Antitrust
• 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)
• Vertical mergers (AOL/Time Warner,
Verizon/MCI)
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
illegal.‖
– 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
monopolization
– Must prove intent to destroy competition or build a
monopoly—through documents or through improper
conduct
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
facility
• Denial of use
• Feasibility of providing the facility
Tying
• 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
Other problems
• Boycotts—several firms
• Refusals to deal—one firm
• Market foreclosure—control of secondary
market that deprives competitor of
necessary supplies
Pricing problems
• Predatory pricing
• Cross-subsidization
• Distorted transfer pricing
• Price fixing
Regulatory immunity?
• Willis Graham Act of 1921—immunity regarding
consolidation
• 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
competitor
• Potential competition mergers
Pre-merger Notification
• Notification of both FTC and of the antitrust
division of the DOJ; one will take on the
case
• 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
necessary
• 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
increase
Defining the market
• Product market
– Including all goods that consumers view as realistic
substitutes—at what point will consumers react to price
rises by switching to another product
• Geographic market
– Focus on realistic alternatives for consumers
• Competitors
– All firms with ability to offer product in long or short
term
Determine if there is market
power
• 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
eroding
• 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
HHI
• 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
concentration
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 anything over
1,800 as highly concentrated; 1,000 – 1,800 as
moderate; below 1,000 as un-concentrated
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
shares
• There’s a big difference between:
– 15% + 15% + 15% + 15% = 60%
and
– 48% + 6% + 3% + 3% = 60%
• Have to look at the characteristics of the industries
themselves
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
lines
– 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
scrutiny