Ch. 7: Review Questions
If a Florida manufacturer of widgets that only sells its widgets in Florida merges with a North Carolina manufacturer of the same widgets who only sells his widgets in North Carolina, this would be a: A) Horizontal geographic extension merger B) Vertical geographic extension merger C) Horizontal product market extension merger D) Vertical product market extension merger E) A and C
A
The Antitrust Act(s) that was/were broad and punitive rather than specific and preventative is: A) Sherman B) Clayton C) FTC D) B and C E) All of the above
A
The Sherman Act proved to be ineffective due to: A) Interpretation by the federal courts B) Interpretation by the state courts C) Manner in which it was written by Congress D) Way in which it was enforced by the President of the United States E) Way in which it was enforced by the Department of Justice
A
The relevant market is the: A) Product market and the geographic market B) Product market only C) Geographic market only D) Market power E) Market share
A
What is a natural monopoly? Why are they exempt from antitrust law?
A natural monopoly is one that, due to its unique product or service, can provide the majority of the market's demand. These monopolies are exempt to antitrust law due to their required unique raw materials, technology, or some other factor to operate.
Why did monopolies grow in the late 1800s?
A surge of successful entrepreneurs in separate markets and a lack of laws against monopolizing practices lead to a flux of monopolies in the late 1800s.
What is the meaning of the word 'anticompetitive'? What is the difference between anticompetitive practices and competitive practices.
Anticompetitive practices refers to engaging in business practices which restricts competition in that market to maintain or increase a relative market position and profits without necessarily offering lower costs or higher quality. Competitive practices result in better products and thus a range of products and prices.
If a supplier mergers with a retailer this would be a: A) Horizontal merger B) Vertical merger C) Market extension merger D) Geographic extension merger E) Conglomerate merger
B
What is price discrimination? A) An area of antitrust activity that is handled by the per se rule B) Selling your product to one entity for one price and selling the same product to another entity for a different price without justification C) Selling your product below your cost D) Selling your product to people of the same race as yourself for a cheaper price than to people of different races E) A and B
B
If Chrysler merged with General Motors, what type of merger would this be? A) Product extension merger B) Geographic extension merger C) Horizontal merger D) Vertical merger E) A and C
C
The primary concern in antitrust law is: A) Profitability of the target company B) Market power of the target company C) The good of the consumer D) The good of the target company E) All of the above
C
Does the Clayton Act outlaw monopolies?
Clayton is specific and preventative whereas Sherman is broad and punitive. Clayton describes many practices that lead to monopolization such as Price Discrimination, Exclusionary Practices, Tying Arrangements, Mergers, and Interlocking Directories.
What is the role of competition in capitalist economies? How did Adam Smith view the relationship between greed and competition?
Competition is the lifeblood of capitalism as it leads to a wide range of customer choices, better products, and efficiency. Smith laid the foundations of free economy with his concept of division of labor and expounded upon how rational self-interest and competition can lead to economic prosperity.
The FTC usually enforces A) Sherman B) Clayton C) FTC D) B and C E) All of the above
D
Which of the following is/are exempt from the Antitrust Laws that we discussed in class? A) NBA-National Basketball Association B) NHL-National Hockey League C) NFL-National Football League D) MLB-Major League Baseball E) All of the above are exempt from Antitrust Laws
D
FTC v. Superior Court Trial Lawyers Association A) Dealt with horizontal price discrimination B) Dealt with vertical price discrimination C) Issued a decision by the per se rule with the exception that horizontal price discrimination is allowed if it is the only way to do it D) Issued a decision by the rule of reason with the exception that horizontal price discrimination is allowed if it is the only way to do it E) A and C
E
Horizontal Exchange of Information is subject to a high burden rule. Therefore, one should not exchange information if: A) They discuss price B) They discuss how to distribute the product C) They discuss the options on shipment of the product D) They hide the fact that they are sharing the information E) A and D
E
If two companies want to merge that sell the same products in a different part of the country, what type of merger would this be? A) Vertical B) Horizontal C) Product extension merger D) Geographic extension merger E) B and D
E
If two totally unrelated companies want to merge, this would be what type of merger? A) Horizontal B) Vertical C) Product extension merger D) Geographic extension merger E) Conglomerate merger
E
Price Discrimination is handled by what law(s)? A) Sherman B) Clayton C) FTC D) Robinson-Patman E) B and D
E
The U.S. merger guidelines can apply to: A) Horizontal competitors B) Vertical competitors C) Conglomerate mergers D) Potential competitors E) All of the above
E
What are the requirements of the Vertical Restraint Guidelines? A) The seller has to have market power in the tying product B) The tied product and the tying product must be separate C) There must be substantial adverse effect on the tied product market D) The consumer must be harmed by the action E) Only A, B, and C are required
E
What caused the trusts to become powerful in the late 1880s? A) Growth of corporations B) Pro-business attitudes of the courts C) Republican domination D) A large amount of international business activity E) A, B, and C
E
What is a type of justification to price discrimination? A) You are simply meeting the competition's price B) Product is out of season C) Volume discount D) Cost justification E) All of the above
E
Which of the following is/are exempt from the Antitrust Laws that we discussed in class? A) Public transportation B) Labor unions C) Insurance and other state regulated industries D) Certain agricultural organizations E) All of the above
E
What are the different types of mergers? How do the types of mergers differ from one another?
Horizontal, Vertical, Market Extension, and Conglomerate are all types of mergers. Horizontal Mergers are mergers of competitors on the same market level (Keurig and Dr. Pepper - Snapple). Vertical Mergers are mergers up and down the business chain (business that pours concrete for construction merges with a business that mines the minerals to make concrete). Market Extension Mergers are mergers of unrelated businesses and include Geographic Market Extension Mergers (can be horizontal or vertical mergers that extend the geographic region that merger conducts business in) and Product Market Extension Mergers (can be horizontal or vertical mergers that extend the types of product or service that merger offers). Conglomerate Mergers are either Non-Market Extension Mergers or Market Extension Mergers, but are neither horizontal or vertical.
What is tying? How can it lead to further monopolization?
Selling one product (tying product) conditioned upon the required purchase of another product (tied product). Only really leads to monopolization when the tied product is unreasonably overpriced, but is still Per Se (with a twist: "Buy one, get one free", etc.).
What actions are prohibited by Section 1 of the Sherman Antitrust Act of 1890? What is the difference between a Per Se violation and a Rule of Reason violation?
Sherman Section 1 prohibits unreasonable restraint of trade, an agreement between two or more parties that substantially reduces competition. A Per Se violation is strictly illegal, regardless of the trust's reason for engaging in that violation. A Rule of Reason violation is left to the scrutiny of the courts as to whether or not the trust reasonably engaged in that violation.
What actions are prohibited by Section 2 of the Sherman Antitrust Act of 1890? How does Section 2 differ from Section 1?
Sherman Section 2 prohibits attempts to monopolize, but not the actual monopoly. Sherman does not prevent monopolies before they arise and only punishes successful monopolies. Section 2 deals with monopolies while Section 1 deals with unreasonable restraint of trade.
What are the major differences in Sherman, Clayton, and FTC? What are the remedies? Which act has the most severe penalties?
Sherman is broad and punitive, prohibiting unreasonable restraint of trade and attempts to monopolize, but only punishes successful monopolies. Clayton is specific and preventative, describing Price Discrimination, Exclusionary Practices, Tying Arrangements, Mergers, and Interlocking Directories, punishing based on proof of significant probability of reducing competition. FTC is a catch-all for unfair methods of competition and deceptive acts or practices that are not covered under Sherman or Clayton. Remedies for antitrust violations include injunctions, monetary penalties, prevention of mergers, order to cease and desist, etc. Violations of acts covered by Sherman are criminally sanctioned.
What is the origin of antitrust law in the United States? How did turn trusts like Standard Oil subvert competition?
The surge of entrepreneurs in the late 1800s like John D. Rockefeller's Standard Oil Trust were monopolizing their respective markets and hurting consumers. Trusts that were monopolizing their respective markets could buy out or underprice their competitors to run them out of business, then jack their costs up.
How is punishment for violations of the Clayton Act different from that of the Sherman Act?
Under Clayton, the courts only have to prove significant probability of reducing competition, whereas under Sherman, a Section 2 violation must show that a firm has acquired monopolistic power AND have engaged in willful attempts to acquire and maintain that power.
