Business Law Chapter 38: Antitrust Law and Promoting Competition

Statutory Defenses to Liability for Price Discrimination

1.) Cost Justification 2.) Meeting Competitor's Prices 3.) Changing Market Conditions

To establish a violation of Section 2 of the Sherman Act, a plaintiff must do what?

A plaintiff must prove both of these elements - monopoly power and an intent to monopolize.

Per Se Violation

A restraint of trade that is so blatantly and substantially anticompetitive that it is deemed inherently (per se) illegal under Section 1 of the Sherman Act. inherently illegal = essentially illegal

Price Fixing

An agreement between competitors to fix the prices of products or services at a certain level. The agreement on price need not be explicit, as long as it restricts output or artificially fixes price, it violates the law. Any agreement that restricts output or artificially fixes price is a per se violation of Section 1.

Section 2 of the Sherman Act also prohibits attempted monopolization of a market.

Attempted Monopolization requires proof of the following three elements: 1.) Anticompetitive market 2.) The specific intent to exclude competitors and garner monopoly power. 3.) A "dangerous" probability of success in achieving monopoly power. The probability is not dangerous unless the alleged offender possesses some degree of market power. Only serious threats of monopolization are condemned as violations.

What kind of violation is vertical restraints and why?

Even though firms operating at different functional levels are not in direct competition with one another, they are in competition with other firms. Thus, agreements between firms standing in vertical relationships may affect competition. Some vertical restraints are per se violations of Section 1. Others are judged under the rule of reason.

What two types of behavior are subject to sanction under Section 2?

Monopolization and Attempts to Monopolize

FTC Enforcement

The FTC has the sole authority to enforce violations of Section 5 of the FTC Act. FTC actions are effected through administrative orders, but if a firm violates an FTC order, the FTC can seek court sanctions for the violation.

Defining Monopoly Power

The Sherman Act does not define monopoly. In economic theory, monopoly refers to control of a single market by a single entity.

Section 7 of the Clayton Act

Under Section 7 of the Clayton Act, a person or business organization cannot hold stock or assets in another entity "where the effect....may be to substantially lessen competition." Section 7 of the statutory authority for preventing mergers or acquisitions that could result in monopoly power or a substantial lessening of competition in the marketplace.

Exemptions to Antitrust Enforcement

allow for labor unions to organize and bargain, allow agricultural cooperatives to set prices, allows the fishing industry to set prices, etc.

Sherman Act Monopolization Claim components

anticompetitive conduct, an intent to monopolize, and a dangerous probability of achieving monopoly power.

Sherman Act Section 2 Violation Requirements

1. The possession of monopoly power in the relevant market, and 2. the willful acquisition or maintenance of that power as distinguished from the growth or development as a consequence of a superior product, business acumen, or historic accident.

Sherman Act Section 1 Violation Requirements

1.) An agreement between two or more parties that 2.) unreasonably restrains competition 3.) affects interstate commerce

Divestiture

A company's sale of one or more of its divisions' operating functions under court order as part of the enforcement of the antitrust laws.

Why Might Firms impose Territorial or Customer restrictions and what is it judged under?

A firm may have legitimate reasons for imposing such territorial or customer restrictions. Territorial and customer restrictions were once considered per se violations of Section 1. In 1977, the U.S. Supreme Court held that they should be judged under the rule of reason.

Vertically Integrated Firm

A firm that carries out two or more functional phases (manufacturing, distribution, and retailing, for instance) of the chain of production.

Monopoly

A market in which there is a single seller or a very limited number of sellers.

Horizontal Merger

A merger between two firms that are competing in the same market. If a horizontal merger creates an entity with a significant market share, the merger will be presumed illegal because it increases market concentration. When analyzing the legality of a horizontal merger, the courts also consider three other factors: the overall concentration of the relevant product market, the relevant market's history of tending toward concentration, and whether the merger is apparently designed to establish market power or to restrict competition.

Treble Damages

A private party who has been injured as a result of a violation of the Sherman Act or the Clayton Act can sue for treble damages (three times the actual damages suffered) and attorneys' fees.

Section 1 of the Sherman Act

1.) 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 and is a felony punishable by a fine or imprisonment.

A party wishing to sue under the Sherman Act must prove the following:

1.) The antitrust violation either caused or was a substantial factor in causing the injury that was suffered 2.) The unlawful actions of the accused party affected business activities of the plaintiff that were protected by the antitrust laws.

Section 2 of the Sherman Act

2.) 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.

Actions by Private Parties

A great deal of case law has established that to pursue antitrust laws, private parties must present some evidence suggesting that an illegal agreement was made.

Vertical Restraint

A restraint of trade created by an agreement between firms at different levels in the manufacturing and distribution process. In contrast to horizontal relationships, which occur at the same level of operation, vertical relationships encompass the entire chain of production. The chain of production normally includes the purchase of inventory, basic manufacturing, distribution to wholesalers, and eventual sale of a product at the retail level.

Tying Arrangement

A seller's act of conditioning the sale of a product or service on the buyer's agreement to purchase another product or service from the seller. The legality of a tying arrangement (or tie-in sales agreement) depends on many factors, particularly the purpose of the agreement and its likely effect on competition in the relevant markets (the market for the tying product and the market for the tied product.)

Rule of Reason

A test used to determine whether an anticompetitive agreement constitutes a reasonable restraint on trade. Courts consider such factors as the purpose of the agreement, its effect on competition, and whether less restrictive means could have been used. The Courts use rule of reason to analyze anticompetitive agreements that allegedly violate Section 1 of the Sherman Act to determine whether they actually constitute reasonable restraints on trade. It was developed because if not, almost any business agreement could conceivably be held to violate the Sherman Act.

Resale Price Maintenance

An agreement between a manufacturer and a retailer in which the manufacturer specifies what the retail prices of its products must be. These agreements used to be considered per se violations of the Sherman Act. Today, both maximum resale price maintenance agreements and minimum resale price maintenance agreements are judged under the rule of reason.

Group Boycotts

An agreement by two or more sellers to refuse to deal with a particular person or firm. Because they involved concerted action, group boycotts have been held to constitue per se violations of Section 1 of the Sherman Act. To prove a violation of Section 1, the plaintiff must demonstrate that the boycott or joint refusal to deal was undertaken with the intention of eliminating competition or preventing entry into a given market.

Exclusive Dealing Contracts

An agreement under which a seller forbids a buyer to purchase products from the seller's competitors. A seller is prohibited from making an exclusive-dealing contract under Section 3 if the effect of the contract is "to substantially lessen competition or tend to create a monopoly." Today, it is clear that to violate antitrust law, an exclusive-dealing agreement (or a tying arrangement) must qualitatively and substantially harm competition. To prevail, a plaintiff must present affirmative evidence that the performance of the agreement will foreclose competition and harm consumers.

Concentrated Industry

An industry in which a single firm or a small number of firms control a large percentage of market sales. When trade association agreements have substantially anticompetitive effects, a court will consider them to be in violation of Section 1 of the Sherman Act.

Jurisdictional Requirements

Any activity that substantially affects interstate commerce falls within the scope of the Sherman Act. The Sherman Act also extends to U.S. nationals abroad who are engaged in activities that have an effect on U.S. foreign commerce. Federal Courts have exclusive jurisdiction over antitrust cases brought under the Sherman Act. State laws regulate local restraints on competition, and state courts decide claims brought under those laws.

Horizontal Restraint

Any agreement that restrains competition between rival firms competing in the same market. Horizontal restraints include price fixing, group boycotts, market divisions, and trade associations.

Exercising U.S. Jurisdiction.

Before U.S. court will exercise jurisdiction and apply antitrust laws, it must be shown that the alleged violation had a substantial effect on U.S. commerce. U.S. jurisdiction is automatically invoked when a per se violation occurs.

Relevant Market

Before a court can determine whether a firm has a dominant market share, it must define the relevant market. The relevant market consists of two elements: a relevant product market and a relevant geographic market.

Trade Associations

Businesses in the same general industry or profession frequently organize trade associations to pursue common interests. A trade association may engage in various joint activities, such as exchanging information, representing the members' business interests before governmental bodies, conducting advertising campaigns, and setting regulatory standards to govern the industry or profession. The rule of reason is applied to many horizontal actions.

Example of a Unilateral Refusal to Deal

Clark Industries, the owner of three of the four major downhill ski areas in Blue Hills, Idaho, refuses to continue participating in a jointly offered 6-day, "all Blue Hills" lift ticket. Clark's refusal to cooperate with its smaller competitor is a violation of Section 2 of the Sherman Act. Because Clark owns 3/4ths of the local ski areas, it has monopoly power. Thus, its unilateral refusal to deal has an anticompetitive effect on the market.

The Sherman Antitrust Act

In 1890, Congress passed "An Act to Protect Trade and Commerce against Unlawful Restraints and Monopolies." It is one of the governments most powerful weapons in the effort to maintain a competitive economy.

The Clayton Act

In 1914, Congress attempted to strengthen federal antitrust laws by enacting the Clayton Act. The act was aimed at specific anticompetitive or monopolistic practices that the Sherman Act did not cover. The substantive provisions of the act deal with four distinct forms of business behavior, which are declared illegal but not criminal. In each instance, the act states that the behavior is illegal only if it tends to substantially lessen competition or to create monopoly power. The major offenses under the Clayton Act are set out in Sections 2, 3, 7, and 8 of the act.

What does Section 2 of the Sherman Act condemn?

It condemns "every person who shall monopolize, or attempt to monopolize."

Market Divisions

It is a per se violation of Section 1 of the Sherman Act for competitors to divide up territories or customers. It reduces marketing costs and allows all firms (assuming there is no other competition) to raise the price of goods they sell in their respective states.

What does Section 1 of the Sherman Act prohibit

It prohibits certain concerted activities that restrain trade.

Unilateral Refusals to Deal

Joint refusals to deal (group boycotts) are subject to close scrutiny under Section 1 of the Sherman Act. A single manufacturer acting unilaterally, though, normally is free to deal, or not to deal, with whomever it wishes. Nevertheless, in some instances, a unilateral refusal to deal will violate section 2 of the Sherman Act. These instances occur only if (1) the firm refusing to deal has-or is likely to acquire-monopoly power and (2) the refusal is likely to have an anticompetitive effect on a particular market.

Proving Monopoly Power through Direct Evidence

Monopoly power may be proved by direct evidence that the firm used its power to control prices and restrict output. Usually though, there is not enough evidence to show that the firm was intentionally controlling prices, so the plaintiff has to offer indirect, or circumstantial, evidence of monopoly power.

The Intent Requirement

Monopoly power, in and of itself, does not constitute the offense of monopolization under Section 2 of the Sherman Act. The offense also requires an intent to monopolize. The acquisition of monopoly power is not an antitrust violation. In contrast, if a firm possesses market power as a result of carrying out some purposeful act to acquire or maintain that power through anticompetitive means, then it is in violation of Section 2. In most monopolization cases, intent may be inferred from evidence that the firm had monopoly power and engaged in anticompetitive behavior.

U.S. Antitrust Laws in the Global Context

Not only may persons in foreign nations be subject to their provisions, but the laws may also be applied to protect foreign consumers and competitors from violations committed by U.S. business firms. Consequently, foreign persons- a term that by definition includes foreign governments-may sue under U.S. antitrust laws in U.S. courts.

Enforcement by Federal Agencies

Only the DOJ can prosecutive violations of the Sherman Act, which may be either criminal or civil offenses. Violations of the Clayton Act are not crimes, but the act can be enforced by either the DOJ or the FTC through civil proceedings.

Section 2 of the Clayton Act prohibits Price Discrimination

Price Discrimination is a seller's act of charging competing buyers different prices for identical products or services. The amendment of Section 2 with the passage of the Robinson-Patman Act prohibits price discrimination that cannot be justified by differences in production costs, transportation costs, or cost differences due to other reasons.

Cases brought under Section 1 of the Sherman Act differ from those brought under Section 2.

Section 1 cases are often concerned with finding an agreement (written or oral) that leads to a restraint of trade. Section 2 cases deal with the structure of a monopoly that already exists in the marketplace.

The Extraterritorial Application of U.S. Antitrust Laws

Section 1 of the Sherman Act provides for the extraterritorial effect of the U.S. antitrust laws. Any conspiracy that has a substantial effect on U.S. commerce is within the reach of the Sherman Act. The violation may even occur outside the U.S., and foreign persons, including governments, can be sued for violation of the U.S. antitrust laws.

Tying Arrangement Violations

Section 3 of the Clayton Act has been held to apply only to commodities, not to services. Some tying arrangements, however, can also be considered agreements that restrain trade in violation of Section 1 of the Sherman Act. Thus, cases involving tying arrangements of services have been brought under Section 1 of the Sherman Act. Although earlier cases condemned tying arrangements as illegal per se, courts now evaluate tying arrangements under the rule of reason.

Section 8 of the Clayton Act

Section 8 of the Clayton Act deals with interlocking directorates - that is, the practice whereby individuals serve as directors on the boards of two or more competing companies simultaneously. The reasoning behind the FTC's prohibition of interlocking directorates is that if two competing businesses share the same officers and directors, the firms are unlikely to compete with one another, or to compete aggressively.

State Laws Concerning Price Discrimination

Some states have enacted statutes to prohibit price discrimination, which can apply in addition to the Clayton Act. For instance, a state statute may apply when a business sells goods or services at different prices to buyers in different locations within the state. Some of these laws protect specific businesses, such as auto dealerships, from discriminatory wholesale or incentive pricing.

Territorial or Customer Restrictions

Sometimes, a manufacturing firm often wishes to insulate dealers from direct competition with other dealers selling the product. To do so, it may institute territorial restrictions or attempt to prohibit wholesalers or retailers from reselling the product to certain classes of buyers, such as competing retailers.

Monopolization

The Supreme Court has defined the offense of monopolization as involving two elements: 1.) The possession of monopoly power in the relevant market. 2.) "The willful acquisition or maintenance of power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident."

Per Se Violations under the Rule of Reason

The Supreme Court has ruled that "vertical restrictions promote Interbrand competition by allowing the manufacturer to achieve certain efficiencies in the distribution of his products." Therefore, Sylvania's vertical system, which was not price restrictive, did not constitute a per se violation of Section 1 of the Sherman Act. The decision in the Continental case marked a definite shift from rigid characterization of these kinds of vertical restraints to a more flexible, economic analysis under the rule of reason.

What are the Federal agencies that enforce the federal antitrust laws?

The U.S. Department of Justice and the Federal Trade Commission. Section 5 of the FTC condemns all forms of anticompetitive behavior that are not covered under other federal antitrust laws.

Monopoly Power

The ability of a monopoly to dictate what takes place in a given market. Section 2 of the Sherman Act addresses the misuse of monopoly power in the marketplace.

Vertical Merger

The acquisition by a company at one stage of production of a company at a higher or lower stage of production (such as a company merging with one of its suppliers or retailers.) A vertical merger is unlawful if it prevents competitors of either merging firm from competing in a segment of the market that otherwise would be open to them, resulting in a substantial lessening of competition.

Market Concentration

The degree to which a small number of firms control a large percentage of a relevant market.

Antitrust Law

The laws that regulate economic competition in the U.S. Antitrust Laws are laws that protect commerce from unlawful restraints and anticompetitive practices. They include the Sherman Antitrust Act of 1890, the Clayton Act, and the Federal Trade Commission Act, passed by Congress to further curb anticompetitive and unfair business practices.

Market Power

The power of a firm to control the market price of its product. A monopoly has the greatest degree of market power.

Predatory Pricing

The pricing of a product below cost with the intent to drive competitors out of the market. Once the competitors are eliminated, the firm will presumably attempt to recapture its losses and go one to earn higher profits by driving up prices far above their competitive levels. This tactic is used in both monopolization and attempts to monopolize.

Relevant Product Market

The relevant product market includes all products that, although produced by different firms, have identical attributes - for example, tea. It also includes reasonably interchangeable products. Products are considered reasonably interchangeable if consumers treat them as acceptable substitutes (coffee may be substituted for tea, for instance). Establishing the relevant product market is often a key issue in monopolization cases because the way the market is defined may determine whether a firm has monopoly power. When the product is defined narrowly, the degree of a firm's market power appears greater.

Relevant Geographic Market

The second component of the relevant market is the market's geographic extent. The geographic market is that section of the country within which a firm can increase its price a bit without attracting new sellers or many customers to alternative suppliers outside that area.

Proving Monopoly Power Indirectly

To prove monopoly power indirectly, the plaintiff must show that the firm has a dominant share of the relevant market and that there are significant barriers for new competitors entering that market. A plaintiff must also show that the relevant market is a market capable of being monopolized. A federal court has ruled that "a single brand of a product or service" can be a relevant market for antitrust purposes when no substitute exists for that product or service.

To violate Section 2 of the Clayton Act

To violate Section 2, the seller must be engaged in interstate commerce, the goods must be of like grade and quality, and the goods must have been sold to two or more purchasers. In addition, the effect of the price discrimination must be to substantially lessen competition, tend to create a monopoly, or otherwise injure competition.

Under Section 3 of the Clayton Act

Under Section 3 of the Clayton Act, sellers or lessors cannot condition the sale or lease of goods on the buyer's or lessee's promise not to use or deal in the goods of the seller's competitor. In effect, this section prohibits two types of vertical agreements involving exclusionary practices - exclusive-dealing contracts and tying agreements.

Differences Between the Two Sections of the Sherman Act

Violation of Section 1 requires two or more persons, as a perosn cannot contract or combine or conspire alone. Thus, the essence of the illegal activity in Section 1 is the act of joining together. Section 2 can apply either to one person or to two or more persons because it refers to every person. Thus, unilateral conduct can result in a violation of Section 2.

Factors Courts Consider under the Rule of Reason

When analyzing an alleged Section 1 violation under the rule of reason, a court will consider the following factors: 1.) The purpose of the agreement 2.) The parties' ability to implement the agreement to achieve that purpose. 3.) The effect or potential effect of the agreement on competition. 4.) Whether the parties could have relied on less restrictive means to achieve their purpose

The types of trade restraints that Section 1 of the Sherman Act prohibits generally fall into two broad categories:

horizontal restraints and vertical restraints