal restraints, in general, are per se unlawful while vertical restraints, in general, are to be resolved under the rule of reason. Vertical restraints may either be harmful or beneficial to competition.
A seller may resist a Robinson-Patman charge by establishing that the price differential is justified to avoid a monopoly.
False A seller may resist a Robinson-Patman charge by establishing one of the following defenses: (1) The price differential is attributable to cost savings. (In practice, the cost savings defense has been difficult to establish.) (2) The price differential is attributable to a good faith effort to meet the equally low price of a competitor. (3) Certain transactions are exempt from the act. Of special note is a price change made in response to a changing market. Thus, prices might lawfully be altered for seasonal goods or perishables.
An exclusive dealing contract is one in which defendants have simply observed each other's pricing behavior over time. They are able, therefore, to anticipate each other's future conduct and act accordingly without any direct collusion.
False An exclusive dealing contract is an agreement in which a buyer commits itself to deal only with a specific seller, thereby cutting competing sellers out of that share of the market. Exclusive dealing and requirements contracts typically are lawful, but antitrust problems can arise depending on harm to competition.
An exclusive deal is one in which a seller agrees to supply all of a buyer's needs, or a buyer agrees to purchase all of a seller's output, or both.
False By its nature an exclusive deal results in market foreclosure; that is, competitors are denied a source of supply or a market for sale. Thus, antitrust issues can emerge depending ordinarily on the market share controlled by the parties. A requirements contract is one in which a seller agrees to supply all of a buyer's needs, or a buyer agrees to purchase all of a seller's output, or both.
Criminal law remedies are generally available under the Clayton Act.
False Civil enforcement of the Clayton Act is similar to the Sherman Act in that injured parties may sue for injunctive relief and treble damages. In general, criminal law remedies are not available under the Clayton Act; however, violation of the Sherman Act opens participants to criminal penalties.
Price discrimination involves selling services at reasonably contemporaneous times to different purchasers at different prices, where the effect is to harm competition.
False Price discrimination involves selling substantially identical goods (not services) at reasonably contemporaneous times to different purchasers at different prices, where the effect is to harm competition.
The Sherman Antitrust Act forbids conspiracies to monopolize, but does not address naturally occurring monopolies.
False Section 1 of the Sherman Antitrust Act forbids restraints of trade, and Section 2 forbids monopolization, attempts to monopolize, and conspiracies to monopolize.
A company agrees to restrict sales to the east of the city, and its competitor agrees to restrict sales to the west of the city. This arrangement is lawful under the Sherman Act.
False Suppliers might want to eliminate competition among themselves, but such arrangements ordinarily are per se violations of the Sherman Act because they attempt to nullify the powerful benefits of competition.
Tying arrangements are a form of nonprice horizontal restraint.
False Tying arrangements (sometimes called "bundling") are a form of nonprice vertical restraint. Typically, tying arrangements permit a customer to buy or lease a desired product (the tying product) only if the customer also buys or leases another, less desirable product (the tied product).
Which of the following statements is true of the Clayton Act? A) Injured parties may sue for injunctive relief under the Clayton Act. B) The Clayton Act facilitates horizontal buyer arrangements. C) The Clayton Act provides for criminal law remedies. D) The Clayton Act facilitates vertical supplier arrangements.
A Civil enforcement of the Clayton Act is similar to the Sherman Act in that injured parties may sue for injunctive relief and treble damages. In general, criminal law remedies are not available under the Clayton Act.
Regarding government's role in antitrust law, critics argue all but which of the following? A) The free-market, despite growing corporate power, has the ability to correct all reduction in competition. B) Concentration of power has led to dramatic income and wealth inequality and reduced upward economic mobility. C) Higher consumer prices, barriers to new competition, and even distortion of the democratic process is the result of big business. D) Seemingly relentless consolidation has led to dominance in most lines of commerce by only a few firms.
A Critics argue that big business has too much authority in American life. That concentration of power, they claim, has led to dramatic income and wealth inequality and reduced upward economic mobility while generating higher consumer prices, barriers to new competition, and even distortion of the democratic process.
Which of the following is a restraint that arises from an agreement among competitors themselves? A) Horizontal restraint of trade B) Franchise tying C) Vertical restraint of trade D) Conscious parallelism
A Horizontal restraints are those arising from an agreement among competitors themselves. Horizontal restraints, in general, are per se unlawful. vertical restraints ordinarily are those imposed by suppliers on their buyers. Conscious parallelism is lawful because the competitors' business judgment has led each to independently follow parallel paths.
Manufacturers and distributors often seek to specify the price at which their customers may resell their products, a policy which is referred to as ________. A) resale price maintenance B) bundling C) price discrimination D) predatory pricing
A Manufacturers and distributors often seek to specify the price at which their customers may resell their products, a policy that is formally called resale price maintenance. Price discrimination involves selling substantially identical goods (not services) at reasonably contemporaneous times to different purchasers at different prices, where the effect is to harm competition. Predatory pricing involves pricing below cost until a competitor drops out and then raising those prices to supracompetitive levels.
Susan opens a pastry shop right across the street from her competitor, George's pastry shop. To eliminate George's competition, Susan radically lowers prices of her pastries attracting customers to her pastry shop and eventually driving George out of business. Which of the following antitrust violations could Susan be charged with? A) Predatory pricing B) Price discrimination C) Predatory discrimination D) Price restraints
A Susan could be charged with predatory pricing which is illegal under antitrust laws. Predatory pricing involves reducing prices below operating costs until a competing discounter drops out of the market and then raising those prices to supracompetitive levels. Price discrimination involves selling substantially identical goods (not services) at reasonably contemporaneous times to different purchasers at different prices, where the effect is to harm competition.
Which of the following forbids price discrimination, tying arrangements, mergers restraining commerce or tending to create a monopoly, and interlocking directorates? A) The Clayton Act B) The Sherman Antitrust Act C) The Robinson-Patman Act D) The Leegin-Miles Act
A The Clayton Act forbids price discrimination, exclusive dealing, tying arrangements, requirements contracts, mergers restraining commerce or tending to create a monopoly, and interlocking directorates. Civil enforcement of the Clayton Act is similar to the Sherman Act in that injured parties may sue for injunctive relief and treble damages. Criminal law remedies, however, generally are not available under the Clayton Act.
