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I. Introduction to Antitrust Laws
A. Defined: Laws designed to promote
the operation of market forces by
prohibiting certain practices that
reduce competition.
B. Historical Background
1. Rooted in the decades following the
civil war when the corporate form
of business began to develop and
“trusts” or monopolies were formed
in certain industries.
2. “Robber Barons”
a. Rockefeller (petroleum)
b. Carnegie (steel)
c. Vanderbilt (railroads)
d. J.P. Morgan (banking)
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II. Major Pieces of Legislation
A. Sherman Antitrust Act 1890
1. Section 1: Prohibits combinations
and conspiracies in restraint of
trade.
2. Section 2: Attacks Monopolization
and attempts to monopolize.
B. Clayton Act 1914
1. Made the intent of the Sherman Act
more specific.
2. In particular, it prohibited certain
Acts when they substantially
lessened competition or tended to
create a monopoly.
a. Section 2:
Outlaws price discrimination
Price discrimination: Charging
purchasers in different markets
different prices that are
unrelated to cost differences.
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b. Section 3
Forbids tying contracts
Tying contracts: producer
requires buyer to purchase other
products from the seller besides
the desired product.
c. Section 7
Prohibits interlocking
stockholding
Interlocking stockholding: One
firm acquiring the stock of a
competing firm.
d. Section 8
Prohibits interlocking
directorates
Interlocking directorates: The
director of one firm is a board
member of a competing firm.
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C. Federal Trade Commission Act 1914
1. Created the FTC to investigate
unfair competitive practices and
issue cease and desist orders when
unfair methods of competition are
discovered.
D. Wheeler-Lea Act 1938
a. Expanded FTC powers to
include “unfair and deceptive
practices,” such as false
advertising and deceptive
packaging aimed at consumers.
b. FTC was established as an
independent antitrust agency.
E. Celler-Kefauver Act 1950
1. Amended Section 7 of the Clayton
Act by prohibiting one firm from
acquiring the assets of another firm
when the effect would be to lessen
competition.
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III. Areas of Focus in Antitrust Activity
A. Merger Activity (Figure 18.1)
1. Types of Mergers
a. Horizontal Merger: Merger
between two firms producing
similar products in the same
market.
1. Antitrust Division of the
Justice Department uses Section 7
of the Clayton Act to challenge
horizontal mergers that add 100
or more points to the Herfindahl
Index or where the post-merger
Herfindahl Index is greater than
1,800.
b. Vertical Merger: The merging of
firms at different stages in the
productive process.
1. Usually escapes antitrust
activity.
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c. Conglomerate Merger: Merger
of a firm in one industry with
another firm in an unrelated
industry.
1. Usually escapes antitrust
activity.
B. Monopolization
1. Issues of Interpretation
a. Structuralists
Believe that a firm with a very
high market share will behave
like a monopolist. Therefore,
structure alone can make a firm
a legitimate target for antitrust
activity.
b. Behavioralists
Believe that the relationship
between structure, behavior and
performance is unclear.
Therefore, behavior not
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structure should be the criterion
for antitrust prosecution.
C. Collusive Activities such as price
fixing, dividing up market Share and
rigging government contracts.
1. per se violation
IV. Important Antitrust Cases
A. Standard Oil Case 1911
1. Court ordered Standard Oil broken
up because of anticompetitive actions.
2. Structure vs. behavior issue
unresolved.
B. U.S. Steel Case 1920
1. U.S. Steel had 50% of the steel mkt.
2. Court ruled that U.S. steel had
monopoly power, but was not guilty of
antitrust violations because it did not
use that power unreasonably.
3. Established “Rule of Reason”
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C. ALCOA Case 1937-1945
1. ALCOA controlled 90% of the
aluminum ingot mkt.
2. The court ruled that ALCOA got its
monopoly position reasonably by prior
standards. However, the court ruled
that ALCOA was in violation of
Antitrust Laws because of structure
alone.
D. Dupont Cellophane Case 1956
1. The issue here was defining the
relevant market. Was it cellophane or all
flexible packaging materials (wax paper
and tin foil)?
2. Court used broad definition.
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E. Microsoft Case 1998-2002
1. Microsoft was charged with violating
section 2 of the Sherman Antitrust Act
by taking a series of actions that were
designed to maintain its “Windows”
monopoly (controlled 95% of the
operating system market). Microsoft
was also charged of being in violation
of Section 1 of Sherman because of bad
conduct.
2. Microsoft was found guilty of being
in violation of Anti-trust because it
behaved badly.
a. Specifically Microsoft illegally
tied its Internet Explorer browser to
windows and provided Internet
Explorer at no charge.
b. Microsoft agreed to change its
behavior toward its competitors as
described in the "last word."
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V. Penalties for being in violation of
antitrust:
A. Imprisonment & Fines
Maximum Prison Sentence: 10 years
Companies can be fined a maximum
of $100,000,000 and individuals
$1,000,000.
B. Structural Remedies
1. If a merger is held to be unlawful,
the acquiring company will be made to
divest itself of the acquired company.
2. Company may be broken up, but this
is rare.
C. Treble Damages
Anyone that is injured by antitrust
violations can sue for treble damages.
D. Consent Decree
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