Antitrust Law

1
Chapter 20

• Antitrust Law

2
Antitrust Law

• Antitrust law restricts attempts by competitors
  to restrain competition and injure competitors.
• Antitrust statutes can be unclear, thereby
  requiring the courts to determine what really
  constitutes antitrust law
• Therefore Antitrust Law refers to antitrust
  statutes and the interpretation of these statutes
  by the courts.

3
The Sherman Act

• Passed by Congress in 1890.
• Regarded as a way to reduce concerns that large
  business interests dominated industry.
• Private parties may sue.
• The major sections of the Act are so broad that
  one could find almost any business activity to be
  illegal.
• No restraint of trade
• Cannot monopolize or attempt to monopolize

4
The Clayton Act

• Enacted in 1914
• Wanted government to have the ability to attack a
  business practice early in its use to prevent a
  firm from becoming a monopoly.
• Practices are illegal that substantially lessen
  competition or tend to create a monopoly.
• Private parties may suetreble damages.

5
The Federal Trade Commission Act

• Enacted in 1914
• Established the FTC as an agency to investigate
  and enforce violations of antitrust laws.
• Declares it illegal to be engaged in unfair
  methods of competition - any business activity
  that may create a monopoly by unfairly
  eliminating or excluding competitors from the
  marketplace.

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Exemptions

• NOT ALL BUSINESSES ARE SUBJECT TO ANTITRUST LAWS
• Clayton Act exempts some activities of nonprofit
  and certain agricultural, fishing and some other
  cooperatives.
• The Export Trading Company Act allows limited
  antitrust immunity for sellers of exports.
  Domestic producers may be allowed to join
  together to enhance their ability to export
  products to other countries.
• Parker doctrine allows state government to
  restrict competition in public utilities,
  professional services, and public transportation.
  
• McCarran-Ferguson Act exempts insurance (as long
  as states regulate).
• Noerr-Pennington doctrine lobbying to influence
  a legislature is not illegal.
• Most labor union activities are exempt.

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Remedies Available

• Government can
• restrain a company or individual from performing
  certain actions
• force a company to sell part of its assets
• force a company to let others use its patents or
  facilities
• cancel or modify existing business contracts
• only plaintiffs suffering injuries caused by
  anticompetitive behaviors of firms can recover
  damages under the law

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The Per Se Rule and The Rule of Reason

• Per Se Rule means that a certain business
  agreement, arrangement, or activity will
  automatically be held to be illegal by the
  courts.
• Rule of Reason means that the court will look at
  the facts surrounding the business practice
  before deciding whether it helps or hurts
  competition.
• Courts consider
• Business reasons for the restraint
• The restraining firms position
• Structure of the industry

9
Mergers (Source of Monopoly concern)

• Merger When two or more firms come together to
  form a new firm.
• Horizontal merger The two or more firms were
  competitors before the merger.
• Mergers should not be permitted to create or
  enhance market power.
• Premerger notification to Antitrust Division of
  Department of Justice or FTC.

10
Standard Oil Co of New Jersey v. U.S. (1911) (in
text)

• Government sued under Sections 1 2 of the
  Sherman Act to break up Standard Oil Trust which
  controlled as much as 90 of production,
  shipping, refining and selling of petroleum
  products, thus allowing the Trust to fix the
  price of oil and monopolize interstate commerce.
• The Trust was ordered to cease and desist in
  actions which violate the Sherman Act AND the
  Trust was broken up so that companies would
  operate independently and compete with each other.

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Determining Market Power

• Product and Geographic Markets percent of
  relevant market controlled by the firm
• Product Market a monopoly exists when there is
  only one firm producing a product for which there
  is no good substitute
• Geographic Market generally limited to the area
  where consumers can reasonably be expected to
  make purchases

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When Mergers Are Allowed

• Merger guidelines Major reason to approve
  merger is that it will enhance the efficiency in
  the market, benefiting consumers by better
  resource allocation.
• Failing firm defense If one of the firms
  involved in a merger has been facing bankruptcy
  or circumstances that threaten the firm, the
  Court will look more favorably upon the merger.
  The firm must show
• not likely to survive without merger
• no other buyers, or this one will least affect
  competition
• tried and failed at all other ways to save firm
• Power buyer defense Merger that increases
  concentration can be defended by showing that the
  firms customers are sophisticated and powerful
  buyers.

13
Horizontal Restraints of Trade

• When businesses at the same level of operation
  come together in some manner, they risk being
  accused of restraining trade.
• Collection of rival firms that come together by
  some form of agreement in attempt to restrain
  trade (restricting output raising prices) is
  called a cartel.
• Examples
• Mergers
• Horizontal price-fixing
• Exchanges of information
• Territorial restrictions
• Cartels such as Organization of Petroleum
  Exporting Countries (OPEC)

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Price-Fixing

• Firms selling the same product agree to fix
  prices the agreement will almost certainly
  violate the Sherman Act.
• Should Per-Se Illegal apply or Rule of Reason?
• In United States v. Trenton Potteries When
  competitors get together to fix prices, there is
  a violation of the Sherman act whether or not
  the prices they set are reasonable.
• Most price-fixing is a horizontal arrangement
  that is per se illegal.

15
Freeman v. San Diego Association of Realtors

• Multiple Listing Service (MLS) often used by real
  estate agents to share info re properties via
  computerized database.
• Agents subscribe to MLS to list properties and
  see info about properties.
• Before 1992, 12 MLSs served San Diego, buying
  data services from 4 different database
  operators.
• 11 MLS associations combine, creating Sandicor
  all subscribers have access to all San Diego
  properties cost less than maintaining separate
  databases.
• 11 MLSs still sign up agents collect fees, but
  Sandicor sets rules.
• No price cutting is allowed. When MLSs compared
  costs, they found largest MLS spent 10/month per
  subscriber, while 2 small ones spent 50/month
  per subscriber.
• Fee for all was set at 44 per subscribing agent,
  paid to Sandicor.
• That price was less than the 50 per subscriber
  the small operators incurred, so lower-cost MLSs
  agreed to cover losses the smaller MLSs incurred.
  
• A service that had cost of 10/month to some MLSs
  now was 44, and Sandicor was profiting millions
  in excessive fees.

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Freeman v. San Diego Association of Realtors,
cont.

• Freeman and other San Diego real estate agents
  sued, saying price of service is inflated.
• Freeman offer to Sandicor to market MLS info thru
  a new service center at a lower price to
  subscribers was rejected.
• Freeman sued for conspiracy in restraint of trade
  and price fixing. District court dismissed.
  Freeman appealed.
• HELD Reversed and remanded.
• Sandicor charges subscribers for their use of
  MLS its MLS fee includes the support services
  provided by associations.
• The support fee Sandicor in turns pays the
  associations for support services fixed at level
  more than 2X what would cost the most efficient
  association to provide them.
• Sandicor charges MLS subscribers 44 per month
  an association collects this fee from subscribers
  and hands it over to Sandicor Sandicor then
  returns 22.50 to associations as the support
  fee.
• Cant turn a horizontal agreement to fix prices
  into an innocent act just by changing the way the
  books are kept.

17
Information Sharing

• Information Sharing
• One problem in antitrust law is deciding whether
  the trading of information among businesses helps
  or restrains the competitive process.
• U.S. v. United States Gypsum Co. The gypsum
  companies defended their practice of verifying
  competitors prices as a good-faith effort to
  meet competition. The court did not apply a per
  se rule against such price information exchanges
  it warned that such exchanges would be examined
  closely and would be allowed in limited
  circumstances.
• Conspiracy to Restrict Information
• May also be illegal to band together to restrain
  nonprice information.
• FTC v. Indiana Federation of Dentists Court
  held that dentists organization policy requiring
  members to withhold X-rays from dental insurance
  companies is a conspiracy in restraint of trade
  upheld under rule of reason.

18
Todd v. Exxon Corporation

• 14 oil companies conducted surveys of the
  salaries they paid to managerial, professional
  and Technical (MPT) employees.
• Reps of the companies met to talk about jobs, and
  consultant analyzed and distributed data to 14
  firms.
• Todd and other employees sued under 1 of
  Sherman Act saying purpose of sharing info was to
  hold down MPT salaries.
• District Court dismissed. Plaintiffs appealed.
  Reversed.
• Price fixing is per se unlawful. If can prove an
  agreement to fix salaries, then theres a
  violation.
• Data exchange claims are close cousins of
  traditional price fixing.
• If plaintiff can prove 1) defendants exchanged
  info deemed anticompetitive and 2) activities had
  an anticompetitive effect on MPT labor market,
  then may have a cause of action.
• Court should consider whether plaintiff showed
  anticompetitive effects on the market power of
  the defendants. Must also consider if data are
  made publicly available. If so the exchange is
  more likely to be approved by the court.

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Territorial Restrictions

• Occurs when firms competing at the same level of
  business reach an agreement to divide the market
  to eliminate competition among those firms.
• These are often held to violate antitrust law.
• An activity that is legal if undertaken by a
  single firm may be illegal if undertaken by a
  group of firms.

20
Vertical Restraints of Trade

• Vertical restraints of trade concern
  relationships between buyers and sellers
  (producers, distributors and retailers).
• A company that does more than one function
  internally, such as manufacturing and
  distribution, is not constrained by the antitrust
  laws.
• Examples of vertical restraints of trade include
  vertical price fixing and vertical non-price
  constraints.
• See Exhibit 20.3

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Vertical Price Fixing

• Usually trying to control price at which product
  is sold to consumer.
• Resale Price Maintenance (RPM) - an agreement
  between a manufacturer, supplier and retailers of
  a product under which the retailers agree to sell
  the product at not less than minimum price.
• Once a producer or supplier sells a product to a
  retailer, it cannot fix or otherwise dictate the
  price the retailer will charge consumers.

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Pros and Cons to Resale Price Maintenance

• Small retailers favor RPM because they are more
  likely to have the same prices as the mass
  merchandisers, i.e. MomnPop can compete with
  Wal-Mart.
• Producers of well-known, established products
  often favor RPM because it allows retailers to
  earn higher profits for the sale of their
  products.
• Mass retailers oppose RPM because they have grown
  large by slashing retail prices and taking
  customers away from smaller stores.
• Dr. Miles case Supreme Court held that
  manufacturer cannot fix prices for future
  sales. Cannot set prices further down the sales
  chain. (Now not per se illegal. See Leegin)

23
Vertical Nonprice Restraints

• Manufacturers frequently impose non-price
  restraints on their distributors and retailers.
• Example Coke and Pepsi have territorial
  restrictions on the sale of the manufacturers
  products. Delivery in competition with another
  bottler is grounds for revocation of the
  franchise agreement.
• Customer restrictions may be imposed on
  distributors and retailers when manufacturer
  elects to sell directly to a certain customer.
• The court applies the rule of reason in such
  cases.

24
Leegin Creative Leather Products v. PSKS

• Leegin designs, makes distributes leather goods
  with brand name Brighton.
• Sold across country, to mostly small, independent
  specialty stores.
• Leegin refused to sell to retailers that
  discounted below suggested prices.
• Allowed products not selling well that the
  retailer did not plan on reordering to be
  discounted.
• Leegin told stores In this age of mega stores .
  . . consumers are perplexed by promises of
  product quality support of product which we
  believe is lacking with these large stores.
  Avoid sale, sale, sale, etc.
• Leegin policy Consistent prices allowing
  selected retailers to earn profits support the
  Brighton brand.
• Leegin discovered that Kays Kloset, discounted
  Brighton brand by 20.
• Asked Kays to stop price cutting below suggested
  retail price. Kays refused. Leegin stopped
  selling to Kays.
• Kays sued Leegin for violating Sherman Act.
• Trial court would not allow expert testimony
  about economic benefits of Leegin policy.
• Held the resale price maintenance was per se
  violation.

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Leegin Creative Leather Product s. v. PSKS, cont.

• Jury awarded Kays 1.2 million damages tripled
  punitive damages.
• Appeals court affirmed. Leegins appealed.
• Held Reversed and case remanded.
• Promotion of interbrand competition is important
  because antitrust laws want to protect such
  competition. One manufacturers use of vertical
  price restraints eliminates intrabrand price
  competition irrelevant for such a small firm.
• Leegins practice has potential to give consumers
  more options so they can choose among low-price
  low, service brands high-price, high-service
  brands and brands that fall in between.
• Absent vertical price restraints, retail services
  that enhance interbrand competition might be
  under-provided.
• This is because discounting retailers can free
  ride on retailers who furnish services and
  capture increased demand those services generate.
• Resale price maintenance, also can increase
  interbrand competition by facilitating market
  entry for new firms and brands.
• Vertical price restrains are to be judged
  according to the rule of reason.

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Tying Arrangements (Tie In Sale)

• Agreement by a party to sell a product (the tying
  product) conditioned that buyer purchases a
  different (complementary or tied) product.
• Tie-ins meet a rule of reason test so long as
  competitive alternatives exist.
• If a tie-in creates a monopoly when there are no
  or few good alternatives, it is likely illegal
  if products or service are tied together when
  there are other competitors, the tie-in will
  likely pass the rule of reason test.
• Supreme Court is likely to impose a per se
  illegality only when three conditions are met
• The seller has market power in the tying product
• Tied and tying products are separate
• There is evidence of substantial adverse effect
  in the tied product market
• In other situations rule of reason is to be
  employed.

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Boycotts

• Boycott When a group conspires to prevent the
  carrying on of business or to harm business.
• Any group can promote this consumers, union
  members, retailers, wholesalers or suppliers.
• Act together to inflict damage on a business.
• Boycott is used to force compliance with a
  price-fixing scheme or other restraint of trade.
• Usually fall under per se rule.

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Robinson-Patman Act

• Enacted in 1936, it amends the Clayton Act.
• The controversial section 2(a) basically states
  that a seller is said to engage in price
  discrimination when the same product is sold to
  different buyers at different prices.
• Price Discrimination - many cases under
  Robinson-Patman are alleged economic injuries
  either from a firm charging different prices in
  different markets or from bulk sale discounts
  given to larger volume retailers.
• Predatory pricing - when Company A attempts to
  undercut Company B in an effort to drive Company
  B from the market. When B is gone, A raises
  prices again.

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Price Discrimination -- Elements Of A Predatory
Pricing Case

• To win a predatory pricing case a plaintiff must
  present strong evidence showing that
• Defendant priced below cost
• Below cost pricing created a genuine prospect for
  the defendant to monopolize the market
• Defendant would enjoy monopoly long enough to
  recoup losses suffered during price war
• Are the volume discounts given to large-volume
  retailers legal?
• Defenses -
• Cost justification - Difference in transportation
  costs a) more expensive to drive further and b)
  its cheaper per unit to deliver 500
  refrigerators versus 10. Not used much.
• Meeting competition - Firm cuts its price in
  order to meet competition. It must be done in
  good faith, not in an effort to injure
  competitors but to stay competitive. Used more
  successfully.