1. Antitrust Policy

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1. Antitrust Policy

• Eugenio J. Miravete

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Introduction

• The idea that competition is good for the society
  goes back (at least) to Adam Smith. However, only
  in the US this idea was openly embraced by
  politicians who incorporated it to the
  legislative body more than 100 years ago.
• Today, the US has the most experienced
  competition analysts, the longest judicial record
  in this area, and the the most developed
  methodology to incorporate economic arguments in
  order to analyze conflictive cases and enforce
  the common good by the law in a systematic
  rather than arbitrary way.
• Was it always this way? No.
• Has the antitrust policy been consistently
  applied over time? No.
• Why does the government interfere with the market
  in cases as alliance between American Airlines
  and British Airways, Microsoft, or the merger
  between AOL and Time-Warner?

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Sherman Act (1890)

• Background
• Around 1890, large firms became increasingly
  common.
• Creation of the modern American corporation.
• Market integration through the national railroad
  system growth potential.
• Important development of capital markets.
• Frequent mergers to take advantage of economies
  of scale.
• Farmers and small business suffered the
  consequences but their increasing number
  developed a real political constituency.
• Republican Senator John Sherman introduced the
  first antitrust bill in July 2, 1890.

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Sherman Act (1890) Section 1

• Section 1 Cartels are declared illegal. Explicit
  collusive agreements and price- fixing can be
  prosecuted.
• Per se Rule Unambiguous interpretation the
  Court has generally held that no circumstances,
  regardless of whether they have an economic
  origin, can justify price-fixing and similar
  collusive agreements. Consistent application over
  time.
• Early Cases
• Trans-Missouri Freight Association (1897).
  Price-fixing of freight rates by a group of
  railroad companies that wanted to prevent
  ruinous competition.
• Addyston Pipe (1897). Six producers of cast iron,
  controlling 65 of the market, set prices through
  a central agency and divided the market in
  exclusive territories.
• Trenton Potteries (1927). The twenty-three
  members of the Sanitary Potters Association,
  controlling 80 of the vitreous pottery fixture
  market (tubs) fixed prices and encourage not to
  sell below the list price.

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Sherman Act (1890) Section 2

• Section 2 Any attempt to exercise monopoly power
  is considered illegal.
• Ambiguous interpretation how can we decide that
  some market outcome is the result of an attempt
  to monopolize the market?
• It took more than 12 years before any firm was
  prosecuted under Section 2.
• Many years later, in 1911, this case against
  Standard Oil came before the Supreme Court.
• This, together with the ruling against the
  Tobacco Trust, also in 1911, defined what has
  become known as the Rule of Reason.
• Rule of Reason Court decisions are somewhat
  arbitrary and subjective.
• Courts should not only examine whether
  monopolization of an industry had occurred but
  also the circumstances surrounding it, such as
  market conditions and the strategies of the
  monopolizing firms to prove that there was an
  explicit intention to monopolize and abuse of
  market power.

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Standard Oil of New Jersey (1911)

• Supreme Court found that Standard Oil illegally
  monopolized (90 share) the petroleum refining
  industry in the last quarter of the nineteenth
  century by means of
• Acquisition of 120 small rival companies.
• Control of major pipelines in the US, including
  cutting off of supplies to competitors.
• Exclusion of rivals using discriminatory freight
  rates to access pipelines.
• Local price cutting to drive competitors out of
  business.
• Obtaining freight rebates from railroad companies
  not only on its own shipments, but also on the
  shipments by competitors.

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Clayton Act (1914)

• Attempt to reduce the arbitrary use of the Rule
  of Reason by better defining some
  anti-competitive practices.
• Section 2 Prohibits anti-competitive price
  discrimination except
• Discrimination based on the quantity sold
  (important loophole).
• Differentiated pricing due to different costs of
  selling or transportation.
• Need to meet a competitors lower price.
• Section 3 Prohibits tying and exclusive
  dealings.
• Section 7 Prohibits anti-competitive mergers
  through stock acquisitions.
• Section 8 Prohibits the control of competing
  firms through interlocked boards of directors.
• The Clayton Act was not successful limiting the
  application of the Rule of Reason. After the US
  Steel case (1920), Section 2 of the Sherman Act
  was not enforced for another twenty years.

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US Steel (1920)

• the law does not make mere size an offense or
  the existence of an unexerted power an offense
• How did US Steel dominate the market?
• Merger between 1900 and 1911 of several firms
  that represented 70 of the US market.
• After the Standard Oil decision its market share
  fell to 50.
• Price-fixing with competitors through
  associations, trade meetings and dinners offered
  by the President of US Steel. (the idea was to
  limit the market share of US Steel, not to
  increase it and thus avoid the application of
  antitrust laws)
• Amazingly, the court reasoned that because US
  Steel had to conspire with its competitors to fix
  prices, it did not have monopoly power.

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Additional Antitrust Law

• Federal Trade Commission Act (1914). Created an
  independent antitrust agency to enforce the
  Clayton Act.
• Robinson-Patman Act (1936). Amended Section 2 of
  the Clayton Act to forbid price discrimination
  that might lessen competition.
• Reflection of the social climate of the
  Depression.
• Aimed to reduce the bargaining power of large
  chain stores.
• Commonly used to protect individual firms rather
  than the competitive process.
• Treat mere size of business as a legitimate
  concern. Is it reasonable?
• Celler-Kefauver Act (1950). Amended Section 7 of
  the Clayton Act to make illegal mergers through
  acquisitions of stock as well as assets.

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The Alcoa Case (1945).

• The Justice Department charged the Aluminum
  Company of America with monopolizing the aluminum
  ingot market in 1937.
• Dismissed by the District Court
• Overturned by a special panel of circuit court
  judges in the New York Court of Appeals (acting
  as Supreme Court because most of its members had
  been involved in the litigation of the case).
• Key case in many aspects
• First application of Section 2 of the Sherman Act
  since 1920.
• Established the major precedent for the next
  twenty-five years.
• Addressed for the first time the issue of market
  definition.
• District Court Alcoas market share was 33 when
  including the secondary ingot (produced from
  scrap aluminum).
• Panel concluded that producing most of the
  primary aluminum, 90, Alcoa indirectly
  controlled the secondary scrap market.

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The Alcoa Case (1945) - Continuation

• Did Alcoa intend to control the market?
• There was little evidence of aggressive
  practices.
• Market power had its origin in cost advantages
  derived from patents rather than predatory
  behavior.
• Persistence of this market power was due to
  economies of scale and technical barriers to
  entry.
• Alcoa had always expanded capacity ahead of
  demand
• Alcoa effectively deterred entrants by increasing
  production and lowering prices in an explicit
  attempt to moderate profits.
• Judge Hand found that Alcoas monopolistic
  position was enough to rule against it, even
  without overt evidence of business intent.

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Follow-ups

• United Shoe Machinery (1954).
• Confirmed the Alcoa precedent.
• Proper behavior. There was no overt intent to
  monopolize the market.
• However their long-term leasing contracts of
  machinery was illegal.
• Financial penalty for early termination of
  contracts.
• Effective entry barrier for potential entrants
• Eliminated competition from second-hand market of
  machinery.
• Du Pont Cellophane (1956).
• Used market definition to prove the existence of
  competition.
• Du Pont produced 75 of cellophane in 1947.
• The court found that it faced a fierce
  competition from many producers of flexible
  wrapping such as wax paper, aluminum foil,
  glassine, and others.

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Oligopoly and Collusion

• American Tobacco (1946).
• The attempt to monopolize was inferred for the
  first time by the identical behavior of a small
  number of firms.
• Together they control 75 of the market but their
  individual market share were small.
• It appears that the Supreme Court was considering
  tacit collusion illegal.
• Theatre Enterprises (1954).
• Supreme Court found that the refusal of eight
  major distributors to supply first-run movies was
  only circumstantial evidence of tacit collusion.
• Ethyl Case (1984).
• FTC ruled that firms in this industry coordinated
  price decisions because in 20 out 24 price
  changes occurred between 1974 and 1979, they
  happen the very same day.
• The Court of Appeals ruled that FTC has to prove
  the anti-competitive intent of this coordinated
  behavior.

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Market Definition Local vs. National

• Brown Shoe (1962). Supreme court disallowed the
  merger of Brown, 4 share, and Kinney, 6 because
  the had larger presence in some local markets.
• Grinnel Corporation (1964).
• It supplied protective services against fire and
  burglary through the use of a central station.
• However, the district court fount that central
  stations defined, by default, the market, and
  thus showed the intent to monopolize.
• Utah Pie (1967).
• It was a small frozen-pie maker selling in the
  Salt Lake City area.
• It sued Continental Baking Co., Carnation, and
  Pet Milk who sold nationwide for lowering the
  prices locally.
• Utah Pies share dropped from 67 to 34.
• The Court found evidence of predatory behavior
  and Utah Pie could successfully use antitrust law
  to prevent competition.