ANTITRUST OUTLINE BASIC ECONOMICS A. Price Restraints 1. Law: e.g., regulated industries. 2. Elastictiy of Demand: measure of buyer responsiveness to change in price. 3. Competition: restrains profits. a. Assumption: Firms seek to maximize profits. b. See class handout re determining profit-maximizing price. B. Market Power 1. Defined: a measure of the firm‟s ability to raise prices above competitive levels without incurring a loss in sales that more than outweighs the benefits of the higher price. 2. Goal of Antitrust Law: to prevent decreases in competition as measured by market power. a. Market Power Dilemma: a firm can increase its market power by excelling at productive efficiency and product improvement, which are benefits of competition (see below). 3. Defining the Market: Boundaries a. Geographic: how far the seller can feasibly ship his products before incurring too much expense. Or how far consumers will travel to get them. b. Product: substitutes. 4. Market Share: measured by any means reasonable under the circumstances (units of output, dollars of revenue, etc.). 5. Characterizing Market Power a. Two Factors i. Number of Firms in the Market: more firms means less market share and more competition. ii. Uniformity of Their Size (Market Share): more uniformity means less market share and more competition. b. Illustration: two firms both operate at 80% capacity. Firm A has sales of 720k units per year (90% of the market) and excess capacity of 180k units per year. Firm B has sales of 80k units per year (10%) and excess capacity of 20k units per year. i. If Firm A raised its price, at most it would lose 20k units per year because that is all that Firm B could increase its output by. Thus Firm A could increase its price in the short term with the only constraint being buyer resistance. ii. This is an extreme case of few firms and non-uniformity. Firm A is effectively a monopolist. Large market share begets market power because there are few alternatives sources from which to buy. c. Capacity to Produce: capacity is limited in the short term by labor force, machinery. Key is capacity utilization. 6. Profits as a Surrogate: simply, the more market power you have, the more money you make. Thus, economists and antitrust lawyers will use sustained profits as a surrogate for market power. See du Pont. C. Perfect Competition 1. Requisite Conditions: many buyers and sellers; no individual firm is large enough to affect price by individual action; products in the market are homogenous, with each 2 product capable of serving as a substitute for another; barriers to entry do not exist; and ability to increase production is without restriction. 2. Fallout: every firms sells as much as it can at the market price; in the long run, no seller makes any profit. D. Values of Competition 1. Lower Prices 2. Allocative Efficiency: this is a state in which no one could be made better off without someone else being made worse off. 3. Productive Efficiency: can‟t raise price, so the only way to increase marginal profit is to decrease costs. 4. Innovation and Product Improvement: an improved product is more desirable and would allow the seller to increase price and lose fewer sales. 5. Industriousness: working hard. 6. Wide Distribution of Work Opportunities: if you want to be [whatever] and you‟re in a competitive economy, you will have a wide choice of firms to work for. 7. Political Benefits: assumed that economic power equates to political power. If you‟ve got highly concentrated industries, they will become politically powerful. E. Drawbacks of Intense Competition 1. Economies of Scale: sometimes the most efficient size of a firm is so large that in order to achieve this efficiency it must have a large share of the market. 2. Research and Development: generally, a firm must be large and profitable to sustain an R&D program. a. Consider agriculture. Individual farmers are not doing experiments, government subsidized university studies are the main source. 3. Economic Instability: intense competition makes prices instable. This makes life hard in general (menu costs) and, in the bad years, people go broke and have to restructure. This is waste of physical resources. FEDERAL ANTITRUST LEGISLATION A. Sherman Act 1. Restraints of Trade (§1): makes unlawful “every contract, combination … or conspiracy in restraint of trade” in interstate or foreign commerce. 2. Monopolizing (§2): makes monopolizing, attempting to monopolize, or combining to monopolize. 3. Enforcement: The Sherman act is enforced by the Antitrust division of the Justice department and also in actions by private parties. There are also criminal penalties (though the government will only seek them in cases of clear/per se violations), injunctions, and damage actions. B. Clayton Act 1. Price Discrimination (§2): prohibits price discrimination between different purchasers where the effect thereof is to substantially lessen competition or to tend to create a monopoly in any line of commerce. 2. Restrictive Arrangements (§3): prohibits sales on condition that the buyer not deal with competitors of the seller (i.e., tie-in sales, exclusive dealing arrangements, and requirements contracts) where the effect may be to lessen competition substantially or to tend to create a monopoly in any line of commerce. 3. Enforcement: enforced by the Antitrust Division of the Justice Department, the Federal Trade Commission, and by private parties. There are no criminal sanctions for violation. C. Federal Trade Commission Act 3 1. Section 5(a): prohibits unfair methods of competition in commerce and unfair or deceptive acts or practices in commerce. 2. Federal Trade Commission: created by the Act. Has exclusive authority to enforce §5 of the act. HORIZONTAL RESTRAINTS ECONOMIC ANALYSIS A. Price Fixing Analysis 1. Cartel Behavior: agreements among competitors that restrict output, increase price or otherwise exclude competition. Conspiracies between competing firms at the same level. a. Cartels are run to eliminate competition and thus make more profit than would otherwise be the case. 2. Competitive Evils a. Create Virtual Monopoly, Eliminate Price Competition i. Not as Bad as Monopoly: Cheating a. Once formed, the first thing that the members do is raise prices, which decreases sales. This necessitates production quotas being placed on the members. High profit margins tempt individuals to cheat this production quota and/or sell under that table at below the set price. b. Enforcement is almost impossible for most products. However, if the product cannot be shipped very far (e.g., cement), then the cartel could enforce the price limit by setting a very low price in the area around the cheater and forcing it out of business. ii. Worse than a Monopoly: Higher Average Costs a. Must set prices high enough to make their least efficient member profitable. As a result, they have higher average costs and higher prices than monopolies. b. Inefficient Non-price Competition: a perfect example of this is noted on p. 115, re the airline industry. Since firms cannot compete as to price, they must compete in non-price ways. 3. Possible Justification: Eliminates Cutthroat Competition a. Can occur when you have a combination of very high fixed costs and low variable costs. In theory, competition will drive prices down to the variable costs, which is close to zero. What happens is that the firm with the deepest pockets survives; others go broke. i. E.g., the additional cost of carrying one additional person on a rail car is effectively zero. b. Cartels can avoid this by fixing the price and establishing production quotas to share capacity evenly among members. c. Economist Counter: ruinous competition will drive the members who don‟t have deep pockets out of business and leave in just enough capacity to meet demand. The remaining firms will be in competition and be producing at their maximum capacity. i. SLAWSON: Thinks it‟s bullshit. Impossible to arrive at the equilibrium because calculations cannot be that precise. There are bound to be underestimates, which will invite new entrants. 4 RULE OF REASON DEVELOPMENT AND PER SE ILLEGALITY A. Rule of Reason Development 1. All Contracts: United States v. Trans-Missouri Freight Assn. (1897). The Sherman Act makes unlawful “all contracts in restraint of trade.” It is unnecessary to decide whether this particular restraint was valid at common law. a. Cutthroat competition is not a valid exception. b. A contract incidental to the sale that enhances its value is legitimate. 2. Ancillary Restraint Doctrine: United States v. Addyston Pipe and Steel Co. (1899). The Court indicated that if the restraint involved was a “direct” restraint (i.e., not ancillary to a lawful main purpose), the restraint was illegal, even if reasonable. Affect on competition was not a consideration. a. Legal Restraints: incidental to a legitimate business purpose and no greater than necessary. Cartels fail this test because their only purpose is to restrict prices. i. Challenge: isn‟t the purpose of all these contracts to make money? Well yeah, but doctrine concerns the means, not the end. b. DEAD END: the court went off in a direction that has never been followed. 3. Birth of the Rule of Reason: Standard Oil Co. v. United States (1911). 4. Price Fixing and the Rule of Reason: Chicago Board of Trade v. United States (1918). Restraints on trade that have anticompetitive effects may be permitted if they are reasonable. a. RULE OF REASON TEST: whether the restraint imposed merely regulates and thereby promotes competition or actually suppresses or destroys competition. Requires consideration of several factors. i. The facts peculiar to the business to which the restraint is applied. ii. Its condition before and after the restraint is applied. iii. The nature of the restraint, its scope, and its effect, actual or probable, as well as the reason for which it was adopted. iv. HOWEVER, some factors are not relevant. a. Legitimate business purpose. The fact that the arrangement would prevent fraud is irrelevant. b. Fallout: Difficult to reconcile with succeeding cases. It may mean: i. If the court can see that the effect on competition is minimal, it will not invalidate the price fixing agreement. ii. Agreements between competitors, even if they affect market prices, may be legal if they improve the functioning of a competitive market. a. Price-fixing: not necessarily illegal, but they fail this test because their only purpose is to reduce competition. b. Covenants Not to Compete: still legal, but strained. There is a benefit in allowing businesses to be sold when owners want to sell them – increases entry into the market and therefore competition. c. Partnerships: strained, but still legal. Although they decrease competition among partners, they increase competition between partnerships. iii. Addyston‟s Ancillary Restraint Doctrine and the Rule of Reason: still valid. “Legitimate” business purposes are just those that promote competition. 5 a. However, this could be problematic because every agreement to fix prices could be characterized as having other legitimate purpose (like preventing fraud?). B. Per Se Illegality and Price Fixing 1. Price Fixing: any agreement that tampers with price structures (conspiring to raise, lower or stabilize prices). Price-fixing is a per se violation of the rule of reason (see Socony-Vacuum). Two elements: a. An agreement to raise, lower or stabilize prices. b. It has that effect. i. See Socony-Vacuum Famous Footnote 59. This seems to indicate that actual power is not required, only the intent or purpose. 2. FACIAL VALIDITY TEST: are the effects of the agreement so plainly anticompetitive no elaborate study is needed to determine their invalidity? If yes, the per se. If no, then rule of reason. See BMI and Professional Engineers. 3. Per Se Unreasonableness of Price Fixing: United States v. Trenton Potteries (1927). Horizontal price fixing agreements are per se illegal. It is never a defense that the prices are reasonable. That is not what the rule of reason is about. Why have per se rules? a. Reduces litigation costs: eliminates the need for an economic analysis that judges and juries are not qualified to perform. b. Makes legal and business planning more predictable. Also, makes it easier for Congress to amend. c. Has an educative effect (business people can understand them). 4. Reaffirmation of Trenton: United States v. Socony-Vacuum Oil Co. (1940). The motives or purposes of a horizontal price fixing combination do not make any difference (e.g., avoiding ruinous or cutthroat competition is not a valid justification). a. If you can prove the act, you don‟t have to make a showing of anticompetitive effects; they are presumed. i. Opinion seems to create a requirement about the actual effect on prices and a requirement that a substantial amount of commerce be involved. ii. Famous Footnote 59: indicates that illegal conspiracy could exist even though the combination did not commit any overt act, had no actual power to affect prices, and the amount of commerce involved was immaterial. b. If you can‟t prove the act, you can always fall back on the rule of reason. MODERN APPLICATIONS: DETERMINING REASONABLE RESTRAINTS A. Analysis 1. Per Se or Rule of Reason? 2. Who Bears Burdens of Proof and Persuasion? B. Cartel Variations: competitors may agree to practices other than outright price fixing that have similar effects. The alternatives may be even more effective in giving competing firms control over their prices than direct price fixing because under these arrangements market share may be specifically allocated among the competitors. 1. Allocating Markets: generally, the courts have usually subjected horizontal market division agreements to the same rules as price fixing agreements (per se illegal). 2. Other Limits on Price Competition: e.g., output limitations, refusals to deal, minimum or maximum price agreements, etc. C. Territorial Divisions and Joint Buying Arrangement: United States v. Topco Associates (1972). Supreme Court held exclusive territories to be per se illegal. However, the district court on remand allowed Topco to continue the same territories as before, only instead of being 6 exclusive, other members would be required to pay compensation to the members with “prime responsibility” in the territory for their promotional efforts. 1. Worse than price fixing? a. It cuts out all competition; do not even have people getting together to agree. Not even any non-price competition. b. Some say that some should be allowed to enhance interbrand competition at the expense of intrabrand competition (see below). i. The SC says that it is not equipped to handle this determination, but apparently district courts feel they are able to. 2. THE REAL LAW OF TOPCO: Relatively small competitors may join in a cooperative venture to better compete with larger competitors if their cooperation involves territorial allocations as long as the restraints are no more than necessary to increase interbrand competition, even if it decreases intrabrand competition. 3. Joint Buying Arrangements: virtually per se legal unless the firms constitute something close to 100% of the market. Why would firms do this? a. Quantity discounts from suppliers. b. Lower transactions costs – eliminates duplication. c. Increased market power (can be a more even distribution of market power). d. Monopsony: there is not much incentive for all firms to join together because it wouldn‟t give any of the members a competitive advantage over the others – they would all get the same price. 4. Territorial Divisions: Use of Private Label a. Supreme Court viewed this as a territorial division – a per se violation. b. The “Real Law” of Topco, again (Rule of Reason): the district court balanced the pro-competitive effects of the interbrand competition and the anticompetitive effects of the intrabrand competition and found that the pro-competitive effects outweighed the anticompetitive effects. This is only effective if the firms have small market shares. i. Free Rider Problem: it was argued that exclusive territories were necessary to protect stores spending money to promote the private label. c. Palmer v. BRG of Georgia: court held arrangement illegal per se, citing Topco. No arguably pro-competitive effects. i. If the two had never competed against each other, then this would probably fall under the rule of reason analysis. D. Separate Product Doctrine (Rule of Reason): Broadcast Music v. Columbia Broadcasting System (1979). Courts should consider the practical realities of an industry in determining whether a particular practice falls within the per se rule. 1. Exception to the Per Se Rule: when the agreement is necessary to preserve the product. See also, NCAA. It is, however, tough to get to this exception. Must truly “preserve the product.” Must be both necessary and effective. 2. PER SE OR RULE OF REASON: “…whether the practice facially appears to be one that would always or almost always tend to restrict competition and decrease output, and in what portion of he market, or instead one designed to „increase economic efficiency and render markets more rather than less competitive‟…” a. When looking at competition, we should consider whether it increases or reduces innovation, productive and/or allocative efficiency. i. Look at pro-competitive efficiencies. Does it increase output and/or reduce price (see NCAA)? 3. Market Considerations: the restraint was no more than necessary to achieve efficiencies. This should remind us of the Addyston test. 7 4. Separate Product: blanket license performs a useful, even necessary service in avoiding thousands of individual negotiations. It is a different product from individual licenses. E. Maximum Price Fixing by Physicians (Per Se): Arizona v. Maricopa County Medical Society (1982). Agreement among physicians to establish maximum fees is a per se violation of the Sherman Act. 1. Maximum Price Fixing: the per se rule reflects faith in price competition as a market force; it is not solely interested in low prices. a. Discourages competition because the agreement provides the same economic rewards to all physicians, regardless of skill, training, experience. b. Could degenerate into an agreement to fix uniform prices – everyone will charge the maximum. 2. Professional status is irrelevant. The agreement was not based on public service or ethical requirements. a. However, it seems likely that when dealing with professions, unless it is absolutely clear, a more detailed rule of reason analysis is necessary. See also, Professional Engineers, below. F. Canon of Ethics (Per Se): National Society of Professional Engineers v. United States (1978). Courts may not consider non-economic factors in determining whether a particular restraint of trade is reasonable. 1. Proper Inquiry: whether the challenged agreement is on that promotes competition or one that suppresses competition. a. Public Interest: the Sherman Act reflects legislative judgment that ultimately competition will produce not only lower prices, but also better goods and services. The assumption is that the market will discipline firms in the market to deliver products consumers want at reasonable prices. 2. Professional status irrelevant. The ultimate inquiry is the affect on competition. However, other cases indicate that they will be shown deference. G. Horizontal Restraints Necessary (Rule of Reason): National Collegiate Athletic Association v. Board of Regents of the University of Oklahoma (1984). Plan by an organization of colleges to restrict negotiations between TV networks and member colleges for televising football games is not a per se violation of the Sherman Act. The analysis is as follows: 1. Look at the anticompetitive effects (output reduction and price fixing). Usually, these are illegal per se, however, in this case, some horizontal restraints are necessary. a. Necessity: horizontal restraints are necessary if the product is to exist at all (i.e., the NCAA‟s rules are needed if there is to be intercollegiate college football). b. Still, the restraints in this case are not necessary. They do not serve to preserve competitive balance and amateurism, as do the necessary restraints. 2. Are there any arguably pro-competitive effects? Um, no. H. “Quick Look” Analysis (Rule of Reason): California Dental Association v. Federal Trade Commission (1999). Where the anticompetitive effects are far from intuitively obvious, the rule of reason demands a more thorough inquiry than a “quick look” analysis. 1. Quick Look Procedure: the analysis is a midpoint between per se and rule of reason. Unclear exactly where it applies (apparently where there is an “intuitively obvious inference of anticompetitive effect”), but it will shorten litigation. a. Is the restraint at issue a naked restraint? b. Are there any offsetting pro-competitive justifications? c. Are the parties to the restraint sufficiently powerful to make a difference? 2. SLAWSON: Not much real difference. Once you‟re under the rule of reason, the court can say it‟s heard enough at any point. 8 WHEN DOES AN AGREEMENT EXIST? A. Oligopoly Pricing 1. Basic Theory and Model: a market characterized by only a few sellers. Recognizing their interdependence, each may restrict its output in order to charge a near monopoly price. Basically oligopolistic pricing is selling the same product for the same price. a. Uniformity: occurs because no firm has an incentive to reduce prices, e.g., if one of the three firms lowers its price, others lower in response and all three return to their original market share at a lower profit margin. Firms can raise prices though signaling in “announcements” they plan in increasing prices and seeing if others respond in kind. b. Elements of a Successful Oligopoly i. The firms must be able to reach a consensus on price. ii. The firms must be able to observe and compare each others‟ prices iii. Cheating must be detectable and punishable. iv. Producers must collectively enjoy market power. c. Cartels Compared: the primary difference between the two involves the method of communication and related problems of coordination. d. Relevance of Number of Firms: larger numbers increase the likelihood of disagreements, the variety of differentiated products, the difficulty of detecting cheating by an individual firm and of enforcing a coordinated response, and the temptation to pursue an independent profit-maximizing course. e. Oligopoly in the Absence of Competitive Behavior: a lack of cooperation does not guarantee competitive results. i. A firm with significant market share might benefit from raising prices if it anticipates losing on some of its sales to competitors (say if they had limited capacity or if the products were differentiated). 2. Factors Affecting Likelihood of Oligopolistic Coordination a. Divergent Interests: monopolists/cartels don‟t have an interest in high prices. They seek to maximize profits by realizing the largest possible difference between aggregate costs and aggregate revenues. b. Available Channels of Verbal and Nonverbal Communication: firms must be able to communicate views about demand, cost or recent or forthcoming changes in them; the characteristics, adequacy, or desirability of past, present, or prospective prices; industry profit, revenue, or price, or; its expectation or intention with respect to price. i. Verbal channels facilitate coordination, but are not necessary. c. Price Comparability of Products: difficult to do when firms sell goods of varying quality, a wide product line, or made-to-order products. d. Nonprice Competition: firms may be sufficiently few in number to coordinate prices at noncompetitive levels through interdependence and yet compete vigorously in other matters. B. Tacit and Inferred Express Agreements: an agreement in restraint of trade can be proved by circumstantial evidence. Also clear that the existence of such an agreement cannot be proved simply by showing that the effects usually associated with such an agreement have occurred. The issue is always whether the evidence justifies the inferences. In these cases, the only hard evidence available is that competitors did the same thing at the same time. 1. KEY QUESTION: would the system operate as it is operating without an underlying agreement? Look at: a. Excessive prices or profits, or increased prices as demand declines b. Acts against self interest 9 2. Conspiracy Established from Conduct: Interstate Circuit v. United States (1939). The courts may infer an agreement or conspiracy from the fact that the parties know that concerted action was contemplated when they adhered to the scheme. a. This is the leading case on “conscious parallelism.” Here, there was no explanation for a firm entering into the contract independently; its success depended on the participation of all parties. b. Factors to Consider i. Nature of proposals ii. Manner in which they are made iii. Unanimity of action 3. Independent But Uniform Action: Theatre Enterprises v. Paramount Film Distributing Corp. (1954). Proof of parallel behavior does not by itself conclusively establish an agreement. In this case, Paramount was acting in its economic best interest. C. Intraenterprise Conspiracy: concerted action by persons within a single business enterprise is not deemed a “contract, combination … or conspiracy” within the meaning of §1. Same for acts involving a corporation and its officer or employees. However, joint action by commonly owned corporations (intraenterprise conspiracies) and by single entities in conjunction with agents have been examined under §1. 1. PARENT-SUBSIDIARY RULE: Copperweld Corp. v. Independence Tube Corp. (1984). A parent and its wholly-owned subsidiary may not conspire within the meaning of §1. It is per se legal. a. Closeness of Connection: THREE CRITERIA i. Is there an elimination of previously independent centers of decision- making and combining them into one decision-making unit? a. Concerted Action v. Unilateral Action: concerted action deprives the marketplace of competitors and increases the market power of those who conspire. ii. Is the coordination necessary in order that the larger unit of which they are a part can increase efficiency? a. Note here that the SC does not use the rule of reason because it wants to consider efficiency gains. The rule of reason only looks at the competitive landscape. iii. Is there a complete unity of interests in all of their corporate goals, primarily profit? b. Rationale for Rule i. Prevents a hindering of efficiencies that could be obtained through decentralized management. ii. Coordination in a firm is likely to result in an effort to compete, not stifle competition. iii. Still note that this reduces the number of actors and concentrates the power of those acting in concert. FACILITATING PRACTICES A. Defined: in industries where there are slightly too many firms for oligopolistic pricing, but too few for vigorous competition, history shows that these firms will try to adopt oligopolistic pricing through “facilitating practices.” a. Something that would make it easier for sellers, but would be illegal under the antitrust law if the agreed to do it. b. If there is an agreement and an anticompetitive effect is shown, this is a §1 violation. 10 B. Two Levels of Analysis: actions that may have the effect of facilitation oligopolistic collaboration can be analyzed on two levels: a. First Level: evidence of a direct conspiracy to fix prices. i. Recall Esco court‟s hypothetical meeting. Is there another factor that could account for the change in prices? Is doing this alone in the firm‟s best interest? b. Second Level: joint decision is violation of Sherman Act §1, so all you have to show is that the anticompetitive effects outweigh the pro-competitive effects. i. Note that if the facilitating practice itself has no arguably pro-competitive effects, then you have shown a per se violation under Socony. C. Data Dissemination: trade associations are statutory combinations and therefore subject to §1. Consider: a. Is the agreement to disseminate the data itself anticompetitive on the whole? b. Even if no, is the dissemination of the data itself anticompetitive on the whole? D. Trade Associations/Agreements to Exchange Information: American Column & Lumber Co. v. United States (1921). Actions by trade associations are by definition pursuant to an agreement. As such, if the actions result in anticompetitive effects, there is a 1 violation. An agreement among competitors to exchange specific information about their business, including prices, through a trade association may constitute a violation. a. Agreement is found in the tendency of intelligent people to follow a common course based on elaborate distribution of information and the restraint of business honor and social penalties. E. No Actual Agreement: Maple Flooring Manufacturers‟ Association v. United States (1925). The dissemination of business information alone does not violate the Sherman Act. a. Vs. American Column: much of the information exchanged in the previous case could only have an anticompetitive effect. The information exchanged here was much more general and therefore exposed no anticompetitive risk. i. In American Column, the information exchanged would allow other competitors to identify price-cutters. In this case the information was compiled into statistics, so you couldn‟t tell. ii. Rationale: permitted because the exchange of many types of industry-wide information is helpful in planning or efficient operation. b. Rule of Reason: issue is whether the information collected and distributed is no more anticompetitive than necessary to accomplish the legitimate objectives. c. Number of Competitors: given the number of competitors it does not appear that the information could have any real effect. Note that the court would be weary of oligopoly doing the same thing. F. Exchange of Price Information: United States v. Container Corp. of America (1969). The legality of data dissemination varies with the industry involved. Even if there is no formal agreement to undertake the activity, concerted action is sufficient to establish a combination or conspiracy under §1. a. In this situation the industry was dominated by relatively few sellers, the product is fungible, and competition is over price so the exchange worked to prevent competition by stabilizing prices downward. b. The court did not explicitly rule per se, but it seems that way because they did not consider the pro or anticompetitive effects of the arrangement. It did, however, say that the prices were stabilized and therefore higher as a result of the arrangement. i. SLAWSON: it‟s probably a per se violation to exchange prices in an oligopolistic industry. c. Dissemination of information in and of itself can be sufficient to be a facilitating practice, but you should still look at the anticompetitive effects (see Maple Flooring). 11 i. Look at the type of information disseminated. If it does not deal with future prices or identify specific customers, it is not as likely to be a facilitating practice. G. Basing Point Pricing: a mechanism sometimes used to determine the price of delivered industrial goods. Actual cost of goods is seller‟s “mill price” plus purchaser‟s cost of transportation. Base point pricing establishes the purchaser‟s cost predicated upon delivery costs from a standard shipping location which may not be the actual place from which the goods for a particular order are shipped. For example, see page 262. a. Economic Effects: buyers have no incentive to minimize transportation costs by purchasing from the nearest sellers. Results in wasteful cross-hauling of goods. Also results in distorted locational decisions, as buyers will locate their plants closer to the base point. b. Collusion or Competition: if prices do not fall over time or if capacity does not expand notwithstanding ample profit potential, an oligopoly might be produced. Regardless of the number of locations, coordination will be possible after a consensus on a single base price, a basing point, and a single set of transportation charges. c. Legal Issues: an express agreement would be illegal. Difficulty arises in determining whether an inferred agreement exists. d. Remedies: cease and desist if individual use of base point delivery pricing, with knowledge that parallel competitive conduct would yield identical delivered price quotations, constituted an unfair method of competition. Still, information dissemination is not itself §1 violation. CONCERTED REFUSALS TO DEAL A. Vs. Price fixing Agreements: a price fixing agreement involves an agreement to refrain from competition within the group in order to exploit, but not to weaken customers or suppliers, while boycotts often involve collective action among a group of competitors that may inhibit the competitive vitality of rivals. B. Collective Boycott Agreements: when competitors are excluded from a market by the positive action of a dominant group, such as blacklisting or boycotting. This is a concerted refusal to deal with one or more persons for the purpose of getting them to do or not do something. Must determine if the effect is anticompetitve. a. Inferred Conspiracy: Eastern States Retail Lumber Dealers‟ Association v. United States (1914). A practice that has the effect of enforcing an informal boycott against disapproved dealers is illegal if its purpose is to lessen competition. i. An individual firm may refuse to deal, but where there is a group conspiracy or agreement, it is unlawful. b. Group Boycott Illegal Per Se: Fashion Originators‟ Guild of America v. FTC (1941). Competitors may not associate and agree among themselves to refuse to deal with buyers who participate in possibly tortuous conduct with respect to members of the association. i. Group boycott is illegal per se. Competition is unreasonably restrained by limitations on outlets to which manufacturers can sell and limitations on sources from which retailers can buy. ii. Limit consumers‟ choices and intend to drive out other businesses. Public health and safety justifications are not admissible. c. Public Injury Not Required: Klor‟s v. Broadway-Hale Stores (1959). Reaffirms that a concerted refusal to deal by retailers is per se unlawful. It is not proper to only look at the conduct‟s affect on prices (public injury); rather you should look at the competitive harm to the other retailers as well. 12 i. Concerted action brought about by individual agreements is sufficient to prove a §1 violation. 1. Note that this type of agreement would be okay if just one manufacturer an distributor agreed, because other manufacturers could still service the competition. Where do you draw the line? ii. American Medical Assn. v. United States (1942). The association expelled or threatened to expel from membership salaried doctors or those who consulted with them. District court held that it was per se illegal because it had the effect of reducing competition. Medical and public welfare are irrelevant. iii. Preserving the Product Defense: Molinas v. National Basketball Assn. (1961). District court found it reasonable to suspend a player from his team and the league, thus preventing his employment by other teams, after he admitted that he bet on games. Disciplinary rules in order to preserve the integrity of the game. This seemingly takes ethics into consideration. C. Bottleneck Agreements: when a single firm or group of firms has sufficient command over some essential commodity or facility in its industry to be able to impede new entrants. a. General Rule: Sherman Act requires that, facilities cannot practically be duplicated by would-be competitors, those in possession must allow them to be shared on fair terms. b. Analysis: look for the anticompetitive effect and ask whether there are justifications for it and whether there are reasonable alternatives for the other companies. c. Access to News: Associated Press v. United States (1945). Independent businesses may not become associates in a common plan which hampers business rivals‟ opportunities to buy or sell the things in which the groups compete. d. Exclusion from Cooperative Wholesale Distributor (Rule of Reason): Northwest Wholesale Stationers v. Pacific Stationary & Printing Co. (1985). The per se rule does not apply to a cooperative wholesaler‟s exclusion of one of its members, absent a showing that the wholesaler had market power or one unique access to a business element necessary for effective competition. i. There would be a violation only if Pacific could show that without the co-op they couldn‟t compete effectively. ii. Purchasing Co-ops: same rationale as Topco. You can buy cheaper and gain quicker access through joint warehousing facilities. Only pro-competitive if it helps smaller firms compete. Must be able to establish reasonable rules to function. 1. Expulsion: if you have a rule, you must be able to enforce it. So, even it the facility is necessary for a firm to effectively compete, if they violate a rule they can be kicked out. a. ANALYSIS: look at the broad pro and anticompetitive effects of such agreements, and then the reason for expulsion. Generally: i. Pro-competitive Effects 1. Increases economies of scale. 2. Keeps smaller retailers in business; enables them to compete with larger retailers who can take advantage of economies of scale. ii. Reasons for Expulsion 1. Must enforce disciplinary rules in order to function effectively. 2. Unless co-op possesses market power or exclusive access to an element essential for competition, cannot conclude that the expulsion 13 will almost always have an anticompetitive effect. 2. Entry: unclear whether this applies. Would have to argue that there is no meaningful distinction between expulsions and admissions. iii. SLAWSON: This case stands for three things: 1. Line between per se and rule of reason is the same for price fixing as it is for buying co-ops. 2. Buying co-ops are not always a per se violation. They have pro- competitive justifications, but only if its members are smaller than the other industry participants. 3. A firm that is expelled or denied entry must show one of three things: a. Market power b. Unique access to a necessary element c. Didn‟t violate a valid rule necessary for effective operation e. Concerted Refusal to Provide Information (Rule of Reason): FTC v. Indiana Federation of Dentists (1986). Violation for professionals to agree among themselves not to provide information required by insurers to monitor the quality of care. i. Not decided under the rule of reason, but there are no credible arguments of pro- competitive effects. Seems to be more a matter of lip service to professional organizations. Recall the “quick look” analysis of California Dental. MONOPOLY MONOPOLIZATION A. Generally: Sherman Act §2. Covers single firm behavior. a. Requires both the attainment of a monopoly and exclusionary practices. B. Vs. Monopoly: Although monopolies are generally forbidden, in some situations a monopoly may be thrust up on the defendant. The passive acquisition of monopoly power is not unlawful. Attaining a monopoly raises the presumption that a monopoly was achieved through some illicit activity. To rebut this presumption, a monopolist must show that monopoly was “thrust upon it.” Three situations in which a monopoly is thrust upon a firm: 1. Natural Monopoly: optimal efficiencies of scale not reached until some firm has a sufficient percentage of the market. 2. Changes in tastes or costs. E.g., beanie babies. 3. Excellent product. Winner of market competition through skill, foresight and industry. B. Unlawful Acquisition of Monopoly Power 1. The Intent Problem Revisited: United States v. Aluminum Co. of America (1945). It is unlawful monopolization where the defendant has the intent to achieve monopoly power and in fact achieves 90% of control of its relevant market. The only necessary intent it to engage in the practices that bring about a monopoly. a. Regarding exclusionary practices this case is only of historical interest, though it has never been overruled. b. Monopoly v. Price fixing Agreement: what is wrong with the argument that since price fixing agreements are illegal per se, monopolies should also be per se illegal? i. The monopolist has an incentive to be as efficient as possible. ii. One weakness of price fixing is the incentive to cheat by the low cost firms. iii. A monopoly can result from honest competition. 14 c. Maintaining a Monopoly: Judge Hand said that this was not thrust upon them; they didn‟t have to it. However, if they didn‟t anticipate excess demand, then the price of aluminum would go up in the event of a shortage. Isn‟t that exploiting a monopoly? i. SLAWSON: no win situation. d. MONOPOLIZATION TEST: United States v. Grinnell Corp. (1966). The offense of monopoly has two elements: the possession of monopoly power in the relevant market and the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen or historical accident. 2. Unlawful Use of Monopoly Power a. Leverage and the Single Profit Monopoly Theorem: the Chicago School of Antitrust challenged the idea that a firm could extend its monopoly in any meaningful or harmful way through leverage. A monopoly in a single market can choose to exercise its powering other markets or can link markets, but that in so doing it does not earn more than one monopoly profit, it does not gain market power in other markets, and it does not increase the harm to society. i. Use of Monopoly Power without Intent to Monopolize: United States v. Griffith (1948). It is unlawful under the Sherman Act to use monopoly power even if the power was lawfully gained. The Defendant used monopolies in “closed” towns as a tool to gain favorable terms in “open” towns, apparently seeking to leverage existing monopolies into “open” towns. b. Business Practices Normally Permissible Become Illegal when Conducted by a Monopolist: United States v. United Shoe Machinery Corp. (1954). A lawfully acquired monopoly power may not be used to maintain a monopoly. The practices here are unlawful for a monopolist since they perpetuate market control rather than encouraging competition. i. Exclusionary Practices Defined: conduct other than competition on the merits or restraints reasonably necessary to competition on the merits that reasonably appears capable of making a significant contribution to or creating or maintaining a monopoly. ii. EXCLUSIONARY PRACTICES: TWO STEP ANALYSIS: reminiscent of the test for implied agreement from parallel behavior. Note that the two clauses are not entirely independent. a. Would the defendant have engaged in this practice if it didn‟t have monopoly power? (This requires you to make a lot of assumptions about the industry.) i. If it is something that you would do in a competitive market, then it is less likely to be found to be an exclusionary practice, but does not compel this conclusion. ii. Can you rebut the allegation with a legitimate business justification (see Aspen, below)? b. Does the practice lessen competition? iii. Opinions on Remedy: dissolution is unrealistic. Instead, almost all practices are enjoined. a. If you were the owner, you would prefer dissolution because you get share in the smaller companies. Otherwise you would just get shares in once beaten down company. 15 3. Vertical Integration and Dealing with Competitors: A firm is considered vertically integrated when it performs functions internally that it could have done by an outside firm. It may be an efficient way to organize a business. The problem arises when a monopolist in one market gains monopoly power in another market through vertical integration. a. Effects i. Short Run: never results in higher prices and may even keep prices down. See “Successive Monopoly,” below. ii. Long Run a. Lessens incentive for cost reduction and innovation at the lower level. b. Barrier to entry at the lower level (if no one else provides the necessary component). b. Successive Monopoly Example: assume Alcoa is vertically integrated and produces aluminum ingots and aluminum pots. Ingots cost $75 to make; pots cost $25. The profit-maximizing price of a pot is $200 ($100 profit). i. A higher/lower price would yield lower profits. Consider: a. At $200/pan, sales are 1000 units/month. Total profit = $100,000. b. At $210/pan, sales are 900 units/month. Total profit = $99,000. c. At $190/pan, sales are 1,100 units/month. Total profit = $99,000. ii. If Alcoa were to sell its fabricating facilities to someone else, Alcoa would be forced to set a price for ingot, which would be over $75. a. If they charge Panco $150 who charges $200, Panco will make $25,000 in profits and Alcoa will make $75,000. b. If Panco raises the price to $210, Alcoa will make $67,500 in profits and Panco will receive $31,500. iii. Thus, under these circumstances (no substitutes for aluminum pots and all ingot is used to make pots), it is better to have a vertically integrated monopoly than a successive monopoly. c. Price Discrimination: vertical integration may allow a firm to price discriminate. Suppose the airline industry used aluminum ingot. If Alcoa vertically integrated into the pot market and refused to sell to other pot manufacturers, they could charge more to the airline industry. d. Monopolists’ Control through Vertical Integration: Otter Tail Power Co. v. United States (1973). Otter Tail controlled electrical transmission wires as well as wholesale power. When it franchise expired, it prevented the communities from adopting municipal distribution systems by refusing to permit the municipalities to purchase power from other producers through Otter Tail‟s transmission lines. This was a violation of §2. i. They would not do this in the absence of a monopoly. ii. Anticompetitive because it excluded others from the power generation market. e. Monopolists’ Control through New Product Development Related to Monopoly Product: Berkey Photo v. Eastman Kodak Co. (1979). Court of appeals held that it is an ordinary and acceptable business practice to keep new developments secret; Kodak had no duty to disclose the new film. The benefit to Kodak resulted not from monopolization but from integration. f. Monopolists’ Duty to Cooperate with Competitors: Aspen Skiing Co. v. Aspen Highlands Skiing Corp. (1985). A monopolist has a duty to market jointly with 16 its competitors if the marketing had originated in a competitive market and persisted for several years. i. There is generally no duty to deal. Refusals do not violate §2 if valid reasons exist. Conduct that does not benefit consumers is not presumptively legitimate. ii. Only Discontinuance? It is a lot easier to prove adverse effects if there is a prior relationship. There is no consensus as to whether this applies across the board, even to new entrants. iii. Burden Shift: court seemed to shift the burden of legitimate business justifications to the defendant once it has been show that a monopoly exists and its conduct has reduced competition. iv. Essential Facilities Doctrine: States that a monopolist in control of an essential facility must share that facility on a reasonable basis with competitors. This is alive in the lower courts; the Supreme Court has never addressed it. a. If you can use this doctrine, previous dealings don‟t matter. b. ESSENTIAL FACILITIES ANALYSIS i. Was it strongly preferred by customers (essential)? ii. Unable to be duplicated? iii. Access denied? iv. Feasible to share the facility? g. No Essential Facilities Claim where Access Exists: Verizon Communications v. Law Offices of Curtis V. Trinko, LLP (2004). The 1996 Telecommunication Act‟s statutory provision for access makes it unnecessary to impose a judicial doctrine of forced access. Further, if the existence of a regulatory structure minimizes the pro-competitive effect that would result from antitrust enforcement, the antitrust laws need not contemplate such additional scrutiny. i. Precedental Value of Trinko a. §III: “Insufficient assistance” is not a recognized antitrust claim under refusal-to-deal precedents. Also discussed forced sharing. b. §IV: did not intend to preempt antitrust laws. MONOPOLY POWER A. Market Power: power over price. Monopoly power simply means a lot of market power. When we talk about market power, we are referring to a firm‟s market power in reference to a specific product, not the firm in general. B. Determining Relevant Market and Monopoly Power: market share data and increases in market share will not necessarily determine the extent of market power. 1. Major Problems: there are three major problems in the monopoly area. a. Determining the relevant market. b. Defining the point at which market power achieves monopoly status. c. Assuming monopoly power exists, defining what conduct is permitted by a monopoly (exclusionary practices). 2. Theoretical Considerations a. Substitution of Products: the ability and willingness of users of a product to use a substitute. b. Geographic Considerations: the geographic location of alternatives. c. Entry into the Industry: price adjustments will be limited by the factor of ease of entry into the industry. 17 C. Price Elasticity of Demand: if you raise the price of a product, how much does that decrease the demand for your product? 1. High if you raise price and there is a big change; low if you raise price and there is a small change. 2. Substitutes: if customers would switch to this other product, it is a substitute. 3. KEY CONCEPT: Two Dimensions of Buyer‟s Alternatives a. Geographic Boundary: Idea is to find a geographic area in which the hypothetical monopolist could profitably raise prices without impact from goods produced elsewhere. If you have a firm producing the same thing, but far away from you, here is what you consider: i. Transportation Charges: e.g., if it cost them $1 per unit to ship to your area, then you might have $1 of leeway before you have to worry about their product as a substitute. ii. Imports: treat foreign firms the same as another local provider. This raises the “floodgate” question. If the foreign firm has a lot of capacity, they might flood the market if you raise prices. As a result, you look at their full capacity, but this might understate your power. a. If there is an oligopoly pricing system, they are not putting that much downward pressure on your prices. b. Legal barriers to imports might limit foreign producers‟ ability to increase market presence. c. Import goods might not have local repair service. d. Or they might not serve a very expandable niche. b. Product Boundary: what, if any, products are in competition with this one? Objective is to find a group of products such that a hypothetical monopolist could profitably impose a small but significant and nontransitory price increase. 4. Relation to Cross-elasticity of Demand: recall that this is the loss of sales increase because buyers shift to other products. Price elasticity includes cross-elasticity. D. Application: United States v. Aluminum Co. of America (1945). Emphasized market power analysis as a component of the monopolization offense. Also, made it clear that §2 would be applied to conduct beyond that condemned for multiple firms under §1. 1. Alternative Market Share Calculations a. 90% is enough b. 64% is unlikely to be enough i. Still, a good working assumption is that a percentage in the area of 60- 65% is at least in the danger zone. c. 33% is not enough 2. Chose not to include the secondary market in the calculation because Alcoa‟s control in the primary market (virgin ingot) effectively gave it control over the secondary market (scrap aluminum). a. The district court included this because it was almost as good as virgin for all uses and sold only at a slight discount (high cross-elasticity of demand). 3. Imports: if there are ancillary costs to a competitor, these costs operate as a price ceiling under which a firm can raise prices with out losing sales. a. In deciding whether to include these, consider how much leeway the firm has in setting prices. In this case, Alcoa could have quadrupled its profits so it was proper to exclude European producers from the market calculation. b. However, it seems almost certain that there was oligopoly pricing going on between Alcoa and the Europeans. 4. Captive Fabricators: made it easier for Alcoa to raise prices because it will not lose sales to the fabricators. 18 a. When the price of aluminum ingot increases, Alcoa will simply charge the fabricators more. Assuming that the market is competitive, Alcoa will not lose any profits, instead this loss will be passed on to the fabricators. b. If the market is not highly competitive, Alcoa will increase the price of pots and pans to reflect the increase in the cost of ingot. Depending on the price elasticity of demand for pots and pans, this might be profitable (though sales will undoubtedly decrease). E. The “Reasonable Interchangeability” Test: United States v. E.I. du Pont De Nemours & Co. (1956). Court used percentages to determine the relevant market. 1. du Pont‟s Profits: article concluded that du Pont had monopoly power because it made excess profits consistently over a long period of time. Thus, du Pont could either price it low and wipe out the competition or price it high enough to remain competitive, but make a profit from the high price, not high volume. Economists have accepted this rationale. 2. MONOPOLY POWER ANALYSIS: look first at excess profits test and, if by this there is not monopoly power, go to the cross-elasticity of demand analysis. Note that there are problems with cross-elasticity of demand: a. Analysis only works when the competing products cost roughly the same and are equally valuable to consumers. b. If consumers prefer product greatly to alternative, then high cross-elasticity of demand is evidence of monopoly pricing. F. “Chicken and Egg Situation”: United States v. Microsoft Corp. (DC 2001). Predominant market share does not indicate monopoly power. Because of the possibility of competition from new entrants, looking only to current market share can be misleading. You must also look at the structural barrier that protects the company‟s future position. 1. In this case, Microsoft dominance was a structural barrier that led to constant reinforcing of its position and erected an effective barrier to entry. ATTEMPT TO MONOPOLIZE A. Defined: a company with market power might use that power in an attempt to monopolize. Differs from a monopolist exercising monopoly power. Behavior that would ordinarily be considered good business practice amounts to monopolizing when used with controlling market power. Thus, the extent of a company‟s market power may be determinative in characterizing its conduct as an attempt to monopolize. B. REQUIREMENTS FOR VIOLATION: this is from McQullan, below. 1. Specific intent to monopolize. 2. Dangerous probability of success. 3. Exclusionary conduct. a. Note that the Court in McQuillan indicated that proving this might be sufficient to prove specific intent because a firm would not do so otherwise. Thus, in certain situations, it seems that there is a two-part test: i. Dangerous probability of success. ii. Exclusionary conduct. C. Refusals to Deal: Lorain Journal Co. v. United States (1951). The refusal of a monopolist newspaper to accept ads from advertisers who also advertise on competing radio stations is an attempt to monopolize. 1. Normally a firm may refuse to deal with anyone, but in the context of monopoly power in some relevant market, such refusals may be unlawful. D. Requirement of Dangerous Probability of Monopolizing: Spectrum Sports v. McQuillan (1993). Parties may not be held liable for attempted monopolization under §2 without proof of a 19 dangerous probability that they would monopolize a relevant market and had specific intent to monopolize. 1. Invalidated the rule of Lessig (9th Circuit decision), which held that predatory practices alone were enough. 2. Rationale: don‟t want to prevent “robust competition”; we only want to prevent conduct that will damage the public. Not worried about individual competitors. VERTICAL RESTRAINTS RESTRICTED DISTRIBUTION A. Vertical Price Fixing: Resale Price Maintenance: practice whereby those who supply goods to distributors set prices to be charged on resale. Keep in mind that entirely unilateral action does not involve an agreement that could violate §1. 1. Economic Considerations a. Low Dealer Markups: for a given wholesale price, lower dealer markups translate into lower final prices to customers, which means increased sales and higher manufacturer profits. Hence, a manufacturer has an interest in keeping dealer markups as low as possible without dealers dropping their product. i. Double Markup Problem: if dealers have market power, they will mark up the product by more than the cost of distribution, which will reduce sales, to the detriment of the manufacturer. ii. Price Ceiling: in order to avoid the double markup, dealers may insist on a price ceiling. If a price ceiling serves to eliminate double markups, then they benefit consumers and enhance overall economic efficiency. b. High Dealer Markups: could have a variety of beneficial effects. i. Better Distribution: low dealer markups because of dealer price competition could negatively influence the distribution services they provide. Thus, limiting intrabrand price competition may be a tool to improve the interbrand competitiveness of the product by changing dealers‟ incentives to provide distribution services. Guarantee your dealers higher margins, and they ill promote more vigorously. ii. Curtail Free Riding: without RPM, full-service dealers may begin offer lower levels of service and information or stop carrying the product at all. A dealer does not want to spend valuable time and expense informing a customer about a product, only to see them purchase it at a lower price from someone else. iii. Purchase Market Penetration: high margins encourage more dealers to stock a product. c. Conflicting Goals: better distribution is in conflict with the other goal of antitrust – preventing firms with market power to raise prices above competitive levels. No clear direction here. The increase in volume of sales is often offsetting. You may end up with a lot of expensive salesmanship among competing firms that cancel each other out, leaving the public with higher prices. d. Price Coordination: RPM may be a device that a group of manufacturers use to coordinate prices. Under RPM, a manufacturer has less reason to cut wholesale prices because dealers cannot pass on the price cut to consumers. Also, cheating is easy to detect. 20 e. Unilateral Exercise of Market Power: RPM allows the manufacturer to raise wholesale prices easier because it can assure all dealers that everyone is getting a higher price. 2. Resale Price Maintenance Illegal Per Se: Dr. Miles Medical Co. v. John Park & Sons Co. (1911). A manufacturer may not set a minimum resale price for wholesalers and retailers. Unlawful because if violates the public policy of restraints on alienation. No relevance today, though never overruled. 3. Maximum Prices (Old Law): Albrecht v. The Herald Co. (1968). Maximum vertical price-fixing agreements are per se illegal. Subsequently overruled by Khan (see below). Only of historical interest now. 4. Maximum Resale Prices (CURRENT LAW): State Oil Co. v. Khan (1997). Maximum resale prices are no longer to be considered per se illegal. They are analyzed under the rule of reason. a. Low prices benefit consumers no matter how they are set, so long as they are above predatory levels. b. In practice the per se rule did not protect dealer freedom; rather it led to manufacturers integrating downward, thus eliminating the independent dealer it sought to protect. c. The Maricopa fear that it could be used to mask minimum pricing could be recognized and punished under the rule of reason. d. Maximum Vertical v. Maximum Horizontal (Khan v. Maricopa) i. Still, the overwhelming consensus that a horizontal agreement to fix maximum resale prices is to be evaluated on a per se basis. ii. In Khan, the dealer was still in competition with other oil companies; in Maricopa, all competition was eliminated. iii. Market entry is not discouraged. iv. Also, if a manufacturer thinks that innovation is a good thing, it will set prices that allow for experimentation. This is not the case with horizontal arrangements. v. Distinction: in vertical situation, it is a business necessity and pro- competitive. a. Imagine a gasoline retailer doubling margins and making the same profit. This would devastate the manufacturer. b. Or McDonald‟s in a rural area. They have to protect their reputation. B. Sole Outlets; Territorial and Customer Limitations: when a manufacturer wants to appoint dealers to sell its products and wants to appropriate to each dealer a specific territory or allocate specific customers. Promoting interbrand competition at the expense of intrabrand competition. It really doesn‟t make that much difference whether it is a territorial or customer restraint. 1. Horizontal Restraints Compared: per se illegal. Therefore, if it can be show that a division of territories between dealers has been agreed upon and imposed on the manufacturer as a result of concerted action by the dealers, this will be an unlawful restraint. 2. Motivations: pretty much the same as with RPM, with the addition of price discrimination. 3. Price Discrimination: e.g., selling prescription drugs for less in Canada. Could be pro or anticompetitive. If, absent discrimination, all sales would be made at the higher price, then it is pro-competitive. If they would be sold for less, it is anticompetitive. 4. Sole Outlet: Packard Motor Car Co. v. Webster Motor Car Co. (1957). A manufacturer may create a sole outlet if it doesn‟t control the relevant market. 21 a. The relevant market is the automobile market. §2 does not apply because there is no monopoly or dangerous probability of getting one. b. Under §1, the net effect was not to reduce competition. As a general matter, when you have a manufacturer make a decision like this, the presumption is that they are doing it because they are in a competitive situation and it will make them more competitive. 5. Customer Limitations: as indicated in GTE Sylvania, the distinction between customer and territorial limitations has not antitrust significance. Why would a manufacturer do this? a. To ensure that retailers have a certain competency level. b. To allocate customers among dealers. c. Reserve customers for the manufacturer. 6. Effect of Passage of Title: Continental T.V. v. GTE Sylvania (1977). Vertically imposed territorial/customer restraints are not illegal per se; rather they are analyzed under the rule of reason. This overruled Schwinn, which held that a manufacturer could exercise control as long as he retained title. a. VERTICALLY IMPOSED RESTRAINTS ANALYSIS: balance the decrease in intrabrand competition (if any) against the increase in interbrand competition (if any). i. Intrabrand competition is not really important. If your sales go up after putting the restriction in place, it is a slam dunk case (assuming they don‟t already have a lot of market power). Making a little guy bigger always increases competition in the market. a. Note that the district court did this analysis in Topco, thought the SC said that it was a job for Congress. b. SLAWSON: doesn‟t require examining a myriad of factors, just look at market share and see if it went up. ii. CYNICAL SLAWSON: no rule at all. If you succeed, it‟s legal. If you try and fail, it‟s illegal, but who would sue you for decreasing your market share. 7. Only Applies to Non-price Restraints: did not overrule the per se rule against RPM. This is because RPM almost always reduces price competition not among sellers of the affected product, but between that product and competing brands. C. Agency and Similar Relationships: the use of agency and consignments is one way around the prohibition in Dr. Miles against setting vertical resale prices. 1. Consignment v. Sale: if the manufacturer sells its goods to a dealer, then RPM restrictions apply. The defense only applies when the manufacturer retains title. 2. TWO PART TEST: from Simpson v. Union Oil Co. (1964). You are not subject to the antitrust laws if you pass either of the following. a. Are the dealers “independent businessmen” or “mere employees” (pass)? i. If dealers carry competing products, then they are conclusively not “mere employees.” ii. Want to preserve efficiencies of the single firm. b. Was it a “one shot deal” (pass) or a “vast distribution scheme”? 3. Territorial Restraints: as a practical matter, you will only get into this with RPM, not territorial or customer restraints. a. HOWEVER, this analysis could seemingly justify a territorial restraint. Makes sense, but has not been done by the Court. D. Refusal to Deal and Vertical Agreement: antitrust laws do not prevent a manufacturer from refusing to deal with a distributor whose marketing practices the manufacturer dislikes. At issue 22 is whether a manufacturer may refuse to deal when the distributor refuses to maintain prices set by the manufacturer. 1. CRITICAL INQUIRY: would the defendant have acted this way if he didn‟t have an agreement to do what he did? 2. Absence of a Contract: United States v. Colgate & Co. (1919). A manufacturer may refuse to deal with dealers who fail to follow its suggested price. Colgate said that they would terminate them if they didn‟t agree to do the scheme. a. General Rule: traders engaged in entirely private business have the right to exercise independent discretion as to the parties with whom they will deal. i. It is acceptable, therefore, to cut dealers if they undercut your suggested retail price as long as there is no agreement to bring this under §1. Perhaps the SC is protecting freedom of association. b. Sherman Act §2: Colgate did not control the market, and there was no intent to create or maintain a monopoly. c. Holding seems to indicate that a manufacturer could announce a resale price and enforce it by refusing to sell to those that did not maintain the set prices, as long as there were no explicit contracts between the parties. 3. Definition of “Agreement” or “Combination”: United States v. Parke, Davis & Co. (1960). A manufacturer may not go beyond mere price announcements and refusals to deal in enforcing price limitations. If a manufacturer takes affirmative action to achieve uniform adherence and avoid price competition, the customers acquiescence is not a matter of free choice prompted alone by the desirability of the product. a. Not necessary to look for explicit agreements; §1 also prohibits “combinations.” b. Here, Parke, Davis “entwined” the wholesalers and retailers in a program to promote compliance with its price policy. This has not been used by the Supreme Court since. 4. Complaints by Dealers to Manufacturer: Monsanto Co. v. Spray-Rite Service Corp. (1984). Evidence of complaints by distributors to a manufacturer about the price-cutting tactics of a particular distributor, followed by the termination of the price-cutting distributor, is not sufficient proof to support a finding of an antitrust violation. a. Does not go beyond Colgate. This is something they would have done in the absence of an agreement; they just used the other dealers as sources of information. i. There must be evidence to exclude the possibility that the manufacturer and non-terminated distributors were acting independently. ii. It can be implied that the Court considered the importance of hiring trained personnel when distributing hazardous products. b. 5. Private Action: Two Showings a. Defendant violated antitrust laws. b. As a result, you were damaged. 6. No Proof of Agreement on Pricing: Business Electronics Corp. v. Sharp Electronics Corp. (1988). A vertical restraint on trade is not per se illegal if it does not include some agreement on price or price levels. a. 7. DISTRIBUTOR TERMINATION SUMMARY a. Concerted action is not permissible. i. Concerted action to set prices is per se illegal. ii. Concerted action on non-price restrictions is judged under rule of reason. 23 a. I.e., if a manufacturer gives distributor an ultimatum and subsequently terminates that distributor, that is not evidence of an agreement if the complaint was not strictly about price. b. Independent action is permissible. TYING ARRANGEMENTS A. Generally: when a seller sells a good to a buyer only on the condition that the buyer buy a second good from the seller. The threshold issue is whether the transaction involves two goods. 1. Tying Product: the more desirable product. 2. Tied Product: the product the buyer must purchase in order to buy the tying product. B. Business Reasons for Tying 1. Monopoly In the Tied Product: the seller‟s object might be a second monopoly. If a new bolt is always used with a new nut, the monopolist of the former could use a tie to obtain a monopoly in the latter. a. Chicago School Critique: seller can only make a single monopoly profit. b. Society might still be concerned, however, because it would eliminate competitive pressures toward cost reductions and innovations in nuts, i.e., people will buy an inferior tied product because they want the tying product. 2. More “Efficient” Pricing of the Tying Product: a monopolist might choose to price more competitively if it could charge a lump sum “fee” for dealing with it at all. 3. Price Discrimination: a tying arrangement could be used as a vehicle for price discrimination. For example, supplies consumed in the course of using a machine can serve as a metering device to measure intensity of use. 4. Disguising Price: when two products are sold as a package, the receipts of the aggregate transaction are not obviously apportionable. Thus it could be used to evade price control, manipulate the computation base for royalties or taxes, conceal the true price of using the tying or tied product, undercut minimum price regulation, and undercut and thereby weaken oligopoly pricing. 5. Cost Savings: two components might be made and marketed more cheaply together rather than separately. 6. Quality Control or Improvement: sometimes the tied product will work better with the tying product. This is a justified defense in some circumstances. C. Clayton Act Analysis: §3 of the Clayton Act doesn‟t expressly prohibit all tie-ins, only those that “substantially lessen competition or tend to create a monopoly.” This doesn‟t really add anything to the Sherman Act and the Court has stopped referring it. 1. DEFENSE #1: Quality Standards: International Salt Co. v. United States (1947). A patentee may not impose as a condition for use of its patented machines a requirement that the licensee purchase all supplies from the patentee. a. Drastic Holding: a tie-in in which the tied products sales are greater than $500,000 is per se illegal. i. In a subsequent district court decision, $75,000 was found substantial. b. Quality Control Defense: the lessor may impose reasonable standards of quality, in good faith, as to products used in connection with its machines. In the present case, the court rejected this on the facts – they couldn‟t prove it. i. Product Improvement: something we want to promote. The quality control defense could be viewed this way. D. Sherman Act Analysis 1. Definition of Market Power under the Sherman Act (Per Se): Northern Pacific Railway v. United States (1958). An entity may have sufficient market power to make tying arrangements illegal if it controls a product considered unique. 24 a. Tying contracts are illegal per se where the defendant has sufficient economic power with respect to the tying product to appreciably restrain free competition for the tied product and not insubstantial amount of interstate commerce is affected. i. Market power in the tying product can be proven by showing substantial foreclosure in the tied product. ii. Don‟t need market power in the tied product to reduce competition on the merits. b. The very existence of a tying arrangement is compelling evidence of the required market power, at least where there is no other business explanation (e.g., quality control). E. Coercion to Purchase Related Products: not technically a tie-in because the tied product is not purchased from the seller; however, it did have the similar effect of reducing competition on the merits in the tied product. F. DEFENSE #2: Cost Justification: preferential price voluntary ties exist when the seller simultaneously offers a product separately at one price and at a lower price when taken with another product. This action is not necessarily excluded from §3 of the Clayton Act, however, the Sherman Act doesn‟t address this. If the evil is reducing competition on the merits and the discount you give is justified, then it is legal. 1. United States v. Loew‟s (1962): distributors of motion picture feature films were justified in block booking. The lower price is no greater than the cost you save by selling them that way. a. Indicates a further de-emphasis of market power requirement in the tying product. In this case it is presumed if the tying product is patented or copyrighted. But there are worthless copyrights (Bank‟s notes) and patents. b. Court also considered the possibility of a bundle being more attractive to buyers if there is a central theme. G. DEFENSE #3: Single Product: United States v. Jerrold Electronics Corp. (1961). A company making and selling new equipment that is unproven and highly sensitive may require that it be the exclusive provider of service for the equipment. 1. The court found required market power in the tying product and substantial foreclosure of the tied product, but did not find the activity per se illegal. 2. Quality Control: because the technology involved was new, both Jerrold‟s reputation and the entire industry were at stake if systems did not operate correctly. Thus, the tie-in was legal for as long as the industry was an infant industry, but only for that long. 3. Single Product: recognized because if there is only one product, you are not reducing competition on the merits. Also incorporates the quality control defense. Presumably, you have an interest in all of the components working well together. H. EVALUATING TYING ARRANGEMENTS: a prima facie case exists if you can show 1. A substantial amount of foreclosure of the tied product (see International Salt). a. $75,000 is substantial; $15,000 is not. 2. Appreciable economic power in the tying product to impose a restraint on competition in the tied product (see Northern Pacific). 3. If this is shown, then the defense can try and rebut the presumption by making any of the three defenses: a. Quality control b. Cost justification, or c. Single product. I. Leverage: United States Steel Corp. v. Fortner Enterprises (1977). The measure of “appreciable economic power” is used to determine if an illegal tying arrangement exists to the competitive advantage of the party seeking the tying arrangement. 25 1. Court found a tie-in, but it was no illegal because there was no showing of market power in the tying market. The competitive advantage must be an economic, physical, legal or similar advantage which prevents competitors from offering a competing product. 2. Defining the Market: this case also stands for the proposition that credit is a separate product. a. SLAWSON: The Court is nuts. No one else was offering 100% financing. How do you define the market? J. Two Approaches to Tying Arrangements: Jefferson Parish Hospital District No. 2 v. Hyde (1984). A firm must have market power in the tying product market before a tying arrangement may be considered illegal per se. Illegal if the seller‟s exploitation of control over the tying product forces buyer into the purchase of a product the buyer did not want at all, or might have wanted on different terms. 1. SEPARATE PRODUCTS TEST: a tying arrangement cannot exist unless two separate product markets have been linked. a. Note that this undermines the second part of the Jerrold opinion, which dealt with the single product defense because it was clear from the facts that all of their competitors were willing to and did sell the components individually. 2. Coercion: the Court viewed the requisite market power as more than the simple possession of power. The Court emphasized use of this power for coercive purposes. a. Fortner, Compared: Fortner looked at whether the seller had any unique advantage. Here the inquiry is whether consumers were forced into purchasing a product they would not otherwise. b. However, as interpreted in Kodak, this forcing language only means power over price. 3. Market Power: Court indicated that the 30% market share possessed by East Jefferson Hospital did not constitute sufficient market power in the tying product market. Court seemed to indicate that this was not a significant amount of foreclosure. Redefines what they mean by foreclosure. 4. O‟Connor Concurrence: calls for a rule of reason approach. However, as the rule is applied, it is more like a rule of presumption. a. RULE OF PRESUMPTION: if you show the requisite market power and foreclosure, it is presumed illegal, but the defendant can show one of the defenses. i. This is not per se or rule of reason. b. SLAWSON: she‟s right to criticize the Court, but it would be wrong to go to a rule of reason. c. Her Economic Analysis: standard Chicago School. The only way to decrease competition is to increase market power. In fact, market power is not usually increased in tie-ins. i. SLAWSON: this is not the way that tie-ins harm competition. They harm competition by reducing competition on the merits in the tied product. This is very important because it is what drives product improvement and cost reduction. 5. Tie-In Law After Hyde: the usual foreclosure rules apply when dealing with end users, except when the conditions are such that there is both price and quality indifference. In that case, you have to go through this special analysis and show that there are a significant number of buyers who are not indifferent and that they are not being foreclosed. a. In this situation, the Court basically said that people don‟t know enough to make choices on the merits. b. Here the Court used the rule of reason because of these complications. 26 K. Tying Within One’s Brand Market: Eastman Kodak Co. v. Image Technical Services 1992). In the existence of an aftermarket, a firm cannot argue that it since it has no market power in the original market, it has no market power in the aftermarket. 1. APPLICATION OF TIE-IN ANALYSIS a. Are there separate products? i. Here there were because there was a thriving independent service industry. b. Once you establish that a tie-in exists, look for appreciable market power in the tying product (in this case, the parts market). i. Kodak argued that if it increased prices for parts or service above competitive levels, people would stop buying their product. And the facts showed that their sales did not drop after they increased the prices for service and sales. This was rejected for two reasons: a. Kodak made no showing of the percentage of the market composed of sophisticated buyers. b. Even if they did this, there was no showing that they could discriminate between sophisticated and unsophisticated buyers. ii. Plaintiffs asserted that this resulted because of high switching and information costs; simply, purchasers were captive. iii. SLAWSON: there was enough power in the tying product to reduce competition on the merits in the tied product. c. Look for substantial foreclosure in the tied product. 2. Per Se or Rule of Reason? Technically a per se case, but there has been a merger. See “Rule of Presumption,” above. EXCLUSIVE DEALING A. Generally: an arrangement where by contract the buyer agrees that it will buy only from a certain supplier. Also called “requirements contracts.” 1. Tie-ins, Compared: no second good involved. It is, however, conceptually analogous to tying arrangements in that an attempt is made to tie a buyer to a supplier on an exclusive basis. In fact, in some situations you could call the same set of facts a tying arrangement or an exclusive dealing arrangement. 2. Must be something more that simply a contract to buy goods; this “something more” must be a substantial adverse effect on the competitive opportunities for other firms to supply the ultimate consumers. B. Objects of Exclusive Dealing 1. Preempting Outlets: arrangement might foreclose market opportunities of the seller‟s competitors. For example, if all food canners agree to buy exclusively from A, there would be no customer‟s left for A‟s rivals. Or if A has exclusive arrangements with dealers, other firms might find it difficult to distribute their product. 2. Assured Markets or Prices for Seller and Buyers: If B agrees to supply firms with fairly stable requirements, it is assured of fairly stable sales and can therefore plan its production and distribution operations with greater precision and efficiency. Unclear whether this confers a competitive advantage on B because the buyers may require that B pass on some of the cost savings to enter the agreement. 3. Promoting Dealer Loyalty and Investment: makes the dealer dependant on the manufacturer, thus conferring on the latter the exclusive benefit of the dealer‟s energies. Potential pro-competitive benefits include: a. Might facilitate new entries into the market. b. Relatively weak brand might survive. 27 4. Other Savings: may eliminate or reduce selling expenses. C. QUANTITATIVE TEST: Standard Oil Co. of California (Standard Stations) v. United States (1949). Anticompetitive effect may be presumed if an exclusive dealing arrangement involves a substantial dollar amount. 1. Lessen Competition? The Court indicated two ways in which the lessening of competition is an “automatic result. a. Such contracts deny dealers the opportunity to deal in the products of competing suppliers i. SLAWSON: doesn‟t make sense. Most of these cases involve a buyer voluntarily choosing to have a requirements contract. b. Exclude suppliers from access to the outlets controlled by those dealers. i. SLAWSON: this makes more sense. Competitors never had any choice in the matter. 2. Substantial Percentage: in this case it was 6.7% of the market. In Tampa (below), 0.7% was probably not enough. Even with a small impact, it is illegal. Court indicated that it was enough for tying arrangements, so consistency required that it be carried over. a. Aggregating Market Shares: in some cases, it may be possible to aggregate the market shares of a small number of firms. See Federal Trade Commission v. Motion Picture Advertising Service Co. (1953). 3. Barriers to Entry: this was a valid argument. All of the choice locations were already taken. Dealers wouldn‟t give up major brands to market minor ones. D. Relevant Market: Tampa Electric Co. v. Nashville Coal Co. (1961). The relevant market is that in which the suppliers compete, not the location in which the buyer is based. 1. Standard Stations Compared: also note that in this case, Nashville Coal was the end user of the product. In Standard Stations the court was trying to protect the consumer by ensuring that alternative products could get to market through the established distribution system. 2. Business Justifications: Qualitative Analysis: This case also considered a much broader range of competitive factors than Standard Stations. a. Probable effect of the contract on the relevant area of effective competition. b. Percentage of the total volume of commerce involved. c. Probable effects on competition of the share of commerce involved being preempted. d. SLAWSON: most commentators interpret Tampa as “a” rule of reason that balances business justifications versus anticompetitive effects. If you can fully justify it, then it‟s not anticompetitive. E. 1st Circuit: Barry Wright Corp. v. Grinnell Corp. (1983). Again, judged under “a” rule of reason. Found that Barry Wright was not fully foreclosed; there was still enough room left for Grinnell to compete. 1. Business Justifications: stable source of supply; stable, favorable price; use of excess capacity; production and planning efficiencies. ENFORCING THE ANTITRUST LAWS A. Consent Decrees: most civil actions filed by the government end up being settled with consent decrees. 1. Nature and Significance: settlement that is filed with the court and incorporated into a judicial decree. These do not necessarily reflect the state of the law. Advantages for both parties because of the enormous expense and great length of much antitrust litigation. 2. „Swift‟ Modification: Supreme Court imposed a very high burden of proof on defendants seeking to alter the injunctive provisions of a consent decree. 28 3. Third-Party Interests: third-parties may not maintain an action for damages, or initiate contempt proceedings for a defendant‟s violation of a consent decree, unless the decree states otherwise. a. Clayton Act §5: makes and litigated decree brought by the government to be used a prima facie evidence of liability in subsequent private actions against the defendant. You cannot use pretrial decrees. i. SLAWSON: to win, all you have to due is sue and prove damages. b. Tunney Act: established elaborate procedures governing consent decrees that requires publication and allows written comments from the public. B. Private Actions 1. Treble Damages and Reasonable Attorneys Fees: recovery of three times damages sustained is a powerful financial incentive to enforce the antitrust laws. However, proving the damages is often a problem. Consider a price-fixing conspiracy that has gone on for years. Courts won‟t be too picky, but they will require more than just speculation. a. Damages = difference between profits made and those you would have made if the defendant had not been acting illegally. 2. Joint and Several Liability; Contribution: defendants are jointly and severally liable for the damages resulting form their conspiracy. Antitrust laws also make not provision for contribution among tortfeasors. a. Fallout: if you have 10 members in your conspiracy, the buyer could go to one and propose settlement for 1/2 of what they could be liable for (damages caused by all 10 firms). Minor or even innocent defendants may be forced to settle. b. Opponents of contribution argue that potential liability increases the deterrence to antitrust violations. 3. Standing and Related Doctrines: both the Sherman and Clayton Act say that anyone injured can sue. This, however, has been limited in two ways: a. Directness of Damages: according to the SC in Hanover Shoe, the defendant will not normally be allowed to prove that the plaintiff passed on the price increases to its customers and therefore suffered no injury. Exception would be if the overcharged buyer has a “cost-plus” contract with the manufacturer making the passing on very clear. i. Supreme Court held in Illinois Brick that the consumer purchasing from an innocent middleman may not recover from the manufacturer. This is a corollary to Hanover Shoe. a. This precluded the consumer from proving injury from a passed- on overcharge whenever the defendant is precluded from proving that its overcharge did not injure its immediate customer because it was passed on to consumers. The Court feared duplicate recoveries. ii. Hanover Shoe and Illinois Brick Drawbacks a. The immediate purchasers, if not the ultimate consumers, would be reluctant to use because they anticipate future relationships. This is particularly the case for franchisees. b. Possible lack of interest in pursuing a claim if the passing on was close to 100%. Also judges and juries are reluctant to reward damages in cases where it is apparent that the plaintiffs were hardly damages themselves and are just in it for a windfall. c. Moral reluctance. iii. A reduction in wages or loss of employment is generally not considered an injury unless the job itself is a commercial venture or enterprise. 29 iv. Parens Patriae: special part of the Clayton Act that permits states to sue on behalf of natural persons. b. Antitrust Injury Requirement i. Three Elements: the plaintiff seeking damages must make three showings: a. Suffers injury or threatened injury that is b. Caused by the defendant‟s illegal conduct and c. Of the kind of injury that the antitrust laws were designed to prevent. ii. Antitrust Laws Not Designed to Prevent Competitive Injury: Brunswick Corp v. Pueblo Bowl-O-Mat (1977). The plaintiff‟s injury resulted from lawful competition and it is not the purpose of the antitrust laws to compensate for such injury. iii. Equity Suites, Also: Cargill v. Monfort (1986). Plaintiff could not enjoin merger because the plaintiff would benefit from a rise in the industry‟s prices. iv. Price Ceilings: Atlantic Richfield Co. v. USA Petroleum Co. (1990). Losses not compensable unless the resale prices were set so low as to be predatory pricing. Otherwise, the losses were the result of competition. c. Plaintiff Participation: it is not a defense that the plaintiff was at one time willing participant in the unlawful arrangement that it now challenges. The only exception might be where the plaintiff is a co-initiator or “equal” participant in the defendant‟s illegality.
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