Ch. 28

Exclusive-Dealing Contracts

A contract 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 if the effect on the contract is "to substantially lessen competition or tend to create a monopoly"

Tying Arrangements

A seller conditions the sale of a product on the buyer's agreement to purchase another product produced or distributed by the same seller. The legality depends on many factors, particularly the purpose of the agreement and the arrangements likely effect on competition in the relevant markets. Can also be considered agreements that restrain trade in violation of Section 1 of the Sherman Act. Now evaluated under the Rule of Reason

Vertically Integrated Firms

A single firm carries out two or more of the separate functional phases. A firm that is integrated backward moves down the chain of production toward a supplier. A firm that is integrated forward moves up the chain of production toward the consumer market.

Horizontal Market Divisions

Agreements to divide up the market among rival firms. It is a per se violation for competitors to divide up territories or customers.

Resale Price Maintenance Agreements

An agreement between a manufacturer and a distributor or retailer in which the manufacturer specifies what the retail prices of its retail products must be. The United States ruled that maximum resale price maintenance agreements should be judged under the rule of reason.

Group Boycotts

An arrangement by two or more sellers to refuse to deal with a particular person or firm. Traditionally considered to constitute per se violations because they invlove concerted action. 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.

Horizontal Restraint

Any agreement that in some way restrains competition between rival firms competing in the same market. Whenever firms at the same level of operation and in direct competition with one another agree to operate in a way that restricts their market activities, thet are said to have imposed a horizontal restraint of trade.

Rule of Reason Usually Applied

Applied in evaluating such practices and agreements.

Price Fixing

Eliminating price competition in which firms seek to sell more by charging less than their rivals

Trade Associations

Exchange information, represent the members' business interests before governmental bodies, conducting advertising campaigns, and setting regulatory standards to govern the industry or profession.

The Rule of Reason

If an agreement is not found to be a per se violation of section 1, the the court proceeds to analyze its legality by balancing the reasons for the agreement against its potentially anticompetitive effects. The courts analyze anticompetitive agreements that allegedly violate section 1 of the Sherman Act to determine whether they may, in fact, constitute reasonable restraints of trade. A court will consider several factors when analyzing an alleged violation; 1. the purpose of the agreement 2. the parties' power to implement the agreement to achieve that purpose, and the effect or potential effect of the agreement on competition.

Per Se Violation

Illegal. If an agreement is considered too anti-competitive, it may be deemed a per se violation. In the case there is a per se violation a court is precluded from inquiring whether the agreement should be upheld on the ground that it provides benefits that outweigh its anticompetitive effects.

Refusals to Deal

Manufacturers are free to deal, or to not deal, with whomever they choose. In some instances a refusal to deal does violate the antitrust laws. This occurs 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

Mergers

Market Concentration: Determining market concentration involves allocating percentage market shares among the various companies in the relevant market. When a small number of companies share a larfe part of the market, the market is concentrated. Horizontal Mergers: Between firms that compete with each other in the same market. If a horizontal merger creates an entity with a significant market share, the merger may be considered illegal because it increases market concentration

Conglomerate Mergers

Mergers between firms that do not compete with each other because they are in different markets. Three general types; 1. market extension merger 2. product extension 3. diversification mergers

Vertical Merger

Occurs when a company at one stage of production acquires a company at a higher or lower stage of production. Factors that may deem the merger illegal; 1. Market concentration 2. barriers to entry into the market 3. apparent intent of the merging parties

Time and Cost Considerations

Price discrimination only occurs if sales at different price levels are made reasonably close together in time. Closeness in time is determined by the economic circumstances of the sales.

Vertical Restraints

Results from an agreement between firms at different levels in the manufacturing and distribution process. Encompass the entire chain of production. Normally includes the purchase of inputs, basic manufacturing, distribution to wholesalers, enad eventual sale of a product at retail level.

Restraint of Trade

The underlying assumption of section 1 of the Sherman Act is that society's welfare is harmed if rival firms are permitted to join in an agreement that consolidates their market power or otherwise restrains competition.

Factors to determine legality

Three factors considered; 1. the overall concentration of the relevant market 2. the relevant market's history of tending toward concentration, and whether the merger is apparently designed to establish market power or restrict competition.

Concentrated Industries

Trade Associations can be, and have been, used as a means to facilitate anticompetitive actions, such as fixing prices or allocating markets. One in which either a single firm or a small number of firms control a large percentage of market sales.

Hierfindahl-Hirschman Index

Used to determine market concentration. Computed by summing the squares of the percentage market shares of the firms in the relevant market. If HHI is less than 1000 then the market is unconcentrated, and merger unlikely to be challenged. If HHI is between 1000 and 1800 the indusry is moderatly concentrated and the merger will be challenged only if it increases the HHI by 100 points or more. If the HHI is greater than 1800 then the market is highly concentrated. If there is an HHI increase of between 50 and 100 then there is "significant" competitive concerns.

Price Discrimination

Whenever a seller charges different buyers different prices for identical goods. A violation in section 2 of the Clayton Act if a seller discriminates in the prices it charges different customers for commodities like quality and grade in interstate commerce, and if the practice results in injury to competition.