Antitrust Law

Antitrust Law
Chapter 20
Antitrust Law
• Antitrust law restricts attempts
by competitors to restrain
competition and injure
• 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.
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
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 sue—treble damages.
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.
• 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
• Most labor union activities are exempt.
Remedies Available
Government can:
• restrain a company or individual
from performing certain actions
force a company to sell part of its
force a company to let others use
its patents or facilities
cancel or modify existing business
only plaintiffs suffering injuries
caused by anticompetitive
behaviors of firms can recover
damages under the law
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 firm’s position
– Structure of the industry
(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.
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
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
Geographic Market – generally limited to
the area where consumers can
reasonably be expected to make
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
• 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 firm’s customers are
sophisticated and powerful buyers.
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:
Horizontal price-fixing
Exchanges of information
Territorial restrictions
Cartels such as Organization of Petroleum Exporting
Countries (OPEC)
• 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
• 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.
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
• 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.
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.
• Can’t turn a horizontal agreement to fix prices into an innocent act
just by changing the way the books are kept.
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.
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 there’s 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.
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.
Vertical Restraints of Trade
• Vertical restraints of trade concern
relationships between buyers and
sellers (producers, distributors and
• A company that does more than
one function internally, such as
manufacturing and distribution, is
not constrained by the antitrust
• Examples of vertical restraints of
trade include vertical price fixing
and vertical non-price constraints.
See Exhibit 20.3
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.
Pros and Cons to Resale Price
• Small retailers favor RPM because they are more likely to
have the same prices as the mass merchandisers, i.e.
Mom’n’Pop 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)
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 manufacturer’s
products. Delivery in competition with another
bottler is grounds for revocation of the franchise
• 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
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 Kay’s Kloset, discounted Brighton brand by 20%.
Asked Kay’s to stop price cutting below suggested retail price. Kay’s refused.
Leegin stopped selling to Kay’s.
Kay’s sued Leegin for violating Sherman Act.
Trial court would not allow expert testimony about economic benefits of Leegin
Held the resale price maintenance was per se violation.
Leegin Creative Leather Product s. v. PSKS, cont.
Jury awarded Kay’s $1.2 million damages – tripled punitive damages.
Appeals court affirmed. Leegin’s appealed.
Held: Reversed and case remanded.
Promotion of interbrand competition is important because antitrust laws want
to protect such competition. One manufacturer’s use of vertical price restraints
eliminates intrabrand price competition; irrelevant for such a small firm.
Leegin’s 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.
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.
• 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 pricefixing scheme or other restraint of trade.
• Usually fall under per se rule.
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.
• 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) it’s 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
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