Antitrust Laws by wulinqing


• Why important to telecommunications?
  – Suits regarding abuses of monopoly power
     • Led to break up of Bell System and restructuring of
       the industry
  – Mergers and their implications
     • Horizontal mergers (Seven RBOCs now three—the
       AT&T/T-Mobile proposed merger)
     • Vertical mergers (AOL/Time Warner,
             Antitrust Laws
• Enforcement
  – Antitrust Division of Department of Justice can
    bring a civil or criminal case
  – Federal Trade Commission can bring civil cases
  – State attorneys general can bring civil lawsuits
    under federal antitrust laws
  – Private party can sue—for triple damages
    (MCI case)
            First anti-trust Law
• Sherman Act of 1890
  – Section 1
     • “Every contract, combination in the form of trust or otherwise,
       or conspiracy, in restraint of trade or commerce among the
       several States, or with foreign nations, is hereby declared to be
  – Section 2
     • “Every person who shall monopolize, or attempt to
       monopolize, or combine or conspire with any other person or
       persons, to monopolize any part of the trade or commerce
       among the several States, or with foreign nations, shall be
       deemed guilt of a felony . . .”
 Additional anti-trust legislation
• Clayton Act of 1914
  – Unlike the Sherman Act, looks to the future and
    to prevent anticompetitive behaviors before
    they occur
     • Unlawful to discriminate in price between different
       purchasers of same type of commodity if effect
       would be to lessen competition or create a monopoly
     • Prohibits tying
     • Prohibits acquisitions that would lessen competition
       or create monopoly
            An important point:
• Monopoly in and of itself is not illegal—lawfully
  attained monopoly is not a matter of antitrust
   – Monopoly that results only from growth or
     development because of a superior product, good
     business sense, or historic accident is not objectionable
• The problem is attempted monopolization and
   – Must prove intent to destroy competition or build a
     monopoly—through documents or through improper
          Antitrust principles
• Certain ways firms should not behave
  – No restraint of trade or unfair business practices
    to get a monopoly
  – No use of monopoly in one market as leverage
    to increase its share in some other market
     • No use of predation or of cross-subsidies
  – No efforts to raise barriers to entry or to raise
    costs of rivals trying to stay in business, or
    deprive rivals of access to customers
     Essential facilities doctrine
• Firm with monopoly power in one market has to
  deal fairly with competing firms in adjacent
  markets who need essential facilities. To show
  antitrust activity have to show:
      • Control of facilities by a monopolist
      • Competitor’s inability to duplicate the essential
      • Denial of use
      • Feasibility of providing the facility
• Seller insists on selling two distinct products or
  services as a package
   – Seller must have power in the tying product market
   – Substantial threat that the seller will acquire market
     power in the tied product market
   – Must be a coherent economic basis for treating the
     tying and tied products as distinct
• Not a problem to bundle the components of what
  can be viewed as a single product or service
             Pricing problems
•   Predatory pricing
•   Cross-subsidization
•   Distorted transfer pricing
•   Price fixing
        Regulatory immunity?
• Willis Graham Act of 1921—immunity regarding
• 1930-1960—there were few antitrust cases
• 1960 and thereafter—many suits developed
  – Immunity upheld if
     • Conflict between FCC rules and antitrust laws
     • Actions complained of are required or approved by FCC
     • Regulatory controls on entry and price preclude defendant’s
       exercise of monopoly power as a matter of fact.
  – Filed rate doctrine
 Doctrine of Primary Jurisdiction
• If there is direct conflict between antitrust
  and regulation, the courts will suspend
  antitrust proceedings and allow regulatory
  agency first chance to resolve conflict
  – Regulators not given the authority to moot
    antitrust claims or to provide final interpretation
    of antitrust decrees
    Mergers and Acquisitions
• Horizontal
      • Un-concentrated--no merger will be disallowed
      • moderately concentrated--only large mergers that lead to greater
        market concentration will be disallowed
      • highly concentrated--almost any merger will be disallowed
• Vertical
      • Between suppliers and customers; have received little attention in
        recent years
• Conglomerate
      • Between unrelated firms; only if risk of elimination of potential
      • Potential competition mergers
      Pre-merger Notification
• Notification of both FTC and of the antitrust
  division of the DOJ; one will take on the
• Second Request (if questions outstanding)
• Efforts at settlement to avoid court action
• Suits brought in about 4% of cases (about
  2,000 a year are investigated)
 Steps taken to decide if action is
• First, define relevant market
  – All buyers and sellers of all products that
    compete with one another
  – Determine what group of competitors could
    jointly effect a substantial and durable price
    Determine if there is market
• Power to control prices or exclude competition
   – Ability to do competitive injury by artificial increase in
     price, restriction of output, exclusion of competition
• In the absence of market power, business practices
  cannot hurt competition and so aren’t concern of
  antitrust authorities, no matter how objectionable
  on other legal grounds
Points of consideration regarding
          market power
• Market share
• Persistence of high market share over time or if
• Whether group dominating the market has
  consistent membership
• Whether significant number of potential entrants
  are ready to enter the market if prices rise
• If producers with large market share face powerful
  or dispersed sellers
   Two method for determining
        market power
• Herfindahl-Hirschman Index (HHI)
• Concentration ratios
• Market shares (based on dollar sales, unit
  sales, or physical capacity)
• Sum the squares of the market shares
• The higher the HHI, the greater the market
                HHI Examples
• Eight firms, 4 with 15% and 4 with 10%:
   – 152 + 152 + 152 + 152 + 102 + 102 + 102 + 102 = 1300
• Four firms, 2 with 40% and 2 with 10%:
   – 402 + 402 + 102 + 102 = 3,400

• Guidelines of DOJ and FTC classify HHI under
  1500 as un-concentrated; 1500-2500 as
  moderately concentrated; above 2500 as highly
        Concentration Ratios
• This method usually looks at the market
  share of the four largest firms to determine
  concentration; over 40% suggests
  possibility to collude
• For a single firm, market power usually
  appears at 15%; market power is significant
  at 25%; market dominance at or above 40%
  – Dominant firm’s market share declines
    slowly—could take decades
       The devil’s in the details
• Need to look at the size of the relative market
• There’s a big difference between:
   – 15% + 15% + 15% + 15% = 60%
   – 48% + 6% + 3% + 3% = 60%
• Have to look at the characteristics of the industries
Role of FCC in Merger Review, pre-
        Telecom Act of 1996
• FCC had been final authority regarding
  approval of mergers between telephone
  companies; had held public hearings and
  solicited comments from state commissions
• FCC had been able to prevent antitrust
  consideration of mergers the FCC deemed to
  be in the public interest
• This authority removed by the Telecom Act
    FCC role post-Telecom Act
• FCC still has role
   – Has to approve transfers of radio licenses and telephone
   – Has to assure that mergers meet communication policies
     (media diversity, universal service, etc.)
   – Has used this ability to extract concessions from companies
     seeking mergers and acquisitions
• Telecom mergers now primarily under
  competitive scrutiny rather than public interest

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