AM-Lecture-1.A-Brief-history-antitrust

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					A brief history of antitrust

        Abel M Mateus
  UCP and New York University
    Antitrust history: USA – beginnings (1890-1915)
•    Antecedents: railroads, trusts and cartels (in steel, petroleum, sugar and cotton)
     caused a concern to farmers and SMEs about prices and their conduct (1870-1914)
•    Sherman Act enacted in 1890: very broad
      – Outlawed “every contract, combination or conspiracy in restraint of commerce” and
        “monopolization”, and treated violations as crimes.
           •   Courts in charge of interpreting and building jurisprudence
           •   Economists’ role: convergence of law and economics
•    Distinction between “naked restraints”(rivals agreed to fix prices or production)
     and “ancillary” restraints (cooperation to introduce a new product). Reject reasons
     for setting cartel and “reasonable prices”, in US v. Addyston Pipe & Steel Co.(1898).
•    Outlaw RPM in Dr. Miles v. John Park (1911)
•    Prohibit the merger of Northern Pacific and Greater Northern railroads (1904)
•    Courts ordered break-up of Standard Oil in 34 independent companies, establish
     “rule of reason”, establish dominant position (had 90% of oil refining) condemn
     predatory practices (selective, below-cost buy-outs of rivals) in Standard Oil v. USA
     (1911)
•    In US v. Terminal Railroad Association of St. Louis (1912) the courts forced
     dominant firms to give access to rivals on commercial terms (Interstate Commerce
     Commission to regulate prices) (doctrine of essential facilities and importance to
     network industries).
•    Clayton Act enacted in 1914, to restrict interpretation of restraints. Prohibits
     certain types of arrangements, including tying, exclusive dealing, and interlocking
     directorates.
•    Federal Trade Commission Act of 1914 creates the FTC as an administrative body
     to enforce competition law, side by side with DoJ.
              Europe: cartels were legal
•   Germany: from at least an 1897 decision, cartel agreements were enforceable in courts of law:
    “The reasoning as to to the interests of society in general rested on the premise that ruinously low
    prices, as occur in a crisis, adversely affect both the individual seller and the national economy, and
    that, therefore, cartel agreements designed to prevent such low prices are in the public interest. …
    a court restraint upon cartel contracts would constitute governmental limitation upon freedom of
    contract” (Marburg, cited in Martin (2005))
•   Cartels assumed a key role in the aftermath of the First World War: “… the steel cartel helped to …
    create a balance between the basic industries of Germany and France …” after the Versailles Treaty.
    (Noken, cited in Martin (2005))
•   Weimer Republic’s Regulation Against Abuse of Economic Power Positions (1923) was the first
    general legislation in Europe to protect the competition process (OECD, 2004)
•   Cartel-like arrangements became even more firmly entrenched as the world economy slid into
    depression: “In the 1930s, economic policy-makers in France and Britain, traditionally committed to
    laissez-faire, became converts to German practices of “organized capitalism” (Gillingham (1989)).
    E.g. the interwar steel cartel in France and Germany.
•   Nazi Germany was based on an economic regime of “state capitalism” closely linking the State and
    big industrial concerns
•   Fascist regimes in South Europe were based on “corporate systems” that established enterprise
    “associations” by industry and “unions” both controlled by the state.
     Antitrust history- USA (cont.): Depression and
            dormant antitrust (1915-1935)

• 1915-mid 1930s: antitrust dormant. Prevails “assotionalism view” of
  business-government relations (Herbert Hoover encouraged business to
  exchange information and cooperation thru trade associations)
• In Appalachian Coal v. US (1933) the courts allowed Depression-era cartels
• National Recovery Act of New Deal discouraged competition
• Robinson-Patman Act of 1936 to discourage entry in retail trade and
  protect small stores
• FTC’s v. Eastman Kodak (1927) suffered a defeat when courts said they
  could not enforce section 5, regarding divestiture to undo anti-competitive
  mergers (curtailed power until 1960s)
• After 1935 Roosevelt tries to restore competition policy. Chicago
  economists like Henry Simmons advocate a more vigorous antitrust
  enforcement.
•
  Antitrust history: USA-reinvigorated antitrust
                   (1935-1954)
• In Interstate Circuit v. US (1939) the court
  condemn a cartel based only on circumnstantial
  evidence.
• In US v. Socony-Vacuum Oil (1940) the court said
  that horizontal price fixing would be condemn
  summarily without considering its effects.
• In Theatres Enterprise v. Paramount Pictures
  (1954) courts ruled that “conscious parallelism”
  without “plus factors” would be a permissible
  oligopoly behavior.
  Economic Theory developments
• Chamberlin and Robinson (1933) were the
  first economists to develop a theory of
  imperfect competition, in fact close to what
  we nowadays consider the theory of
  monopolistic competition
Antitrust history: USA: antitrust “excesses”(1954-1973)

• Supreme Court uses per se rules to ban:
   – Tying arrangements where a seller conditions the sell of
     one product to the client buying a second product
     (International Salt v. US (1947) and Northern Pacific v. US
     (1958))
   – Restricting retailers to a geographic area (US v. Arnold
     Schwinn (1967)
   – Group boycott by which a retailer threatens a
     manufacturer not to sell to discounter (Klor’s v. Broadway-
     Hale Stores (1959))
   – A marketing joint venture (US v. Topco Associates (1972))
   – Fulfillment of new demand by adding capacity was
     considered predatory (Alliminum Co. v. US (1945)).
  Economic theory developments
• Industrial Organization is born with the paradigm
  of “structure-conduct-performance” of Joe Bain
  (1956)
  – Structural approach to market analysis (study
    characteristics of demand and supply)
  – The conduct of business is largely influenced by
    market structure (competitive environment or not)
  – Larger concentration is usually associated with higher
    profit margins. But higher profits may also be the
    result of economies of scale or more innovation
  – There seems to be no association between innovation
    and concentration
• Supreme Court prohibits mergers
  – Brown Shoe (1962)
  – Pabst Brewers (1966)
  – Von’s Grocery Co. (1966)
      • With market shares after merger of 5%
• Efficiencies were usually dismissed and even
  taken as against the merger
• Celler-Kefauver Act (1950) gives authorities the
  possibility to block vertical and conglomerate
  mergers, and simple acquisition of assets.
               Europe: after WW II
• In 1954 France set-up “Commission technique des ententes”, a
  technical body to advise on cartel agreements, upon request by the
  Ministry of Economy, but without any enforcement power. The
  Minister had the power to refer to the criminal courts cases of
  “illegal price fixing”
• The UK also created the “Monopolies Commission”. Cartels had to
  register with the Commission, and could be prosecuted.
• In Germany the de-cartellisation program was undertaken at Allies'
  insistence and the initiative of future Chancelor Erhard of the Social
  Market Economy model, inspired in the ordo-liberal school
  (Freiburg University) of freedom of contract and economic
  democracy.
• But most of the Western Europe was dominated by the “planning
  economy” of five-year development plans obligatory for the Public
  Sector but under concertation with the Private Sector
   European Communities: antitrust
 incorporated into the Treaty of Rome
• The first step of European integration was the European
  Coal and Steel Community, inspired by Jean Monnet and
  Schuman, to coordinate production and capacity expansion
  mainly between France and Germany. Seen as a
  continuation of international cartel of the 1930s by Allies
  (mainly Secretary of State Dean Acheson)
• Jean Monet contacts the American High Commissioner for
  Germany that draw on the services of diplomat Robert
  Bowie to draft the first versions of what became articles 65
  and 66 of the Treaty of Paris, based on Sections 1 and 2 of
  the Sherman Act. After some changes they became articles
  85 and 86 of the Treaty of Rome, now 81 and 82 (Martin
  (2005))
  The Chicago School and the antitrust paradox (1973)

• Reacting to the excessive activism of antitrust enforcement, the
  Chicago School used simple economic models to show the
  irrationality of the court decisions
    – Economic theory background of economists like Director and Stigler
    – Judges savvy in economic theory (Posner, Bork, Easterbrook and
      Gellhorn)
        • “The only goal of the antitrust laws should be to promote economic welfare”
        • “business firms should be assumed to be rational profit maximizers, so that
          the issue in evaluating the antitrust significance of a particular business
          practice should be whether it is a means by which a rational profit maximizer
          can increase its profits at the expense of efficiency” (Posner , Antitrust Law, on
          the economic approach to antitrust exposed in Matsushita Electric v. Zenith
          Radio (1986)).
• Questioned many per se rules created by the Supreme Court
  between 1940 and 1972
• Most of the vertical restrictions should be per se legal
        Building EU Institutions
• The European Commission only acquires
  enforcement powers in 1962
  – Regulation 17, based on Article 83 establishes
    procedural rules
• Appellate bodies: ECJ established in 1952 and the
  CFI in 1989
• First decisions of the Commission in 1964 (first
  was Grunding-Consten on distribution
  agreements of TVs in France and Germany,
  upheld by ECJ in 1966)
• First regulations on block exemptions in 1967
Creating a EU doctrine on competition
• First cartel cases (chemical industry):
  – 1968 Decision on international quinine cartel,
    market sharing, upheld in 1970 by ECJ (41/69 ACF
    Chemiefarma NV v. Commission)
  – 1969-72 Decision on dyestaffs: ECJ defining
    concerted behaviour and tacit collusion (48/69,
    49/69, 51-57/69 ICI v. Commission)
Creating a EU doctrine on competition
• First abuses of dominance cases (distribution
  agreements)
  – 1975 distribution of bananas Chiquita by United
    Brands, upheld by ECJ in 1978 (27/76 , United Brands
    v. Commission, practices: export ban to other
    countries, refusal to sell, price discrimination,
    excessive pricing)
  – 1976 Hoffman-la Roche regarding vitamins, upheld by
    ECJ in 1979 (85/76, Hoffman-la Roche v. Commission,
    practices: loyalty rebates to large customers)
     The Chicago school influence (1973-1991)

• The first judgment reflecting Chicago School theories was
  Continental TV v. GTE Sylvania (1977) that held that all non-price
  vertical restraints should use a rule of reason and emphasized the
  use of analysis of economic effects to evaluate its competitive
  impact.
• Collusion and coordination cases showed an oscillating pendulum
  between per se illegality and a rule of reason approach.
• A number of dominant firm abuses were brought to courts. The
  most famous was US v. ATT (1982) that led to the break-up of the
  Bell system. In Aspen Skiing v. Aspen Highlands the court held that
  dominant firms had a special responsibility in maintaining
  competition especially in cases of natural monopolies
• Mergers become more permissible, despite the Celler-Kefauver Act
 Economic theory: game theory and IO
• Game theory developments in the 1970s and 1980s showed that
  the Chicago School had gone too far in denying anticompetitive
  behavior, and that a more realistic model could rationalize those
  practices
• On coordinated practices, repeated games of indefinite duration
  showed that communication is a way to support a cartel that harms
  consumer welfare
• Although vertical restrains are usually more pro-competitive, there
  may be cases of exclusivity that harm overall consumers
• Predatory pricing is also shown to be a profitable strategy when a
  dominant firm decreases prices below costs and is able, by “deep
  pockets” or by reputation to weaken or eliminate its efficient
  competitors
• Market foreclosure can also occur by tying or bundling when the
  dominant firm is able to exclude efficient competitors
  Merger control introduced in EU
• In Continental Can (Europemballage Corp & Continental
  Can Co Inc v. Commission 6/72 ECJ decision of 1973) the
  Commission tried to prohibit a merger based on article 82
  (only for cases of strengthening an already dominant
  position), and subsequently, ECJ had suggested problems
  with application of article 81 (if a cartel is prohibited why
  do firms do not merge and escape the law?)
• Merger control was only instituted in 1990 because the
  opposition of national governments, mainly Germany
• Three months after Commission blocks the first merger:
  Volvo-Renault, based on dominant position in market for
  trucks in several countries). Decision come into heavy
  political pressure and was widely criticized. No blocking of
  decisions for several years
               Merger control
• Late 1990s. Several decisions taken by
  Commission and Bundeskartellamt shape
  electricity markets in Germany. Important
  commitments taken by parties. Four major
  players, market liberalized. Problems with
  uncompetitive markets
• In early 2000s 3 major merger blocking decisions
  quashed by ECJ (Airtours, Schneider and Tetra
  Pack)
• Until now only about 10 final blocking decisions,
  but dozens of decisions with major remedies
  Antitrust history: US (1991-2000)
• Detection of cartels by using leniency programs (an instrument also
  discovered by game theorists) accelerated enforcement on a national and
  also international scale
• The Microsoft cases initiated in late 1980s and 1990s showed that
  dominant firms in the new economy can also harm competitors and
  innovation in given situations
• Predatory pricing became very difficult to prove after Brooke v. Brown
  (1993) because plaintiff has to prove that defendant is likely to recoup
  after plaintiff has exited
• DoJ initiates proceedings against Visa and Mastercard (75 to 80% market
  share) because foreclosure of credit card networks. After Supreme Court
  confirmation, Visa settles with AMEX for $2.3 billion (the largest antitrust
  settlement in antitrust) and Discovery ($2.8 billion).
• Kodak (1993) and dominance of its aftermarkets was one of the cases
  were game theory was more extensively used
 Antitrust History: US: new low enforcement era (2000-2008)


• Microsoft case is settled with minor remedies
  (against the will of several states)
• DoJ American Airlines predatory pricing case
  used extensive modern economic theory but
  was dismissed by the courts
• Fight against cartels kept at high levels
• But, merger policy was again very lax
 Opening a divide between US and EU
          in the 2000-2008
• Microsoft case: contrasting to the US, the European
  Commission after an investigation that took more than five
  years, adopted a decision in 2006 condemning Microsoft
  for abuse of dominance: inter-operability in server-client
  systems in Windows operating system and tying of browser
  an music application
• US more lenient on mergers (GE-Honeywell)
• In 2006 the EC publishes draft Guidelines on Abuse of
  Dominance, followed in 2008 by guidance for priorities,
  establishing a “more economic approach” and setting
  consumer harm as the objective of policy
• In 2008 the DoJ publishes a paper confirming the more lax
  position of the Supreme Court in the 1990s
             Reforms of 2004
• Regulation 1/2003 establishes
  decentralization of EU competition system to
  NCAs and National Courts applying articles 81
  and 82
• Revised merger regulation
• Increased investigative powers to Commission
• Elimination of prior notification under article
  81

				
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