chapter 19 BLAW

1. horizontal merger 2. vertical merger

1. A merger between two firms that are competing in the same market. ex: When analyzing the legality of a horizontal merger, however, 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 apparent design of the merger is to establish market power or to restrict competition. 2. occurs when a company at one stage of production acquires a company at a higher or lower stage of production. An example of a vertical merger is a company merging with one of its suppliers or retailers. . Whether a vertical merger is illegal generally depends on several factors, such as whether the merger would produce a firm controlling an undue percentage share of the relevant market.

defenses for violating section 2 Clayton antitrust act

1. Cost justification. If the seller can justify the price reduction by demonstrating that a particular buyer's purchases saved the seller costs in producing and selling the goods, the seller will not be liable for price discrimination. 2. Meeting competitor's prices. If the seller charged the lower price in a good faith attempt to meet an equally low price of a competitor, the seller will not be liable for price discrimination. 3. Changing market conditions. A seller may lower its price on an item in response to changing conditions affecting the market for or the marketability of the goods concerned. Thus, if an advance in technology makes a particular product less marketable than it was previously, a seller can lower the product's price. ex: Water Craft was a retail dealership of Mercury Marine outboard motors in Baton Rouge, Louisiana. Mercury Marine also sold its motors to other dealers in the Baton Rouge area. When Water Craft discovered that Mercury was selling its outboard motors at a substantial discount to Water Craft's largest competitor, it filed a price discrimination lawsuit against Mercury. The court ruled in favor of Mercury Marine, however, because it was able to show that the discounts given to Water Craft's competitor were made in good faith to meet the low price charged by another manufacturer of marine motors.

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. ex: A meatpacking firm, for instance, might be forced to divest itself of control or ownership of butcher shops.

monopoly

A market in which there is a single seller or a very limited number of sellers. Monopoly power exists when a firm has an extreme amount of market power—the power to affect the market price of its product. ex: A "mom and pop" grocery located in the isolated town of Happy Camp, Idaho, is a monopolist if it is the only grocery serving that particular market. Size in relation to the market is what matters because monopoly involves the power to affect prices. this ex is not illegal if it didn't control prices and stuff - 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. - 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 to new competitors entering that market.

vertical restraint (part of section 1)

A restraint of trade created by an agreement between firms at different levels in the manufacturing and distribution process. encompasses 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. When a single firm carries out two or more of the separate functional phases, it is considered to be a vertically integrated firm.

Resale Price Maintenance Agreements (vertical restraint)

An agreement between a manufacturer and a distributor or retailer in which the manufacturer specifies what the retail prices of its products must be is referred to as a resale price maintenance agreement. maximum resale price maintenance agreements are judged under the rule of reason. The setting of a maximum price that retailers and distributors can charge for a manufacturer's products may sometimes increase competition and benefit consumers. minimum resale price maintenance agreements should also be judged under the rule of reason.

treble damages

Damages that, by statute, are three times the amount of actual damages suffered. 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 A party wishing to sue under the Sherman Act must prove that: 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.

another legal monopoly example

DuPont manufactures and sells para-aramid fiber, a synthetic fiber used to make body armor, fiber-optic cables, and tires, among other things. Although several companies around the world manufacture this fiber, only three sell in the U.S. market—DuPont (based in the United States), Teijin (based in the Netherlands), and Kolon Industries, Inc. (based in Korea). DuPont is the industry leader and, at times, has produced 60 percent of all para-aramid fibers purchased in the United States. After DuPont brought suit against Kolon for theft and misappropriation of trade secrets, Kolon counterclaimed that DuPont had illegally monopolized and attempted to monopolize the U.S. para-aramid market in violation of Section 2. Kolon claimed that DuPont had illegally used multiyear supply agreements for all of its high-volume para-aramid customers to deter competition. A federal appellate court, however, found that there was insufficient proof that DuPont possessed monopoly power in the U.S. market during the relevant time period (between 2006 and 2009). Additionally, the court concluded that Kolon had not showed that the supply agreements foreclosed competition. Therefore, the court held in favor of DuPont on the antitrust claims.

Relevant Geographic Market (section 2)

For products that are sold nationwide, the geographic market encompasses the entire United States. If transportation costs are significant or a producer and its competitors sell in only a limited area (one in which customers have no access to other sources of the product), the geographic market is limited to that area. A national firm may thus compete in several distinct areas and have monopoly power in one area but not in another.

Unilateral Refusals to Deal

Group boycotts, discussed earlier, are also joint refusals to deal—sellers acting as a group jointly refuse to deal with another business or individual. These group refusals 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. a unilateral refusal to deal will violate antitrust laws. These instances involve offenses proscribed under Section 2 of the Sherman Act and occur only if the firm refusing to deal has—or is likely to acquire—monopoly power and the refusal is likely to have an anticompetitive effect on a particular market. ex: 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 six-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 three-fourths of the local ski areas, it has monopoly power, and thus its unilateral refusal has an anticompetitive effect on the market.

sherman antitrust act

Sections 1 and 2 contain the main provisions 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 and/or imprisonment]." 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 [and is similarly punishable]."

antitrust acts

The laws regulating economic competition Laws protecting commerce from unlawful restraints and anticompetitive practices.

example of per se violation

The manufacturer of the prescription drug Cardizem CD, which can help prevent heart attacks, was about to lose its patent on the drug. Another company developed a generic version in anticipation of the patent expiring. After the two firms became involved in litigation over the patent, the first company agreed to pay the second company $40 million per year not to market the generic version until their dispute was resolved. This agreement was held to be a per se violation of the Sherman Act because it restrained competition between rival firms and delayed the entry of generic versions of Cardizem into the market.

monopolization (section 2)

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

predatory pricing (Section 2)

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 on to earn higher profits by driving prices up far above their competitive levels.

Relevant Product Market (section 2)

The relevant product market includes all products that, although produced by different firms, have identical attributes, such as sugar ex: Whole Foods Market, Inc., wished to acquire Wild Oats Markets, Inc., its main competitor in nationwide high-end organic food supermarkets. The Federal Trade Commission (FTC) filed a Section 2 claim against Whole Foods to prevent the merger. The FTC argued that the relevant product market consisted of only "premium natural and organic supermarkets" rather than all supermarkets, as Whole Foods maintained. An appellate court accepted the FTC's narrow definition of the relevant market and remanded the case to the lower court to decide what remedies were appropriate, as the merger had already taken place. Whole Foods and the FTC later entered into a settlement that required Whole Foods to divest (sell or give up control over) thirteen stores, most of which were formerly Wild Oats outlets

clayton antitrust act

aimed at specific anticompetitive or monopolistic practices that the Sherman Act did not cover. The substantive provisions of the act—set out in Sections 2, 3, 7, and 8—deal with four distinct forms of business behavior, which are declared illegal but not criminal. For each provision, the act states that the behavior is illegal only if it tends to substantially lessen competition or to create monopoly power.

section 2 sherman antitrust act

can apply either to one person or to two or more persons because it refers to "every person." cases deal with the structure of a monopoly that already exists in the marketplace addresses the misuse of monopoly power in the marketplace. monopoly power: The ability of a monopoly to dictate what takes place in a given market. A violation of Section 2 requires that BOTH these elements—monopoly power and an intent to monopolize—be established.

relevant market (section 2)

consists of two elements: a relevant product market and a relevant geographic market.

Section 8 of clayton antitrust act—Interlocking Directorates

deals with interlocking directorates—that is, the practice of having individuals serve as directors on the boards of two or more competing companies simultaneously. Specifically, no person may be a director in two or more competing corporations at the same time if either of the corporations has capital, surplus, or undivided profits aggregating more than $29,945,000 or competitive sales of $2,994,500 or more.

Territorial or Customer Restrictions (vertical restraint)

firm or company may institute territorial restrictions or attempt to prohibit wholesalers or retailers from reselling the product to certain classes of buyers, such as competing retailers. judged under rule of reason, not necessarily per se violation

The Intent Requirement (section 2)

intent to monopolize ex: When Navigator, an Internet browser by Netscape Communications Corporation, was introduced, Microsoft, Inc., perceived a threat to its dominance of the operating-system market. Microsoft developed a competing browser, Internet Explorer, and then began to require computer makers that wanted to install the Windows operating system to also install Explorer and exclude Navigator. Microsoft included codes in Windows that would cripple the operating system if Explorer was deleted, and paid Internet service providers to distribute Explorer and exclude Navigator. Because of this pattern of exclusionary conduct, a court found Microsoft guilty of monopolization. Microsoft's pattern of conduct could be rational only if the firm knew that it possessed monopoly power.

section 2 of antitrust act

prohibits price discrimination: when a seller charges different prices to competing buyers for identical goods or services.

section 1 sherman antitrust act

requires two or more persons, as a person cannot contract or combine or conspire alone. cases are often concerned with finding an agreement (written or oral) that leads to a restraint of trade. focuses on agreements that are restrictive—that is, agreements that have a wrongful purpose horizontal restraints: Any agreement that restrains competition between rival firms competing in the same market. may include price-fixing, group boycotts, market divisions, and trade associations. vertical restraints: per se violations: illegal

section 7 of clayton antitrust act: mergers

says that a person or business organization cannot hold stock and/or assets in another entity "where the effect ... may be to substantially lessen competition." market concentration: The degree to which a small number of firms control a large percentage of a relevant market. ex: If the four largest grocery stores in Chicago accounted for 80 percent of all retail food sales, the market clearly would be concentrated in those four firms. If one of these stores absorbed the assets and liabilities of another, so the other ceased to exist, the result would be a merger that would further concentrate the market and thereby possibly diminish competition.

Section 3—Exclusionary Practices of clayton

says that 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 arrangements. exclusive-dealing contracts: An agreement under which a seller forbids a buyer to purchase products from the seller's competitors. it is not allowed if it is "to substantially lessen competition or tend to create a monopoly." eX: In a classic case decided by the United States Supreme Court in 1949, Standard Oil Company, the largest gasoline seller in the nation at that time, made exclusive-dealing contracts with independent stations in seven western states. The contracts involved 16 percent of all retail outlets, with sales amounting to approximately 7 percent of all retail sales in that market. The market was substantially concentrated because the seven largest gasoline suppliers all used exclusive-dealing contracts with their independent retailers. Together, these suppliers controlled 65 percent of the market. The Court looked at market conditions after the arrangements were instituted and found that market shares were extremely stable and entry into the market was apparently restricted. Because competition was "foreclosed in a substantial share" of the relevant market, the Court held that Section 3 of the Clayton Act had been violated. tying arrangements: 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. eX: Morshigi Precision, Inc., manufactures laptop hardware and provides repair service for the hardware. Morshigi also makes and markets software, but the company will provide support for buyers of the software only if they also buy its hardware service. This is a tying arrangement. Depending on the purpose of the agreement and the effect of the agreement on competition in the market for the two products, the agreement may be illegal.

rule of reason

the courts use this to analyze anticompetitive agreements that allegedly violate Section 1 of the Sherman Act to determine whether they actually constitute reasonable restraints 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.

Attempts to Monopolize

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

to violate section 2 of antitrust act

the seller must be engaged in interstate commerce, the goods must be of like grade and quality, and goods must have been sold to two or more purchasers. the effect of the price discrimination must be to substantially lessen competition, tend to create a monopoly, or otherwise injure competition. Without proof of an actual injury resulting from the price discrimination, the plaintiff cannot recover damages. can arise from discounts, offsets, rebates, or allowances given to one buyer over another. Giving favorable credit terms, delivery, or freight charges to only some buyers can also lead to allegations of price discrimination. For instance, offering goods to different customers at the same price but including free delivery for certain buyers

price fixing

type of horizontal restraint An agreement between competitors to fix the prices of products or services at a certain level. this is a per se violation ex: Independent oil producers in Texas and Louisiana were caught between falling demand due to the Great Depression of the 1930s and increasing supply from newly discovered oil fields in the region. In response to these conditions, a group of the major refining companies agreed to buy "distress" gasoline (excess supplies) from the independents so as to dispose of it in an "orderly manner." Although there was no explicit agreement as to price, it was clear that the purpose of the agreement was to limit the supply of gasoline on the market and thereby raise prices. There may have been good reasons for the agreement. Nonetheless, the United States Supreme Court recognized the potentially adverse effects that such an agreement could have on open and free competition. The Court held that the reasonableness of a price-fixing agreement is never a defense. Any agreement that restricts output or artificially fixes price is a per se violation of Section 1.

group boycotts

type of horizontal restraint An agreement by two or more sellers to refuse to deal with a particular person or firm. per se violation: Section 1 has been violated if it can be demonstrated that the boycott or joint refusal to deal was undertaken with the intention of eliminating competition or preventing entry into a given market. not all boycotts bc of political reasons are illegal because a defense could be freedom of expression

trade association

type of horizontal restraint In concentrated industries, however, trade associations can be, and have been, used as a means to facilitate anticompetitive actions, such as fixing prices or allocating markets. A concentrated industry is one in which either a single firm or a small number of firms control a large percentage of market sales.

Horizontal Market Division (part of section 1)

type of horizontal restraint It is a per se violation of Section 1 of the Sherman Act for competitors to divide up territories or customers. ex: Alred Office Supply, Belmont Business, and Carlson's, Inc., compete against each other in the states of Kansas, Nebraska, and Oklahoma. The three firms agree that Alred will sell products only in Kansas, Belmont will sell only in Nebraska, and Carlson's will sell only in Oklahoma. This concerted action reduces marketing costs and allows all three (assuming there is no other competition) to raise the price of the goods sold in their respective states. The same violation would take place if the three firms agreed to divide up their customers by having Alred sell only to institutional purchasers (such as governments and schools) in all three states, Belmont only to wholesalers, and Carlson only to retailers.