CHAPTER 19: Antitrust Laws & Policy

   Legislature:        Broad, general mandate
   Executive:          Provide specific rules & guidelines
   Judicial:           Interpret and resolve disputes

                                            Content of Antitrust Laws
Sherman Act of 1890
      Section 1: Forbids explicit cartels (price fixing)
      Section 2: Prohibited monopolization

       Ambiguous wording left doubt as to what type of monopolizing behavior was prohibited (amendments
     Court’s interpretation was that monopoly was not illegal as long as the firm did not commit “bad acts.”
     These points led to the “merger to monopoly” movement
        i)     to achieve economies of scale
        ii)    to avoid antitrust entanglements
     Needed sensible enforcement (rule of reason)
        i)     attack market power that harms consumers
        ii)    ignore innovation that produced temporary monopoly
The merger to monopoly wave ended shortly after 1900 with the slowdown in the economy and the Northern
Securities case (1904). In this case the attempt to combine two railroads was found to be illegal under both sec.
1 and 2 of the Sherman Act (close to a per se ruling).

The Standard Oil case of 1911 was also a landmark case, applying the rule of reason for the first time. Court
refused to apply per se rule and investigated whether the resulting effect was an unreasonable restraint of trade.
Standard Oil was charged with engaging in unfair practices (predatory pricing) and broken up.
The American Tobacco case of 1911 also resulted in a break-up.

However, with the ambiguity of the Sherman Act, and confusion in enforcement led to the Clayton Act and
FTC Act in 1914.

Clayton Act of 1914 – targeted 4 specific practices
       Sec. 2: prohibits price discrimination that limited competition
       Sec. 3: prohibits tie-ins & exclusive dealing to lessen competition
                       [amended in 1936 by Robison-Patman Act]
       Sec. 7: prohibits mergers that reduce competition (could not acquire stock but could acquire assets)
                   [amended by Celler-Kefauver Act of 1950]
       Sec. 8: forbade interlocking directorates

Federal Trade Commission (FTC) Act of 1914
       Created a new agency to enforce antitrust laws and possibly adjudicated with their own administrative
       law judge. Main provision was in section 5 which prohibits “unfair” methods of competition (still a
       broad mandate).

The three main statues of antitrust law then are the Sherman Act, the Clayton Act, and the FTC Act. Problem:
overlapping authorities.
1.   Dept of Justice – Antitrust Division (usually takes big cases)
    Injunction (prohibit certain conduct)
    Criminal fines/jail penalties in criminal suit
    Sue to recover damages
2.   FTC (usually price fixing & mergers) [cease and desist order]
3.   Attorney General’s of the States (applying state law)
4.   Private actions (predominant form over last 50 years) – get treble damages
5.   European Commission (no world coordinating body)

    Justice loses few criminal suits
    Many suits are disposed on “nolo contendere” (no contest) pleas
    Advantages of nolo contendere:
      i)     small fines
      ii)    provides no evidence of collusion that can be used in a private suit for treble damages

The most common outcome is some form of settlement in the modern era – rather than a full blown trial (due to
uncertainty of outcome)
        Consent decree
        In merger cases products or divisions are “spun-off” or certain assets are divested
        Prohibit specific acts (FTC – cease and desist order; Justice – injunction)

Goal of Antitrust Law:               Promote efficiency
   1. Not to benefit certain groups (e.g., small firms)
   2. Efficiency in the long-run: PV of PS + CS

                                Policy Toward Monopolization – Section 2 cases

1.     Concern about the “dominant firm”
2.     Section 2 cases condemned:
         Monopolization
         Attempts to monopolize
         Conspiring to monopolize
3.     Did not condemn monopoly itself
4.     Must distinguish between superior efficiency and predatory tactics
5.     Must consider static and dynamic efficiency
6.     Many argue that economic efficiency should be the only objective in antitrust decisions

Early cases: up to 1940

1911        Standard Oil and American Tobacco
             Dominant firms due to mergers and predatory tactics
             Utilized rule of reason
             Evidence of intent to monopolize (predatory tactics)

1920    U.S. Steel
            Not guilty, despite the price fixing at the “Gary Dinners”
            Not engaged in predatory or aggressive acts towards rivals
1940 – 1970 Cases
1945      ALCOA
           Court ruled that there was illegal monopolization even though there was no evidence of
             predatory tactics
           Created two new competitors (Reynolds, Kaiser)
           Rule of reason did not require much reason
           Regarded as a per se ruling (Big is Bad)
1953      United Shoe
           Example of business practice that would indicate illegal monopolization
           Leasing practices found to be exclusionary – restricting entry
           BUT, for the most part there was “good” behavior
           Similar to limit pricing to obtain market share
           Consumers not harmed

1970 – present

   1.    More lenient view
   2.    Many cases are terminated by consent decree
   3.    IBM case dropped in 1982
   4.    ATT case settled in 1982

Microsoft case:
    Engaged in anticompetitive practices
    Exclusionary licenses – consent decree in 1995
    Bundling of Internet Explorer – Microsoft won appeal of decree, but did change some practices
    Justice filed suit in 1998 – Microsoft found guilty and threatened break-up, but then MS won on appeal,
      seems to be over for now
    European Commission still has some issues

                                   Cooperation Among Competitors & Antitrust
                                               Overt Price Fixing:

    1.    Most overt price fixing and output agreements to eliminate competition and raise prices is regarded as
          illegal per se, w/o inquiry into the reasonableness
    2.    Some European countries and Japan have allowed cartels believing they would increase efficiency.
          Wrong for most part
    3.    EU laws now closely resemble U.S. law in enforcing competition

    In early cases, court interpretation of price fixing - illegal per se.

    1. Trans – Missouri Freight Assoc (1897)
         Competing railroads entered into agreements about rates, claiming it was reasonable and prevented
           ruinous competition
         Court did not agree – said no

   Rate fixing was eventually allowed by the ICC (capture theory of regulation)
   ICC was eliminated by de-regulation (Staggers Act 1980)
   RR mergers followed after the Staggers Act – presumably consolidation was efficient
   2.      Addyston Pipe (1899)
            Court ruled against price fixing, but left open a reasonableness defense
            Several months after the decision, the defendants merged

   3.      Trenton Potter (1927)
            Reinforced prohibition against price fixing
            Ruled reasonableness of price was no justification

                                  Cooperative Agreements that are not Illegal

Cooperation may be necessary for efficiency and pricing may be involved (ancillary). Use rule of reason.

CBOT (1918)
   Members (buyers & sellers) agreed to rules
   Could not transact trades after closing at price other than closing price
   Closing price set by committee
   Board would not exist w/o trading fees
   Board promoted competition by providing information

ASCAP, BMI (1979)
   Had to deal with transaction problems of collecting license/copyright fees for music
   Set price in some sense

Professional Sports
    Need to agree on rules, schedules, revenue sharing

                             Information Exchanges / Price Exchange Agreements

Common Association or Trade Association often collect information on the industry that is valuable to
members. Note that revealing costs or transaction prices is not collusion.

Offsetting Effects:
    Exchanges of information can assist in collusion/price fixing
    Dissemination of information can be valuable

Must use a rule of reason. Courts have ruled both ways (Hardwood – no; Maple Flooring – yes). If exchange
of information primarily regards price, likely to be found anticompetitive and illegal.
Container Corporation (1969)
     Court ruled illegal, but used rule of reason (industry was too concentrated)

U.S. Gypsum (1978)
    Rule of reason came through – consider “intent” of price exchange
    Weakened Container Corp precedent

Trade Associations
    Rule of reason used
    Simple info gathering viewed as reasonable
    Attempts to impose prices viewed as unreasonable
The Professions (lawyers, doctors)
    Professional associations may forbid advertising or price competition (note that advertising may benefit
    Courts have limited the scope of professions to limit competition

Non-Profits/Colleges & Universities

NCAA (1984)
    Ruled against the NCAA as being anticompetitive on TV controls – but used rule of reason
IVY League (1993)
    Price fixing conspiracy

                                              Oligopoly Behavior
How to handle cases without explicit evidence of collusion
Interstate Circuit (1939)
     Court ruled that similarity in behavior was enough to constitute evidence of an agreement or conspiracy
     Conscious parallelism
     Problem: competitive reactions should be parallel in some sense – especially with interdependence

American Tobacco (1946)
   Court ruled that similarity of conduct among 3 major companies provided basis to infer unlawful

Theatre Enterprises (1954)
    Change in direction
    Parallel behavior not pre se violation – need additional offense
    Conscious parallelism plus

In the absence of an explicit agreement to fix prices, only the most extreme forms of parallel behavior can
successfully be fought in court. Note that the Justice Department seeks emails and other documentation for

                                       Public Policy Towards Mergers
Merger History
1890    Sherman Act – spawns merger to monopoly wave
        Companies formed: Standard Oil, GE, US Steel, DuPont, Eastman Kodak, American Tobacco
             economies of scale
             end run around Sherman Act
             vertical integration to ensure throughput
             stock market boom

1904     Merger wave ends with:
            Northern Securities Case (RR holding company illegal)
            Stock market crash (1905?)
1911     Standard Oil and American Tobacco break-ups

1914     Clayton Act and FTC Act
           No specific anti-merger provisions in Sherman Act
           Practices that lessen competition specified
1920s      Merger to Oligopoly wave (2nd)
              Could not merge to monopoly

1929     Stock market crash & Great Depression

1950     Celler-Kefauver Act
               Restricted horizontal mergers that lessen competition

1950s – 1960s Conglomerate Merger Wave (3rd)
               Horizontal mergers restricted
               Peaked in 1968 (recession in 1969)

1980s      4th merger wave
                Reduced antitrust scrutiny
                LBOs

1990s      5th merger wave
                In industries in midst or anticipating deregulation or growth (banking, telecommunications)
                Seeking economies of scale & scope (media)

                                              Motives for Mergers
Firm Motive: Increase profitability
    Market power through increased concentration
    Market power from efficiency

Mergers that Increase Efficiency:
  1. Economies of scale – [horizontal]
  2. Economies of scope – [horizontal, vertical, diversified]
  3. Improvement in management [LBO, (hostile) take-over]
  4. Reduce transaction costs [hold-up problems in vertical chain]

Mergers that Reduce Efficiency:
  1. Tax purposes [reduce total tax liability]
  2. Acquire additional market power [deadweight loss]

Returns to Society:
Stock market evidence supports the view that merger activity improves efficiency and creates value.
Shareholders of target firms are the primary beneficiaries. Appears to be little increase in market concentration
and market power, so consumers do not lose.

This is misleading. Looking at short-term gains. Need additional research on profits to confirm efficiency

Policy makers need to view mergers on a case-by-case basis

Evidence in airline industry:
   1. Market power effects dominated efficiency gains
   2. Price increases are positively correlated with changes in concentration
                                        Antitrust Cases Towards Mergers

   Northern Securities (1904) – holding company illegal
   Standard Oil (1911) – break-up
   US Steel (1920)
       Court retreated from vigorous ban on mergers
       Created by merger of 180 indep. Firms – 90% market share
       Refused to find creation illegal since it did not engage in improper behavior (Said collusion is o.k. if
          it is friendly)

Horizontal Mergers:

   Thatcher Manufacturing (1926)
       Acquired assets, rather than stock of competitor
       This loophole was closed in the Celler-Kefauver Act (1950)

   Brown Shoe (1962)
       Applied new standards from the C-K Act of 1950 which amended section 7 of the Clayton Act.
       Blocked merger of Brown and Kinney – both were manufacturers and retailers
       Court’s decision indicated that a combined share of 5% in a city was excessive
       Gave laundry list of criteria for defining a market – a difficult problem that was not made any clearer

   Philadelphia Bank (1963)
         Court continued its hard line on mergers
         Almost a case of horizontal mergers being illegal per se
         Rejected consideration of the efficiency benefits of mergers

   Von’s Grocery Company (1966)
       Court took its strictest stance in enforcing Section 7
       Von’s sought to acquire Shopping Bag, giving the combination a 7.5% share in L.A., a smaller share
         than Safeway

After the Von’s case a shift in policy began to take place:

   1. In 1968 the Justice Department issued its first merger guidelines in which firms could likely merge
      without challenge
   2. More recent guidelines in 1984, 1992, and 1997 recognized potential efficiency gains from mergers
   3. Nonetheless, efficiency gains leading to increased concentration would likely need to lead to lower
      prices for approval
   4. Courts have also allowed failing-firm defense, allowing a merger if one of the firms were to go out of
   5. Finally, the FTC & Justice address concerns about lack of competition by restructuring assets (selling to
      a new entrant). “Fix it first” rather than prohibit used extensively last two decades.

                                        Mergers of Potential Competitors

El Paso Natural Gas (1964)
      El Paso had natural gas pipeline into CA. Sought to acquire assets of Pacific NW Pipeline, a potential
         deliverer of natural gas to CA
      Acquisition barred since Pacific had bid for service in CA
Procter & Gamble (1967)
     Sought to acquire Clorox Chemical (bleach)
     P&G did not produce bleach, but many related household products
     Acquisition blocked b/c P&G was likely entrant into bleach

Marine Bancorporation (1974)
    Gov’t challenged merger between bank in Seattle and Spokane
    Not direct competitors. Court allowed merger
    Potential competition doctrine has not fared well since
                    Hart-Scott-Rodino (HSR) Act (1976) [Antitrust Improvements Act]

       Advanced notification of merger must be given to Justice or FTC
       More accepting of economic advantages (efficiency) that may benefit consumers
       Mergers usually go through
       Those that are challenged are:
                   i)      abandoned by the firm
                   ii)     anticompetitive features are eliminated (fix it first)
       No major horizontal merger case has worked its way to the Supreme Court since 1976

                                              Merger Guidelines

       1982 guidelines introduced Herfindahl-Hirschman Index (HHI)
       Safe mergers depend on post-merger HHI & increase in HHI
       Market definition still a problem (esp. geographic boundaries)
       Revisions made in 1992 and 1997
       Developed principles to define relevant economic market
       Recognized efficiency gains and considered post-merger competition and ease of entry
       Fix it first rather than ban philosophy

                               Price Discrimination & the Robinson Patman Act

       PD considered bad when it is predatory
       But predatory pricing is an unlikely event - when it does occur it tends to benefit consumers with lower
       Robison Patman is generally considered an anticompetitive law – not pro-competitive
       Enforcement by the FTC has declined

                                  Policy Toward Vertical Restraints of Trade

     Can accomplish objectives of vertical integration through merger or through contract (restraints).
     Vertical mergers can be a problem under:
     1. Foreclosure – difficult to accomplish w/o pre-existing market power
     2. Extension of Monopoly – probably should do something about pre-existing monopoly
    Vertical restraints may increase welfare, but it is often treated harshly by the courts
                                       Tying Agreements of Tie-in Sales
Justification for Tie-in:
    1. Efficiency. Many products are bundled together for efficiency
         Automobiles and tires
         Automobiles and batteries
         Shoes and shoe laces
    2. Assure quality
         Kodak claims that film sales are tied to processing – quality preserves good will (could simply
            advertise Kodak Processing)

   3. Increase monopoly profit
       In broad sense recall that tie-in sales may be used to price discriminate
       Use tie-in strategically to exclude or foreclose rivals
       Foreclosure of competition is a traditional antitrust concern
       Tie-ins viewed as illegal when there is sufficient market power in tying product market

A.B. Dick (1912)
    Patented mimeograph – required ink tie-in
    Ruled legal – but before Clayton Act

Motion Picture Patents (1917)
   Court reversed position in A.B. Dick case

IBM (1936)
    Sold key-punch machines with tabulating card tie-in
    Claimed they needed quality control (hanging chads?)
    Court rejected IBM’s claim since the gov’t was using competitor cards with no problems

Hyde (1984)
    Tie-in ruled legal because firm lacked market power

Kodak (1992)
    Sells photocopiers with parts & service tie-in
    Refused to sell parts in independent repair shops
    Ruled against Kodak even though it lacked market power in copiers

                                                Franchising tie-ins
      Some requirements tie-ins by the franchisor may be necessary (and efficient) to maintain business
       format strategy
      Although tie-in may be used solely to extract more revenue from franchisee
      Courts have generally ruled against franchisors arguing the tie-in will foreclose competition in input
                                    Exclusive Dealing (contractual integration)
      Forbid distributors to sell products of competing manufacturers
      Avoid free-riding by competing manufacturers
      Can harm society if it prevents or impedes rivals from obtaining distribution of their product (raises
       rivals cost)
      Courts have treated exclusive dealing harshly
      However, as long as other efficient methods of distribution are available, neither exclusive dealing or
       vertical integration restrain entry
Standard Oil of CA (1949)
    Court ruled against Standard for exclusive dealing and requirements tie-in
    Did not use rule of reason

Tampa Electric (1961)
    Established rule of reason in these cases
    Supreme Court allowed contracts with little anticompetitive effects

                                                 Exclusive Territory
      Exclusive territories provide dealers with incentives to promote product and obtain economies of scale
       without being undercut by free-riding rivals
      However, they can be harmful if they facilitate a cartel
      As with other vertical restrictions it requires a rule of reason

White Motor (1963)
   Supreme over District and argued for rule of reason

Schwinn (1967)
    Case made exclusive territories a per se violation of antitrust laws

GTE Sylvania (1977)
   Overruled Schwinn per se prohibition
   Recognized vertical restrictions as potentially promoting competition and re-instituted rule of reason

                                     Resale Price Maintenance (RPM)
      Maximum RPM restricts double monopoly mark-up and benefits consumers
      Minimum RPM can increase efficiency by inducing the retailer to promote the product
      However, minimum RPM can also foster collusive behavior
      RPM has been popular with manufacturers
      RPM was repealed in 1975 and is currently illegal per se
      Recent Supreme Court ruling (1997) argued for a rule of reason in RPM cases

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