Chapter 7 - Antitrust Law
Sherman Antitrust Act of 1890
"Trust buster Act" -outlaws trust Inadequacies 1) did not protect consumers from anti-competitive practices 2) ineffective at dismantling well establish trust due to supreme court interpretation of Sherman primarily directed at trust, specifically standard oil trust there are no defenses 21 years late, Johnny lost due to this act under rule of reason and per se. - Was exclusively DOJ
Federal Trade Commission v. Superior Court Trial Lawyers Association (1990)
- the attorneys who tookm appointed court cases belonged to a professional organization (NOT LABOR UNION) called the Superior Court Trial Lawyers Association. -they tried ti raise the fees paid to these courts but unsuccessful -the attorneys refused to take cases unless fees were increased -Fee were not increased -Turmoil appeared in D.C. Criminal Court System -FTC filed complaint claiming unreasonable restraint of trade -FTC ruled against -Supreme court ruled that SCTLA's agreement was horizontal price fixing and was per se illegal as violation of Sherman section 1. -Reasoning of the court: attorneys desinged to obtain higher pricws by refusing to serve the only customer (CJA), the attorneys constricted the supply pf available attorneys. -motive irrelevant Exception: To prove that this is the only way to do it.
United States v. Socony-Vacuum Oil Co., (1940)
-Horizontal price fixing law for about 40 years -they entered into the agreement with major refining companies to limit production in the market and thereby prices -Louisiana caught in overproduction due to recently discovered oil fields and lack of demand due to the depression -Supreme court ruled per se violation -Famous Footnote 59 rules states ---conspiracy to fix prices violates section 1 of the Sherman Act though no overt act is shown. ---banned because of their actual or potential threat to the nervous system of the economy.
Private Parties
-Individuals and businesses have a right to sue alleged violators of Antitrust Law under Sherman and Clayton. -if do normally get tremble damages, attorney fees, and court costs. -90% are private lawsuits Private individuals cannot bring criminal actions
Per se Rule
-automatically held to be illegal -no defenses -found in area to be inherently anti-competitive -if per se only issue remaining is the type and amount of damages
Clayton Violation Area "Price Discrimination "
-charge different buyers different price without justification "Monopoly" -supllemented by Robinson-Patman Act of 1936 -ability to charge different prices often depends on monopolistic power -If only supplier firms tend to drive competition by raising prices -firms then take those profits made to offset losses suffered in markets where they compete with rivals by lowering prices and thus gain advantage and eliminate competition.
Sherman "Restraint of Trade" Section 1
-every contract combination in the form of trust in restraint of trade or commerce among the several states, is declared to be illegal. -restraint trade definition: is any agreement between two parties that substantially reduces competition in the marketplace. Example: two firms cannot contract to fix prices on their products to eliminate competition.
horizontal group boycotts
-if boycott involves horizontal agreements among direct competitors, the rule is per se illegal
Antitrust Law
-is dynamic it changes as business and society changes -two basic rules 1)per se 2) rule of reason
Mergers
-joining of two more companies in one. - under FTC and Sherman in which they will overlap -occurs by acquiring another firm, combining assets to create a new firm.
Rule of reason
-much more flexible standard -allows some antitrust violations as long as reasonable -the court can consider many factors
Firm concentration
-proportion of the relevant market served by the largest firms in the market. -the higher the concentration of market share in the hands of a few firms the more they violate section 7 -not the greatest tool to determine if this is reducing competition
Arizona v. Maricopa County Medical Society (1982)
-two medical societies formed two foundations for medical care as an alternative to existing health insurance plans -doctors that joined had to agree on a maximum fee charge set by foundations -fee schedules "Horizontal pricing" supreme court rules per se illegal under section 1 of Sherman.
Price Fixing
-when firms selling the same product agree to fix prices, it is almost certain in violation of Sherman act
Legal monopolies
-where the companies become sole provider of a given good through superior and does not subvert the benefits of market competition - and if the monopoly refrains from maintaining its status through anti-competitive means and allows competitors to readily enter the market. -these pose no real harm to society
Horizontal Exchanges of Information
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St. Louis Case
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Determining Monopolistic Power
1) must determine the relevant market - what is the product, product marketing, where is it sold, geographic market 2) must show that is has the power to price above the competitive level -courts have frequently used market share as rules of thumb to see if they can actually price above. - in any event, determination of the market power for section 2 violations is hard to prove.
Appalachian Company Coal
After 1929 Stock Market Crash, this company set a fixed price - poor part of the country depended on coal to heat their homes -131 companies decided to fix pricing to compensate and they explained why they did so. -They had a reasonable cause since they did not hurt the consumers it was still affordable. -They made zero profit made this decision to only keep the companies from going bankrupt. - case dismissed because of RULE OF REASON.
Price Discrimination
Clayton Section 2 always restricted price discrimination
The FTC usually enforces
Clayton and FTC
Price Discrimination is handled by what laws?
Clayton law and Robinson-Patman
FTC vs. Superior Court Trial Lawyers Association
Dealt with horizontal price discrimination 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.
Civil action by the governement
Equitable remedy under Sherman -injunction; court order stopping the antitrust violations -Civil damages ----FTC or DOJ can receive tremble damages ----FTC can also investigate suspected business dealings, hold hearings, issue cease and desist orders to discontinue or modify certain business acts, prevent mergers, assess substantial civil penalties. Remedies Available -injunctions -monetary -target company to divest
What caused the trusts to become powerful in the late 1800's
Growth of corporations pro-business attitudes of the courts republican domination
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?
Horizontal - competitors and Geographic extension merger
Trenton Potteries (1927)
Individuals and corporations having to do with bathroom fixtures -they were trying to convince that they were helping the consumers but in fact were not. 1st price fixing per se illegal!
NCCA v. Oklahoma (1990)
Oklahoma wanted to own TV rights
Which of the following are exempt from Anti-Trust Law?
Only MLB-Major League Baseball
CBS v. BMI (1980)
Set Price -CBS had an attorney and owed a large bill to pay copyrights ---They followed footnote 59 about price fixing, so they said if this illegal then paying is illegal so restrain from paying BMI. -BMI counteracted by stating a royalty has the right to be compensated by BMI, ---this only way to do it so supreme court agreed with BMI. -rules of reason!
The Anti-trust Act that was broad and punitive rather than specific and preventative is:
Sherman
Adam Smith
Smithian Model economist who opposed competition wanted little government intervention and business to rely on self-interest and profits.
What are the requirements of the Vertical Restraint Guidelines?
The seller has to have market power in the tying product the tied product and the tying product must be separate there must be substantial adverse effect on the tied product
Federal Regulatory Agencies that enforce Antitrust Law
U.S. Department of Justice -only one that can bring criminal cases Federal Trade Commission (FTC)
Wide range of choice
competition allows for a wide range of choice to allow consumers 1) to reward firms that closely matches their individual tastes 2) the individual choice then channel resources to the most efficient and responsive firm 3) creates a dynamic reward system promoting entreprenuership, efficiency, and risk taking 4) created wealth
Individual firms
competition in the best option because can reduce profits, force costly change, and want to reduce competition. This are rise to monopolies where only one seller dominates.
If two totally unrelated companies want to merge this would be what type of merger?
conglomerate merger or diversification
Federal Trade Commission Act of 1914
created the federal trade commission regulates unfair methods of competition and deceptive acts -section 5 -so called "catch-all-law" empowers agency to investigate and enforce antitrust law.
John D. Rockefeller
creation of the standard oil trust -took over competitors -large this got, the easier to force competition out of the market ---stock transfers (absorbed companies transferred their stock to standard oil trustee. ---used new monopoly ---made a lot of enemies in the process
Anticompetitive practices
deliberate action by firms to harm their competitors rather than improving their own products and services.
Promoting competition
delivers the best set of rules and outcomes for society as a whole
Antitrust Law
designed to prevent and punish anti-competitive practices
Clayton Antitrust Act of 1914
directly outlawed anti-competitive practices that led monopolization addresses activities that lead to trust and monopolies prevents them. Gap filler law; supplemented Sherman. this is specific and preventative where Sherman was broad and punitive after the fact. under this act you only need prove that a firm is significantly reducing competition. deals with probably harm to competition not criminal provisions. - is civil monetary damages -Clayton is enforced by FTC or DOJ
Ohio Supreme court
dissolved oil trust in 1892, broken into various geographically based companies -standard oil of new jersey " Exxon-mobil" -standard oil in California "Chevron"
Railroads
dominated trusts, used market power ton increase price. The public reaction was negative, so Congress passed the Interstate Commerce Act -purpose to regulate railroads -first step to protecting consumers and small businesses
Values of Capitalism
efficiency opportunity individual liberty
Section 2 Sherman "Monopoly"
every person who shall monopolize or attempt to any part of trade or commerce, shall be deemed guilty of felony. -only outlaws any attempt to monopolize it does not outlaw monopolies. -only outlaws anti-competitive means of achieving a monopoly or attempting to use ant-competitive means to create a monopoly. -proving violation the firm must have shown to have acquired monopolistic power and have engaged in willful attempts to maintain that monopolistic power. -not a legal tool in preventing monopolies. -it means of punishing successful, anti-competitive attempts to create and sustain monopolies.
Per se violation of Section 1 Sherman
historically included: price fixing, group boycotts refusal to deal, some market divisions. -strong -automatic violations -deemed blatantly anti-competitive
The U.S. merger guidelines can apply to?
horizontal competitors vertical competitors conglomerate mergers potential competitors
Penalties under criminal sanctions per violation
individuals -3 years in prison and or -$350,000 fine corporations -$10 million fine per violation
The Sherman Act proved to be ineffective due to :
interpretation by the federal courts
Rule of Reason Violation Section 1 Sherman
is not automatic -it is said under this that restrain of trade may cause a reduce in competition, however, they also may create benefits that outweighs the damage they do -the courts reserve the right to weigh the evidence and determine whether the agreement is defensible on the grounds of its overall benefit to society.
Horizontal Market Division
is per se illegal so long as it involves more than one company. -United States v. Suntar Roofing (1990)
Competition
is the lifeblood of capitalism
Dr. Miles Medical Company v John D. Park and Sons company (1911)
one of the first supreme court on resale price maintenance (RPM) --RPM's are where the manufacturer requires the buyer to agree to not sell their product below a certain price -utilized to protect the integrity of the product Dr. Miles producer of patent medicines sold product and put minimum cap on it -supreme court held that a manufacturer can sell his product for whatever price he desires, but once sold he has no control over the price after the fact. -any attempt to do this is PER SE ILLEGAL
If Chrysler merged with General Motors, what type of merger would this be?
only horizontal merger not product extension merger
Leegin Creative Leather Products v. PSKS - Rule of reason Vertical Pricing
overruled Dr. Miles case -made maximum price fixing handles under the rule of reason Kay's closet a women apparel store, sold Leather goods (leegin) about 40 to 50 % of its business -had to sign to not sell product below suggest price (RPM) -Leegin learned that kay put the entire store on sale for 20% off. ---leegin demanded that Kay stop the sales ----Kay's refused ----leegin then refused to sell product to Kay in the future Kay used leegin for vertical price fixing, lower courts agree and went to U.S. supreme court Supreme court overruled the loser courts -Overruled Dr. Miles -vertical price fixing is now RULE OF REASON -supreme courts reasoning was some (RPM) could be pro competitive and enhance the marketplace, thus rule of reason was appropriate
The relevant market is
product market and the geographic market
Exclusionary Practice/Exclusive Dealings
prohibited by Clayton -where one firm is given exclusive right, to the exclusion of others, to buy, sell, or trade another's product (section 3) -contractual attempts by a seller to prevent buyer from considering competitive bids from other sellers Good reasons - the manufacture may want to prevent the firms that sell their products from selling the products of the rival manufactures -therefore courts recognize that some exclusive dealing helps reduce selling and advertising costs. -this only a threat when the arrangements applies to a substantial share of products in a market.
Which of the following is/are exempt from the Anti-Trust Laws?
public transportation labor unions insurance and other state regulated industries certain agricultural organizations
Barriers to entry in the relevant market
reduce the number of existing competitors, more like to lessen competition and be prohibited. Types 1) licensing requirements 2) access to scarce resources 3) large scale investment like manufacturing plant development and construction costs
Tying Arrangement
seller requires a buyer to purchase a "tied" product as a condition of purchasing the desired tying product. (Section 3) -only exchanges of goods not services -does not work in competitive markets -compels buyers to get a less desirable product in order to be able to acquire a more desirable one!
What is price discrimination?
selling your product to one entity for once price and selling the same product to another entity for a different price
Per Se approach issue with RMP
small business claim RPM helps them to compete with larger businesses. -they due to volume discount they cannot compete with larger businesses -if a reasonable scheme could be set then they could compete with large discount chains and provide services the customer needs. Hypothetical Joe's TV and repair store, (Joe's) in town of 5000 people: 1) Jo'es only buys 3 TV model from zenith per year 2) walmart buys thousands of model from zenith per year 3) Walmart gets a volume discount, Joe's does not 4)walmart can sell tv cheaper and make some profit 5) Walmart does not repair TV and Joe's goes out of business. 6) no one left to repair tv, hurting consumers 7) if Zenith could set a price at which the tv will be sold at the same price to Joe's and Wal-mart then Joe will be able to compete and provide services that Wal-mart does not do. 9) this will benefit the consumers.
Vertical Market Division
territorial restraints - manufacturer tells retailer where they can sell the product customer restrictions - restrictions on who can sell to, such as wholesalers only vertical market divisions are clearly rule of reason.
The primary concern in anti-trust law is..
the good of the consumer
Horizontal Exchange of Information is subject to a high burden rule. Therefor, one should not exchange information if:
they discuss price they hide the fact they are sharing the information
Vertical Restraint of Trade
two or more firms in the distribution chain enter into contract to restrain trade -chain such distributor to wholesaler to a retailer to customer can beither per se or rule of reason
Types of Exclusionary Practices
tying arrangement or tie-in sales exclusive-dealing contracts boycotts
Predatory Pricing
type of price discrimination
If a supplier mergers with a retailer this would be a ?
vertical merger
Trusts
were groups of companies that agree to eliminate competition among them
Horizontal restraint of trade
when businesses operate at the same level and generally in same market Example: Cartel- rival firms come together to purposely restraint trade such as OPEC can be either per se or rule of reason
Vertical Price Fixing
when the manufacturer of a product tells the buyer that they must sell the product for a stated amount
What is a type of Justification to price discrimination
you are simply meeting the competitions price product is out of season volume discount cost of justification
