Antitrust Law Outline – Professor Kovacic
Fall 2012
Table of Contents
THE U.S. ANTITRUST ENFORCEMENT SYSTEM............................................................................................ 3
RELEVANT STATUTES AND GUIDELINES ............................................................................................................................. 3
The Sherman Act ......................................................................................................................................................................3
Section 1.............................................................................................................................. 3
Section 2.............................................................................................................................. 4
The Clayton Act .........................................................................................................................................................................4
Section 3.............................................................................................................................. 5
Section 7.............................................................................................................................. 5
Section 8.............................................................................................................................. 5
The Federal Trade Commission (FTC) Act ...................................................................................................................5
Section 5.............................................................................................................................. 5
STRUCTURE OF THE ENFORCEMENT SYSTEM..................................................................................................................... 6
Leniency Programs .................................................................................................................................................................6
Remedies ......................................................................................................................................................................................7
REASONS FOR ANTITRUST LAW ........................................................................................................................................... 7
Economic .....................................................................................................................................................................................7
Noneconomic .............................................................................................................................................................................7
HORIZONTAL AGREEMENTS .............................................................................................................................. 8
TYPES OF CONDUCT ................................................................................................................................................................ 8
Price Fixing and its Variants ..............................................................................................................................................8
Division of Markets .................................................................................................................................................................9
Concerted Refusals to Deal (Group Boycotts).......................................................................................................... 10
Collusive ........................................................................................................................... 10
Exclusionary ..................................................................................................................... 11
Other Types of Conduct ...................................................................................................................................................... 11
Hub and Spoke Agreements.............................................................................................. 12
Conscious Parallelism ....................................................................................................... 12
Information Exchanges ..................................................................................................... 14
Invitations to Collude ........................................................................................................ 15
WHAT YOU MUST SHOW ....................................................................................................................................................... 15
In the pleadings ..................................................................................................................................................................... 15
Antitrust Injury.................................................................................................................. 16
Twombly Standard ............................................................................................................ 16
At trial ........................................................................................................................................................................................ 16
Per Se Illegality ................................................................................................................. 16
Quick Look ....................................................................................................................... 17
Rule of Reason .................................................................................................................. 18
SUMMARY AND ANALYSIS .................................................................................................................................................... 20
VERTICAL AGREEMENTS .................................................................................................................................. 21
TYPES OF CONDUCT .............................................................................................................................................................. 22
Intrabrand Price Restraints ............................................................................................................................................. 22
ANTITRUST OUTLINE 1
Non-Price Intrabrand Restraints .................................................................................................................................. 24
Tying ........................................................................................................................................................................................... 24
Vertical Boycotts ................................................................................................................................................................... 27
SUMMARY AND ANALYSIS .................................................................................................................................................... 28
MERGERS ............................................................................................................................................................... 29
THE RISE AND FALL OF THE STRUCTURAL PRESUMPTION ............................................................................................ 30
MEASURING MARKET CONCENTRATION ........................................................................................................................... 37
MARKET DEFINITION ........................................................................................................................................................... 38
PRE-MERGER NOTIFICATION AND THE ENFORCEMENT PROCESS ............................................................................... 40
PROVING THAT A MERGER WILL CAUSE COORDINATED ANTICOMPETITIVE EFFECTS ............................................ 41
PROVING THAT A MERGER WILL CAUSE UNILATERAL ANTICOMPETITIVE EFFECTS ............................................... 45
DEFENSES TO A MERGER CHALLENGE............................................................................................................................... 47
Entry ........................................................................................................................................................................................... 48
Efficiencies ............................................................................................................................................................................... 50
Failing Firms ........................................................................................................................................................................... 51
DIFFERENCES AND SIMILARITIES BETWEEN THE US AND THE EU.............................................................................. 52
SUMMARY AND ANALYSIS .................................................................................................................................................... 54
MONOPOLIZATION ............................................................................................................................................. 58
MARKET DEFINITION AND MARKET POWER ................................................................................................................... 58
IMPROPER CONDUCT ............................................................................................................................................................ 59
SUMMARY AND ANALYSIS .................................................................................................................................................... 62
2 ANTITRUST OUTLINE
The U.S. Antitrust Enforcement System
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The US antitrust system is focused on preventing anticompetitive conduct.
Anticompetitive conduct is conduct that is likely to lead to the creation, maintenance, or
enhancement of market power, or that involves the actual exercise of market power.
Market power is the ability to raise prices above a competitive level by manipulating
supply.
The consequences of anticompetitive conduct are:
o Higher prices,
o Consumer deception,
o Lower product quality,
o Less consumer choice among products,
o Little product innovation,
o Wealth transfer.
Collusive and exclusionary anticompetitive effects:
o Collusive effects directly impair markets and typically will involve coordinated
action by competitors that collectively possess market power and are attempting
to emulate the behavior of a monopolist by restricting output and raising prices.
 Such conduct does not depend on any follow-on activity for its
anticompetitive impact.
 Its effects are immediate and direct: output is reduced and prices are
inflated.
o Exclusionary effects: confer market power by raising a rival’s costs, as by cutting
it off from key inputs to its production, or limiting a rival’s access to the market,
as by cutting off its access to a key channel of distribution.
 They can result from the act of a single firm, or arise as the product of
agreement among firms.
 Effects of exclusionary conduct are always indirect: by excluding a rival,
or impairing its ability to compete effectively, the predator hopes to obtain
power over price or influence some other dimension of competition.
 Exclusionary conduct will be condemned when the conduct establishes
conditions under which a firm or group of firms is able to exercise market
power.
Relevant Statutes and Guidelines
The Sherman Act
- This Act can be enforced by:
o The DOJ,
o The FTC, and
o Private parties
Section 1
- Section 1 declares every contract, combination in the form of trust or otherwise, or
conspiracy, in restraint of trade to be unlawful both civilly and criminally.
- Elements of a Section 1 offense:
o Concerted action: a contract, combination, or conspiracy
o Anticompetitive effects: restraint of trade
ANTITRUST OUTLINE 3
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There are two ways to prove anticompetitive effects:
o Circumstantial evidence: market definition, a calculation of market shares, and an
inference from high market shares that the defendants had the capacity to harm
competition.
o Direct evidence: evidence of actual anticompetitive effects, of the exercise of
market power, such as reduced output, higher price, or diminished quality.
Mergers can be challenged under this section as agreements in restraint of trade.
Section 2
- Focused on single firm conduct, usually the activities of actual or would-be monopolists.
- It also places a great deal of emphasis on the evaluation of the market effects of allegedly
anticompetitive conduct
- The offense of attempted monopolization has two elements:
o Specific intent to accomplish the illegal result, and
o A dangerous probability that the attempt to monopolize will be successful.
- When evaluating the second element, the courts do not rely on hindsight but examine the
probability of success at the time the acts occur.
- If a defendant had the requisite intent and capacity, and his plan if executed would have
had the prohibited market result, it is no defense that the plan proved to be impossible to
execute.
- An agreement is not an absolute prerequisite for the offense of attempted joint
monopolization.
- Mergers can also be challenged under this section as monopolization or attempts to
monopolize.
The Clayton Act
- This Act can be enforced by:
o The FTC
o The DOJ
o Private parties.
- Private plaintiffs still must demonstrate that they are harmed as a result of the practice
they challenge as anticompetitive.
- In practice, most merger enforcement is conducted by the federal antitrust agencies.
- Some mergers in certain industries may also be reviewed on competition grounds by
other federal agencies.
- The distinguishing characteristic of the anti-merger prohibitions of the Clayton Act is its
objection to mergers that “may substantially lessen competition.”
o This gives agencies the authority to attack mergers when the trend to a lessening
of competition in a line of commerce was in its incipiency.
o It also gives authority to attack mergers before they are consummated.
- The statutory test under Section 7 of the Clayton Act is whether the effect of the merger
may be substantially to lessen competition in any line of commerce in any section of the
country.
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Section 3
- Vertical interbrand restraints can be addressed under Section 1 of the Sherman Act, under
Section 2 of the Sherman Act, and under Section 3 of the Clayton Act, which has legally
distinct standards of proof.
Section 7
- Most mergers are reviewed under Section 7 of the Clayton Act.
- Clayton Act requires market definition.
- An acquisition that appears likely to facilitate tacit collusion violates Section 7 of the
Clayton Act, even if the coordinated behavior that results would not itself be subject to
attack under the antitrust laws.
- Section 7 Clayton Act Test:
o First, the government must show that the merger would produce a firm controlling
an undue percentage share of the relevant market, and would result in a significant
increase in concentration of firms in that market.
o Such a showing establishes a presumption that the merger will substantially lessen
competition.
o To rebut that presumption, the defendants must produce evidence that shows that
the market-share statistics give an inaccurate account of the merger’s probable
effects on competition in the relevant market.
o If the defendants successfully rebut the presumption of illegality, the burden of
producing additional evidence of anticompetitive effects shifts to the government,
and merges with the ultimate burden of persuasion, which remains with the
government at all times.
o Note: This test can be used at both the merits stage and the preliminary injunction
stage.
Section 8
- Interlocking directorates – the presence of common directors on the boards of rival firms
– can also be an antitrust violation under Section 8 of the Clayton Act.
The Federal Trade Commission (FTC) Act
- Only the FTC can enforce this act.
Section 5
- Mergers can be challenged under this section as unfair methods of competition.
- The FTC can also reach invitations to collude under the broad unfair competition
prohibition of Section 5 of the FTC Act.
ANTITRUST OUTLINE 5
Structure of the Enforcement System
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In cases involving regulated sectors, such as telecommunications, other government
bureaus, such as the FCC, exercise competition policy functions concurrently with the
federal antitrust agencies.
Giving an executive department (DOJ) enforcement power increases presidential control
over the law’s implementation and makes policy more responsive to presidential election
results.
Creating an “independent” agency (FTC) gives the legislature more ability to shape
competition policy and divest dispute resolution in an expert body.
Private rights of action ensure that the law is enforced even in the case of neglect or
inadequate resources of the government.
Rationales for diversifying prosecutorial power:
o To guard against default by any single prosecutorial agent.
o Private lawsuits can be more effective because the plaintiff has more information
and stronger incentives.
o Competitive benefits of diversification (DOJ and FTC compete for cases)
When federal law isn’t enforced as much for whatever reason, states usually increase
enforcement of state law. There is also an increase in private suits.
Costs of diversifying prosecutorial power:
o More governmental costs for duplication of personnel
o Reduces clarity and predictability of competition law (different standards and
burdens of proof)
Leniency Programs
- Leniency exploits the tensions among cartel members suggested in the Prisoner’s
Dilemma.
- By providing an incentive for such informants to come forward, DOJ’s leniency program
has demonstrated the benefits of using decentralized monitoring to enforce antitrust laws.
- You get full immunity for yourself, your company, and its employees if you inform on a
cartel if:
o You are the first in the door (set a “marker”), and
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o You are not the ringleader.
If there are cartels for products A, B, and C, and you come in to discuss the product A
cartel, they may ask you about the other cartels for products B and C.
o If you lie about cartels B and C, you lose immunity for cartel A.
o You can always hope they don’t ask.
o It’s possible to use leniency to deflect attention away from bigger cartels.
Sometimes companies reward executives who “take one for the team” after their prison
terms.
Beyond offering dispensations from criminal sanctions and encouraging pure
volunteerism, the U.S. antitrust system provides no further incentives to gain the
assistance of informers.
If a company is granted leniency but breaches the conditions of those agreements, it can
be subject to prosecution for their participation in criminal antitrust violations.
Prior grant of immunity may be a defense to conviction, but it is not a defense to
indictment.
Remedies
- Criminal enforcement is not very common and is reserved for the more egregious
conduct. Potential remedies include:
o Imprisonment
o Fines, both for corporations and individuals
o Asset forfeitures
o Injunctive relief
- Civil enforcement is must for common. Potential remedies include:
o Treble damages
o Injunctive relief
 Conduct prohibitions
 Divestiture or other structural relief
o Attorney’s fees
Reasons for Antitrust Law
Economic
- Antitrust law prevents a transfer of resources from buyers to sellers.
- Those who look at aggregate welfare are not as concerned with this issue.
- However, those who look only at consumer welfare are concerned with this issue.
- Antitrust law prevents allocative efficiency loss (deadweight loss).
Noneconomic
- Fairness, social justice, and equity
- Protection of small businesses
- Political stability
ANTITRUST OUTLINE 7
Horizontal Agreements
Types of Conduct
Price Fixing and its Variants
- The formation of an agreement to fix prices or output is illegal per se.
- Price is composed of many components (see Catalano). To fix any one of these
components is to fix prices. At its core, price fixing is essentially removing the ability to
compete on price.
- According to case law, the per se illegality applies to both minimum and maximum prices
(see Maricopa). It is unclear if this case would still be decided the same way today.
- Benefits: None.
- Anticompetitive effects:
o Raise prices
o Lower output
o Decrease consumer welfare
o Possibility of decreasing aggregate welfare.
- Illustrative cases:
o Trenton Potteries (1927): Agreements that create the potential power to keep
prices fixed high due to the absence of competition may well be held to be in
themselves unreasonable or unlawful restraints. Uniform price fixing by those
controlling in any substantial manner a trade or business in interstate commerce is
prohibited by the Sherman Law, despite the reasonableness of the particular prices
agreed upon.
o Socony (1940): Under the Sherman Act, a combination formed for the purpose
and with the effect of raising, depressing, fixing, pegging, or stabilizing the price
of a commodity in interstate or foreign commerce is illegal per se. Fixing output
also fixes prices.
 It doesn’t matter if the conspiracy is impossible. Just the agreement is
enough.
 Any combination that tampers with price structures is engaged in an
unlawful activity.
 Prices are fixed if the range within which purchases or sales will be made
is agreed upon.
o National Society of Professional Engineers (1978): A ban on competitive bidding
in the professional society’s code of ethics is not justified under the rule of reason.
The rule of reason does not support a defense based on the assumption that
competition in itself is unreasonable.
o BMI v. Columbia Broadcasting (1979): The challenged practice has redeeming
competitive virtues. The courts will listen to an efficiency (or precompetitive)
argument. This ruling clearly limits the per se rule to naked price-fixing (an
agreement among rivals on price with no plausible efficiency justification).
 In characterizing the conduct under the per se rule, the inquiry must focus
on whether the effect and the purpose of the practice are to threaten the
proper operation of our predominantly free-market economy.
8 ANTITRUST OUTLINE
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Does the practice facially appear to be one that would always or almost
always tend to restrict competition and decrease output (and in what
portion of the market), or instead one designed to increase economic
efficiency and render markets more, rather than less, competitive?
 The per se rule is not employed until after considerable experience with
the type of challenged restraint.
 This case introduces the “quick look” prong of the analysis.
Catalano (1980): It is per se illegal for competing wholesalers to agree
collectively to refuse to sell on credit, as the wholesalers had previously used
more favorable credit terms as a means of competition. A collective refusal to
compete on credit terms was indistinguishable from an agreement to fix prices.
This case is a reminder that price is comprised of many components. To fix a
component of price is to fix prices.
Maricopa (1982): Fixing a maximum price is illegal per se. It is unclear whether
this would be decided the same way today.
NCAA (1984): This case involves an industry in which horizontal restraints on
competition are essential if the product is to be available at all (BMI argument),
so it must be analyzed under the rule of reason despite the fact that it is, on its
face, a horizontal agreement to set output. A naked restraint on price and output
requires some competitive justification even in the absence of market power.
Dagher (2006): Application of the per se rule is inappropriate to the price setting
of a joint venture. It is price setting by a single entity. The plaintiffs in this case
elected to pursue their claims under the per se rule or not at all, so judgment was
entered for the defendants. The rule of reason would apply today.
Polygram (2005): Suspension of advertising by two competitors of two competing
products in the hopes of generating interest in a third joint venture is inherently
suspect; hence, the defendants were required to come forward with evidence of a
cognizable justification.
Division of Markets
- Competitors can emulate a monopolist by dividing up markets into:
o Defined geographic areas,
o Customers or customer categories, or
o Product lines.
- In some ways, dividing markets can be more anticompetitive than price fixing.
o Price fixing agreements may leave open the possibility of non-price competition,
such as quality.
o Diving markets generally limits all competition, price and non-price.
- A market division scheme cannot effectively convey power over price unless the parties
to the arrangement collectively possess market power.
- Illustrative cases:
o Timken (1951): Division of markets by competitors is illegal per se, just like price
fixing.
o Sealy (1967)
o Topco (1972): Dividing up geographic territories is illegal per se, regardless of
procompetitive effects. It is unlikely that this case would be decided similarly
today based on the same facts because it was not clear that the Topco associates
ANTITRUST OUTLINE 9
were competitors. However, the basic rule still applies to cases in which
competitors divide markets without competitive benefits or efficiencies.
 This case was decided before BMI. I think this case would be analyzed
differently today using the BMI rationale.
 The government argued that Topco members had violation Section 1 of
the Sherman Act by:
 Dividing up geographic markets, and
 Restricting the sale of the association’s products at wholesale by
members.
 Topco argued that it increased competition by dividing markets because it
allowed its own cheaper products to compete with larger chains.
 The district court used the rule of reason and found that the practices were
procompetitive. The Supreme Court required the per se rule.
 Per se rules enhance predictability in business decisions. Courts are ill
suited to make economic determinations. That is for Congress.
 Dissent: We shouldn’t make per se rules just for ease of task. Just because
per se rules are necessary doesn’t mean they are always appropriate.
o BRG of Georgia (1990): The division of markets by competitors is illegal per se,
regardless of whether the parties split a market within which both do business or
whether they merely reserve one market for one and another for the other.
Concerted Refusals to Deal (Group Boycotts)
- The terms “concerted refusal to deal” and “group boycott” can be used literally to
describe a wide variety of legal and common business relationships.
- If the per se rule on refusals to deal covered all such relationships, it would prove to be
quite disruptive and costly, as any time a buyer chooses an exclusive seller, it is refusing
to deal with other sellers.
- Group boycott cases can turn on the nature of the alleged anticompetitive effects of the
group boycott: collusive or exclusionary. However, neither the term “group boycott” nor
the Supreme Court’s cases using the term distinguish between concerted refusals to deal
that have collusive anticompetitive effects and those that have exclusionary effects.
o Courts appear to view collusive boycotts as better candidates for per se
condemnation, especially when there is evidence of an underlying agreement to
fix prices or divide markets.
o However, one Supreme Court case seemed to suggest that the use of the per se
rule should be confined to certain exclusionary boycotts that are targeted at
competitors.
Collusive
- Collusive group boycotts refer to concerted refusals to deal that result in collusive effects
(i.e., those that directly restrict output or raise price).
o Examples:
 An agreement among competitors to boycott a supplier in order to coerce
acceptance of a lower price than the supplier could change in a
competitive market.
10 ANTITRUST OUTLINE
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An agreement among competitors to boycott a purchaser in order to coerce
acceptance of a higher price than the purchaser would pay in the
competitive market.
o Characterization of conduct as a boycott instead of price fixing, especially in the
case of a boycott on a purchaser, may turn on little more than the presence of
evidence of express, coercive demands.
o The evidence relevant to a case of a collusive group boycott will focus on the
boycotters’ demonstrated ability to secure their demanded price (i.e., their market
power).
Illustrative cases:
o Superior Court Trial Lawyers (1990): The collusive boycott in this case was ruled
to be illegal per se, so the court refused to look at social justifications. All
concerted refusals to deal have an expressive component. That does not mean that
they are protected by the First Amendment.
Exclusionary
- Exclusionary group boycotts most typically are directed at rivals of the colluding firms
rather than suppliers or customers and seek to affect price only indirectly.
o Examples:
 Competitors solicit suppliers to refuse to sell to a rival. This is what
happened in JTC Petroleum.
 Competitors solicit customers to refuse to purchase from a rival.
 Competitors themselves refuse to deal or associate with a rival.
o Indirect power over price can be achieved, for example, by raising a rival’s costs
or limiting its revenues.
o The ultimate goal of such a boycott is the same as a that of a collusive one.
o The relevant evidence will focus on the impact of the boycott on the rival (i.e., the
actual exclusionary effect of the refusal to deal) and on other evidence that tends
to support the prediction that the rival’s exclusion will confer power over price on
the colluding firms.
o Market power is likely to be relevant to a case of an exclusionary group boycott.
o Direct evidence of market power will consist of both evidence tending to
demonstrate actual exclusion of the rival and evidence that the boycotting firms
have the ability thereafter to maintain or raise price.
o Evidence of justifications is more likely to be considered in the case of an
exclusionary group boycott than in the case of a collusive one.
o Exclusionary group boycotts may also be used to solve the cheating problems
associated in many cartels and conspiracies.
Other Types of Conduct
- The main question in the below cases is: Was there even an agreement?
- An agreement is best understood as a process involving negotiation and the exchange of
assurances, not an outcome.
- It is ultimately unpersuasive to identify an agreement under the antitrust laws from
circumstantial evidence in parallel pricing cases by applying common judicial definitions
that sound in contract, like “meeting of the minds” or “conscious commitment to a
common scheme.” This is because applying these definitions would lead a court to
ANTITRUST OUTLINE 11
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mistakenly infer an agreement merely from the consciously parallel interaction among
oligopolists.
There would be nothing practical that a court could order the parties to do to correct
leader-follower pricing tactics.
If an agreement is evidenced by something beyond mere parallel price behavior, then a
court can, in principle, enjoin that “something extra.”
This is why conscious parallelism has not read “agreement” out of the Sherman Act.
Hub and Spoke Agreements
- In a hub and spoke agreement, a single firm is said to have acted as a cartel manager,
orchestrating an agreement among its suppliers or customers.
- A series of over agreements between a common dealer and its various suppliers could be
used as circumstantial evidence of a covert horizontal agreement among suppliers.
- The vertical agreements appear obvious, but the legal issue is whether there are
horizontal agreements.
- The question is whether each “spoke” would have accepted and put into place such a plan
under normal business circumstances if none of the other “spokes” were to do the same.
- Illustrative cases:
o Interstate Circuit (1939): Acceptance by competitors, without previous agreement,
of an invitation to participate in a plan, the necessary consequence of which, if
carried out, is restraint of interstate commerce, is sufficient to establish an
unlawful conspiracy under the Sherman Act. It was enough that, knowing that
concerted action was contemplated and invited, the distributors gave their
adherence to the scheme and participated in it.
o Toys R Us: TRU organized 10 vertical agreements that would allow TRU to be
the only retailer of certain toys. To address the problem of other profitable
retailers tempting suppliers to cheat, it orchestrated a horizontal agreement among
its key suppliers to boycott the clubs. The suppliers agreed to boycott on the
condition that their competitors would do that same.
Conscious Parallelism
- Circumstantial evidence of consciously parallel behavior may be enough to prove a
conspiracy. No formal agreement is necessary to constitute an unlawful conspiracy.
- The essential combination or conspiracy in violation of the Sherman Act can be found in
a course of dealings or other circumstances as well as in any exchange of words.
- There must only be a meeting of the minds in an unlawful agreement.
- “Plus” factors are factors that, when added to the fact of parallel conduct by the
defendant, can sustain a finding of conspiracy.
o Plus factors tend to show that the defendants’ conduct was unreasonable in light
of the circumstances. For example, raising prices appears unreasonable when
manufacturing costs are declining and the economy is in the middle of a
depression or recession.
o Plus factors are best thought of as evidence that the alleged conspirators have
gone though a process of negotiation and exchange of assurances in addition to, or
as the reason for, their parallel price behavior.
o Plus factors support a conclusion based on the totality of the circumstantial
evidence that the parties have done more than merely watch each other’s market
12 ANTITRUST OUTLINE
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behavior and respond to it independently, as leaders and followers, and,
consequently, that the firms could have behaved differently.
o Historically, the most important plus factors involved evidence suggesting that the
firms were a hidden cartel (for example, secret and direct communications among
the sellers just before prices rose suggest a cartel denied by its members and
pushed underground by the Sherman Act).
If the objective is unlawful, it doesn’t matter if the means used are lawful.
Courts will not find concerted action where the plaintiff shows only that the defendants
recognized their interdependence and simply mimicked their competitors’ conduct.
Additional evidence beyond parallel conduct, today termed “plus factors,” is required.
In two situations, Matsushita’s “economic sense” requirement should shield firms from
claims of conspiracy:
o First, if the industry structure is not conducive to coordination – perhaps because
entry is easy or because a firm could cut prices in secret and steal business from
rivals – then a court should recognize that it would be irrational for a firm to risk
prosecution by engaging in the forbidden process without any hope of gaining
market power.
o Second, if the industry structure is conducive to coordination, a court should
consider whether it was necessary for the firms to engage in the forbidden process
to reach a coordinated, high-price equilibrium, or whether they could achieve the
same outcome through leader-follower behavior that does not carry the risk of
liability.
Under other circumstances, however, the inference of conspiracy could make economic
sense.
o In an industry where entry and discounting are discouraged, a court should be
willing to infer an agreement in a parallel pricing case if the firms appear to have
been doing more than merely following each other’s market moves.
o Three indicators that firms have engaged in the forbidden process:
 First, firm behavior might be more complex than would be plausible if the
outcomes had been reached absent the forbidden process, as through mere
leader-follower behavior.
 Second, the inference of agreement would be strengthened if the
explanations offered by the parties about the putative legitimate business
purposes are weak or even pretextual.
 Third, the inference of agreement would be strengthened if the rivals had
an opportunity to communicate, and strengthened even more if their
conduct includes overt communications spurring immediate responses,
even if those communications and responses are not binding on the parties.
o Two plus factors that are more difficult to understand because they are also
consistent with leader-follower behavior:
 Actions contrary to self-interest, and
 Facilitating practices.
There are arguments for and against this type of analysis (See Turner-Posner Debate).
o Endorsing the approach of Theatre Enterprises, Turner argued that interdependent
behavior should not be interpreted as an illegal conspiracy under Section 1.
ANTITRUST OUTLINE 13
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An oligopolist behaves exactly as a seller in a competitive industry, except
that it also accounts for its rivals’ reactions.
 Injunctive relief that directed defendants to ignore their rivals would be
anomalous, for it would order them to make irrational price and output
decisions.
 This view makes sense if, in industries where firms can readily solve their
cartel problems, high prices frequently result from leader-follower
behavior that cannot be practically enjoined.
 On the whole, this view has prevailed.
o Justice Posner suggested that these analytical difficulties might be overcome by
an alternative theory.
 Oligopoly markets involve concerted action in that they manifest a tacit
output agreement among sellers.
 In a concentrated market, sellers must act voluntarily to translate their
mutual dependence into oligopoly prices.
 If oligopoly pricing is to succeed, the seller’s rivals must cooperate by
curbing their output as well.
 Since tacit collusion or noncompetitive pricing is not inherent in an
oligopolist market structure but like conventional cartelizing, requires
additional, voluntary behavior by the sellers, it violates Section 1.
 There are specific forms of behavior beyond the mere fact of
interdependence that could be enjoined in a practical way.
 This view makes sense if firms that are able to solve their cartel problems
to achieve higher than competitive prices through coordination almost
invariably engage in explicit communication or other forms of conduct
that can be enjoined.
Illustrative Cases:
o American Tobacco (1946): When major firms (with a prior history of
monopolization and concerted action) all raise their prices with no economic
justifications, a violation of Section 2 of the Sherman Act can be proven by
circumstantial evidence.
o Theatre Enters (1954): Conscious parallelism has not read conspiracy out of the
Sherman Act entirely. Circumstantial evidence of consciously parallel behavior
may be enough to prove a conspiracy, but the jury found in this case that there
was no conspiracy despite the parallel, but justified, behavior.
Information Exchanges
- Because agreements to share information typically were express, these cases presented
what appeared to be two distinct questions:
o Whether an express agreement to share information can provide a basis for
inferring an illicit agreement to fix prices (potentially per se unlawful); and
o Whether an express agreement among rivals to exchange information could itself
constitute an unreasonable restraint of trade under Section 1 of the Sherman Act
(judged by the rule of reason).
- An economist’s inquiry about information sharing today would focus on its impact on
competition, not on any formal distinction regarding whether it provides circumstantial
evidence of a price fixing agreement or is unreasonable itself.
14 ANTITRUST OUTLINE
-
-
Today, courts look at whether the exchange of certain types of information by rivals can
be fairly viewed as circumstantial evidence (a plus factor) that tends to prove the
existence of an agreement to fix prices. If proven, such an agreement to fix prices likely
would be treated as per se unlawful.
Illustrative cases:
o American Column & Lumber (1921): The Court found that the members of the
association had conspired to fix prices. When firms know that their rivals will
rapidly detect cheating and respond by also cutting price and expanding output,
they may prefer not to compete aggressively and thus collude tacitly.
o Maple Flooring (1925): There was no evidence that the information exchanges
raised prices. Had the information exchange in this case been shown to be the
basis of agreement or concerted action to lessen production arbitrarily or to raise
prices beyond the levels of production and price that would prevail if no such
agreement or concerted action ensued, it would have been enjoined
Invitations to Collude
- One approach to preventing tacit collusion is to take measures that increase the hazards of
even inviting a competitor to engage in a collusive scheme.
- In the mid-1980s, the DOJ sought to use Section 2’s prohibition against attempted
monopolization to attack an unaccepted invitation to collude where the offeror and the
offeree together accounted to a substantial share of market activity.
o The offense of attempted monopolization has two elements:
 Specific intent to accomplish the illegal result, and
 A dangerous probability that the attempt to monopolize will be successful.
o When evaluating the second element, the courts do not rely on hindsight but
examine the probability of success at the time the acts occur.
o If a defendant had the requisite intent and capacity, and his plan if executed would
have had the prohibited market result, it is no defense that the plan proved to be
impossible to execute.
o An agreement is not an absolute prerequisite for the offense of attempted joint
monopolization.
- Since American Airlines, the DOJ has preferred to challenge attempted price fixing or
attempted bid rigging as violations of the wire fraud or mail fraud statutes rather than as
attempts to monopolize.
- The FTC can also reach invitations to collude under the broad unfair competition
prohibition of Section 5 of the FTC Act.
- Illustrative Cases:
o American Airlines (1984): The government need not allege or prove an agreement
to monopolize in order to establish an attempted joint monopolization under
Section 2 of the Sherman Act.
What you must show
In the pleadings
- Section 1 of the Sherman Act
o Agreement
o Unreasonable restraint of trade
ANTITRUST OUTLINE 15
o Antitrust injury
Antitrust Injury
- Brunswick (1977): Antitrust damages are not available where the sole injury alleged is
that competitors continued to stay in business, thereby denying respondents an
anticipated increase in market shares.
- A plaintiff must plead and prove an “antitrust injury,” which is an injury of the type the
antitrust laws were intended to prevent and that flows from that which makes the
defendants’ acts unlawful.
- The injury should reflect the anticompetitive effect either of the violation or of
anticompetitive acts made possible by the violation.
- It should be the type of loss that the claimed violations would be likely to cause.
Twombly Standard
- Matsushita test for summary judgment: If the plaintiff is incapable of producing evidence
that would tend to exclude the possibility of unilateral conduct, summary judgment is
warranted.
- This test has been expanded to the pleadings stage of litigation in Twombly.
o The plausibility standard calls for enough facts to raise a reasonable expectation
that discovery will reveal evidence of an illegal agreement.
o An allegation of parallel conduct and a bare assertion of conspiracy will not
suffice.
- The combination of Twombly and Matsushita makes the pursuit of an antitrust claim a
costly and challenging undertaking for plaintiffs.
At trial
Per Se Illegality
- Legally, the per se rule reduces the Section 1 inquiry to whether the defendants engaged
in a contract, combination, or conspiracy and whether that agreement falls into a
recognized per se category, such as price-fixing or market division.
o Once such an agreement is proven, if a per se rule applies, the anticompetitive
effect is presumed.
o At that point, all defenses, such as reasonableness and efficiency, are precluded.
- Economically, the per se rule reflects a judgment that the costs of identifying exceptions
to the general rule so far outweigh the costs of occasionally condemning conduct that
might upon further inspection prove to be acceptable, that it is preferable not to entertain
defenses to the conduct at all.
- Per se rules make the most economic sense when factors like the following are present:
o If permitted, the conduct will likely harm competition severely,
o If the conduct is reviewed for reasonableness rather than held illegal per se:
defendants will frequently claim that their conduct is reasonable; it will be costly
and time-consuming to evaluate those claims; and in the end, few such claims will
prove to be valid,
o Little procompetitive conduct will be deterred by establishing a rule that denies
defendants the ability to prove that their conduct was reasonable.
16 ANTITRUST OUTLINE
-
-
Think of per se rules like traffic laws, such as running a red light. There are times when
going through a red light is entirely safe, but it is better to prohibit this conduct outright
than to engage in a case-by-case analysis of whether or not there was any danger in this
specific driving going through the red light.
The per se rule should not be applies until after considerable experience with the type of
challenged restraint.
Illustrative Cases:
o Trenton Potteries (1927): Agreements that create the potential power to keep
prices fixed high due to the absence of competition may well be held to be in
themselves unreasonable or unlawful restraints. Uniform price fixing by those
controlling in any substantial manner a trade or business in interstate commerce is
prohibited by the Sherman Law, despite the reasonableness of the particular prices
agreed upon. Trenton Potteries appeared firmly to establish that price fixing by
competitors was per se unlawful, and it did so by creating an irrebuttable
presumption of unreasonableness.
o Socony: Under the Sherman Act, a combination formed for the purpose and with
the effect of raising, depressing, fixing, pegging, or stabilizing the price of a
commodity in interstate or foreign commerce is illegal per se. Fixing output also
fixes prices.
 It doesn’t matter if the conspiracy is impossible. Just the agreement is
enough.
 Any combination that tampers with price structures is engaged in an
unlawful activity.
 Prices are fixed if the range within which purchases or sales will be made
is agreed upon.
o Catalano (1980): It is per se illegal for competing wholesalers to agree
collectively to refuse to sell on credit, as the wholesalers had previously used
more favorable credit terms as a means of competition. A collective refusal to
compete on credit terms was indistinguishable from an agreement to fix prices.
This case is a reminder that price is comprised of many components. To fix a
component of price is to fix prices.
o Maricopa (1982): Fixing a maximum price is illegal per se. It is unclear whether
this would be decided the same way today.
o Polygram (2005): Suspension of advertising by two competitors of two competing
products in the hopes of generating interest in a third joint venture is inherently
suspect; hence, the defendants were required to come forward with evidence of a
cognizable justification.
o Dagher (2006): Application of the per se rule is inappropriate to the price setting
of a joint venture. It is price setting by a single entity. However, look for cases in
which the joint venture is only a pretense for price setting or in which the two
entities reduce competition for products that are not part of the joint venture to
increase demand for the joint venture product.
Quick Look
- Naked restraints on price or output would typically be treated as per se unlawful. But
sometimes the case does not deserve per se condemnation.
ANTITRUST OUTLINE 17
-
-
-
-
In addition, not all cases excused from per se treatment deserve or require the full-blown
rule of reason.
The quick look analysis acknowledges that there are alternatives to the two extremes of
the harsh per se condemnation and the costly and lengthy full-blown Rule of Reason
analysis.
In contrast to the per se rule, the quick look creates a rebuttable, not an irrebuttable,
presumption of unreasonableness.
In evidentiary terms, the quick look can be understood as a burden-shifting device:
evidence of actual harm to competition gives rise to a presumption that the challenged
conduct was an unreasonable restraint of trade and shifts the burden of production to the
defendant to offer evidence that the conduct can otherwise be justified.
o If the plaintiff comes forward with direct evidence of anticompetitive effects,
evidence of lack of market power will be rejected. However, direct evidence is
not required.
 Actual anticompetitive effects evidence creates a presumption that cannot
be easily rebutted by circumstantial market share evidence.
 To rebut the direct evidence of market power, a defendant must challenge
the direct evidence on its own terms.
 Experience with similar practices in the past (natural experiments) can
substitute for actual effects evidence because it makes the prediction of
those effects especially sound.
o Instead, the plaintiff can come forward with sufficient circumstantial evidence to
show that anticompetitive effects are in fact likely.
If the plaintiff succeeds with either direct or circumstantial evidence in addressing the
justification provided by the defendant, the evidentiary burden shifts back to the
defendant to show:
o That the restraint in fact does not harm consumers (i.e., attack the direct evidence
on its merits), or
o That the restraint has procompetitive virtues that outweigh its burden on
consumers.
If the defendant fails in this respect, the conduct is condemned as per se unlawful.
If the defendant succeeds in this respect, the case moves to a Rule of Reason analysis.
Illustrative Cases
o NCAA
o IFD
o Polygram
Rule of Reason
- Under BMI, the presence of plausible efficiencies could justify moving a case out from
under the per se label into the quick look analysis.
- However, where any anticompetitive effects of a given restraint are far from intuitively
obvious, the Rule of Reason demands a more thorough inquiry into the consequences of
those restraints. Therefore, the case must be analyzed using the Rule of Reason, not the
quick look.
- The inquiry mandated by the Rule of Reason is whether the challenged agreement is one
that promotes competition or one that suppresses competition.
18 ANTITRUST OUTLINE
-
-
-
However, the Rule of Reason does not support a defense based on the assumption that
competition in itself is unreasonable. The statutory policy precludes inquiry into the
question of whether competition is good or bad.
The Rule of Reason does not permit an inquiry into the reasonableness of the prices set.
An appellate level court cannot do a first instance Rule of Reason analysis, so if the lower
court incorrectly applies the quick look or per se test, the case must be remanded.
Factors relevant to the Rule of Reason analysis (Chicago Board of Trade):
o Facts peculiar to the business (conditions of the business before and after the
restraint was imposed),
o The nature, scope, and effect of the restraint (probable or actual),
o The history and purpose of the restraint.
Once a case has been determined to fall into a Rule of Reason analysis, the burden is on
the plaintiff to demonstrate that the agreement restrains trade.
If the plaintiff succeeds, the defendant can then demonstrate that the restraint is ancillary
to a legitimate business transaction.
Next, the plaintiff can rebut the defendant’s defense by showing that the restraint of trade
is more restrictive than necessary to achieve the defendant’s procompetitive, legitimate
purpose. The legitimate means are thus just a pretext for illegitimate conduct and the
excess of those means is the cause of the unreasonableness.
ANTITRUST OUTLINE 19
Summary and Analysis
20 ANTITRUST OUTLINE
Vertical Agreements
-
-
Vertical restraints and horizontal restraints traditionally have been distinguished and
analyzed under different standards.
As was true of horizontal agreements, vertical restraints can have collusive or
exclusionary anticompetitive effects. However, they are not grouped as such.
Instead, they have been divided into two categories: those that restrict intrabrand
competition and those that restrict interbrand competition.
o Intrabrand restraints affect competition between sellers of the same brand, such as
rival Ford dealers.
 As long as interbrand competition is robust, these kinds of restrictions on
intrabrand competition raise few significant antitrust concerns.
 They could, however, be used by a group of competing dealers or
manufacturers to help facilitate price coordination (all collusive effects).
 They could also be used to facilitate efforts by a dominant dealer or
manufacturer to exclude rivals (exclusionary effects).
 Examples of intrabrand restraints include:
 Exclusive distributorships: the manufacturer has agreed to market
its products exclusively through a single wholesaler and has agreed
not to appoint any other wholesaler.
 Territorial restrictions: Each dealer has agreed to concentrate its
sales efforts within an assigned region, and each is prohibited from
selling the wholesaler’s products outside of that region. The
wholesaler may remain free to appoint additional retailers in each
region, depending upon whether is also has agreed to make each
dealer an exclusive distributor. Restrictions might also apply to
customers or sales locations.
o Interbrand restraints limit competition between competing brands, such as
Chevrolet and Ford.
 Often, single brand sellers of these sorts of branded products are
prohibited by their suppliers from carrying competing brands, perhaps
through exclusive dealing arrangements.
 Tying, which requires a dealer or consumer to purchase a second,
generally unwanted product or service as a condition of purchasing a
desired item, can affect interbrand competition in the market for the tied
product. (It can raise concerns about exclusion that can lead to higher
prices or other anticompetitive harms.)
 Examples of vertical interbrand restraints include:
 Exclusive dealing: Manufacturer B cannot sell to dealers who have
agreed to purchase solely from Manufacturer A.
 Tying: Manufacturer B cannot sell Product 2 to consumers or
dealers, who can only buy Product 1 from Manufacturer A if they
also agree to buy Product 2.
Intrabrand restraints tend to raise concerns about collusive effects, while interbrand
restraints tend to raise concerns about exclusionary effects.
Vertical intrabrand restraints are generally addressed under Section 1 of the Sherman Act,
whereas vertical interbrand restraints can be addressed under Section 1 of the Sherman
ANTITRUST OUTLINE 21
-
-
-
-
Act, under Section 2 of the Sherman Act, and under Section 3 of the Clayton Act, which
has legally distinct standards of proof.
Today, only tying remains formally per se in limited circumstances.
Vertical restraint doctrine began with Dr. Miles (1911) in which the court held that
vertical price restraints (RPM) were per se unlawful.
o In Colgate (1919), the court held that a firm seeking to impose minimum RPM
was free to do so “unilaterally” provided it was not a monopolist. The firm could
announce in advance the circumstances under which it would refuse to sell, as
long as there was no agreement.
o In a Section 1 Sherman Act charge based on RPM, the result of Colgate and Dr.
Miles was: RPM was illegal per se, but a manufacturer could accomplish a similar
end by simply announcing that it would not sell to price-cutting dealers – so long
as the manufacturer did not take other steps that would lead a court to infer that it
was doing more than merely adhering to the state policy and had in fact reached
an agreement on RPM with a dealer.
The Court held in Schwinn (1967) that vertical intrabrand non-price restraints were also
per se unlawful.
In Albrecht (1968), the court determined that maximum RPM was also illegal per se.
The impact of Dr. Miles was seriously limited through the 1970s but the Miller-Tydings
Amendment and the McGuire Act, which allowed states to establish fair-trade RPM on
an industry-by-industry basis, until they were repealed in 1975.
Sylvania (1977): In this case, the court holds that, while RPM is still per se unlawful,
vertical non-price restrictions on intrabrand competition must be evaluated under the rule
of reason. Departure from the rule of reason standard must be based upon economic
effect rather than upon formalistic line drawing. Interbrand competition is the primary
concern of antitrust law.
Khan overturned the per se rule against maximum RPM in 1997.
Leegin (2007): The reasoning of the court’s more recent jurisprudence has rejected the
rationales on which Dr. Miles was based. The reasons upon which Dr. Miles relied do not
justify a per se rule. RPM agreements have procompetitive justifications. It cannot be
stated with any degree of confidence that RPM always or almost always tends to restrict
competition or decrease output. We can’t make per se rules to govern procompetitive
conduct solely for the purpose of administrative convenience.
Types of Conduct
Intrabrand Price Restraints
- Vertical agreements concerning price are often called resale price maintenance (RPM)
and are distinct from non-price restraints.
- All vertical RPM agreements (minimum and maximum) are analyzed under the Rule of
Reason.
- Three factors that would be relevant to a rule of reason analysis of RPM:
o The scope of the use of the minimum RPM in the market,
o The source of the restraint, and
 If the retailers are the source, this could be a retailer cartel.
 If manufacturers are the source, the restraint is likely benign.
o The market power of the supplier and the dealer.
22 ANTITRUST OUTLINE
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-
Ways to use RPM to restrain competition:
o Exclusionary RPM Strategies by a Manufacturer or Dealer With Market Power
 A manufacturer with market power might adopt minimum RPM to impair
its rivals’ access to dealers.
 For the dealer, RPM must result in higher profits than it would
obtain if it agreed to carry the products of the manufacturer’s
rivals.
 The manufacturer would in effect use RPM to pay the dealer for its
agreement not to carry the products of the manufacturer’s rivals (a
form of compensated exclusive dealing).
 A dealer with market power might induce minimum RPM to forestall
innovation in distribution that could reduce costs.
 A dominant dealer, fearful that it might lose significant sales to an
innovated dealer with lower costs, might solicit minimum RPM
from a common supplier.
 Although its own greater efficiency might still increase its
profitability, minimum RPM would prevent a rival dealer from
expanding its market share through lower prices.
 However, a manufacturer has an interest in promoting more
efficient methods of distribution and therefore would resist the use
of RPM under these circumstances.
o Dampening Competition using RPM
 Manufacturers may impose RPM on dealers as a way of making a
commitment to compete less aggressively with each other.
 RPM is likely to have more power in generating higher price through this
mechanism if adopted by multiple competing manufacturers.
o Monopoly Pricing with RPM
 RPM could enhance a monopoly manufacturer’s ability to engage in
monopoly or supracompetitive pricing.
 This idea was implicitly rejected in Sylvania when the court declared
interbrand competition to be the primary concern of antitrust law.
 A reduction in intrabrand competition could allow a monopolist to
increase its market power.
 RPM could also allow a monopolist to discriminate in the price it charges
to various groups of buyers (for example, by neighborhood).
 One way to account for these anticompetitive possibilities would be to
allow the demonstration by the plaintiff of substantial restrictions on
intrabrand competition by a firm with significant market power to shift a
burden of production to that firm to demonstrate that the restraints in fact
promote interbrand competition in some way (implied by Stevens in his
dissent in Sharp).
Procompetitive Uses of Minimum RPM:
o Providing a means to encourage dealers to invest in tangible and intangible
services or promotional efforts,
o Facilitating efforts by new firms to enter or expand into a market,
ANTITRUST OUTLINE 23
o Providing consumers with more options, such as goods that are lower price/low
service, high price/high service, or a range of options in between,
o Addressing market imperfections such as free riding, and
o Providing a more efficient means of contractually requiring dealers to provide
certain levels of performance.
o Note: All of the justifications for its use, both pro and anticompetitive, lead to
higher absolute prices. The difference is that procompetitive instances provide
value to consumers that can justify higher prices.
Non-Price Intrabrand Restraints
- Vertical intrabrand non-price restraints are analyzed under the Rule of Reason.
- As a practical matter, vertical intrabrand non-price restraints have almost because per se
lawful.
- When can vertical, intrabrand, non-price restraints be unreasonable?
o Possible Answer: When intrabrand competition represents a substantial source of
downward pressure on price, i.e., when the firm imposing the restraint has
interbrand market power.
Tying
- Tying arrangements are per se unlawful.
- However, tying arrangements based on platform software should be evaluated under the
Rule of Reason (Microsoft).
- Tying is when a manufacturer sells Product A (usually a desirable product) to dealers on
the condition that they also purchase Product B (usually an undesirable product. Product
A is the “tying” product. Product B is the “tied” product.
- Types of tying arrangements:
o The tying product and the tied product may be related in a variety of ways:
 They may be products that are used in fixed proportions (i.e., nuts and
bolts).
 The tied product may be designed to be used with the tying product (i.e.,
software with a personal computer).
 Or the tired products may be usable together or separately (i.e., seed and
fertilizer).
o A tying arrangement may be contractual, in which a seller says that it will not sell
the tying product unless the buyer will also purchased the separate tied product.
o Or the tying arrangement may be technological, in which the seller physically
integrates the tying product and the tied product, so that anyone purchasing the
tying product necessarily purchases the tied product simultaneously.
- The elements of a tying suit are:
o The two products are distinct.
 Two products are distinct if they are demanded for separately and
provided separately.
 If the integration of two formerly separate products creates a more
efficient new product, the integration may not constitute tying.
o There has been a forced or coerced sale.
 A written contract containing the condition is usually sufficient.
24 ANTITRUST OUTLINE

-
-
It is sufficient to show that the bundled products are priced so that
purchase of the products individually is not economically viable.
o The seller has monopoly power over the tying product.
 Proof that the defendant possesses market power in the tying product
market is required, even if the defendant’s product is protected by IP
rights.
o More than an insubstantial amount of commerce is involved.
o Foreclosure of other suppliers
o The defendant is then given a chance to provide justifications for the tying.
Bundled/Loyalty Discounts
o You get a discount if you buy a certain number of products from me over a period
of time.
o These are not strictly volume discounts.
o The key is that they are not mandatory.
o 3M: The firm offered buyers a rebate when they purchased a bundle of products.
The effect of this rebate was to allow buyers to get private label tape at a reduced
cost from 3M. This foreclosed the market for LePages private label tape because
companies would buy their normal products from 3M bundled with the tape and
get a rebate that would offset the cost of the tape. (They basically got it for free.)
The court held that this was a violation of Section 2 because it is predatory
conduct without a valid business justification.
Illustrative cases:
o IBM: The defendant claimed that the used of generic punch cards for the
tabulation machines will lead to malfunctions that will damage the defendant’s
reputation. The court said that such a justification might suffice, but there is no
evidence to support this claim here.
o International Salt: The defendant offered the use of patented salt dispensing
machines only if the customers purchased salt exclusively from the defendant.
The court said that a patent on the machine confers no right to restrain trade of an
unpatented product (in this case, salt).
o Jefferson Parish: The defendant hospital had a contract with an anesthesiology
company such that this particular anesthesiology company would handle the
hospital’s surgeries. The plaintiff claimed that this was a tying arrangement. The
defendant claimed that these were not two separate products: no one asks for
surgery without anesthesiology, and no one asks for anesthesiology without
surgery. The court says that:
 The two products are not distinct because there is no demand for the two
separate products.
 The hospital hasn’t forced unwilling patients to accept anesthesiology,
 The hospital only has a 30% market share, which is not enough to have
market power.
 The concurrence says that per se invalidation is inappropriate where the
court is conducting an elaborate inquiry into economic effects. This
imposes all of the costs of the Rule of Reason without the benefits.
Instead, the courts should consider: Actual market power; substantial
ANTITRUST OUTLINE 25
threat of acquiring market power in the tied product; and a coherent
economic reason for treating two products as distinct.
26 ANTITRUST OUTLINE
Vertical Boycotts
- Precedent limits the per se rule in the boycott context to cases involving horizontal
agreements among direct competitors.
o A group of competitors threatened to withhold business from third parties unless
those third parties would help them injury their directly competing rivals.
o Although Klor’s involved a threat made by a single powerful firm, it also
involved a horizontal agreement among those threatened.
o Klor’s was not a vertical agreement case, but rather a horizontal agreement among
competitors.
o Vertical restraint is not illegal per se unless it includes some agreement on price
or price levels.
- We already have business tort laws (i.e. fraud) for this type of case; antitrust damages for
tort harm would be disproportionate.
- Illustrative Cases:
o Klor’s:
o Discon (1998): The per se group boycott rule does not apply to a buyer’s decision
to buy from one seller rather than another. The plaintiff must allege and prove
harm, not just to a single competitor, but rather to the competitive process (i.e. to
competition itself).
ANTITRUST OUTLINE 27
Summary and Analysis
Vertical price restraints
(RPM), both maximum
and minimum, are
analyzed using the Rule
of Reason.
Factors in the analysis:
Analyzing vertical
restraints on trade
Vertical non- price
restraints are analyzed
using the Rule of
Reason.
Factors in the analysis:
What is the
source of the
RPM?
If retailers are the source,
this could just be a
pretext for a retailer
cartel.
What is the
scope of the
RPM use in the
industry?
If it is frequently
used, this could just
be a com mon
business practice.
What are the
respective market
powers of the
supplier and the
dealer?
If they have the ability to
control price, this could
indicate that
anticompetitive effects
are likely.
Does the restraint
affect interbrand
or interbrand
competition?
Does the
restraint promote
efficiency?
What is the effect
of the restraint
on competition?
Does the
restraint help to
avoid a free- rider
problem ?
Is this a small or
failing fi rm that
needs a restraint
to stay afl oat?
28 ANTITRUST OUTLINE
If manufacturers are
the source, the
restraint is likely
benign.
Antitrust laws are more
concerned with limits
on interbrand
competition.
As a practical matter,
vertical intrabrand
non- price restraints
have become almost
per se lawful.
Does the fi rm imposing the
restraint have substantial
market power and is thereby
representing a main source of
downward price pressure? If so,
this may be a case in which the
restraint is unreasonable.
Mergers
-
-
-
-
-
-
When a firm buys some or all of the stock or assets of another, the transaction is termed
an “acquisition.”
If all of a firm is acquired, the two companies are said to have “merged.”
Mergers and acquisitions among rivals can reduce competition because they alter the
structure of markets by changing the number, identity, size, and other characteristics of
firms.
Mergers and acquisitions are commonly categorized as “horizontal,” “vertical,” or
“conglomerate.”
o Like horizontal agreements, horizontal mergers and acquisitions involve sellers of
substitutes, i.e., competitors.
o Like vertical agreements, vertical mergers and acquisitions involve firms and their
suppliers, customers, or other sellers of complements.
o Conglomerate mergers involve firms that sell neither substitutes nor compliments.
Typically, a conglomerate is engaged in many unrelated lines of business.
The Supreme Court has not decided a substantive merger case since the mid-1970s.
Most mergers are reviewed under Section 7 of the Clayton Act.
The statute applies equally to horizontal, vertical, and conglomerate mergers.
Mergers can also be challenged under:
o Section 1 of the Sherman Act as agreements in restraint of trade;
o Section 2 of the Sherman Act as monopolization or attempts to monopolize.
o Section 5 of the FTC Act as unfair methods of competition.
Interlocking directorates – the presence of common directors on the boards of rival firms
– can also be an antitrust violation under Section 8 of the Clayton Act.
The distinguishing characteristic of the anti-merger prohibitions of the Clayton Act is its
objection to mergers that “may substantially lessen competition.”
o This gives agencies the authority to attack mergers when the trend to a lessening
of competition in a line of commerce was in its incipiency.
o It also gives authority to attack mergers before they are consummated.
The Clayton Act, like the Sherman Act (but not the FTC Act), may be enforced by states
and private parties, as well as by antitrust enforcement agencies.
o Private plaintiffs still must demonstrate that they are harmed as a result of the
practice they challenge as anticompetitive.
o In practice, most merger enforcement is conducted by the federal antitrust
agencies.
o Some mergers in certain industries may also be reviewed on competition grounds
by other federal agencies.
Motives for Mergers Among Rivals.
o Firms commonly seek to make acquisitions for a number of reasons that do not
raise antitrust concerns:
 To reduce costs or improve products in ways unavailable to the merger
partners individually,
 To improve the profitability of the acquired assets by replacing ineffective
management,
 To obtain tax advantages in some situations, and
ANTITRUST OUTLINE 29

To satisfy the pride of some managers who obtain personal satisfaction
from controlling large corporate empires.
o An acquisition may permit the merger partners to obtain market power in three
ways:
 Coordinated Competitive Effects: By reducing the number of competitors,
a merger may make it easier for rivals in a market to collude tacitly or
achieve higher prices through consciously parallel conduct after the
merger. These mergers would raise the same kind of concern about
collusive conduct that might also arise in agreements among rivals to fix
prices or divide markets.
 Unilateral Competitive Effects: If the merging firms are the only two
participants in the relevant market, their merger to monopoly could result
in unilateral competitive effects because, once merged, they could raise
prices without needing to coordinate. A merger may also allow two
merging firms that sell products that are close substitutes to coordinate
their business strategies, lessening the competitive constraint the sellers
pose for each other and leading to higher prices. These unilateral
competitive effects may be understood as reflecting collusive competitive
concern.
 Exclusionary Anticompetitive Effects: A merger may allow firms to
obtain market power by impairing rivals’ access to key inputs or
distribution channels.
o A merger may create opposing incentives for merging firms:
 An incentive to raise price that may result from an increase ability to
exercise market power, and
 An incentive to lower price that may derive from efficiencies.
The Rise and Fall of the Structural Presumption
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The Emergence of the Structural Presumption
o Brown Shoe (1962):
 This case involved a very fragmented industry of shoe manufacturing and
retailing.
 Proposed merger: Brown Shoe wanted to acquire Kinney.
 Kinney
o 0.5% of domestic manufacturing
o 1.2% of domestic retailing
 Brown Shoe
o 4% of domestic manufacturing
o 6% of wholesale shoes sold nationally
 These were vertically integrated firms in an industry that had a trend
toward more vertical integration.
 There was supposedly no economic justification or benefit for the merger.
 The shoe industry was being subjected to a cumulative series of vertical
mergers that, if left unchecked, would be likely substantially to lessen
competition.
30 ANTITRUST OUTLINE

The court discussed the congressional intent of the Clayton Act
amendments.
 The court says that if it approves this merger and therefore allows Brown
Shoe to have 5% market power, it would be required to allow future
merger efforts by Brown’s competitors to go through.
 The fact that the share would be held by a large national chain could
adversely affect competition.
 The merger also creates a large national chain that is integrated with a
manufacturing operation.
 Their expansion is not rendered unlawful by the mere fact that small
independent stores may be adversely affected. It is competition, not
competitors, which the Act protects. But the court cannot ignore
Congress’s intent to promote competition through the protection of viable,
small, locally owned business.
 Another factor to be considered in evaluating the probable effects of a
merger in the relevant market is a history of tendency towards
concentration in the industry.
 Congress says that tendencies towards concentration in industry are to be
curbed in their incipiency, particularly when those tendencies are being
accelerated through giant steps striding across a hundred cities at a time.
 This case sets forth inconsistent themes:
 It is competition, not competitors, that the antitrust laws protect,
but
 Congress wants to increase competition by protecting small
businesses.
 How can mergers harm competition by lowering costs?
 Note: modern courts and commentators no longer view an
“efficiency offense” as a viable basis for a claim under the antitrust
laws.
o Philadelphia National Bank (1963):
 Proposed merger: PNB sought to merge with Girard
 36% of the area banks’ total assets
 36% of deposits
 34% of net loans
 Trend toward concentration of banks in the Philadelphia area was
noticeable.
 Business justifications were presented by the defendants.
 The statutory test under Section 7 of the Clayton Act is whether the effect
of the merger may be substantially to lessen competition in any line of
commerce in any section of the country.
 Philadelphia is the relevant market.
 The intense congressional concern with the trend towards concentration
warrants dispensing with elaborate proof of market structure, market
behavior, or probably anticompetitive effects.
 A merger that produces a firm controlling an undue percentage share of
the relevant market and results in a significant increase in the
ANTITRUST OUTLINE 31
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
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
concentration of firms in that market is so inherently likely to lessen
competition substantially that it must be enjoined in the absence of
evidence clearly showing that the merger is not likely to have such
anticompetitive effects.
Such a test lightens the burden of proving illegality only with respect to
mergers whose size makes them inherently suspect in light of Congress’
design in Section 7 to prevent undue concentration.
The court does not specify a threshold, but rather just says that 30% of the
market share is clearly above that threshold. An increase of more than
33% in concentration must be regarded as significant.
The defendants do nothing to rebut the inherently anticompetitive
tendency manifested by the percentages.
 The district court places too much weight on the lay evidence on
such a complex problem. The witness failed to give concrete
reasons for his conclusions.
 It doesn’t matter that there are 40 other banks in the area. The
problem is the concentration.
The three affirmative justifications are not valid.
 Only through mergers can banks follow their customers to the
suburbs.
o The court says that instead, they should open up branches.
o Corporate growth by internal expansion is socially
preferable to growth by acquisition.
o I actually disagree. Expansion internally is more expensive
than a merger. Also, the goal of every entrepreneur is to be
able to sell his business.
 The increased lending limit of the resulting bank will enable it to
compete with the large New York banks for very large loans.
o If anticompetitive effects in one market could be justified
by procompetitive consequences in another, the logical
upshot would be that every firm in an industry could,
without violating Section 7, embark on a series of mergers
that would make it in the end as large as the industry
leader.
o If all the commercial banks in the Philadelphia area merger
into one, it would be smaller than the largest New York
City bank.
 Philadelphia needs a bank larger than it now has in order to bring
business to the area and stimulate its economic development.
o A merger is not saved because it may be deemed beneficial
if it violates Section 7.
o Congress determined to preserve our traditionally
competitive economy.
o It therefore proscribed anticompetitive mergers, the benign
and the malignant alike, fully aware that some price might
have to be paid.
32 ANTITRUST OUTLINE

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Von’s Grocery (1966): A combined 7.5% market concentration of the two
merging firms is enough when the industry shows a trend towards
concentration. That trend is enough to violate Section 7.
 Pabst Brewing (1966): A combined 4.49% market concentration of the
two merging firms is enough. Rapid consolidation was a key feature.
 There is an alternative explanation for the trend towards concentration:
technological developments that lower the costs of transportation and
communication lead some markets to grow in size.
 When firms find themselves in expanding markets, they find it
profitable to make large investments in advertising or research and
development.
 Markets become more concentrated as they grow in size.
 Increasing industry output suggests that prices will decline even
though the number of firms is shrinking.
The Erosion of the Structural Presumption
o General Dynamics (1974): The Supreme Court makes clear that the presumption
of anticompetitive effects derived from concentration is rebuttable.
 The trend in the coal industry has been towards increased concentration.
 The percentage increases in concentration are roughly comparable to those
found in Von’s Grocery.
 The issue is whether the district court was justified in finding that other
pertinent factors affecting the coal industry and business of the defendants
mandated a conclusion that no substantial lessening of competition
occurred or was threatened by the acquisition.
 In Brown Shoe, the court cautioned that statistics concerning market share
and concentration, while of great significance, were not conclusive
indicators of anticompetitive effects.
 Findings of the district court:
 First, coal had become increasingly less able to compete with other
sources of energy in many segments of the energy market.
 Second, to a growing extent since 1954, the electric utility industry
has become the mainstay of coal consumption.
 Third, to an increasing degree, nearly all coal sold to utilities is
transferred under long-term requirements contracts.
 In the coal market, statistical evidence of coal production was of
considerably less significance.
 A company’s past ability to produce is of limited significance,
since it is in a position to offer for sale neither its past production
nor the bulk of the coal it is presently capable of producing
because it is already committed under a long-term contract.
 A more significant indicator of a company’s power effectively to
compete with other companies lies in the state of a company’s
uncommitted reserves of recoverable coal.
 The entity to be purchased had unpromising coal reserve prospects and
was unable to compete effectively for future contracts. It had neither the
ANTITRUST OUTLINE 33
possibility of acquiring more reserves nor the ability to develop deep coal
reserves.
 Although this case makes clear that the structural presumption was
rebuttable, the successful rebuttal was arguably on narrow grounds: that
concentration was measured incorrectly.
 However, most courts read General Dynamics more broadly to permit a
wide-ranging analysis of whether market shares accurately reflect the
merging firms’ ability to compete.
o The 1982 Guidelines declared that concentration was highly influential but not
outcome-determinative in evaluating acquisitions among rivals.
o General Dynamics was the last major Supreme Court decision on merger
jurisprudence.
 The lower courts have not adhered closely to the letter or spirit of the
Supreme Court’s merger jurisprudence
 They have:
 Raised the market share thresholds for presuming illegality, and
 Shown that the nominal opportunity for defendants to rebut the
presumption can be exercised successfully.
 Discussions of the political and social values of preferring economic
decentralization at the possible cost of economic efficiency have vanished
from the lower decisions.
 The federal guidelines use the structural presumption of Philadelphia
National Bank but with several qualifications:
 They emphasize that the examination of market shares only starts
the inquiry.
 They underscore the need to assess other variables that shed light
on whether the merging parties, acting alone or coordinating with
rivals, could raise prices.
 The threshold is also well above 4.49% of Pabst.
 The FTC and DOJ tend to only sue when a merger reduces the number of
companies in the market to fewer than four.
 Congress has not amended Section 7 to forestall the drift away from the
tenets of the Court’s merger cases.
 Other non-merger Supreme Court decisions indicate that the Court agrees
with the views embraced in lower court decisions. The Court would decide
the old merger cases differently today.
o Baker Hughes (1990): A defendant seeking to rebut a presumption of
anticompetitive effects must show that the prima facie case inaccurately predicts
the relevant transaction’s probable effect on future competition. The more
compelling the prima facie case, the more evidence the defendant must present to
rebut it successfully. A defendant can make the required showing by affirmatively
showing why a given transaction is unlikely to substantially lessen competition, or
by discrediting the data underlying the initial presumption in the government’s
favor.
 By showing that a transaction will lead to undue concentration in the
market for a particular product in a particular geographic area, the
34 ANTITRUST OUTLINE
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

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government establishes a presumption that the transaction will
substantially lessen competition.
Evidence on a variety of factors can rebut a prima facie case, such as the
absence of significant entry barriers in the relevant market. However, this
is not the only thing that the government should focus on.
Evidence of market concentration simply provides a convenient starting
point for a broader inquiry into future competitiveness.
The Supreme Court has never indicated that a defendant seeking to rebut a
prima facie case is restricted to producing evidence of ease of entry.
DOJ’s own Merger Guidelines discusses non-entry factors that can
overcome a presumption of illegality established by market share
statistics.
 Changing market conditions,
 The financial condition of the firms in the relevant market,
 Special factors affecting foreign firms,
 The nature of the product and the terms of sale,
 Information about specific transactions and buyer market
characteristics,
 The conduct of firms in the market,
 Market performance, and
 Efficiencies.
The statistics used in this case were misleading.
 The U.S. HHUDR market is minuscule, and thus market share
statistics are volatile and shifting, and easily skewed.
 Because of this, selling one more HHUDR can increase a market
share by 5%.
 High concentration has long been the norm in this market, but
there is no proof of overpricing, excessive profit, or any decline in
quality, service, or innovation.
 The product is esoteric and the market is small.
The customers who purchase HHUDR’s are sophisticated.
 These products cost hundreds of thousands of dollars. Orders can
exceed $1 million.
 HHUDR buyers must closely examine all available options and
typically insist on receiving multiple, confidential bids for each
order.
 This is likely to promote competition.
The defendants may, but do not have to, prove that entry to the market
would be quick and effective.
 Section 7 involves probabilities, not certainties or possibilities.
 A defendant cannot realistically be expected to prove that new
competitors will quickly of effectively enter unless it produces
evidence regarding specific competitors and their plans.
 A firm that never enters a given market can nevertheless exert
competitive pressure on that market. The threat of entry can
ANTITRUST OUTLINE 35
stimulate competitors in a concentrated market, regardless of
whether entry ever occurs.
 Two companies had entered the HHUDR market before and were poised
for future expansion.
 Firms in other countries are also easily able to expand to the U.S. market.
 A “clear” showing is unnecessary. The defendants are only required to
produce “sufficient evidence.”
o Heinz: High concentration in a market with barriers to entry does not alone entitle
the government to a preliminary injunction, and a successful rebuttal requires
evidence showing that market share statistics provide an inaccurate account of the
merger’s probably effects on competition.
 The determine the likelihood of success of a Section 7 claim on the merits,
the courts measure the probability that, after an administrative hearing on
the merits, the Commission will succeed in proving that the effect of the
merger may be substantially to lessen competition, or to tend to create a
monopoly.
 Section 7 Clayton Act Test:
 First, the government must show that the merger would produce a
firm controlling an undue percentage share of the relevant market,
and would result in a significant increase in concentration of firms
in that market.
 Such a showing establishes a presumption that the merger will
substantially lessen competition.
 To rebut that presumption, the defendants must produce evidence
that shows that the market-share statistics give an inaccurate
account of the merger’s probable effects on competition in the
relevant market.
 If the defendants successfully rebut the presumption of illegality,
the burden of producing additional evidence of anticompetitive
effects shifts to the government, and merges with the ultimate
burden of persuasion, which remains with the government at all
times.
 Note: This test can be used at both the merits stage and the
preliminary injunction stage.
 The government satisfied the first part of the test.
 In this case, the baby food industry was highly concentrated premerger, and the merger would increase that concentration in excess
of the threshold set forth in the Guidelines.
 There are high barriers to market entry.
 Three rebuttal arguments:
 There is little competitive loss from the merger because Heinz and
Beech-Nut do not really compete against each other at the retail
level.
 The anticompetitive effects of the merger will be offset by
efficiencies resulting from the union of the two companies –
36 ANTITRUST OUTLINE
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
efficiencies that they assert will be used to compete more
effectively against Gerber.
 The merger is required to enable Heinz to innovate, and thus to
improve its competitive position against Gerber.
There was one expert who testified for the defendants who said that there
would be too many cartel problems for the defendants to collude.
 However, the expert did not tell the court exactly why the baby
food market was different than other market.
 The defense was required to make a specific showing that these
cartel problems are so much greater in the baby food industry than
in other industries that they rebut the normal presumption that
collusion is likely in a merger to duopoly.
The court gives concentration evidence substantial weight, as opposed to
the “convenient starting point” in Baker Hughes.
Measuring Market Concentration
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Market concentration is examined using the Herfindahl-Hirschman Index (HHI).
It takes into account both the numbers and relative size of the firms in the market.
It is computed by squaring the market share of each firm and summing the resulting
numbers.
The HHI ranges from 0 to 10,000.
o A perfectly competitive industry, with no firm having as much as 1% of the
market, would have an HHI near zero.
o A monopolist, with 100% of the market, would have an HHI of 10,000.
The relationship between concentration and market power is no longer thought to be as
strong as was believed at the time of Philadelphia National Bank.
The relation, if any, between seller concentration and profitability is weak statistically
and the estimated concentration effect is usually small.
The empirical economic evidence does not support the structuralist view that high market
concentration makes tacit collusion inevitable.
There is no well-established critical concentration ratio.
The Merger Guidelines specify safe harbors for mergers in relatively unconcentrated
markets or for mergers in more concentrated markets that do not increase concentration
very much.
Mergers are unlikely to be challenged if:
o The post-merger HHI is below 1000 (unconcentrated markets),
o The post-merger HHI is between 1000 – 1800 (moderately concentrated markets)
and the HHI rises by no more than 100 points, or
o The post-merger HHI is above 1800 (highly concentrated markets) and the HHI
rises by no more than 50 points.
For mergers that do not fall within safe harbors based on low market concentration, the
Merger Guidelines call for further competitive analysis with market shares taken into
account to the extent they bear on the likely competitive effects of the transaction.
Under some circumstances, the historical market share of a firm may overstate its
competitive significance.
ANTITRUST OUTLINE 37
Market Definition
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Cardinal Health: The outer boundaries of a product market are determined by the
reasonable interchangeability of use or the cross-elasticity of demand between the
product itself and substitutes for it.
When one product is a reasonable substitute for another, it is to be included in the same
relevant product market even though the products themselves are not the same.
The higher the cross-elasticity, the more likely it is that the alternative products are to be
counted in the relevant market.
The relevant market consists of all of the products that the defendants’ customers view as
substitutes to those supplied by the defendants.
However, the mere fact that a firm may be termed a competitor in the overall marketplace
does not necessarily require that it be included in the relevant product market for antitrust
purposes.
Within a broad market, well-defined submarkets may exist which, in themselves,
constitute product markets for antitrust purposes.
Staples (1997):
o The main issue was the relevant product market.
 The FTC defined the product market as the sale of consumable office
supplies through office superstores, with “consumable” meaning products
that consumers buy recurrently or items that get used up or discarded.
 The defendants defined it as the sale of office products, of which a
combined Staples-Office Depot accounted for 5.5% of total sales in North
America.
o The mere fact that a firm may be termed a competitor in the overall marketplace
does not necessarily require that it be included in the relevant product market for
antitrust purposes.
o Practical indicia for determining the presence of a submarket:
 Sensitivity to price changes,
 Uniqueness of the product or service within the broader market,
 Industry or public recognition of the submarket as a separate economic
entity,
o Pricing evidence presented by the FTC:
 Comparison of Staples’ prices in geographic markets where Staples in the
only office superstore to markets where Staples competes with Office
Depot or Office Max, or both.
 Prices are 13% higher in markets where it faces no competition.
 Internal Staples documents present price comparisons between Staples’
and Office Depot’s prices, and Staples’ and Office Max’s prices, within
different price zones.
o Office superstore prices are affected primarily by other office superstores.
o All of these different competitors that sell office supplies but are not office
superstores are present in the price zones described, but they do not affect price.
o A small but significant increase in Staples’ prices will not cause a significant
number of consumers to turn to non-superstore alternatives for purchasing their
consumable office supplies.
38 ANTITRUST OUTLINE
o Office superstores are unique. You know it when you see it. No one entering
Staples would mistakenly think he or she was in Best Buy.
o Superstores’ customer base overwhelmingly consists of small businesses with
fewer than 20 employees and consumers with home offices.
o Internal documents show that both Staples and Office Depot focus primarily on
competition from other superstores. They view other superstores, not other stores
that sell office supplies, as competitors.
o Probable effect on competition:
 Examine concentration statistics and HHIs within the geographic markets.
 The average increase in the HHI caused by the merger would be
2,715 points.
 In some markets, post-merger HHI would be 10,000.
 Post-merger HHIs range from 5,000 to 10,000.
 The evidence of defendants’ own current pricing practices shows that an
office superstore chain facing no competition from other superstores has
the ability to profitably raise prices about competitive levels.
 Eliminating this competition with one another would free parties to charge
higher prices in many other markets.
 Absent the merger, firms are likely and in fact have planned to enter more
of each other’s markets, leading to a deconcentration of the market and,
therefore, increase competition between the superstores.
 Direct evidence shows that by eliminating Staples’ most significant and
often only rival, this merger will allow Staples to increase prices or
otherwise maintain prices at an anticompetitive level.
o Efficiencies
 Whether an efficiencies defense showing that the intended merger would
create significant efficiencies in the relevant market, thereby offsetting any
anticompetitive effects, may be used by a defendant to rebut the
government’s prima facie case is not entirely clear.
 Even if it is a defense, it doesn’t work in this case.
 The defendants must simply rebut the presumption that the merger will
substantially lessen competition by showing that the FTC’s evidence gives
an inaccurate prediction of the proposed acquisition’s probably effect.
 The defendants’ cost savings estimates are unreliable.
 The estimates presented to the board are almost 500% greater than
the figures presented to the two Boards of Directors at the time of
approval of the mergers.
 Defendants failed to produce verification of the estimates.
 The defendants’ expert was unable to explain her methodology.
 The estimates included stand-alone savings that would have
occurred regardless of whether or not the merger was
consummated.
 The defendants are not likely to pass the savings to customers.
 The defendants normally pass on savings to customers.
ANTITRUST OUTLINE 39

But in this case, they claim that they will pass on 70% of the
savings to customers, when historically they only pass 15%
through.
Pre-Merger Notification and the Enforcement Process
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The Hart-Scott-Rodino Antitrust Improvements Act (HSR Act) created a system of premerger notification; mergers today are commonly challenged upon their announcement.
o Retrospective merger review often made remedy a difficult problem because it
required a court to unscrambled integrated business assets and activities.
o Challenges after consummation created uncertainty for the merged entity.
o Retrospective review in theory permitted courts to judge mergers based on their
actual effects.
o In practice, however, courts often discounted favorable post-transaction evidence
on the ground that the firm’s managers were aware that government investigation
and judicial review were pending.
Prospective merger review requires enforcers and courts to make a prediction about the
likely competitive effects of the deal.
A structural presumption predicts anticompetitive effects based on significant increases in
market power. It is a legal device for making predictions about the competitive effects of
mergers in an environment of uncertainty.
The statute generally requires that firms report all stock or asset acquisitions, including
those involved in the formation of a joint venture, above certain thresholds based on the
size of the transaction and the size of the parties. The thresholds are indexed for inflation.
Failure to file notice may result in penalties.
Once a merger is reported to government antitrust enforcers, the transaction may not be
closed and joint operations may not begin for several weeks.
Stages of Merger Reviews:
o Filing: Transaction filed with the FTC and DOJ.
o Clearance: DOJ and FTC decide which agency, if any, will investigate. If neither
agency wishes to investigate, and early termination has been requested by the
parties, it will generally be granted.
o Initial Waiting Period: The investigating agency decides whether to issue a
second request. The merging firms cannot close their transaction for 30 days
follow the date of the filing (15 days for a cash tender offer or an acquisition in
bankruptcy), unless early termination of the waiting period is granted. The
waiting period is extended if there is a second request.
o Second Request: The investigating agency may request additional information.
The second request is typically extensive although it may be reduced by mutual
agreement, and parties may take weeks or sometimes months to comply with it.
o Second Waiting Period: The investigating agency decides whether to challenge
the deal. The parties may not close their transaction until they have substantially
complied with the second request and a second waiting period of 30 days (ten for
a cash tender offer or an acquisition in bankruptcy) is complete. If the agency
brings a court challenge, it will typically seek a temporary restraining order or
negotiate with the parties to prevent consummation of the transaction while the
preliminary injunction hearing is pending.
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The vast majority of reported transactions are not investigated beyond the initial waiting
period.
The second request typically includes extensive interrogatories and document requests,
though its scope is often modified in negotiations with the parties in order to satisfy the
agencies’ information needs at less of a burden to the merging firms.
Parties may consummate their transaction after a second waiting period is complete,
unless doing so is enjoined by the court.
After reviewing the merging firms’ response to a second request, the agencies may
identify competitive concerns.
Agency concerns are generally not resolved through litigation. Parties sometimes:
o Withdraw the filing, restructure their transaction to avoid agency concerns, and
refile.
o Negotiate a limited divestiture of some of the merger firm’s assets to resolve the
agency’s competitive concerns.
In cases where the enforcement agency has competitive concerns but a settlement cannot
be reached, the agencies file a complaint to enjoin the merger.
Often, merging firms will choose not to litigate.
Trial would be before an FTC administrative law judge in an FTC case and before the
federal court in a DOJ case.
State attorneys general and private parties may also challenge mergers in court, though
such actions are also rare.
The states in particular are active in merger review, often investigating a transaction
simultaneously with the federal investigation.
States also may challenge transactions on their own if the federal agencies choose not to,
or even after a federal agency has resolved its concerns by consent order.
Private parties may also challenge mergers regardless of the outcome of federal
enforcement agency review.
In planning a transaction or cooperating to complete the HSR premerger review process,
the parties to a proposed consolidation must exercise care not to coordinate their affairs in
a manner that assumes the deal is an accomplished fact. Otherwise, they could be held
liable for those actions under Sherman Act Section 1.
Proving that a Merger Will Cause Coordinated Anticompetitive Effects
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Hospital Corp.:
o The fewer competitors there are in a market, the easier it is for them to coordinate
their pricing without committing detectable violations of section 1 of the Sherman
Act.
o Certificate-of-need law prevents outsiders from building new hospitals; the
defendants could oppose the granting of a certificate.
o The requirement of notice makes it harder for the member of a hospital cartel to
cheat by adding capacity in advance of other members.
o Patients cannot go to a hospital in another city for emergency services; and
doctors will not send their patients to a hospital where they do not have privileges.
o Most hospital services cannot be provided by nonhospital providers.
o Demand for hospital services by patients and their doctors is highly inelastic
under competitive conditions.
ANTITRUST OUTLINE 41
o Most hospital bills are paid largely by insurance companies or the federal
government rather than by the patient.
o A low elasticity of demand means that raising price will cause a relatively slight
fall in demand, with the result that total revenues will rise sharply.
o There is a tradition of cooperation between competing hospitals in Chattanooga.
o The hospitals all have the same management.
o Hospitals are under great pressure from the federal government and the insurance
companies to cut costs. One way of resisting this pressure is by presenting a
united front in negotiations.
o Section 7 does not require proof that a merger or other acquisition has caused
higher prices in the affected market. All that is necessary is that the merger create
an appreciable danger of such consequences in the future.
o Defendants arguments
 Hospital services and sellers are complex and heterogeneous in this
market.
 However, hospital services are no more complex than any other
products.
 A different mixture of services in different hospitals would not
make it difficult for owners to fix prices for competing services.
 The changing industry may make collusion more difficult but also more
urgent for stabilization.
 The concentration of the buying side of a market does inhibit collusion,
but third-party payers are not the same as large buyers. Blue Cross could
not tell its subscribers that it will not reimburse them for any hospital
services there because prices are too high.
 A rational competitor would not complain about collusion because it
would also benefit from the higher prices. The complaining hospital must
have thought that the acquisition would lead to lower prices. But this is
just one opinion.
o Factors Urged by the Parties in Hospital Corp.:
 Facilitating Tacit Collusion (FTC):
 Reduction in the numbers of competitors, leading to a market
controlled by four firms;
 Absence of competitive alternatives within the relevant geographic
market;
 Regulatory limitations on output expansion or entry by nonmerging firms (state certificate-of-need law);
 Highly inelastic demand under competitive conditions;
 Tradition of cooperation among rival sellers, including routine
exchange of information on prices and costs; and
 Sellers understand that cooperation would permit them to resist
external pressures to lower price (motive to coordinate).
 Frustrating Tacit Collusion (Hospital Corp.)
 Hospital services are complex and heterogeneous;
 Sellers are heterogeneous;
 Industry is undergoing rapid technological and economic change;
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 Buyers are large and sophisticated; and
 FTC investigation was triggered by competitor complaint.
Conscious Parallelism: If the firms in an oligopoly are able to achieve high prices without
reaching an agreement, they may exercise market power without violating Section 1 of
the Sherman Act.
o An acquisition that appears likely to facilitate tacit collusion violates Section 7 of
the Clayton Act, even if the coordinated behavior that results would not itself be
subject to attack under the antitrust laws.
o From this perspective, the merger laws are prophylactic, intended to limit the
spread of coordinated pricing.
In order to conclude that coordinated competitive effects are likely to result from merger,
it is necessary to make two showings:
o The first is to demonstrate that the post-merger market is conducive to
coordination (i.e. that the firms likely can reach a consensus on terms of
coordination and deter cheating on those terms).
o The second is to show that the merger makes a difference (i.e. that the merger
increases the likelihood that firms in the market can successfully raise price
through coordination or that the merger makes it likely that ongoing coordination
would become more effective).
A substantial increase in market concentration is generally thought to raise the odds that a
firm can reach consensus and deter cheating.
The merger may alter certain factors facilitating or frustrating coordination to improve
the prospects of coordination.
A merger may make coordination more likely or more effective by leading a maverick
firm in the relevant market to compete less aggressively.
o Incomplete Coordination Leads Naturally to Mavericks
 When coordination occurs, it is likely to be imperfect and incomplete.
 A maverick firm is one that is nearly indifferent between coordination and
cheating, and in consequence constrains coordination from becoming
more effective.
 There could be more than one maverick in a market, particularly in
markets where it is impossible for firms to reach consensus or deter
cheating.
 A maverick could take the lead in starting price wars or sales. It could also
keep price from rising merely by refusing to follow rival attempts to raise
price.
 Rivals would be expected not to attempt to increase price unless they had
reason to think that industry conditions had changed in a way that would
lead the maverick to go along.
o Identifying Mavericks
 Three strategies are available to identify mavericks
 A maverick firm might be identified based on past conduct
showing that the firm has actually constrained industry pricing.
 Look for natural experiments that identify the firm that constrains
industry pricing.
ANTITRUST OUTLINE 43

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Look for features of market structure that tend to suggest that a
firm would prefer lower coordinated price than would its rivals.
 A variety of structural characteristics might give a firm a greater economic
incentive to prefer a lower coordinated price than do its rivals or to
otherwise deviate from terms of coordination when its rivals would not.
o The Significance of Mavericks for Merger Analysis
 Mergers Involving a Maverick
 A merger involving the maverick may harm competition by
removing the maverick from the marketplace.
 The concept of a maverick could operate as a sword, explaining
why the prospective increase in market concentration generated by
merger is likely to lead to higher prices.
 Mergers Involving Non-Mavericks
 The transaction may have no effect on competition.
 The industry maverick may continue to constrain prices after the
merger much as it did before.
 The concept of a maverick would operate as a shield to undermine
an antitrust challenge to a merger that increases market
concentration.
 In order for the loss of a non-maverick firm to make coordination
more effective, the merger must affect the maverick’s incentives.
 A merger involving non-mavericks could instead promote
competition by creating a new industry maverick.
 The acquisition could confer such large efficiencies on the merging
parties as to lead them to prefer a much lower price than either did
before the transaction, and below the price desired by the current
industry maverick.
 Coordinated Competitive Effects Analysis Without a Maverick
 It will not always be possible to identify the maverick with
precision or to determine with confidence how the loss of a firm
through merger affects the maverick’s incentives.
 When courts and enforcers cannot identify a maverick in a market
conducive to coordination, they tend to have difficult explaining
why the particular merger under review matters.
 Courts routinely rely on changes in market structure, particularly
the structural presumption, to explain the incremental impact of a
merger on coordinated conduct.
 The maverick analysis provides a theoretical connection between
market concentration and more effective coordination.
 The fewer the number of significant sellers, the more likely it will
be that the loss of any one would involve the loss of a firm that
constrains the effectiveness of coordinated conduct.
 If the merger narrows differences in product attributes across firms
or differences in seller costs, the odds that the merger involves a
maverick will increase.
Competitor versus Customer Complaints
44 ANTITRUST OUTLINE
o The very fact of a competitor complaint is inconsistent with the government’s
anticompetitive theory.
o Only if the merger would promote competition and lead to lower prices, would
rivals lose profits and be expected to oppose the deal.
o Customer views normally would be aligned with public interest.
o If the merger would raise price, customers should object; if it would lower price,
they should favor the transaction.
o Courts should employ the identity of the plaintiff as a filter for screening out
unpromising cases. Some judges think that lawsuits brought by rivals should be
dismissed outright.
o Agencies routinely talk to rivals to learn about the industry and facts, but such
information may be discounted to the extent the rivals are seen as interested
parties.
o Customers and suppliers may be less informed about the market than rivals, but
they interests may generally be more aligned with the public interest that the
agency hopes to vindicate.
 However, in some ways, the enforcement agency is in a better position to
learn about competitive conditions in the market than is any firm,
customer, or competitor.
 Sometimes customers may be poor guides to likely competitive effects of
the transaction.
 The inference that a merger is procompetitive from rival complaints
presumes that the anticompetitive harm is collusive, not exclusionary.
o Courts should consider the trustworthiness of evidence from competitors or
customers.
o Buyers are unlikely to have special expertise as to how seller behavior would
change after a merger, which is the competitive effects issue in a coordinated
effects case.
Proving that a Merger Will Cause Unilateral Anticompetitive Effects
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Mergers may also harm competition unilaterally by making it possible for the merged
firm to raise price on its own, without consideration of the likely responses of nonmerging rivals (i.e. in a merger to monopoly).
The Guidelines’ concept of unilateral effects extends beyond the setting of mergers to
monopoly.
The Guidelines set forth two main unilateral competitive effects theories.
o One for markets in which products are differentiated.
o One for markets in which products are homogeneous.
Differentiation is common in branded consumer products in industries (soft drinks), in
markets where buyers see important differences in the nature or quality of services
(automobiles), and in industries where differences in seller locations are important to
buyers (supermarkets).
Kraft (1995): It would not be profitable for Kraft to raise the price of Grape Nuts in the
expectation that a substantial portion of its lost sales would go to Nabisco Shredded
Wheat, because it is likely that the lost sales would de dispersed among a wide variety of
products, and that Nabisco Shredded Wheat would only gain a small percentage of those
losses.
ANTITRUST OUTLINE 45
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o First, the court looked at the extent to which the two brands had similar physical
characteristics and images.
o Second, the court relied upon customer testimony about the extent of buyer
substitution between the brands.
o Third, the court relied upon marketing survey data about the characteristics of
each brand’s customers.
o Fourth, the court examined the extent to which the merging firms monitored and
responded to key marketing decisions of each other.
o Fifth, the court relied upon an econometric study of buyer demand conducted by
defendant’s expert economist (low cross-price elasticities of demand)
o The court looked to the Merger Guidelines as persuasive authority.
o Both market definition (under the Guidelines approach) and unilateral effects
among sellers of differentiated products turn on the same economic force: demand
(buyer) substitution.
Unilateral effects can be a motive for a merger.
o If the manufacturer for Product A acquires Product B (a substitute for Product A),
it can raise the price of Product A because customers will either buy the higher
priced Product A or switch to Product B.
o Product B need not be the most preferred alternative among the buyers who
switch away from Product A in response to a price rise in order for the merger to
create harmful unilateral effects, so long as Product B is the preferred alternative
for a substantial group of those buyers.
o The higher price of the merged firm’s products may make it profitable for nonmerging rivals to raise the prices for their products.
o There are two kinds of defenses that the merging firms might offer:
 Expansion of output by rival suppliers, as through entry of new products,
either by new or established firms, or the repositioning of existing
products by competing firms (modifying product or brand attributes, or
extending brands by adding variants to the product line).
 Efficiencies from that merger may counteract the incentive to raise price.
o Economists analyzing unilateral effects have developed sophisticated simulation
tools for predicting the post-merger price.
Staples (1997):
o In general, there is a little need to engage in a detailed economic analysis of
competitive effects if the transaction is a merger to monopoly.
o The court concluded that Staples and Office Depot were the first and second
choices for a substantial number of office supply customers, giving the merged
firms an incentive to raise prices after the merger without regard to the presence
of other non-superstore rivals in the market.
o Staples could recapture many of the customers that would have been diverted by
higher prices at its original stores to previously Office Depot stores, thus making
the increased prices more likely to be profitable.
o If the loss of head-to-head competition among merger partners would permit the
firms to raise price regardless of the response by other sellers in the market, the
competitive concern can be described equivalently as a unilateral competitive
46 ANTITRUST OUTLINE
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effect within a broad market, or as a merger to near monopoly within a narrow
submarket.
After the 1992 Merger Guidelines, the unilateral competitive effects analysis of mergers
among sellers of differentiated products became the predominant theory of economic
harm pursued in government merger investigations and challenges.
Concerns about the practical implementation of the unilateral effects approach:
o The unilateral approach may render market definition unnecessary, as harm can
be found without regard to whether market shares are large or small.
 Market definition may be reverse engineered (i.e. defined by the set of
customers likely to be harmed by the merger).
 Clayton Act requires market definition.
o A number of econometric and conceptual issues may arise when attempting to
assess quantitatively, through analysis of historical pricing data, the unilateral
incentive to raise price arising from a given merger.
o Anticompetitive harm will always be found, to at least some degree, if
efficiencies, repositioning, and entry cannot be taken explicitly into account.
 To address this concern, Merger Guidelines incorporate a safe harbor
provision that was intended to bar challenge to mergers among sellers of
differentiated products on a unilateral competitive effects theory unless the
merging firms have a combined market share in excess of 35%.
 However, it is restricted to those rare cases in which the likely harm to
competition (closeness of substitutes) is inferred solely from market
shares.
Although the unilateral theory of competitive effects among sellers of differentiated
products is well established at the federal enforcement agencies, merger litigation framed
around this theory is rare and the judicial reaction has been mixed.
Oracle: To prevail on a differentiated products unilateral effects claim, a plaintiff must
prove a relevant market in which merging parties would have essentially a monopoly or
dominant position.
o This standard is controversial.
o Sometimes, the products of the merging firms are the first and second choice for
many customers, but more customers of each could pick a different brand. Thus
the merging firms do not have to have market power to benefit from unilateral
effects.
o Some economists have argued that market definition is unimportant or
unnecessary in order to prove unilateral effects, as the same evidence about
demand substitution would be analyzed in the same way regardless of how the
claim is framed legally.
o It may be hard to identify clear breaks in the chain of substitutes.
Whole Foods: the product market includes all supermarkets, not just those that sell
natural and organic products.
Defenses to a Merger Challenge
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Under the Merger Guidelines, once market concentration is found to exceed safe harbor
levels and a plausible threat of unilateral or coordinated effects is demonstrated, the
inquiry turns to two factors that can mitigate competitive concerns: entry and efficiencies.
ANTITRUST OUTLINE 47
Entry
- If the threat of entry would prevent price from rising after a merger, the merger would not
make coordinated or unilateral price increases more likely, or otherwise generate more
market power.
- Waste Management (1984):
o A post-merger market share of 48.8% is sufficiency to establish prima facie
illegality under Philadelphia National Bank.
o WMI argues that it is unable to raise prices over the competitive level because
new firms would quickly enter the market and undercut them.
o Under General Dynamics, a substantial existing market share is insufficient to
void a merger where that share is misleading as to actual future competitive
effect.
o A market definition artificially restricted to existing firms competing at one
moment may yield market share statistics that are not an accurate proxy for
market power when substantial potential competition able to respond quickly to
price increases exists.
o The Merger Guidelines not only recognize the economic principle that ease of
entry is relevant to appraising the impact upon competition of a merger by also
state that it may override all other factors.
o In this case, entry into the relevant product and geographic market by new firms
or by existing firms in the area is so easy that any anticompetitive impact of the
merger would be eliminated more quickly by such competition than by litigation.
 All you need is a truck. It has been done in the past.
 Entry by larger companies is relatively easy.
 Out of town haulers can also enter.
 The fact that such entry has not happened more frequently reflects only the
existence of competitive, entry-forestalling prices.
 The present market share of the defendants can be retained only by
competitive pricing. Ease of entry constrains not only the defendants, but
also every firm in the market.
 Existence of good will achieved through effective service is a natural
result, not an impediment to, competition.
 Existing contracts prevent price increases.
o This case signaled to the government that it would be held to its own Merger
Guidelines in court.
o The courts of appeals were willing to allow merger law to embrace modern
economic thinking even without further guidance from the Supreme Court.
- Evidence of history of entry, without further analysis, is double-edged.
o If entry occurred in the past, that fact is consistent both with low entry barriers in
the past (which permitted the entry to occur) and with the exercise of market
power in the past (which induced that entry).
o If entry did not occur in the past, that fact is consistent both with a competitive
market (which made entry unattractive even though it was possible) or with the
presence of barriers to entry (which made entry impractical or unprofitable).
- In concluding that evidence of ease of entry sufficiently rebutted the government’s prima
facie case in Baker Hughes, the court specifically rejected the government’s position that
48 ANTITRUST OUTLINE
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the merging firms should have been required to show clearly that entry would be quick
and effective.
Entry Analysis in the Merger Guidelines
o First, the guidelines adopted a three-part test that requires that entry be timely,
likely, and sufficient to solve any competitive harms of the merger.
o The guidelines drew a distinction between uncommitted entry and committed
entry.
 Uncommitted entry is a hit-and-run. Uncommitted entrants are firms that:
 Can enter quickly (within one year), and
 Do so with little in the way of unrecoverable or sunk costs –
expenditures that would be unrecoverable in the event the firm
later chooses to exit the market.
 Committed entrants are in for the long haul.
 Once they enter the market, they expect to stay because to abandon
the market would mean waling away from a substantial sunk
investment.
 An uncommitted entrant considers the current price in the market
while a committed entrant must instead consider what competition
and prices will look like after it enters.
o Entry may depress the market price for two reasons:
 First, the entrant adds output to the market, causing the industry outcome
to move along the demand curve in the direction of a lower price.
 Second, incumbent firms may react to the competition from the new
entrant with an aggressive competitive response (price war) of their own.
o A committed entrant would not find such entry profitable if it has a large
minimum viable scale, measured by break-even annual sales at pre-merger prices
as a percent of the total market.
 There is a 5% benchmark for assessing the magnitude of a minimum
viable scale calculation.
 Both higher fixed costs and higher variable costs of entry would increase
the minimum viable scale.
 The benchmark can be modified if called for by an examination of factors
affecting the sales opportunities available to the committed entrant,
including market growth, the extent to which buyers are locked in to
incumbent sellers through long term contracts or vertical integration, and
the anticipated response of incumbent firms to new entry.
o The guidelines require an analysis of whether committed entry would be timely –
that is, whether it would achieve significant market impact within two years – and
sufficient in magnitude, character, and scope to solve the competitive problem.
o A sufficiency inquiry might consider whether some potential entrant are better
situated than others, or whether entry into one niche of a market characterized by
product differentiation would solve a competitive problem that arises largely in
some other part of the market.
o Committed entry is considered easy, and likely to deter or counteract an
anticompetitive problem from merger, only if that entry satisfies all three tests –
that is, only if it is timely, likely, and sufficient.
ANTITRUST OUTLINE 49
Efficiencies
- Mergers and other cooperative relationships, such as joint ventures, can benefit the
economy by allowing firms to reduce costs or develop better products.
- Cooperation is the basis of productivity.
- Procter & Gamble (1967): Possible economies cannot be used as a defense to illegality.
That decision was made by Congress.
- Judicial hostility to efficiencies has steadily decreased.
- Courts have cited efficiencies as one factor that may be used to rebut the plaintiff’s prima
facie case based on market concentration.
- They have also played a role in successful defenses by the merging firms against
government challenges, although they were not the primary reason for the failure of the
government’s cases.
- The D.C. Circuit observed that the trend among lower courts is to recognize such a
defense.
- In 1997, the government’s Merger Guidelines were revised to articulate an approach for
taking efficiencies into account in evaluating the likely competitive effects of a merger.
- Efficiencies can be the basis for allowing a merger to go forward even though it
otherwise appears likely to be anticompetitive.
- Such efficiencies must be cognizable. They are not cognizable unless they are:
o Substantiated and verified,
o Merger-specific (i.e. they could not practically be achieved through some
reasonable alternative that presents less risk to competition, and
o Not due to anticompetitive reductions in output or service.
- Types of cognizable efficiencies:
o Resulting from shifting production among facilities formerly owned separately,
o Relating to research and development (hard to verify),
- If a merger affects not whether but only when an efficiency would be achieved, only the
timing advantage is a merger-specific efficiency.
- A merger will not be challenged if the cognizable efficiencies are of a character and
magnitude such that the merger is not likely to be anticompetitive in any relevant market.
The efficiencies must reverse the merger’s potential to harm competition as by preventing
pricing increases in that market
- The Guidelines do not discuss how to allocate the relevant burdens of going forward and
persuasion.
- The emphasis here on rebutting the case for anticompetitive effects recalls the shifting
burden of production concept associate procedurally with defenses.
- Efficiencies should be understood as providing an affirmative defense to an otherwise
unlawful merger.
- Note on Efficiencies and Consumer Welfare
o If a merger creates cognizable efficiencies, the agency then asks where they likely
would be sufficient to reverse the merger’s potential to harm consumers in the
relevant market.
o Therefore, the Guidelines are primarily concerned with consumer welfare, not
aggregate welfare.
o This arguable makes consideration of efficiencies part of the competitive effects
analysis – part of the determination of whether the merger will likely raise price –
50 ANTITRUST OUTLINE
o
o
o
o
o
o
o
o
o
o
rather than an analysis conducted in defense of an otherwise anticompetitive
acquisition.
The impact of the analysis will depend on the nature of the harm alleged (i.e.
whether the concern is with coordinated interaction or some type of unilateral
competitive effects.
A focus on competitive effects means that variable cost savings matter more than
reductions in fixed costs, as only the former have the potential to provide
incentives for the merged firm to lower price in the relevant market.
The Guidelines do not insist that cost savings or other efficiencies be passed
through to consumers in order to count, although that requirement is to some
extent implicit in the suggestion that efficiencies must prevent price increases or
otherwise reverse a merger’s anticompetitive potential.
The great the potential adverse competitive effects of a merger, the greater must
be cognizable efficiencies in order to conclude that the merger will not harm
competition (sliding scale approach).
Efficiencies have at times persuaded the enforcement agencies not to bring a case.
Notwithstanding the sliding scale approach of the Guidelines, and the statement
that efficiencies almost never justify a monopoly or near monopoly, efficiency
arguments have occasionally been successful before agencies in highconcentrated markets (mostly in defense industry cases).
Efficiencies have historically had a less friendly reception in the courts.
Efficiencies have not yet been the sole reason for a successful judicial defense to a
government merger challenge, as opposed to proof of entry (Waste Management).
The focus on concentration in Heinz is more related to the continuing
development of doctrinal standards related to the efficiency defense than to any
rethinking of the totality-of-the-circumstances approach.
It may be appropriate for courts to be more skeptical of an efficiencies defense
than an entry defense.
 Efficiencies are being analyzed as a defense – as offered to defeat the
government’s proof of higher prices or other competitive harm rather than
as an affirmative defense that would excuse higher prices.
 Regardless of the formal allocation of the burdens of production or
persuasion, defendants must typically prove efficiencies because the
relevant evidence is more likely under their control.
 Some suggest that efficiency claims are generally more prospective and
more speculative than entry claims.
Failing Firms
- The Supreme Court created a narrow “failing company” defense to Section 7 of the
Clayton Act in International Shoe (1930).
- The Guidelines incorporate failing firm considerations as a defense and allow the
acquisition of a firm notwithstanding possible harm to competition if:
o The firm would be unable to meet its financial obligations in the near future and
unable to reorganize successfully,
o It has made unsuccessful good-faith efforts to sell its assets to a buyer who would
keep its assets in the relevant market and pose a less severe danger to competition
than the proposed merger, and
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o The assets of the failing firm would exit the relevant market absent the merger.
The requirements are to be construed strictly.
Any offer to purchase the assets of a failing firm for a price above the liquidation value of
those assets – the highest valued use outside the relevant market – will be regarded as a
reasonable alternative offer.
A weakened of flailing firm in financial trouble but not close to bankruptcy will not
satisfy the strict tests for application of the failing firm defense.
The merger partners may, however, argue that their transaction is unlikely to harm
competition because the acquired firm, as a result of its financial distress, is unlikely to
be a significant competitive force in the future absent the merger (General Dynamics
defense).
Differences and Similarities Between the US and the EU
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The European Commission (“EC”) is the E.U.’s regulatory body.
Similarities:
o Both jurisdictions require pre-merger notifications of certain large transactions
and impose mandatory waiting periods.
o In both jurisdictions, the enforcement agencies rely principally on information
provided by the merging parties and by interested third parties, including
customers and rivals.
 Second requests in the U.S. tend to be more taxing that the information
required by the EC.
 The EC has a single competition policy entity (DG Comp), and there is no
uncertainty about which instrumentality will review a deal with
community-wide importance.
o The horizontal merger guidelines of the two jurisdictions share a largely common
intellectual vision.
o Judicial decisions in both jurisdictions have pressed enforcement authorities to
satisfy more demanding evidentiary standards and withstand closer judicial
scrutiny of proof offered to demonstrate likely anticompetitive effects.
Differences:
o In the U.S., a decision not to challenge is not subject to judicial review.
o In the E.U., third parties can appeal a decision of the Commission not to intervene
or to resolve competitive concerns with remedies that a third party believes to be
inadequate.
o Unlike U.S. practice, DG Comp is compelled to provide a written opinion
explaining all decisions to intervene and not to intervene.
o U.S. agencies have greater latitude to rely on qualitative subjective judgments
about the strength of efficiency arguments that would weigh in favor of permitting
a merger to take place. The EC would be required to spell out those arguments
and to offer evidence to substantiate them.
o Judicial review for decisions not to prosecute limits the freedom of EC decision
makers to rely on relatively subjective considerations.
o U.S. agencies would not be liable for damages even if their decisions were
overruled by reviewing courts.
o Judicial oversight of EC merger decisions can be a powerful constraint on the
EC’s discretion.
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Occasional Conflict
o The FTC declined to challenge the Boeing-McDonnell Douglas merger.
 The EC challenged it.
 The U.S. warned that an E.U. decision to block the transaction would elicit
U.S. retaliation against E.U. manufacturers.
 EC backed away from the deal, but they obtained a settlement.
o The FTC did not challenge the G.E.-Honeywell merger.
 E.U. did.
 E.U. opposition led the parties to abandon the deal.
On the whole, merger analysis in the E.U. and the U.S. today shares a great deal of
common ground and has been moving towards producing consistent results across
jurisdictions.
See next page for summary.
ANTITRUST OUTLINE 53
Summary and Analysis
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Traditional five step analytical process for determining if a horizontal merger is likely to
harm competition:
o Defining the relevant markets and determining market concentration.
o Assessing potential adverse competitive effects.
o Assessing whether entry would deter or counteract adverse effects.
o Assessing potential procompetitive efficiencies.
o Determining whether one of the merging firms is in such severe financial distress
as to qualify as failing.
54 ANTITRUST OUTLINE
Analyzing mergers.
Does the market
concentration of the
merger exceed "safe
harbor" levels? If it does
not, it will likely not be
challenged.
The DOJ/ FTC tend to only
sue when a merger
reduces the number of
firms in the market to
fewer than four.
The following are safe
harbor levels:
Non- concentrated markets:
the post- merger HHI is
below 1000.
Moderately concentrated
markets: the post- merger
HHI is between 1000- 1800
and the HHI rises by no
more than 100 points.
Highly concentrated
markets: the post- merger
HHI is above 1800 and the
HHI rises by no more than
50 points.
Is the market concentration
sufficiently high as to create a
presumption of
anticompetitive effects?
There is no "critical" level of
concentration. According to
the merger guidelines, an HHI
above 1800 indicates a highly
concentrated market.
Examples of concentration
levels that gave rise to a
structural presumption, usually
along with proof of a trend
towards concentration:
If so, the defendant has an opportunity to rebut
this presumption by showing that, in some way,
the statistics give an inaccurate picture of the
merger's probable effects on competition in the
market.
If not, is there a plausible
threat of unilateral or
coordinated effects after
The defendant can rebut
the merger (See other
the plaintiff's case:
flow chart)
Pabst Brewing: 4.5%
Von's Grocery: 7.5%
Brown Shoe: 4.5- 7.2%
PNB: 35%
General Dynamics: 7.5%
Baker Hughes: 76%
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Monopolization
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To prove a monopolization violation under Section 2 of the Sherman Act, you must
show:
o That the defendant has market power:
 Circumstantial evidence: the defendant has a high market share in the
relevant market along with high profits, or
 Note: high profits could just be due to superior investment in
research and development, which indicates that this isn’t a
monopoly.
 Direct evidence: the defendant engaged in exclusionary conduct by means
other than efficiency in a relatively inelastic market.
 Aggression against rivals through business practices that aren’t
profit maximizing and whose only purpose is driving out
competition or encouraging collusion is improper.
o That the market power was obtained or maintained as a result of a purposeful act.
Exclusionary conduct is thought of as raising costs, even if it involves reducing rival
access to customers or the market.
Complete foreclosure is not necessary for exclusionary conduct to confer market power
on the remaining firms.
Exclusionary practices can create a type of involuntary horizontal cartel, either by
restricting access to suppliers or to distributers.
Exclusionary arrangements with suppliers, distributors, or customers, or even for singlefirm refusals to deal, sometimes may harm competition in much the same way that a
voluntary cartel does.
Economic analysis of raising rivals’ costs:
o Look at whether a firm has been excluded. This step will focus on whether the
excluded firms have practical alternative means of obtaining the supply or
distribution at favorable costs.
o Look at if the excluding firms are able to successfully disadvantage excluded
firms. One must ask whether the exclusionary conduct would be profitable for the
excluding firm, taking into account the costs of doing so.
o Look at whether any resulting benefit to competition would outweigh the
potential harm to competition.
Relevant legal framework:
o Does the defendant have market power?
 What is the relevant product market?
 What is the relevant geographic market?
 What is the defendant’s market share given the relevant market?
 Does the market share rise above the threshold?
 90% is enough
 40% is not enough.
 60-70% would be a tough call.
Market Definition and Market Power
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Market definition will often determine the outcome of the case.
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Courts tend to use alternatives of inferring monopoly of market power from firms’
market shares, at least when coupled with evidence that entry barriers to that market are
relatively high.
o The plaintiff always argues for a narrow market definition, which will make the
defendant appear to be a dominant player in the field.
o The defendant will always argue for a more expansive market definition of which
it has a smaller share.
The Product Market:
o The relevant product market is largely determined by consumer preferences and
the extent to which physically dissimilar products can fulfill the same consumer
needs.
o What products are viewed as being reasonably interchangeable?
Improper Conduct
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The successful competitor, having been urged to compete, must not be turned upon when
he wins.
Section 2 does prohibit every monopoly. This would discourage competition. It only
prohibits monopolies achieved by improper means.
Exclusionary expansion was seen as improper in both Alcoa and Cellophane.
o Exclusionary expansion is the increase of supply/capacity to match the increase in
demand for the sole purpose of preventing others from entering the market or
expanding to meet that increase in demand.
o Alcoa has been described as being on the fringe of Section 2 jurisprudence and is
therefore not a common scenario.
A leasing and service agreement was found to be exclusionary in United Shoe.
Refusals to deal:
o This can occur in several ways:
 A dominant firm severs relations if customers consider dealing with a
competitor (Lorain).
 A dominant firm withdraws from an existing contractual relationship to
impose new terms (Aspen).
 A dominant firm refuses access to an essential facility (bottleneck
doctrine).
 The plaintiff must prove:
o The actual control of the essential facility by the
monopolist,
o Inability of the competitor to reasonably duplicate this
facility,
o Denial of the use of the facility to a competitor, and
o Feasibility of providing the facility to the competitor.
 Three conditions must be satisfied:
o A facility must be truly essential and not merely convenient
or less expensive,
o The court must take into consideration justifications for
denying/restricting access, and
o The plaintiff should be required to pay the defendant.
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Predatory Pricing:
o Test:
 Pricing below average variable cost, and
 Possibility of recoupment, considering barriers to entry and actual
monopoly power
o Schools of thought:
 Cost-based school: Pricing below average variable cost should be illegal.
 Structural filter school: Will firms be able to charge higher prices once a
monopoly is established? If there is no possibility of recouping the cost of
the predatory pricing scheme, there is no scheme.
 No rule school” Predatory pricing should not be frowned upon. At the
very least, there should be tougher burdens on plaintiffs alleging predatory
pricing?
 Game theoretic school: The courts should employ a full, fact-specific
analysis and should use documents and testimony to decipher intent.
Illustrative Cases:
o Standard Oil (1911): The defendant controls 90& of the oil refining industry by
virtue of not only centralized management and vertical integration but also by
predatory practices. The court finds that total domination of the industry is leads
to a presumption of a monopoly. The presumption becomes conclusive due to the
defendant’s improper behavior in maintaining the market share.
o U.S. Steel: 41% is not enough to prove the existence of a monopoly. The fact that
prices have remained at a constant level is not alone indicative of monopoly
power. The market share fell from 90% to 40%, so clearly they no longer have
market power. If they had market power, they wouldn’t need the collude with
competitors.
o Alcoa (1945):
 A threshold of 90% clearly confers market power. 60% is a close call.
35% is not enough.
 Virgin ingot is included in the market definition.
 Imports are excluded from the market definition because of the trade
barriers at the time. (Note: today, there are much less trade barriers).
 Secondary ingot is excluded from the market definition because Alcoa
controls the market for secondary ingot by controlling the market for
virgin ingot.
 Virgin ingot produced for Alcoa’s own use is included in the market
definition because it Alcoa could easily have that ingot compete in the
market by selling it. Not all firms have the ability to do this, however.
o Lorain Journal (1951): The court concluded that the newspaper’s conduct violated
the antitrust laws because the defendant made it more difficult for the radio
station, its only rival, to compete, threatening the radio station’s existence, and
because the newspaper was unable to provide a persuasive rationale for
threatening to withhold cooperation from local advertisers if they placed
advertisements with the radio station.
o The Cellophane Case (1956): See notes.
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Determination of the competitive market for commodities depends on how
different from one another the offered commodities are in character or use.
 The court stressed the cross-elasticity of demand, competition with other
products, and the functional interchangeability of those products.
 The test for deciding if two products are in the same market is the
reasonable interchangeability for the purposes for which they are produced
– price, use, and qualities considered.
Kodak: The fact that there may be two related markets doesn’t mean that there
cannot be a monopoly in one of the markets. Actual data suggests that the
defendant does have an ability to raise prices while retaining customers due to the
costs of switching. Due to the difficulty in calculating life-cycle pricing, the
customers may be insensitive to service price hikes, so a monopoly is plausible.
Existing customers are locked in with no substitutes. The fact that a future
increase in price may result in loss of business doesn’t preclude a finding that the
defendant is already exercising significant market power. This case resulted from
a change in Kodak’s business practice (used to sell parts to ISOs, no longer does).
Had Kodak never sold to ISOs, there would have been no liability.
United Shoe: The defendant had a 75-85% market share. Machines were leased
on maintenance and service contracts with an early return penalty and 10-year
duration. Repairs are free. If the customer wants to switch companies, the
company renegotiates the contract on more favorable terms. Competitors use the
same terms.
 The court finds that the agreements create a barrier to entry.
Berkley Photo: Kodak introduced a new film type that only fits in Kodak cameras.
The court found that there is no duty of advanced notice of design/product
changes to manufacturers of competing as well as complementary products. If we
allow piggy-backing, incentive to innovate is destroyed. It would be very difficult
for this court to suggest managerial guidelines on pre-disclosure.
IBM: The court allows the defendant to continuously redesign equipment to
defeat compatibility with peripherals manufactured by competitors so long as the
defendant had some evidence that the redesign also improved quality.
Xerox: Court found that the defendant had built a “patent thicket” and
aggressively pursued patent infringement suits.
Utah Pie: The local company had a 66% market share in Utah until a national
chain entered and used a predatory pricing scheme in the local company’s market.
The local company’s market share fell below 50%. The court holds that it is
illegal to charge below cost plus overhead.
Brooke Group: The plaintiff began selling generic brand cigarettes. The
defendant, with a 12% market share, then began selling brand name cigarettes
below cost. Internal memos suggested a predatory pricing scheme. The plaintiff
also alleged tacit collusion.
 The court finds that there must be a reasonable expectation of recovery;
otherwise the strategy is beneficial to consumers and not to the defendant.
 Without requiring recouping, the courts would essentially be prohibiting
discounting.
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Unless achieving substantial market power is feasible, no recoupment
seems possible at this time.
There is no evidence of agreement, and the conscious parallelism
argument is destined to fail.
One of the other manufacturers isn’t following the plan.
Prices to consumers didn’t rise. There’s no restriction of output.
Summary and Analysis
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