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					                                                                        11/1/2007 9:56:00 PM

I. Introduction to the Competitive Model
         A. Overview
             o Goals of Antitrust (Bork)
                     To prevent wealth transfers
                     To promote economic efficiency
                          Productive efficiency
                                       That is, competition drives producers to find efficient
                                        ways of production
                                           o For example, economies of scale
                                    Also, competition creates low costs
                               Allocative efficency
                                       Resources are being allocated for the highest value
                                             o This is the concept of opportunity cost
                        Protectionist goals
                             Limit the power of large businesses and protect small
                        Historic goals
                             Trust busting and Teddy Roosevelt era
         B. The Common Law Legacies
             o American common law against monoplies was particularly strong
                    Usually, unless the monopoly was, by reason of a patent, for the
                      purpose of invention, it was contrary to the American common law.
             o United States v. Trans-Missouri Freight Association
                    Facts:
                           18 railroads made agreement to set prices
                           The railroads argue that the set prices are reasonable.
                           The plaintiff‘s claimed that this conduct constituted a restraint
                              of trade
                               Holding: Court rules that the these agreements are illegal
                               Rationale:
                                       First, the Court states that the Sherman Act does not
                                        just reflect the common law
                                       The Court says that in a competitive market, each
                                        railroad has to act alone in the market, and not try to get
                                        together to fix a price
                            o The Court is essentially saying that they will not
                              entertain a defense that the railroad tries to
                 Rule: Agreement to fix a price is per se illegal.
                      Court will not look to the reasonableness of the price.
                 Advantages to the per se rule:
                         The rule is a bright-line rule
                         Administrative eas in applying the rule
                         The rule would work as a deterrence to prevent any
                          collusive conduct
                         The rule does not require judges to make economic
                          predictions as to what is reasonable and what is
                      Uniformity across circuits
                 Disadvantages to the per se rule:
                         The overinclusiveness of this rule
                             o The benefits that could possibly be derived from
                                horizontal agreements could be eliminated
                             o Things like noncompete agreements to protect
                                  goodwill (allowable under the common law)
                                  would be declared illegal here
                         The threat of litigation might have a chilling effect on
                          the way businesses run
                              o This could stagnate the market and effect
                                 competition in a negative way.
                     The per se rule creates a lack of judicial flexibility
o United States v. Addyston Pipe
      Case goes further than the Trans-Missouri case
          Facts:
               Addyston and five other companies entered into an agreement
                  to fix prices for pipes across the U.S.
               Addyston and the five accounted for 65% of manufacturing
          Rule:
                 Naked restraints, such as price fixing, were per se illegal (old
                  rule under Trans-Missouri)
                         That is, restraints of trade that are direct
          Restraints that are ancillary to an efficiency creating joint
           venture are analyzed under the rule of reason.
                  That is, restraints that are ancillary to a ―legitimate
                   lawful purpose‖
                       o The restraint still can be deemed illegal.
                         However, courts need to assess whether this
                         type of ancillary agreement is reasonable or not.
   Rationale:
        Court said that examples of the types of restraints that the
           courts generally upheld are:
                  1. Agreements by the seller of property or business not
                   to compete with the buyer in such a way as to derogate
                   from the value of the property or business sold
                  2. Agreements by a retiring partner not to compete
                   with the firm
                  3. Agreements by a partner pending the partnership not
                   to do anything to interfere, by competition or otherwise,
                   with the business of the firm
                  4. Agreements by the buyer of property not to use the
                   same in competition with the business retained by the
                 5. Agreements by an assistant servant or agent not to
                  compete with his master or employer after the
                  expiration of his time of service
        Note that these five examples are only relevant during the time
           period when this case was decided (1899)
   Importance of this decision:
        Before this decision, Courts and Congress interpreted the
           Sherman Act as a federal codification of common law
          This case combined the economic model of competition with
           the traditional legal doctrine of combinations in restraint of
          Thus, this case freed the Courts from the substance of the
           historical common law
                  As a result, courts in the future could create their own
                   antitrust rules in an economic/legal combination that
                         was distinct from the motivation behind the Sherman
                         Act as just a codification of common law.
          The opinion does not go so far as to the say that direct restraint in
           trades that are also reasonable should be allowable
                Reason why court didn‘t say this:
                       ―sea of doubt‖
                            o If this was allowed, it would create too much
                                judicial discretion in economic matters
o Standard Oil Co. v. United States
      Court goes further than in Addyston Pipe case
          Facts:
               Combination of 37 oil companies—the combination was
                  managed through a holding company
               The companies were brought together and joined through a
                  series of devices and mergers
               The combination was charged with predatory conduct and
                  anticompetitive abuses, including price cutting and
                  discriminatory pricing.
          Rule:
                 Court here applies the standard of reason test
                      Even though the agreement is not ancillary, the
                       agreement has to be assessed before declaring the
                       agreement illegal
      Basically, this decision ―sets sail on the ‗sea of doubt‘‖ described in
         Addyston Pipe case
o Analytical framework:
          Two types of rules
              First rule: the per se rule
                         This can take two forms:
                             o 1. Per se illegality
                                      Adopted in Trans-Missouri
                             o 2. Naked restraint per se rule or indirect
                                 restraint per se rule
                                      Agreement that is not ancillary is per se
                                         illegal (Adopted in Addyston Pipe)
                                                       Today, price fixing falls under this
                                Second rule: rule of reason
                                       This can take two forms:
                                           o 1. Only ancillary agreements are subject to
                                               the rule of reason
                                                    This was adopted in Addyston Pipe
                                            o 2. The unstructured rule of reason
                                                  The agreement does not have to be
                                                          This rule says that you can
                                                          subject the agreement outright to
                                                          the rule of reason
                                                This was adopted in the Standard Oil
                   The distinctions between the different approaches are fuzzy
             o Goals/policy objectives embodied in the above cases:
                   In the Trans-Missouri case:
                           The Court seems to be pursuing economic efficiency, wealth
                                 transfers, and maybe big/small business implications
                                Seems that efficiency goals are not being served
                                     The rule in this case sometimes would eliminate the
                                      benefits that agreements can provide
                             Also, the Court might be trying to prevent wealth transfers and
                              prevent large trusts from forming and protecting small
                       In Addyston Pipe:
                             The Court seems to be shifting its goal to economic efficiency,
                               but not efficiency in its entirety
                       In Standard Oil:
                             The Court seems to be moving even more towards promoting
                               economic efficiency
                                       Moves away from protecting small business from large

II. Framework for analysis
   A. The Economic Problem
       o 1. Introduction
               Antitrust is based on two parts of economics:
                    a. Price theory
                    b. Industrial organization.
       o 2. The Law of Demand
             Fundamentally: more of a given product is purchased if its price is
                lowered, provided that nothing else changes
             Downward sloping curve
             Price elasticity/elasticity of demand:
                        Perfectly inelastic end of the spectrum:
                               Graphically: a perfectly price inelastic curve has a
                                derivative of (negative) infinity (completely vertical)
                               Perfect inelasticity means that a predetermined quantity
                                will be demanded no matter what price is charged
                                    o This indicates that the product has no
                        Perfectly elastic end of the spectrum:
                               Graphically: a perfectly price elastic curve has a
                                derivative of zero (completely horizontal)
                               Perfect elasticity means that that a slight increase in
                                price will result in an immediate shift to other products
                                  by consumers and leave zero demand for consumers
                                      o In other words, that there are perfect substitutes
                                         for products
                        Price elasticity refers to how responsive change in quantities
                         are to change in prices
                        If a large number of firms produce identical products, then
                         each firm faces a perfectly elastic demand curve
                                This is important in analyzing monopoly market
                        Also, the elasticity of demand facing a particular individual
                         firm is a function not only of the price it attempts to charge but
                         also of the ability of other firms to offer products that
                         consumers view as substitutes
                 This second part is sometimes referred to as the
                  elasticity of supply:
                      o Elasticity of supply is a function of:
                               The closeness with which consumers
                                  view a product as a substitute for another
                               Excess capacity in the hands of
                                  competing producers
                               The ease with which competing firms
                                  can enter firm A‘s market
                      o Elasticity of supply may go towards determining
                        ease of entry into a market
                             Infinite elasticity of supply means that
                                entry is very easily attained.
                      o In considering the elasticity of supply, a court
                        must consider:
                                 The likelihood that new firms will
                                 enter the market, and
                               The time that new entry will require
                                     For example: if entry into the
                                        market is relatively easy, but
                                        construction of a plant and
                                        creation of a distribution network
                                        takes five years, an existing
                                        monopolist in that market will be
                                        able to earn five years worth of
                                        monopoly profits.
          Substitutes come from the same goods from other producers or
           from different goods that consumers view as similar.
   Note that there is a difference between changes in quantity demanded
    and change in demand itself
        Change in quantity demanded is a slide along the same demand
        Change in demand itself is a horizontal shift of the demand
           curve. (Sliding linear equation)
        Demand curves are ―snapshots‖ at a certain point in time.
o 3. The theories of cost
      An increase in output generally requires an increase in the amount of
         inputs that are needed, which results in increased costs
          Costs that are not dependant on production levels are fixed costs
               Graphically: Figure 4 p. 47 CB
               That is, that the costs must be paid whether or not, for example,
                  a plant operates or not.
               Fixed costs do not change in response to the rate of output
          Costs that do respond to the rate of output are called variable costs
               Graphically: Figure 5(a), p. 47 CB
               At low levels of output (before x = A, graphically):
                        Variable costs rise rapidly but at a decreasing rates
                         (first derivative is positive, second derivate is
                         negative—increasing, concave down)
                 At levels of output within a middle range (between x = A and x
                  = B, graphically):
                         Variable costs rise more slowly with increased output
                          (first derivative is still positive but smaller, second
                         derivative is still negative but closer to zero—slightly
                         increasing, slightly concave down)
                 At high levels of output (above x = B):
                         Variable costs rise rapidly at an increasing rate (first
                          derivative is positive, second derivative is positive—
                          increasing, concave up)
                 The shape of the total variable cost curve indicates that a plant
                  operates more efficiently in certain ranges of output
                        If the plant is operated outside of these ranges of
                         efficiency, a substantial penalty is incurred in terms of
                         higher per unit costs.
          Average variable costs:
               Graphically: Figure 5(b), p. 47 CB
               Variable costs per unit of output
                 Average variable cost is obtained by dividing the total
                  variable costs by the output level
           In many situations, a plants costs are fairly constant over a
            wide output range.
        When a plant‘s costs are fairly constant over a wide output
            range, the AVC curve will have a flatter bottom than that
            depicted in Figure 5(b)
   Total short run cost:
        Graphically: this is the same as the AVC curve except there is
            a vertical shift (due to adding the fixed cost), Figure 6(a) p. 48
   Marginal cost:
          Graphically: Figure 6(b) p. 48 CB
          The cost associated with producing an additional unit of output
                 Or in other words: The value of resources that must be
                  sacrificed to get an additional unit of output
          Relationship between marginal cost and average cost:
                 If marginal cost is above the average cost, the average
                  cost rises (doing better than your average on a test), and
                  vice versa
   Economies of scale:
          Graphically: Figure 7 p. 49
          A larger plant might have the capability of producing at lower
           per unit costs if enough is produced.
                 See the graph between points x = A and x = B (this is
                  the range of economies of scale)
          Similarly, diseconomices of scale say that under certain
           situations, costs per unit rise with increased plant size
                  See the graph between points x = B and x = C (this is
                   the range of diseconomies of scale)
   Long run average cost curve:
        Graphically: Figure 8 p. 49
        This curve considers a variety of plant sizes and the cost curves
           associated with each plant size
                  Basically, taking the minimum point of each average
                   total cost and plotting these minimums
   The points where the curve is decreasing, concave down, is the
    range of economies of scale; the points where the curve is
    increasing, concave up, is the range of diseconomies of scale
            Graphically, economies of scale are to the left of the
             point x = A; diseconomies of scale are to the right of
             the point x = A.
   A plant located at the minimum of the long run average curve
    is said to be the optimally scaled plant, since it is the one in
    which per unit costs are at an irreducible minimum
   The shape of the long run average cost curve of a given
    industry is of extreme importance to antitrust policy
          For example, see Figure 9 p. 50 CB
              o This is an example of a natural monopoly
                      A larger firm could undercut the smaller
                         firm‘s price because the larger scale of
                         production would give the larger firm
                         lower costs.
                      Since the long run average cost curve
                         declines all the way to its intersection
                           with the demand curve, the firm of most
                           efficient size will be one capable of
                           taking care of the entire market.
                          If two or more firms operate in this
                           market, one of two things will happen:
                                1. One of the firms would
                                   eventually obtain a larger market
                                   share and a cost advantage over
                                   the other firm and drive it out of
                                   business or,
                                  2. If the two firms continued to
                                   operate in the market, the total
                                   market outputwould be lower
                                   than optimal and the price would
                                   be higher than optimal.
          Another example, see Figure 10 p. 51 CB
                      o The market here could support five optimally
                        sized plants of size A.
                             This is because the lowest point of the
                                long run average cost curve intersects
                                the demand curve at quantity 5A.
   Cost characteristics of a particular industry are determined primarily
    by technology considerations and transaction costs
         These are major factors in determining the maximum number
           of firms that the industry will support.
         Industries with small scale requirements relative to market
           demand (such as agriculture) will be able to support a large
           number of firms
         Likewise, industries with large scale requirements relative to
           market demand (such as the automobile industry) may only
           have a few firms.
   Differentiating between an accounting cost and an economic cost:
         Economic costs also includes opportunity costs
         An important component of costs is:
                What is the expected rate of return?
                      o Profits occur when the actual rate of return is
                        above the expected rate of return.
                             You can have an accounting profit but
                                not an economic profit, because
                                accounting profits do not take expected
                                rate of returns into consideration
   Summary of costs:
        Total cost:
                  The total cost (including expected rate of return) to
                   provide a given quantity
               ―The cost to produce X units‖
          Average cost:
                This is the cost per unit of production
                     o Total cost divided by X units
          Margin cost:
                  This is the cost to produce the last unit
                  ―The cost to produce the Xth unit‖
       o 4. Idea of consumer surplus:
              Graphically: It is the area between the following two curves:
                     1. The demand curve
                     2. The horizontal line that sets a price.
                     (See handwritten graph p. 45)
                 The primary concern with antitrust law is who gets the benefit of
                  the consumer surplus
                       In the graphical example, consumers that would pay the higher
                         price than is set for the product are benefiting.
   B. The Market in Movement
       o 1. Perfect competition
                 The driving force in a market system is the behavior of the
                  competitive firm
                 Characteristics of a perfectly competitive firm:
                      1. It is only one among many firms producing identical
                      2. No individual firm is large enough to effect the market price
                         by its individual actions
                      3. There are no significant inhibitions on entry into and exit
                          from the industry
                 Profit maximizing output level:
                      Graphically: see figure 11, p. 52 CB
                                Assume here, that since there are a large number of
                                 firms producing identical products, the demand curve
                                 for any individual firm is perfectly elastic. (dashed line
                                     o If a firm sells at q0, they incur a cost of C0.
                                         This firm, however, is selling at P1. If the firm
                                      makes more products up to q1, the firm can sell
                                      more of those products at P1 price. As a result,
                                      if a firm sells at q0, they are not making as
                                      much profit as possible.
                                    o If a firm sells at q2, they are losing a profit.
                                      This is because the firm incurs a cost of C2 to
                                      product at q2, and C2 is higher than the P1 price
                                      that the product is sold for.
          As a result of this example, we see the general rule that:
                 The maximizing output level is when price equals
                  marginal cost
                     o A competitive firm attempts to maximize
                         profits by setting output levels at the place
                         where the firms marginal costs equal the
                         obtainable price.
   Adjustment process of a competitive market
        Consumers express their desires for goods and services in the
          marketplace by their willingness and ability to pay for items
                This is summarized by the demand curve
          Producers express their willingness to provide products at
           various prices by adjusting output in order to maximize profits
                This is summarized by the supply curve
          By combining the supply and demand curve, an equilibrium
           price and quantity can be ascertained.
          Now examine Figure 13, p. 53 CB
                 In figure 13(b), looking at the ―before entry Supply
                  Curve,‖ if the price is below P1, there is a shortage, and
                  consumers will ―bid‖ the price back up to P1
                     o Similarly , if the price is above P1, there is a
                        surplus, and consumers will compete against
                        each other to sell the excess products, thereby
                        lowering the price to P1.
                 But notice that P1 is above the low point in the ATC
                     o Since the ATC already includes normal profit
                         levels, pricing above this low point means that
                          the 100 firms are making profits in excess of
                          what is necessary to attract and maintain
                          investment in the industry.
                               Other companies may look at this and
                                  decide to enter the market. So now,
                                  instead of 100 firms, there are 120 firms,
                                  and the supply curve shifts
                                         Pricing at P1 in this new supply curve
                                         will create an excess and drive prices
                                         down to P2.
          In summary:
                1. Consumers choose goods that satisfy their personal
                2. Consumers reveal these preferences by making purchases in
                 the marketplace
                3. Producers choose a quantity of output that maximizes their
                 profits at a given price
                 4. If profits are above necessary levels in a given industry
                  other producers are attached to the industry
                 5. The excess supply at the high price forces producers to
                  compete for sales—the result from this is that price is reduced
                  so as to eliminate above normal profits
                 6. The resulting equilibrium point is where marginal costs
                  equal price
                 7. The outcome is that products are supplied at prices which
                  reflect minimum costs
o 2. 5 conditions needed for a perfectly competitive market
       a. Market with numerous buyers and seller involved in the market
              Reason: no one is big enough that they affect the market price
              Every producer sees a perfectly flat (perfectly elastic) curve.
       b. The product must be a fungible product
              Example: grain, wheat
              No differentiation between firms‘ product in the market.
       c. Purchases reflect individual subjective preferences
              The purchases are purely a measure of taste
                 Market allows for individual preferences
          d. No barrier to entery into the market for both buyers and sellers
                 Example: no transaction costs to enter or exit the market
          e. All participants in the market must have full knowledge
                 Buyers: must know the prices
                 Sellers: everyone knows the lowest cost technology
          If these conditions are met, each good is priced at the average total
           cost of producing
o Goal of antitrust:
      To have price = marginal revenue = marginal cost = average total cost
      This goal is rarely attained.
o 3. Monopoly
      Definition:
             There is only one firm producing the product in question and,
                assume that there is no possibility of competitive entry
                         But the monopolist also has limitations—monopolist
                          cannot just charge an infinite price for its product
                             o But the monopolist can charge more than the
                                   competitive price without losing so many sales
                                   that the price increase is unprofitable.
          Since the monopolist is the only firm in the industry, the market
           demand curve is also the firm demand curve.
          Marginal revenue as it interacts with monopolies:
               Marginal revenue is the amount a seller receives by selling an
                   additional unit
               Because the monopolist is unable to charge higher prices to
                   those willing to pay them, and at the same time lower prices to
                  other, each reduction in prices loses some revenue that could
                  have been earned from people willing to pay the higher price
                       Thus, for every dollar reduction in selling price, the
                        change in revenue is the difference between [the new
                        price times the new quantity] and [the old price times
                        the old quantity]
          Summary of how monopolists make the price-output decision:
               1. Consumers choose goods that satisfy their personal
                 2. These preferences are revealed by actual purchases of
                 3. The monopolists downward sloping demand curve indicates
                  that it can charge more by reducing output.
                 4. The monopolist maximizes its profits by choosing an output
                  level that equates marginal costs to marginal revenue
                 5. Profits can remain at supracompetitive levels because
                  competitive entry is foreclosed.
                        6. The outcome is that products are supplied at prices higher
                         than costs, and higher than prices in competitive markets, and
                         market output is lower than it would be in a competitive market
                 See chart on website
                      Dead weight loss:
                                Core concern for the economists and the judiciary in
                                 this area
                                Loss attributable to the lowering of the quantity
                                 produced by a monopolist
                                    o This is a major concern: we want to avoid this
                                       because it is a misallocation of resources
                        Wealth transfer:
                                Place where the monopolist is taking away from the
                                Monopolist gains this wealth while the consumer loses
                                The transfer of wealth to the monopolist is not
                                 necessarily unwanted
                                    o That is the transfer of wealth is not the main
                                      concern of the courts
                        Consumer surplus
                                The remaining that is not dead weight loss or wealth
                                 transfer becomes the consumer surplus
                                     o The consumer surplus is less than under a
                                         competitive market
   C. Judicial Emphasis on Economic Reasoning:
       o Structuralist approach:
                 The structure of the industry determines the conduct and behavior of
                  the firms
                       That is, the number and size distribution of firms in the
                 Limitations:
                       Markets can very greatly in their details, but the fact finding
                          ability to determine this is severely limited.
                            Implications of forced changes in industry structure are usually
             o Chicago approach:
                   The framework of this analysis is the price theory described above
                   The underlying assumption is that the interaction of supply and
                     demand will determine a set of prices that maximize society‘s
                     economic welfare.
                          Profit maximizing firms will seek cost reducing production
                            techniques in order to enhance its own market position, and in
                            doing so inadvertently improve economic welfare by charging
                                 lower prices.
                        This approach says that structure should be regarded
                             Firms that try to raise their price to exercise monopoly power
                                 will cause firms to enter into the market to drive down the price
                        Chicago approach believes that competition will work even though
                         only a few firms dominate the industry
                             Structuralists are much more suspicious, believing that a
                                 monopolist can do nothing other than act as a monopolist, and
                                 likewise a group of oligopolists can do nothing other than act
                               like a shared monopoly.
                    Chicago approach focuss on economies of scale
             o Strategic behavior analysis
                    An attempt to find middle group between structuralists and Chicago
                    Says that the structuralists place too little emphasis on technological
                       efficiencies and that Chicago ignores the dangers of increased market
                       concentration, strategic creation of barriers to entry, and strategic
                       raising of rivals costs
                        This approach attempts to incorporate the insights of game theory into
                         antitrust analysis.

III. Cartels and Other Joint Conduct by Competitors—Horizontal Restraints
         If you are analyzing under § 1 of the Sherman Act:
              o The first question that you should always ask is:
                       Is there an agreement? (that is, ―Is there concerted action?‖)
             o The second question that you should always ask is:
                 Is the restraint naked or ancillary to some efficiency enhancing
       o The third question that you should ask is:
             Is there any market power?
                     Only ask this question if the restraint is ancillary.
                     In order to assess whether or not there is market power, you
                       have to first identify the market.
                           Ask: is there a possibility of substitutes
       o The fourth question that you should ask is:
             Does the agreement have procompetitive effects?
                         Only ask this question if there is a market power concern.
                         Here, examine the effects on the market
       o The fifth question that you should ask is:
             Are there less anticompetitive alternatives to achieve the
                 procompetitive benefits?
                     That is, can you capture these benefits in a way that doesn‘t
                        have anticompetitive benefits alongside the procompetitive
       o The sixth step:
             If the fifth question indicates that there is not a less anticompetitive
                  method to achieve the positive effects, then do a balancing test
                      Weigh procompetitive benefits with the anticompetitive harms
                      Usually, though, if there is a less harmful alternative, the Court
                        will not go into the balancing inquiry
   A. The Development of Analytical and Evidentiary Rules
       o 1. Introduction: The problems of horizontal arrangements
                 Section 1, Sherman Act:
                      “Every contract, combination in the form of trust or otherwise,
                          or conspiracy, in restraint of trade or commerce among the
                          several States, or with foreign nations, is hereby declared to be
                          illegal. Every person who shall make any contract or engage
                          in any combination or conspiracy hereby declared to be illegal
                          shall be deemed guilty of a felony, and, on conviction thereof,
                          shall be punished by fine not exceeding $10M if a corporation,
                          or, if any other person, $350,, or by imprisonment not
                 exceeding three years, or by both said punishments, in the
                 discretion of the court.”
                Section 1 of the Serman Act is directed toward conduct which
                 significantly interferes with trade and is the product of an
                 ―agreement‖ among two or more independent actors.
         When an agreement is among competitors, the conduct is classified
          as horizontal
               Examples of horizontal arrangements:
                       Price fixing
                       Market divisions or allocations
                       Bid rigging
                       Group boycotts
                       Other concerted activities that restrict output or exclude
         Section 1 requires concerted conduct by more than one entity
              Not all agreements of competitors are illegal.
              The problem with section 1 is to characterize the conduct and
                 understand how it affects competition.
         Central policy of the Sherman Act: protection of competition
                Specifically, the goal is to avoid the formation of cartels:
                       Cartels are inherently unstable agreements
                       Under cartels, the incentives to cheat on the particular
                        agreement are very high
                    The incentives are akin to prisoner‘s delimma
o 2. Doctrine governing horizontal restraint
         Two doctrines
             1. Per se illegality
                       Four distinct categories are per se illegal
                           o 1. Price fixing
                           o 2. Bid rigging
                                    That is, producers agreeing to set bid
                           o 3. Market division
                                    Producers dividing a market without
                           o 4. Output fixing
                                        Similar to price fixing—only produce a
                                         certain quantity
                                      OPEC is a classic example of this
                             o These four things definitely have a negative
                                 effect on the market.
                 2. Rule of reason:
                      Things that fall outside of per se illegality
                      A majority of cases are analyzed under this approach.
o 3. Antitrust guidelines for collaborations among competitors (p. B1-B35
          The purpose of these guidelines is to explain how Agencies analyze
           certain antitrust issues raised by collaborations among competitors
          §1 Purpose, Definitions, and Overview
                §1.1 Purpose and definitions
                         Competitor collaboration: a set of one or more
                          agreements, other than merger agreements, between or
                          among competitors to engage in economic acitivity, and
                          the economic activity resulting therefrom.
                              o Competitor collaborations involve one or more
                               business activities, such as R&D, production,
                               marketing, distribution, sales or purchasing.
                             o Information sharing and various trade
                               association activities also may take place
                               through competitor collaborations
                         Competitors: actual and potential competitors.
                         Anticompetitive harm: refers to an agreement‘s
                          adverse competitive consequences, without taking
                          account of offsetting procompetitive benefits.
                         Procompetitive benefit: refers to an agreement‘s
                          favorable competitive consequences, without taking
                          account of its anticompetitive harm.
                        Overall competitive effect/competitive effect: the
                         combination of an agreement‘s anticompetitive harm
                         and procompetitive benefit.
                 §1.2 Overview of Analytical Framework
   The USSCT uses two types of analysis to determine the
    lawfulness of an agreement among competitors
       o 1. The per se approach
                This approach deals with agreements
                   that are so likely to harm competition
                   and to have no significant
                   procompetitive benefit
       o 2. The rule of reason approach
                All other agreements are analyzed under
                   this approach which analyzes an
                  agreement‘s overall competitive effect
   Agreements challenged as per se illegal:
       o Agreements of a type that always or almost
           always tend to raise prices or to reduce output
           are per se illegal.
                Examples of agreements that are held
                   per se illegal include—agreements
                   among competitors to: fix prices, fix
                   output, rig bids, or share or divide
                  markets by allocating customers,
                  suppliers, territories, or lines of
                 Courts presume such agreements, once
                  identified, to be illegal, without
                  inquiring into their claimed business
                  purposes, anticompetitive harms,
                  procompetitive benefits, or overall
                  competitive effects.
                 The DOJ prosecutes participants in
                  hardcore cartel agreements criminally
   Agreements analyzed under rule of reason:
       o Agreements not challenged as per se illegal are
          analyzed under the rule of reason to determine
          their overall competitive effect.
               These include agreements are of a type
                  that otherwise might be considered per
           se illegal provided they are reasonably
         related to, and reasonably necessary
         to achieve procompetitive benefits
         from an efficiency-enhancing
         integration of economic activity.
o Rule of reason focuses on the state of
  competition with, as compared to without, the
  relevant agreement
          The central question is: whether the
           relevant agreement likely harms
          competition by increasing the ability
          or incentive profitably to raise price
          above or reduce output, quality,
          service, or innovation below what
          likely would prevail in the absence of
          the relevant agreement.
o Rule of reason is a flexibility inquiry and varies
  in focus and detail depending on the nature of
  the agreement and market circumstances.
         Focus is on only those factors
          necessarily to make a sound
          determination of the overall competitive
          effect of the relevant agreement.
o Analysis begins with an examination of the
  nature of the relevant agreement
       The agencies ask about the business
          purpose of the agreement
       The agencies ask whether the agreement,
         if already in operation, has caused
         anticompetitive harm.
o In some cases, the nature of the agreement and
  the absence of market power together may
  demonstrate the absence of anticompetitive
  harm. In these cases:
          The agencies do not challenge the
              o However, where the likelihood of
                anticompetitive harm is evident from the nature
                of the agreement, or anticompetitive harm has
                resulted from an agreement already in operation,
                        Absent overriding benefits that could
                         offset the anticompetitive harm, the
                         Agencies challenge such agreements
                         without a detailed market analysis
              o If the initial examination of the nature of the
                  agreement indicates possible competitive
                  concerns, but the agreement is not one that
                  would be challenged without a detail market
                      The agencies analyze the agreement in
                         greater depth.
                      The agencies typically define relevant
                         markets and calculate market shares and
                          market concentration as an initial step
                          in assessing whether the agreement may
                          create or increase market power or
                          facilititate its exercise.
                         In doing so, the agencies examine the
                          extent to which the participants and the
                          collaboration have the ability and
                        incentive to compete independently.
   §1.3 Competitor Collaborations Distinguishes from Mergers
          Difference between competitor collaborations and
           mergers is that mergers completely end competition
           between the merging parties in the relevant markets
          By contrast, most competitor collaborations preserve
           some form of competition among the participants
          Test for when the merger guidelines are used, as
           opposed to the collaboration guidelines:
              o a. the participants are competitors in the
                   relevant market
                      o b. the formation of the collaborations involves
                          an efficiency-enhancing integration of economic
                          activity in the relevant market
                      o c. the integration eliminates all competition
                          among the participants in the relevant market;
                      o d. the collaboration does not terminate within a
                          sufficiently limited period by its own specific
                          and express terms.
   §2 General Principles for Evaluating Agreements Among Competitors
          §2.1 Potential Procompetitive Benefits
                 Examples of ways that consumers may benefit from
                  competitor collaborations:
                     o Competitor collaboration may enable
                        participants to offer goods or services that are
                        cheaper, more valuable to consumers or brought
                        to market faster than would be possible absent
                        the collaboration.
                     o A collaboration may allow its participants to
                         better use existing assets, or may provide
                         incentives for them to make output enhancing
                         investments that would not occur absent the
                 Efficiency gains may result from a combination of
                  different capabilities or resources:
                      o For example, one participant may have special
                          technical expertise that usefully complements
                          another participant‘s manufacturing process,
                          allowing the latter participant to lower its
                          production cost or improve the quality of its
                      o In other instances, a collaboration may facilitate
                          the attainment of economies of scale
          §2.2 Potential Anticompetitive Harms
                 Competitor collaborations may harm competition and
              o This can happen by increasing the ability or
                incentive profitably to raise price above or
                reduce output, quality, service, or innovation
                below what likely would prevail in the absence
                of the relevant agreement.
              o These effects can arise through a variety of
                     Agreements may limit independent
                        decision making
                     Also, competitor collaborations also may
                          facilitate explicit or tacit collusion
                          through facilitating practices such as the
                          exchange or disclosure of competitively
                          sensitive information
                         Also, through increased market
   §2.3 Analysis of the Overall Collaboration and the Agreements
    of Which it Consists
          A competitor collaboration comprises
              o A set of one or more agreements other than
                  merger agreements
              o Between competitors
              o To engage in economic activity
              o And the economic acitivy resulting therefrom
   §2.4 Competitive Effects Are Assessed as of the Time of
    Possible Harm to Competition
          The competitive effects of a relevant agreement may
           change over time, depending on changes in
               o Examples of such changes in circumstances:
                      internal reorganization
                      adoption of new agreements as part of
                         the collaboration
                      addition or departure of participants
                      new market conditions
                            changes in market share
                      o The agencies assess the competitive effects of a
                         relevant agreement as of the time of possible
                         harm to competition, whether at the formation
                         of the collaboration or at a later time as
                Analy
   §3 Analytical Framework for Evaluating Agreements Among
          §3.1 Introduction
                 Some types of agreements are so likely to be harmful to
                  competition and to have no significant benefits that they
                  do not warranty the time and expense required for
                  particularized inquiry into their effects
                      o These agreements are challenged as per se
                 Agreements not challenged as per se illegal are
                  analyzed under the rule of reason
                     o Rule of reason focuses on the state of
                         competition with, as compared to without, the
                         relevant agreement.
                     o Central question under the rule of reason:
                              ―whether the relevant agreement likely
                                harms competition by increasing the
                                ability or incentive profitably to raise
                                price above or reduce output, quality,
                                service, or innovation below what likely
                                 would prevail in the absence of the
                                 relevant agreement.‖
          §3.2 Agreements Challenged as Per Se Illegal
                 Agreements that always or almost always tends to
                  raise price or reduce output are per se illegal.
                 Agreements that have been held per se:
       o 1. Agreements among competitors to fix prices
         or output.
       o 2. Rigging bids
       o 3. Agreements to share or divide markets by
         allocating customers, suppliers, territories or
         lines of commerce.
       o Courts presume such agreements, once
         identified, to be illegal without inquiring into
         their claimed business purposes, anticompetitive
         harms, procompetitive benefits, or overall
           competitive effects
   If, however, participants in an efficiency-enhancing
    integration of economic activity enter into an
    agreement that is reasonably related to integration
    and reasonably necessary to achieve its
    procompetitive benefits, the agencies analyze the
    agreements under the rule of reason, even if it‟s of a
    type that might otherwise be considered per se
        o An agreement may be ―reasonably necessary‖
             without being essential.
                 But if participants could achieve an
                    equivalent or comparable efficiency-
                    enhancing integration through practical,
                    significantly less restrictive means, then
                    the agencies conclude that the agreement
                    is not reasonably necessary.
                 In making this assessment, the agencies
                   consider whether practical, significantly
                   less restrictive means were reasonably
                   available when the agreement was
                   entered into.
   In an efficiency enhancing integration:
        o Participants collaborate to perform or cause to
            be performed (through something like a joint
            venture) one or more business functions, such as
                  production, distribution, marketing, purchasing
                  or R&D, and thereby benefit or potentially
                  benefit, consumers by expanding output,
                  reducing price, or enhancing quality, service, or
          Participants in an efficiency enhancing integration
           typically combine significant capital, technology, or
           other complementary assets to achieve procompetitive
           benefits that the participants could not achieve
          The mere coordination of decisions on price, output,
           customers, territories, and the like is not integration.
           Also, cost savings without integration are not a basis
           for avoiding per se condemnation.
          The intergration must be of a type that plausibly
           would generate procompetitive benefits cognizable
           under the efficiencies analysis (see §3.36).
   §3.3 Agreements Analyzed under the Rule of Reason
          Agreements not challenged as per se illegal are
           analyzed under the rule of reason to determine their
           overall competitive effect.
          Rule of reason focuses on the state of competition with
           the relevant agreement
               o Asks the central question (see above)
          Analysis:
              o First:
                      Examination of the nature of the relevant
                         Reason: the nature of the agreement
                          determines the types of anticompetitive
                          harms that may be of concern.
                         In this analysis, the agencies ask about
                          the business purpose of the agreement
                          and examine whether the agreement, if
        already in operation, has caused
        anticompetitive harm.
o Second:
      If the nature of the agreement and the
        absence of market power together
        demonstrate the absence of
        anticompetitive harm, then the agencies
            do not challenge the agreement
o Third:
      Where the likelihood of anticompetitive
            harm is evident from the nature of the
            agreement, or anticompetitive harm has
            resulted from an agreement already in
            operation, then, absent overriding
            benefits that could offset the
            anticompetitive harm, the agencies
            challenge such agreements without
            detailed market analysis.
o Fourth:
           If the nature of the agreement indicates
            possible competitive concerns, but the
            agreement is not one that would be
            challenged without a detailed market
            analysis, then the agencies analyze the
            agreement in greater depth.
           In doing so, agencies typically define
            relevant markets and calculate market
            shares and concentration as an initial
            step in assessing whether the agreement
            may create or increase market power.
           Factors relevant to such an inquiry:
            whether an agreement is exclusive or
            non-exclusive; duration of the
            agreement; whether entry would be
            timely, likely, and sufficient to deter or
            counteract any anticompetitive harms;
                          any other market circumstances that may
                          impede anticompetitive harms.
                         If these factors indicate no potential for
                          anticompetitive harm, the agencies end
                          the investigation without considering
                          procompetitive benefits
                         If the investigation indicates
                          anticompetitive harm, the agencies
                          examine whether the relevant agreement
                          is reasonably necessary to achieve
                          procompetitive benefits that likely
                          would offset anticompetitive harms.
   §3.31 Nature of the Relevant Agreement: Business Purpose,
    Operation in the Marketplace and Possible Competitive
          The nature of the agreement is relevant to whether it
           may cause anticompetitive harm
          In examining the nature of the agreement:
               o Agencies take into account inferences about
                business purposes for the agreement that can be
                drawn from objective facts.
              o Evidence of subjective intent of the participants
                to the extent that it sheds light on competitive
              o Only unless an anticompetitive harm appears
                likely do the agencies undertake a full analysis
                of procompetitive benefits.
          Examples when anticompetitive harm might be
              o If a competitor collaboration successfully
                  mandates new, anticompetitive conduct, or
                  successfully eliminates procompetitive pre-
                  collaboration conducts, such as withholding
                  services that were desired by consumers when
                  offered in a competitive market.
   §3.33 Market Shares and Market Concentrations
          Market share and market concentration affect the
           likelihood that the relevant agreement will create or
           increase market power.
          All other things equal, market share affets the extent to
           which participants or the collaboration must restrict
           their own output in order to achieve anticompetitive
           effects in a relevant market.
               o The smaller the percentage of total supply that a
                   firm controls, the more severely it must restrict
                   its own output in order to produce a given price
               o In assessing whether an agreement may cuase
                 anticompetitive harm, agencies typically
                 calculate the market shares of the participants
                   and of the collaboration
          All other things being equal, market concentration
           affects the difficulties and the costs of achieving and
           enforcing collusion in a relevant market.
          Market share and market concentration provide only a
           starting point for evaluating the competitive effect of
           the relevant agreement.
   §3.34 Factors Relevant to the Ability and Incentive of the
    Participants and the Collaboration to Compete
          Whether the nature of the agreement and the market
           share and market concentration reveal a likelihood of
           anticompetitive harm, the agencies more closely
           examine the extent to which the participants and the
           collaboration have the ability and incentive to compete
           independent of each other.
               o The agencies focus on six factors:
                     1. The extent to which the relevant
                        agreement is non-exclusive in that
                        participants are likely to continue to
                        compete independently outside the
                  collaboration in the market in which the
                  collaboration operates
                 2. The extent to which participants
                  retain independent control of assets
                  necessary to compete.
                 3. The nature and extent of participants‘
                  financial interests in the collaboration or
                  in each other.
                 4. The control of the collaboration‘s
                  competitively significant decision
                 5. The likelihood of anticompetitive
                  information sharing; and
                 6. The duration of the collaboration
   Six factors described below:
   §3.34(a) Exclusivity
        o Agencies consider whether, to what extent, and
            in what manner the relevant agreement permits
           participants to continue to compete against
         each other and their collaboration
       o Competitive concern is likely reduced to the
         extent that participants actually have continued
         to compete, either through separate, independent
         business operations or through membership in
         other collaborations, or are permitted to do so.
   §3.34(b) Control over Assets
        o Agencies ask whether the relevant agreement
           requires participants to contribute to the
         collaboration significant assets that previously
         have enabled or likely would enable participants
         to be effective independent competitors in
         markets affected by the collaboration.
       o In general, the greater the contribution of
         specialized assets to the collaboration that is
         required, the less the participants may be relied
         upon to provide independent competition
   §3.34(c) Financial Interests in the Collaboration or in
    Other Participants
        o Agencies assess each participant‘s financial
           interest in the collaboration and its potential
           impact on the participant‘s incentive to compete
           independently with the collaboration.
   §3.34(d) Control of the Collaboration‘s Competitively
    Significant Decision Making
        o Agencies consider the manner in which a
            collaboration is organized and governed in
         assessing the extent to which participants and
         their collaboration have the ability and incentive
         to compete independently.
       o The collaboration is less likely to compete
         independently as participants gain greater
         control over the collaboration‘s price, output,
         and other competitively significant decisions.
   §3.34(e) Likelihood of Anticompetitive Information
        o Agencies evaluate the extent to which
           competitively sensitive information concerning
           markets affected by the collaboration would
           likely be disclosed
                This depends on things like the nature of
                   the collaboration, its organization and
                   governance, and safeguards implement
                   to prevent or minimize such disclosure
       o In general, it is less likely that the collaboration
         will facilitate collusion on competitively
         sensitive variables if appropriate safeguards
         governing information sharing are in place.
   §3.34(f) Duration of the Collaboration
        o Agencies consider the duration of the
           collaboration in assessing whether participants
                 retain the ability and incentive to compete
                 against each other and their collaboration.
               o In general, the shorter the duration, the more
                 likely the participants are to compete against
                 each other and their collaboration.
   §3.35 Entry
          Where the nature of the agreement and market share
           and concentration data suggest a likelihood of
           anticompetitive harm that is not sufficiently mitigated
           by any continuing competition in 3.34, agencies inquire
           whether entry would be timely, likely, and sufficient in
           its magnitude, character and scope to deter or
           counteract the anticompetitive harm of concern
               o If so, the relevant agreement ordinarily requires
                  no further analysis
          usually, the shorter the anticipated duration of an
           anticompetitive agreement, the smaller the profit
           opportunities for potential entrants, and the lower the
           likelihood that it will induce committed entry.
          To be timely, entry must be sufficiently prompt to deter
           or counteract such harms
   §3.36 Identifying Procompetitive Benefits of the Collaboration
          Primary benefit of competitor collaborations to the
           economy is their potential to generate efficiencies
              o Efficiencies are generated through collaboration
                  that can enhance the ability and incentive of the
                  collaboration and its participants to compete,
                  which may result in lower prices, improved
                  quality, enhanced service, or new products.
          If agencies conclude that the relevant agreement has
           caused or is likely to cause anticompetitive harm, they
           consider whether the agreement is reasonably necessary
           to achieve ―cognizable efficiencies‖
       o Cognizable efficiencies: efficiencies that have
         been verified by the agencies that:
                  do not arise from anticompetitive
                   reductions in output or service, and
                  that cannot be achieved through
                   practical, significantly less restrictive
   §3.36(a) Cognizable Efficiencies Must be Verifiable
    and Potentially Procompetitive
        o The participants must substantiate efficiency
           claims so that agencies can verify by reasonable
           means the likelihood and magnitude of each
           asserted efficiency
                How and when each would be achieved
                Any costs of doing so
                How each would enhance the
                   collaboration‘s or its participants‘ ability
                   and incentive to compete
                why the relevant agreement is
                reasonably necessary to ahieve the
                claimed efficiencies.
       o Also, cognizable efficiencies must be potentially
             Cost savings that arise from
                anticompetitive output or service
                   reductions are not treated as
                   cognizable efficiencies
   §3.36(b) Reasonable Necessity and Less Restrictive
        o Agencies consider only those efficiencies for
           which the relevant agreement is reasonably
                An agreement may be reasonably
                   necessary without being essential
               o In making this assessment, agencies consider
                 only alternatives that are practical in light of the
                 business situation faced by the participants
                      The agencies do not search for a
                         theoretically less restrictive alternative
                         that is not realistic given business
               o The reasonable necessity of an agreement may
                 depend upon the market context and the
                 duration of the agreement.
                       Also may depend on whether it deters
                        individual participants from undertaking
                        free riding or other opportunistic
                        conduct that could reduce significantly
                        the ability of the collaboration to achieve
                        cognizable efficiencies.
   §3.37 Overall Competitive Effect
          If the relevant agreement is reasonably necessary to
           achieve cognizable efficiencies:
                o Then the agencies assess the likelihood and
                    magnitude of cognizable efficiencies and
                    anticompetitive harms to determine the
                    agreement‘s overall actual or likely effect on
                    competition in the relevant market.
                         In order to make this determination, the
                           agencies consider whether cognizable
                           efficiecies likely would be sufficient to
                           fofset the potential of the agreement to
                          harm consumers in the relevant market,
                          for example, by preventing price
          In assessing the overall competitive effect of an
               o Agencies consider the magnitude and likelihood
                   of both the anticompetitive harms and the
                        cognizable efficiencies from the relevant
                      o As the expected anticompetitive harm of the
                        agreement increases, the agencies require
                        evidence establishing a greater level of expected
                        cognizable efficiencies in order to avoid the
                        conclusion that the agreement will have an
                        overall anticompetitive effect.
                             When the anticompetitive harm of the
                                agreement is likely to be particularly
                                 large, extraordinarily great cognizable
                                 efficiencies would be necessary to
                                 prevent the agreement from having an
                                 anticompetitive overall effect.
   §4 Antitrust Safe Zones
        §4.1 Overview
                 Safety zones set out below are designed to provide
                  participants in a competitor collaboration with a degree
                  of certainty in those situation in which anticompetitive
                  effets are so unlikely that agencies presume that the
                  arrangements are lawful without inquiring into the
                  particular circumstances.
                 Competitor collaborations are not anticompetitive
                  merely because they fall outside the safety zones.
          §4.2 Safety Zone for Competitor Collaborations in General
                 Agencies generally do not challenge a competitor
                  collaboration when the market shares of the
                  collaboration and each of its participants collectively
                  account for no more than 20% of each relevant
                  market in which competition may be affected.
                      o This safety zone does not apply to agreements
                         that are per se illegal, or to collaboration to
                         which a merger analysis is applied.
          §4.3 Safety Zone for R&D
                               When there are three or more independently controlled
                                research ventures that are close substitutes for joint
                                research and development actiivites
   B. Price Fixing: The Foundation Cases
       o a. Chicago Board of Trade v. United States (1919)
                Price fixing arrangement:
                       Grain trading situation. The Chicago Board of Trade adopted a
                         ―call‖ rule:
                               Call rule said that sales ―to arrive‖ (sales to be delivered
                                when the grain arrives in Chicago) could not be made
                                at any price other than the closing bid at each day‘s call.
                        USSCT applied the rule of reason and did not condemn the
                         ―call rule‖
                               Reasons:
                                   o Court said that you have to look to the facts of
                                      the particular business or agreement to see if
                                      there is a problem
                                               Factors that are relevant: [ALWAYS
                                                COME BACK TO THESE THREE
                                                    1. Nature of the agreement
                                                    (that is, what is the intent?)
                                                 2. Scope of the agreement (that
                                                    is, what is the market power?)
                                                 3. Effect of the agreement
                                                    (that is, what are the effects in
                                                    terms of the economic effect in
                                                    the market?).
                                    o Applying these factors to this case:
                                          1. Nature/intent of the agreement:
                                                 One intent might have been to
                                                    regulate the hours of trading
                                                 Another intent might have been
                                                    to raise the price and therefore
                                                    lower the quantity produced
                                                    (Court rejects this)
          2. Scope of the agreement:
               The scope here seems to be
                  small—the ―to arrive‖ portion of
                  the grain market was small.
               Duration was also for a small
                  period of time.
          3. Effect on the market:
               Court here says that the effects
                  on the market are positive
o Court determines that the agreement merely
  regulates and promotes competition
o Calling the Court‘s decision into question:
      Any possible negative effects?
              1. Negatively impacts firms with
                 the ability to purchase around the
      Also, the relevant market might not have
         just been the grain market, but it could
         have been the trader market
               Prof: Court might have been too
                simplistic in just looking at the
                grain market.
o From supplement:
      Under the call rule, all price
        determination was made under the most
        public and competitive of circumstances,
        with no buyer or seller in a position to
        take advantage of another party‘s
          Another thing—when consumer search
           costs are low, then that leads support to
           there being competitive effects on the
                In Chicago Board of Trade, the
                   market forced all transactions
                   into a single environment in
                                                   which consumer search costs
                                                   were very low.
          ―The true test of legality is whether the restraint imposed is such as
           merely regulates and perhaps thereby promotes competition or whether
           it is such as may suppress or even destroy competition. To determine
         that question, the court must ordinarily consider the facts peculiar to
         the business to which the restraint is applied, its condition before
         and after the restraint was imposed, the nature of the restraint and
         its effect actual or probable.‖
o b. United States v. Trenton Potteries (1927)
          Facts:
               Trenton Potteries and other companies controlled 82% of
                  market in manufacturing and distributing bathroom fixtures in
                  the U.S. They all agreed to fix prcies
               Factors (from Chicago)
                         1. Nature of the agreement?
                             o Price fixing
                         2. Scope?
                             o Seems that the scope here is pretty large
                         3. Effects:
                             o Court here seems to say that they will not look
                               at the effects of the market
          Ruling: Court condemns the agreement based on a per se illegality
               Court distinguishes this case from Chicago:
                         Here, the Court says that the restriction was a primary
                          price fixing intention
                              o In Chicago, it seemed like the restriction
                                 actually enhanced the market
                         Also, the Court says that the restrictions are long term
                             o In Chicago, it seemed like the restrictions were
                                  short term
                 Court in this case also seems to establish a market power
                         (top of p. 195) ―by those controlling in any substantial
                This case uses per se illegality
                     Chicago uses rule of reason
      Interesting question: can you infer market power from market share
o c. Appalachian Coals, Inc. v. United States (1933)
      Facts:
             Here, there was a joint selling agency created by 137
                competing coal producers—these producers constituted 74% of
                the Appalachian territory (but 12% east of the Mississippi)
             Because the coal is fungible, however, the agency charged the
                 same price for all deliveries of a particular grade of coal
                       As a result, the agency sold the coal of all members at
                        the same price.
                       Also, a member of the venture would have refused to
                        deal with anyone who tried to buy coal from it directly.
         Ruling: Court here refused to condemn the agreement and used a rule
          of reason analysis
               How did the Court distinguish this from Trenton Potteries
                       Court here seems to believe that competition would be
                        harmful because of the Great Depression
                           o Indicates that the agreement could have a
                               positive effect on the market
                       Another distinction might be looking at the aggregate
                        effect on the market:
                            o Rather than the effect on a portion of the market
                                (such as the Appalachian portion)
                                     Court here appears to be saying that
                                        there is not much market power to affect
                                        the price
                                             Basically, the argument that the
                                                Court uses is that there is not
                                                enough power—that is, if they
                                                try to effect the price, then more
                                                competitors will come in and
                                                drive the price down.
                 In this case, the Court is willing to let private parties step in to limit the
                  seemingly harmful effects of competition in a depressed market
                 Applying the three factors from Chicago:
                      Intent of the agreement:
                                  Here, the Court seems to indicate that the agreement
                                   enhances efficiency (by reducing costs)
                                Court does not see this as a bare price fixing
                         Scope of the agreement
                                 Scope seems to be quite small because entry into the
                                  market is very possible
                         Effect of the agreement on price:
                                  Court has said that the agreement could have the effect
                                   of stabilizing the market
                                       o Court here seems to be willing to tolerate this
                                           effect on the price
                 Why does Court here use rule of reason and not per se (used in
                  Trenton Pottteries case)?
                      One argument: this case is an anomaly b/c of the
                          circumstances of the great depression
                         Another argument: this is an efficiency enhancing integration,
                          and therefore reasonableness should be used rather than per
                                 This implies that Potteries case did not have an
                                  efficiency enhancing integration
                 This analysis takes somewhat of a balancing approach:
                      Balance the benefits versus the harm:
                                  Harm: seems to be minimal—parties have limited
                                   market power
                                  Benefits seem to outweigh the harms
   C. Price Fixing: Supply or Output Restrictions/Agreements Limiting Price
       o a. Supply or Output Restrictions
                1. United States v. Socony-Vacuum Oil Co. (1940)
                       The agreement:
             Public agreement among oil and gasoline producers to
              allocate the supply of gasoline
             Specifically, the oil companies sold large amounts of
              gasoline to middle men, who then supplied to service
             Under the allocation agreement, each major oil
              producer was assigned to independent oil producers
              who had no marketing outlets.
                 o The major producers agreed to buy up the
                     independent producers‘ output and in the
                     process, each major producer had an
                     opportunity to reduce its own production.
   Ruling:
          The court condemns the agreement based on per se
   Rationale:
             ―Under the Sherman Act a combination formed for the
              purpose and with the effect of raising, depressing,
              fixing, pegging, or stabilizing the price of a commodity
              is illegal per se.‖
                   o Seems to be two parts:
                           1. The purpose
                           2. The effect
             How is this different from Chicago
                o In Chicago, there was an effect on price, but
                     there did not seem to be a purpose.
             How is this different from Appalachian Coal
                o In Appalachian, the effect and purpose seem to
                     be to fix price
         Having a ―purpose‖ requirement can give some s
          leeway for agreements not to be deemed illegal per se
   Framework resulting from this case:
             Elements needed for a per se illegal agreement price
                  o 1. Purpose
                  o 2. Effects on price
   Is market power required? (note, market power, not
    market share)
        o Court indicates both yes and no.
                 Indication that there is a market power
                       (p. 207 CB) ―Where the means
                          for price-fixing are purchases or
                          sales of the commodity in a
                          market operation or, as here,
                          purchases of a part of the supply
                          of the commodity for the purpose
                          of keeping it from having a
                          depressive effect on the markets,
                          such power may be found to
                          exist though the combination
                          does not control a substantial
                          part of the commodity.” (―such
                          power‖ indicates market power
                         p. 204—This case is
                          distinguished from Appalachian
                          Coal. In Appalachian Coal, the
                          defendents did not have the
                          power to fix the prices. Court in
                          Socony seems to be saying that
                          Socony is distinguished from
                          Appalachian in that Sucony s
                          had market power whereas
                          Appalachian s did not have
                          market power.
                 Indication that there is not a market
                  power requirement:
                       (Footnote 59) ―The group
                          making those agreements may or
                          may not have power to control
                          the market. But the fact that
                                                 the group cannot control the
                                                 market prices does not
                                                 necessarily mean that the
                                                 agreement as to price has no
                                                 utility to the members of the
                                                This footnote seems to indicate
                                                 that all that is needed is a
                                                 conspiracy in the horizontal
                                                 agreement to fix the price.
                        Determining whether or not there is market power can
                         be an indication of the effects on price
                        Other factors that can help determine the effectiveness
                            o 1. Competitive tactics
                            o 2. Position in the industry
                            o 3. Formula underlying price policies
                        Bottom line: no clear guidance as to whether market
                         power is required or not.
                 Court gives a clearification of the per se rule:
                        (p. 206) ―Any combination which tampers with price
                         structures is engaged in unlawful activity.‖
                 Court gives a clarification of the definition of ―price fixing‖:
                        (p. 206) ―Prices are fixed within the meaning of
                         Trenton Potteries if the range within which purchases
                         or sales will be made is agreed upon, if the prices
                         paid or charged are to be at a certain level or on
                         ascending or descending scales, if they are to be
                         uniform, or if by various formulae they are related
                         to market prices.‖
                             o The fact that prices may be fixed at the fair
                              market price is immaterial.
                          o It is the fact that they are agreed upon that is
                              important, not what price they agreed upon.
o b. Agreements Limiting Price Competition
      1. Fee Schedules
            Agreement to set maximum prices is per se illegal
                               Reasons:
                                   o 1. Higher prices which result in greater prices
                                      could encourage entry of more competition into
                                      the market—thus the price fixed may be an
                                      entry-deterring price.
                                   o 2. The maximum price fix may be an indirect
                                      method of achieving a minimum price; the price
                                      will rise to the level of the fixed price and not
                                      go below it.
                                   o 3. By fixing the level of the price, above which
                                     the price will not rise, demand for the product
                                     may be increased.
                                   o 4. Maximum price fixing may be a means to
                                     establish price leadership
                                   o 5. It may have the result of inhibiting product
                                     innovation which might result in higher prices
                                     and greater competition.
                               p. 212: USSCT reaffirmed its holding that horizontal
                                agreements that establish maximum prices are illegal
                                per se without further inquiry
                               It would seem that Trenton and Socony would have
                                settled the issue whether the fixing of a minimum price
                                would constitute a per se violation
                                   o But the Court was presented with this question,
                                       in the context of a professional fee schedule
                                            Court said that a professional fee
                                               schedule is within the ―price fixing‖
                                              The Court, however seemed to create a
                                               professional organization exemption:
                                                   The Court‘s opinion suggested a
                                                      greater toleration of a restraint
                                                      imposed by a professional
   D. Price Fixing: Data Dissemination and Information Exchanges
       o a. Introduction/Overview
   Horizontal agreements to share information might be enough for §1 of
    Sherman Act to potentially govern
   Reason why there is concern over information sharing:
        Potentially achieving monopoly results out of information
                 For example, gaining information about what a
                  competitor might be doing/charging
          Negative effects of these agreements:
                  Might lead to setting prices above what would result in
                   a normal competitive market
                   Also, members breaking out of the agreement could
                    lead to constant undercutting of prices set by the
                        o Pressures would be placed upon the breaking-
                            out competitor to shape back up.
                                 Policing mechanism
   In short, information sharing could have characteristics of both price
    setting and policing
   Procompetitive benefits of information sharing:
          Could require some minimal information standard
          Also, could help avoid fraud
          As a result, not all such agreements are void
              Courts take a rule of reason approach to this area.
   Two major aspects of price information sharing:
          1. The type of information being exchanged
                  That is, is the type of information being exchanged a
                   threat to competition
                       o This is akin to the nature of the agreement
                         question (from Chicago)
                  Information of price and quantity is most potentially
          2. Characteristic of the market where the information is
           being exchanged
                  Look at the market structure
                      o This is akin to the scope question and is also
                          akin to the effect question.
          Spectrum view of information sharing:
               In economic theory, having all the information is supposed to
                  make the market function efficicently
                        Spectrum:
                            o One end: competitors know all the information
                            o Other end: competitors know nothing about
                                each other.
                       The question is whether the market is better off by
                        moving the placement toward the “know all
                        information” end of the spectrum
                            o This is the heart of the issue that courts examine
                              in this area.
o b. Maple Flooring Manufacturers Association v. United States (1925)
      Note case of importance (American Column & Lumber Co. v. United
        States (1921)):
                 USSCT struck down a trade association program which
                  mandated compliance with several restrictive requirements,
                  including immediate reporting of price changes and the filing
                  of daily reports on sales, production and purchases
                        The association‘s membership (365 producers)
                         accounted for 33% of the industry production, but there
                         was some evidence of increases in prices
                        Also, the price information that was being share was
                         current price information
                             o This seems to indicate that the members to
                                 agreement can use the information more
                                 immediately than if the price information was
                        Also, the information was not made available to the
                            o The problem with the information being hidden
                                 is that it makes it look like there is something
                                 that is trying to be hidden (and thus used
                                 against) consumers
                  The nature of the meetings that took place seem to
                   indicate that the meetings involved
                   price/quality/production discussions
                  Third party involvement included an expert that
                   assessed the harmonization of the market
                  An auditor was used to determine costs and quality of
                      o This mechanism was in place so that no one in
                          the agreement would ―cheat‖
                 Also, there was evidence of price increases that resulted
                  from the agreement
        The association was clearly worried about ―overproduction‖
          and the members occasionally met to discuss problems that
          would occur if people did not hold back on the output.
   Agreement in Maple Flooring:
        22 producers that controlled 70% of the market
        Exchange of price information among producers of hardwood
        Historic (past) price information was being shared
          The information that was shared was available to buyers
          The nature of the meetings did not seem to involve discussion
           of price as much
          Information did not seem specific (as to which competitor had
           which information)
          Third party involvement served as a gatherer of data
                This indicates that there was no clear policing
          There was no evidence of price effects as a result of the
   Court in this case refuses to condemn the exchange of price
   Reasoning:
         How to reconcile this with American Column Lumber?
           (Difficult to)
                  The Court distinguished this case by emphasizing that
                   flooring manufacturers did not give the names of
           customers and that they reported only past transactions
           instead of current prices.
               o The Court somehow explained that these
                   differences made cartelization less likely than in
                   American Column Lumber
                        This can be called into question since
                           here, the participants in the agreement
                           controlled 70% of the market while the
                           participants in American Column
                           Lumber controlled 33% of the market.
          But in American Column Lunber, there competitors
           have more of an incentive to ―cheat‖
              o Reason: 365 firms that controlled 33% of the
              o Whereas in this case, the competitors had a high
                  incentive to have price fixing:
                       Reason: 22 firms that controlled 70% of
                          the market—the competitors could reap
                          monopoly benefits as a result
          In American Column Lumber, many of the members
           were isolated and had poor knowledge of market
           conditions; many buyers, though, were large and well
               o This lends support that the agreement in ACL
                  was probably more competitive than
          In Maple Flooring, all the member seemed to be using
           the same ―basing point‖ pricing
              o This lends support that the danger to
                 competition was more substantial than in ACL.
   How to reconcile this case with Socony? (Difficult to)
          In this case, the Court seems to be saying that the
           stabilization of price is not an unreasonable restraint
               o The Court in Socony, however, seems to
                  indicate the oppostite
                                           Court in Socony seems to say that such
                                          stabilization is per se illegal
                                o The Court here, however, uses the rule of
                                  reason for such stabilization and further that the
                                  rule of reason analysis allows for this agreement
                           Argument that this is not inconsistent with Socony:
                               o In a perfectly competitive market, you would
                                 expect prices to stabalize.
                                       As a result, you may need a further
                                       inquiry as to what is causing stability
                                    The agreement in Socony may have
                                       gone too far in creating stability, but the
                                       agreement here could indicate that
                                       having full information might be okay.
o c. United States v. Container Corp. of America (1969)
      Agreement in question:
              The agreement here isn‘t a formal agreement to share
              The agreement, rather, seems to be like if one company shares
                     information, then that company has the expectation to receive
                     information at some point.
                          Seems to be a behind the secens agreement.
                    So is this even an agreement under §1 of the Sherman Act
                     (remember that this is the first question that you always ask)?
                          Yes.
                    In this agreement, 18 of 51 manufacturers of corrugated
                     containers, controlling 90% of production in the Southeast.
                     The 18 manufacturers had an informal agreement
          Ruling:
               Court condemns the agreement under a rule of reason analysis
          Rationale:
               The agreement had the effect of prices in the market going
                  down. So why did the Court infer bad effects from this?
                           Under the rule of reason applied in this case:
                               o If the market in which the price information
                                    exchange occurred is concentrated, if the
                                   product is fungible so that price is the
                                   predominant element in competition, and
                                   demand is inelastic at the competitive price, the
                                   exchange will be condemned
                                       This is particularly the case if the court
                                          finds any relationship (either
                                          downward or upward) between the
                                          information exchange and the market
         Fitting this with ACL:
                In the absence of evidence of express collusion (like ACL), the
                 exchange of information in an unconcentrated market should
                 be legal.
                        In a concentrated market, it is less likely that there will
                         be sellers like those in ACL who have a poor
                         knowledge of market conditions
         Dissenting opinion:
              Seems to indicate that entry into the market is easy because
                 there are only 18 of 51 firms
                        The dissent is essentially saying that it would be
                         difficult to raise the price because entry into the market
                         will result when the 18 try to raise prices, despite the
                         fact that the 18 have 90% of the market).
         Bottom line: Price information exchanges are more threatening to
          competition in concentrated markets than in markets containing many
          small producers
              The more concentrated the market, the more likely that the
                 exchange is anticompetitive
o d. United States v. United States Gypsum Co. (1978)
         Basically, this case says that proof of intent is required for criminal
          liability, not just effects.
               That is knowledge of the probable bad effects are needed.
         Essentially, intent is a separate element that must be established in a
          criminal antitrust case
               This standard is therefore stricter than in a civil case.
   E. Price Fixing: The Meaning and the Scope of the Rule of Reason
       o a. National Society of Professional Engineers v. United States (1978)
                Agreement:
                       A professional association of engineers defended a cannon that
                         prohibited members from bidding competitively for jobs.
                                The defense was that unrestrained competitive bidding
                                 would motivate engineers to cut corners in an effort to
                                 produce the lowest bid. As a result, they might produce
                                 unsafe projects that would injure the public.
                                The price for the job is learned after the person/group is
                                 selected for the job.
                 Rule:
                        Court condemned the agreement, but it is unclear as to
                         whether the court used the rule of reason or the per se
                 Rationale:
                      First of all, there is an agreement that is a restraint on trade
                      So the only way to even have a rule of reason analysis is to
                         have an argument that the restraint on trade is ancillary to a
                          procompetitive effect.
                         The problem with the defendants here is that they attacked the
                          idea of competition
                                The defense has to come from a positive effect on
                                 competition—the defense cannot attack the idea of
                                 competition itself
                                    o Here, the agreement is attacking the competition
                                       and they are not asserting a procompetitive
                                       effect—as a result, the Court does not go into a
                                         full rule of reason analysis
                                              ―the Rule of Reason does not support a
                                                  defense based on the assumption that
                                                  competition itself is unreasonable‖
                                                       Here, competition is defined as a
                                                          state of affairs in which
                                                          consumers are presumed to know
                                                   what they want and what they are
                                                   willing to pay.
          It seems as if the court is taking a per se approach:
                 How to tell?
                           Ask whether or not the Court would still deem this to
                            be illegal, even if there is a lack of market power.
                                 o If so, then the analysis is per se
                    Here, is there market power?
                           Here there are about 12k participants in the agreement
                            out of 160k nationwide.
                           o But there still may be market power, aside from
                               what the numbers how.
      Court seems to indicate that a procompetitive effect might have been a
         good defense
             This seems to be taking a step away from Socony.
o b. Broadcast Music, Inc. v. Columbia Broadcasting System (1979)
      Facts:
             BMI was an association that was made up of thousands of
                composers, publishers and others who owned the performance
                     rights to musical compositions
                            The ―performance right‖ gave the holder the exclusive
                             right to perform a composition or license the right of
                             performance to others.
                    The market for such performance rights: radio stations, TV
                     stations, movie producers, etc.
                    BMI sold ―blanket licenses‖ which allowed the licensee to
                     perform everything in BMI‘s library.
                           The purposes of the blanket licenses were to save
                            transaction costs associated with having to get each
                            individual license.
                           The blanket licenses gave the individual licensees
                            immediate access to anything in BMIs library without
                            having to go through the transaction hassle.
          Ruling:
                    Court refuses to condemn the agreement under a rule of
                     reason analysis
   Rationale:
        Go through the six step analysis (above):
                 1. Is there a constraint that raises concern?
                      o Yes.
                      o The blanket license prevent the copyright
                          holders from competing against each other for
                 2. Is the restraint naked or ancillary?
                      o Seems to be ancillary
                 3. Is there market power?
                      o Seems like the sellers (BMI/ASCAP) do possess
                          significant market power.
                 4. What are the procompetitive benefits of the
                      o Benefits to the marketplace
                             This agreement makes entry into the
                                market easier for copyright holders
                             Also a policing/monitoring of the market
                 5. Is there a less anticompetitive method to achieve the
                  positive effects?
                      o Court seems to indicate that a ―clearing house‖
                          idea might be a lss anticompetitive method.
               6. Balancing test
          How to reconcile this case with the strong per se approach of
                 Socony required an effect on price
                     o An effect on price rendered a strong per se
                 The Court here seems to be stepping away from
                  Socony‘s strong per se approach
                     o The blanket licensing agreement (that this Court
                        upheld) seemed to go against the conclusion of
                        Socony that agreements among competitors that
                        tamper with the market‘s price structure are
                         illegal per se
                 One way to reconcile:
                             o The Court said that they were not very familiar
                               with these types of agreements—as a result, the
                               unfamiliarity of the Court may have driven them
                               away from using the per se rule.
                         Another way to reconcile:
                             o The agreement didn‘t really involve price fixing
                                by competitors
                                     How fungible are the products?
                                             Each type of song will occupy its
                                               own market
                 Here, there was price fixing, but the Court used rule of reason
                      Some commentators classify this result as sui generis.
                      The agreement here fell under the price fixing
                       definition of Socony
o c. Arizona v. Maricopa County Medical Society (1982)
      Facts:
             Arrangement amount doctors and health insurers which fixed
                maximum prices that the doctors would charge.
             A group of doctors agreed not to charge more than a certain
                  price for specified services.
                         Insurance companies in return agreed to pay the full
                          cost of these services if they were provided by a
                          participating doctor.
                              o The list of participating doctors was made
                                  available to consumers.
          Ruling:
               The Court condemned the agreement, saying that they are
                  doing so under the per se approach
                         However, the Court undergoes a rule of reason analysis
                            o This indicates the fine line between per se and
                               rule of reason.
          Rationale:
               Court inquires as to the anticompetitive effects of the
                         Court says that having a maximum price agreement
                          chills incentives to enter into the market
                         Additionally, maximum prices can chill innovation.
                         Also, maximum price in effect becomes the minimum
                          price (similar rationale to telling a jury as to how much
                          they can award)
                 Under the per se approach, there is no inquiry into the actual
                 Under the rule of reason, there is a fully market inquiry
                 The Court here says that they are doing per se, but (p. 257) the
                  Court is looking also at procompetitive and anticompetitive
          Court here seems to be using the “quick look” rule of reason
          Court distinguishes this case from BMI
               Services that result from this agreement is not a new product,
                  whereas in BMI, the individual copyright holders could not
                  offer the product that was being offered
                       Here, the individual doctors could offer the individual
                        product that is being offered.
o d. National Collegiate Athletic Association v. Board of Regents (1984)
          Facts:
               The agreement limited the number of times per season that
                   each member of the association could have its games televised
          Ruling:
                 The Court condemned the agreement under a rule of reason
          Rationale:
               The Court here seems to indicate that this is a naked restraint
                  on trade
                         However, the Court uses a rule of reason approach
                            o Why?
                                     It seems like the Court is trying to give
                                        deference to the fact that the NCAA is
                                        trying to maintain a certain product
                                             As a result, the Court does a rule
                                                of reason analysis
                 Court essentially holds that the rule of reason must be
                  applied to an industry in which agreements among
                  competitors were ―essential if the product is to be
                  available at all‖
                     o It‘s essential because the NCAA football teams
                         simply cannot produce their product without
                         agreeing with each other about certain things,
                         such as a playing schedule, the size and shape of
                         the football field, the rules of the game, and on
                         rules determining player eligibility.
          The Court cited the following as anticompetitive effects:
                  Price fixing and reduced output
                  Restraint on universities
                  Consumers choices are limited
                  Gives networks a position of power once they‘ve
                   acquired broadcasting rights
   Reconciling this case with BMI:
        Similarities:
                 In both this case and in BMI, an agreement is necessary
                  for the product to even exist
          Distinctions:
               BMI was viewed as having an ancillary restraint
               This case is viewed as a naked restraint
               Additionally, this case creates a noncompetitive
                market whereas BMI does not.
   NCAA‘s defense:
       NCAA tries to argue that they do not have market power
                 Court rejects this argument
                     o Says that NCAA‘s product is unique—not many
                         substitutes for it
                              This indicates a strong presence of
                                  market power
                 Also Court indicates that market power does not matter
                  because this is a naked restraint
                     o That is, even though the rule of reason is used,
                         the Court refused to look whether or not there
                                        was a presence of market power when a naked
                                        restraint was involved
       o e. California Dental Association v. Federal Trade Commission (1999)
             Facts:
                     The dental association‘s rules sought to limit deceptive
                        advertising, but were in fact so aggressive that they eliminated
                        nearly all price and quality advertising by dentists
             Majority used the quick look approach
             The basic point from this case:
                        When it‟s possible that there might be procompetitive
                         effects, then you cannot use the “quick look” approach
                               Instead, you have to go further and ask about these
                                procompetitive benefits
                      Majority says: stop after step 4
                      Dissent says: stop after step 3
                 Framework for the ―quick look‖ approach:
                      1. Asks whether there is a restraint.
                      2. Asks whether the restraint is naked or ancillary. (usually
                        ancillary restraints will result in a full scale rule of reason
                         analysis, not just the quick look)
                        3. Asks whether there is market power.
                              Once negative effects are seen, then the dissent says
                               that the analysis stops and that you don‘t look to
                               procompetitive effects
                        4. Asks whether there are any procompetitive effects
                                Majority says that you have to go this far. If there
                                 could be any procompetitive effects, then you must go
                                 further and cannot stop.
   F. Proof of Agreement: Introduction/Conscious Parallelism
       o a. Introduction
                Under §1 of the Sherman Act, two or more parties must be engaged in
                Difficulties arise as to how to prove that an agreement exists
                 The agreement requirement of §1 does not require proof of explicit
                The agreement can be tacit (silent, unspoken, or implied) and
                 still be illegal
               Evidence showing that there has been a ―meeting of the minds‖
                 concerted action, or mutual understanding is sufficient to
                 support an inference of an agreement.
o b. Interstate Circuit v. United States (1939)
       Facts:
                    s were a group of eight distributors and sever exhibitors of
                     motion pictures.
                    Distributors controlled about 75% of first-class feature films.
                    One of the largest distributors sent a letter to the eight
                     distributors suggestion that each insert two clauses in future
                     exhibition contracts wit h theaters.
                         Subsequently, the eight distributors incorporated these
                          clauses into many of their contracts.
                 Other than this, there was no evidence of there being a
                   potential agreement
          If there was an agreement among distributors, what would the analysis
                    The agreement would seem to be affecting price, and as a
                     result, under Socony, you could say that it is per se illegal
                    Even if Socony wasn‘t used, it seems like the quick look
                     approach would be used and that it would be deemed illegal
          Ruling:
                 Court held that given the information, that there was sufficient
                  evidence to determine that there was an agreement among the
          Rationale:
                    The Court looked at three things
                           1. Invitation/opportunity to deal
                                o Here, the letters seemed to be an invitation to
                           2. Parallel action
                               o Here, the course of conduct between each of the
                                   distributors and the exhibitors is strikingly
                              o Also, there is a radical departure from the past
                              o [course of conduct; similarity/different from
                                past conduct]
                        3. Motivation
                              o Here it would be irrational for the distributors to
                                  enter into this agreement by themselves
                              o [rationality of entering the agreement
                 But are all these factors required?
                         (p. 296 CB):
                              o ―While the District Court‘s finding of an
                                  agreement of the distributors among themselves
                                  is supported by the evidence, we think that in
                                  the circumstances of this case, such agreement
                                  for the imposition of the restrictions upon the
                                  subsequent-run exhibitors was not a prerequisite
                                  to an unlawful conspiracy. It was enough that,
                                  knowing that concerted action was
                                  contemplated and invited, the distributors gave
                                  their adherence to the scheme and participated
                                  in it.‖
                                        The Court might be indicating here that
                                          all that is needed is parallel/concerted
                                                The other factors might not be
o c. Theatre Enterprises, Inc. v. Paramount Film Distributing Corp. (1954)
          This case was different from Interstate in that here:
                 There was parallel action
                 There was not a radical departure from the past
                 There was motivation for independent actors to act in the same
                 There was not really an invitation
                 Basically, the only thing that was present was parallel action
                 Court here says that there is not sufficient evidence of an agreement
                  among the distributors
                      But here, there is parallel action—how do you reconcile with
                         Interstate and p. 296 language?
                                The Court here is saying that the presence of parallel
                                 action, by itself, is not enough
                                     o (p. 300) ―But this Court has never held that
                                         proof of parallel business behavior conclusively
                                         establishes agreement or, phrased differently,
                                         that such behavior itself constitutes a Sherman
                                         Act offense.‖
                                     o Maybe you need something like motivation or
                                         invitation in addition to parallel action.
                 One thing to note is the procedural posture of the two cass:
                      Interstate was a trial on the merits
                      This case was a direct verdict
   G. Proof of Agreement: Oligopoly Pricing and Facilitating Devices
       o a. Introduction
               Definition of an oligopoly:
                       1. A market that has few sellers and many buyers, and;
                       2. There is no serious threat of new entry.
                 Interdependence
                       In oligopolies, each seller may take into account the pricing
                         and output decisions of the other competitors
                                This might lead sellers into foregoing price cuts for fear
                                 that if one seller were to drop the price, each would
                                 follow with retaliatory price, the result of which would
                                 nullify a gain achieved by reason of the initial price
                        Antitrust enforcers use the economic theory of interdependence
                         as a means of challenging parallel price conduct in oligopoly
                                The argument is that sellers in an oligopoly recognize
                                 that their own price and production decisions are
                                 dictated in large part by the predicted reactions of other
                                 sellers to price moves.
                      o Anticipating such reactions, competitors adopt
                           parallel pricing
   Other factors of an oligopoly that lead to collusion:
        1. The small number of firms indicate that it is easier to make
           the agreements
        2. The large number of buyers indicate that the firms are not
           concerned with losing a few buyers here and there.
                 That is, having many buyers is more conducive to
          3. Product homogeneity/Simple product
          4. Excess capacity
                 Marginal costs are less than the price.
                 Demand is inelastic.
                    o With an inelastic demand cure, the incentive to
                        cheat out of an agreement is low.
                 Having excess capacity gives the authority to penalize
                  the cheaters
                      o Example:
                              One firm cheats and lowers prices. The
                                other firms, because they have excess
                                capacity, can lower their prices to the
                                level of marginal costs in order to match
                                the cheater.
                                     This is true even when the
                                        demand is elastic.
          5. The market is open and there are many small transactions
                 If things are open, then it is easier for the firms to
                  police the agreement
                 If there are small transactions, this ties to the idea of
                  many buyers—no reason to break out and capture the
                  ―big‖ transaction.
          6. Firms have similar costs
          7. There are identical degrees of verticle integration
          8. Most of the competition is on price
                       Firms will compete based on price, and there is no real
                        opportunity to breach out of the agreement in other
                        areas (such as product differentiation, etc)
                 9. New entry into the market is difficult or it takes a long time
                 10. Demand is static or falling.
          The oligopoly market is structured in a way where anticompetitive
           effects are present without any type of agreement
                This makes it very difficult to determine if the parallel action is
                   a result of competition or of collusive activity.
          Incentives for cheating in an oligopoly are low
                The reason for this is that there are no long term gains for the
                 cheater because the competitors will similarly lower prices.
      The primary question is whether parallel behavior within an oligopoly
          should be deemed illegal under §1 of the Sherman Act.
o b. E.I. Du Pont De Nemours & Co. v. FTC (2nd Cir. 1984)
          Court here established a test to prove antitrust violation in the absence
           of an agreement
                (p. 320 CB)
                Without an agreement, either of the following are required:
                         1. Evidence of anticompetitive intent or purpose on the
                          part of the producer charged OR
                         2. The absence of an independent legitimate business
                          reason for its conduct.
                 Interesting question:
                         Is it even possible to show either of these without
                          showing proof of an agreement?
                               o That is, is the court essentially requiring a proof
                                   of an agreement by saying that one of these two
                                requirements are met.
                 Back to the two part test:
                         How can you show anticompetitive intent to achieve
                          some sort of monopoly profit (requirement 1)?
                              o It seems as if market power is required
                                      In order to get market power, it is likely
                                       that you will get market power either
                                       through having a monopoly (in the realm
                                                 of §2 of Sherman) or though making an
                                                 agreement (in the realm of §1 of
                                                 Sherman) .
                                How can you show an absence of a legitimate business
                                 reason (requirement 2):
                         Professor: basically, this test is illusory
                                 The test is essentially requiring an agreement, and the
                                  non-agreement avenue is illusory.
                         Interesting example:
                                If you have one firm with 25% of a market
                                     o If there is no collusion here (that is, the firm is
                                         acting unilaterally), the firm is not large enough
                                         to be a monopoly
                                     o As a result, the firm is not illegal
                                On the other hand, if you have two firms, each with
                                 12.5% of the market and they both agree
                                     o This is illegal under the per se rule.
                                How can you reconcile these two situations?
                                   o The second situation (two competitors) denies
                                         the market of independent competitors
                                              Secrecy to add even more market share
                                                power to the agreement (above the
                                                combined 25% that they have)
   H. Proof of Agreement: Intra-Enterprise Conspiracy
       o a. Introduction
               §1 of the Sherman Act requires, among other things, a plurality of two
                  or more legal persons to act.
               In defining the requirement of plurality, the question arises whether
                  concerted conduct by persons within a single legal entity comes within
                  the statutory proscription of an agreement in restraint of trade.
                 The general rule for corporations is that a single corporation cannot
                  conspire with itself under §1 of the Sherman Act
                      Related questions are raised regarding conduct by subsidiary
                         corporations and by unincorporated divisions on behalf of a
                         parent corporation.
              Central to the inquiry is whether concerted action has been engaged in
               by separate economic entities
       o b. Copperweld Corp. v. Independence Tube Corp. (1984)
             Facts:
                    Copperweld bought Regal Tube Company from Lear and
                      transferred its assets to a new wholly owned subsidiary.
                    Lear agreed not to compete with Regal for five years after the
                    However, an officer of Lear formed Independence Tube Corp
                      to compete with Regal.
                 Issue: Can a parent and its wholly owned subsidiary conspire within
                  the meaning of §1 of the Sherman Act?
                 Ruling:
                         Court here said that there is no antitrust problems in this
                 Notable things:
                      §2 of Sherman Act deals with single entity actions
                                Under §2, market power matters a whole lot (unlike
                                 under §1 where it may not matter so much)
                         Gap between §1 and §2:
                                If a firm is not powerful enough to be considered a
                                 monopoly, the firm can pretty much do anything it
                                wants, so long as it acts alone, to avoid antitrust
                         Two types of situations:
                                1. What if there is not a wholly owned parent-
                                 subsidiary relationship (e.g. partially owned situation)?
                                2. What if an agent of the firm has a separate economic
                                 interest that is separate from the firm?
                 Seems like the central question to ask is whether or not there is
                  economic unity between the parties making the agreement.
   I. Proof of Agreement: Burdens of Proof and Summary Judgment
        o a. Matsushita Electric Industrial Co. v. Zenith Radio Corp. (1986)
                Facts:
          s, US TV manufacturers, alleged that their Japanese rivals
           had conspired to charge unduly low prices in the United States
           in order to get rid of the s
          Basically, the allegation is that Japanese companies are
           keeping prices high and output low in Japan
                 As a result, the allegation is that there is an excess
                  amount in Japan and the companies are dumping this
                  excess into the U.S. market to drive the price down.
                     o Companies want to drive the price down to put
                          the US companies out of business in order to
                          establish an monopoly condition.
   Evidence that  offers to prove these allegations:
        1. Offering evidence that prices in Japan are fixed
        2. Japanese firms were dividing the market
                 Agreement to divide the market is a per se violation of
                  the antitrust laws
          3. Evidence of minimum prices in the U.S. via MITI
                 This alongside evidence that they are ―cheating‖
                  minimum prices with rebates
        4. Excess capacity
        5. The market is an oligopoly
   Ruling:
          The Court rules that the ‘s allegations do not surive
           summary judgment
   Rational
        In order to survive a summary judgment in other areas of law,
           three things are needed:
                 1. Party seeking to survive summary judgment must
                  show that there is an issue of material fact
                     o In antitrust law, this essentially means trying to
                         show that there is an agreement
                 2. A genuine dispute is needed
                 3. The party surviving summary judgment needs to
                  show that the trier of fact could reasonably infer a
                                    o In antitrust law, this essentially means that the
                                      trier of fact could reasonable infer the existence
                                      of an agreement
                                It seems like if this traditional summary judgment
                                 standard is used, the trier of fact could reasonably infer
                                 an existence of an agreement and the case should go to
                                So does the Court change the summary judgment
                                    o p. 342:
                                           ―To surive a motion for summary
                                              judgment or for a directed verdict, a
                                              plaintiff seeking damages for a violation
                                                  of §1 must present evidence „that tends
                                                  to exclude the possibility‟ that the
                                                  alleged conspirators acted
                                                       It seems to indicate that THIS IS
                                                         THE SUMMARY
                                                       JUDGMENT STANDARD
                                                       FOR ANTITRUST CASES
                                                    Whether or not this standard
                                                       changes the traditional standard
                                                       is up for debate.
                 How would Interstate Circle come out differently under this standard?
                     In Interstate, it seems as if the evidence could suggest that there
                       is independent action.
                     Seems like the Matsushita standard could be met by the
                         Interstate Circle case
   J. Market Allocation: Horizontal Market Divisions
       o a. Introduction:
               A market division agreement is one in which firms agree not to
                  compete in a designated market
               Agreements between competitors to divide markets can be as
                  anticompetitive as price fixing agreements
                  In entering such agreements, competitors may avoid competing
                   on price, enhance market power without an explicit price fixing
                   agreement, and thus facilitate creation of a monopoly in a
                   given area.
          In short, the purpose or effect of a market allocation agreement is
         often the reduction of competition
o b. Note case:
      United States v. Sealy
                    The USSCT said that if the market allocation is horizontal
                     and part of “an aggregation of trade restraints including
                     unlawful price-fixing and policing” it is unlawful per se.
                        The Court noted that in such agreements, they are
                        unlawful under §1 without the necessity for an inquiry
                        in each particular case as to their justifications.
o c. United States v. Topco Associates (1972)
      Facts:
              About 25 small grocery chains collectively created ―Topco‖
                 brand food products.
                           These grocery chains agreed to purchase through
                           The association also assigned each member a territory
                            in which it could sell the Topco brand.
                                o A grocery chain could open additional grocery
                                   stores in other territories, but it could not
                                   market Topco brand products in those other
                           Basically, each member promised to sell Topco brand
                            names in its own area—each member had an exclusive
                            area in which it could market Topco brand products.
          Ruling:
                    Court condemns the agreement under the per se analysis
                           But Prof says that rule of reason should have been
                               o This case has been heavily criticized for failure
                                   to use the rule of reason approach.
                           Reason why rule of reason should have been used:
                               o The restraint seemed to be ancillary
                               o There are potential procompetitive benefits to
                                   the agreement:
                                        The introduction of a new brand to the
                                        Lower costs because of economies of
                                           scale considerations
          If the rule of reason approach was used:
                 We need to ask the question of whether there was market
                 Also, we need to ask whether or not there is less harmful
                 Some market divisions are nothing more than an alternative to
                  price fixing and is generally illegal per se
                         Other schemes, like Topco, are clearly ancillary to a
                          joint venture with a potential for efficiency
          Bottom line from this case:
               The restraint seemed to be ancillary and there seemed to be
                some procompetitive benefits. As a result, the rule of reason
                should have been used.
o d. Polk Brothers v. Forest City Enterprices (7th Cir. 1985)
      Facts:
             Two companies make an agreement not to market each other‘s
                product since the two companies share the same building
                 This seems to be a product division as opposed to a
                  geographic division
          Ruling:
               The 7th Circuit refused to condemn the agreement and applied a
                  rule of reason analysis
          Rationale:
                 Because the restraint appeared to be ancillary, the rule of
                  reason must be applied
                 Since the rule of reason was applied, we ask whether or not the
                  firms had market power
                         The court here said that the firms lacked anything
                          resembling market power.
                        Also, the court says that the agreement must be looked at from
                          the time that the agreement is formed
                 It seems that this case somewhat overrules the USSCT‘s use of the per
                  se rule in Topco
                        Similarities between here and Topco
                              Both had ancillary restraints
                 The court here moves away from Topco and towards the rule of reason
                  by citing BMI, NCAA cases
   K. Boycotts and Refusals to Deal
       o a. Introduction
                 There are three types of boycotts (handwritten p. 379)
                      1. Competitors agree not to deal with suppliers; competitors
                         agree not to deal with customers
                                Competitors have market power and exercise that
                                 market power to get suppliers to accept competitors‘
                                 low price demands
                                Competitors also force customers to deal with high
                        2. Changing the market structure through the group boycott
                                Example: three competitors agree to put pressure on a
                                 supplier to get a supplier not to deal with a fourth
                              Example: three competitors agree to put pressure on
                               customers to get customers not to deal with a fourth
                        3. Competitors binding together to cut off another competitor
                                Example: four competitors that deal with each other,
                                 and three of them bind together to cut the fourth one
                                This seems like an effective way to enforce price
                 Most of the time, concerted refusal to deal, even though involving
                  competitors, are analyzed under the rule of reason.
              Remember that this does not make them legal, just that they are
               not illegal per se.
             Boycotts that are naked, however, are analyzed under per se
o b. Development of a per se analysis: Collective agreements aimed at
      1. Eastern States Retail Lumber Dealers‘ Association v. United States
             Facts
                           The agreement here was one that was among lumber
                            retailers to identify lumber wholesalers who were
                            dealing directly with consumers.
                           If a wholesaler was found to be retailing directly, the
                            wholesaler‘s name was put on a ―blacklist‖ and the
                            retailers refused to purchase whole sale from him.
                           This seems to put the agreement into the third category
                            (listed above)
                 Ruling:
                        The court struck down this agreement based on the per
                         se approach
                 Rationale
                           There seems to be two different motives as to why the
                            retailers would engage in such an agreement:
                                o 1. Price fixing
                                         That is, the agreement may have been an
                                           effort by a cartel to prevent erosion of its
                                           dominant position in the market
                                o 2. The directly retailing wholesaler might be
                                   more efficient than the others. As a result, the
                                   agreement might have been a way to make entry
                                   into the market more difficult.
                           Bottom line: In cases where there is no plausible
                            argument that a concerted refusal produces
                            efficiencies, and where the only apparent purpose is
                            the facilitation of cartelization or preotection from
                                       new entry, application of the per se rule is
                              Interesting question:
                                      How would this case turn out under Matsushita?
                       2. Klor‘s, Inc. v. Broadway-Hale Stores, Inc. (1959)
                            Facts:
                                       claimed that a larger competitor had an agreement
                                       with distributors that told the distributors not to deal
                                       with .
                                       alleged that the larger competitor was using its
                                       monopolistic buyer power to force the manufacturers to
                                       stop dealing with it.
                                   This seems to be situation 2 (described above)
                              Ruling:
                                      Court said that the  should be entitlted to prove its
                                       case of conspiracy—that is, the court adopted a per se
                                       rule by concluding that the ‘s simple allegation of a
                                       concerted refusal was sufficient to withstand a motion
                                     for summary judgment, even though the plaintiff had
                                     not alleged any injury to the public in the form of
                                     reduced output or higher prices.
             o c. Industry Self-Regulation and Disciplinary Actions
                    1. Northwest Wholesale Stationers, Inc. v. Pacific Stationery &
                      Printing Co. (1985)
                           Court here held that even unexplained explusion of a member
                              would qualify for rule of reason treatment if the defendant
                               association guilty of the expulsion had no market power.
                                      If the association had a dominant position (i.e. market
                                       power), then the per se rule might apply.

IV. Monopoly Structure, Power and Conduct
         A. The Problem of Monopoly
             o a. Introduction
                     Monopolies are not always bad
          Sometimes monopolies are viewed as the most efficient way to
           serve the public (electric power, for example)
                  This is an example of a natural monopoly:
                       o The most efficient size of a plant will satisfy
                           100% or more of the entire profitable demand in
                           that market
   Most of the time, however, monopolies are seen as bad
       Reasons why:
                  Noneconomic reasons:
                      o There is a tendency of monopolies to
                        concentrate large amounts of power in the hands
                        of a few private owners
                      o Also, monopolies transfer wealth away from
                        consumers (who pay more for monopolized
                        products) and towards monopoly producers
                        (who are able to charge monopoly prices).
                  Economic reasons:
                      o Monopolies have a tendency to cause
                         inefficiencies in the production and distribution
                          of goods and services.
                                 These inefficiencies result from two
                                 aspects of monopoly power: (1)
                                 monopoly pricing and (2)
                                 monopolistic conduct
   Look at the graph on the website
          (note that the marginal revenue curve and the marginal
           cost curve intersect at x = Q(monopoly)
          A firm without market power will tend to produce at the point
           where marginal cost = market demand
          A firm with market power, however, will not take the market
           price as given
                 Rather, it will reduce its output to the point at where
                  marginal cost = marginal revenue
          The ―deadweight loss‖ represents resources that are
           misallocated, or wasted because of the monopolization
   A monopoly seems to do two primary things at the same time:
          1. It transfers wealth away from consumers and to the
          2. It causes a certain amount of deadweight loss because of
           inefficient buyer substitutions
          Also, there is a third, social harm
                 Resources of competitors and others, which might be
                  inefficiently lost by the monopolist‘s attempt to attain
                  or retain a dominant position.
   Further concerns with monopolization
        Control over price
          No incentive for innovation
          Social concerns
          Monopoly power is usually characterized as increasing price
           and excluding competition
   Two primary elements of a monopolization claim:
       1. Possession of monopoly power
                  Note that a firm does not need complete control of the
                   market to have monopoly power.
          2. Exclusionary conduct
               The firm must also engage in some unlawful behavior,
                called exclusionary power
   Though monopolies, by themselves, could be illegal under §1, courts
    do not interpret §1 in this way
   Note that a monopoly, by itself, is not illegal
   Ways the measure monopoly power:
        1. Market share information
                  Courts have used this information to try and prove
                   monopoly power
               Monopoly share, by itself, is not enough though.
          2. Ask whether or not Price > Marginal Cost by a significant
                  If this is the case, it could mean that there is some
                   significant monopoly concern
                 It may be difficult, however, to get information about
                  marginal cost.
          3. Elasticity of demand
                       This also is difficult to measure
                       More inelastic, more likely that there is monopoly
         Three step process to determine monopoly concerns
              First:
                     Define what the relevant product market is.
                Second:
                     Define what the relevant geographic market is
                Third:
                       Determine what the firm‟s share of the relevant
                        market is (Firm share divided by market share)
o b. Department of Justice and FTC Guidelines—Market Definition,
  Measurement and Concentration
      §1.0 Overview
                A merger is unlikely to create or enhance market power or to
                 facilitate its exercise unless it significantly increases
                 concentration and results in a concentrated market
                       Mergers that do not significantly increase
                        concentration or do not result in a concentrated
                         market ordinarily require no further analysis
                For each product or service of each merging firm, the he
                 Agency seeks to define a market in which firms could
                 effectively exercise market power if they were able to
                 coordinate their actions.
                Definition of ―market‖
                       A market is defined as:
                           o 1. A product or group of products, AND;
                           o 2. A geographic area in which those products
                              are sold.
                            o These two factors might be established in a way
                              such that a hypothetical profit-maximizing firm,
                              not subject to price regulation, that was the only
                              present and future producer or seller of those
                              products in that area likely would impose at
                               least a small but significant and nontransitory
                    increase in price, assuming the terms of sale of
                    all other products are held constant.
                          The relevant market is a group of
                            products and a geographic area that is
                            no bigger than necessary to satisfy this
   In determining whether a hypothetical monopolist would be in
    a position to exercise market power, it is necessary to evaluate
    the likely demand responses of consumers to a price increase.
          In contrast, where a hypothetical monopolist would
           discriminate in prices charged to different groups of
           buyers, distinguished by their uses or locations (for
           example), the Agency may delineate different relevant
           markets corresponding to each such buyer group.
   Once a relevant market is defined, it must be measured in terms
    of its participants and concentration.
           Participants:
               o Include firms currently producing or selling the
                   market‘s products in the market‘s geographical
               o Also, ―participants‖ may include other firms,
                 depending on their likely supply reposnses to a
                 small but significant and nontransitory price
               o A firm is viewed as aparticipant if, in
                 response to a small but significant but
                 nontransitory price increase, it likely would
                 enter rapidly into production or sale of a
                    market product in the market‟s area without
                        This would occur without significant
                           ―sunk costs‖ of entry and exit.
   If the process of market definition and market measurement
    identifies one or more relevant markets in which the merging
    firms are both participants, then the merger is considered to be
          §1.1 through 1.5 will describe how product and geographic
           markets will be defined and how market shares will be
           calculated and how market concentration will be assessed.
   §1.1 Product Market Definition
         §1.11 General Standards
                 Product market:
                     o A product or group of products such that a
                         hypothetical profit-maximizing firm that was
                         the only present and future seller of those
                         products (aka monopolist) likely would impose
                         at least a small but significant and nontransitory
                         increase in price.
                 Specifically, the Agency will begin with each product
                  (narrowly defined) produced or sold by each merging
                  firm and ask what would happen if a hypothetical
                  monopolist of that product imposed at least a ―small but
                  significant and nontransitory‖ increase in price
                      o If, in response to the price increase, the
                         reduction in sales of the product would be large
                         enough that a hypothetical monopolist would
                         not find it profitable to impose such an increase
                         in price, then the Agency will add to the
                         product group the product that is the next-
                         best substitute for the merging firm‟s
                 The Agency will take the following likely reaction of
                  buyers to a price increase into account:
                     o 1. Evidence that the buyers have shifted or have
                        considered shifting purchases between products
                        in response to relative changes in price or other
                        competitive variables
                      o 2. Evidence that sellers base business decisions
                        on the prospect of buyer substitution between
                        products and in response to relative changes in
                        price or other competitive variables
               o 3. The influence of downstream competition
                 faced by buyers in their output markets; and
               o 4. The timing and costs of switching products.
          What constitutes a ―small but significant and
           nontransitory‖ increase in price will depend on the
           nature of the industry
               o The Agency at times may use a price increase
                   that is larger or smaller than five percent
   §1.12 Product Market Definition in the Presence of Price
          Definition of price discrimination:
              o Charging different buyers different prices for
                   the same product
          Under the above analysis, the assumption is that price
           discrimination would be profitable for a hypothetical
          A different analysis results where price discrimination
           would be profitable for a hypothetical monopolist
              o If a hypothetical monopolist can identify and
                  price differently to those buyers who would not
                  defeat the targeted price increase by substituting
                  to other products in response to a small but
                  significant and nontransitory‖ price increase for
                  the relevant product, and if other buyers likely
                  would not purchase the relevant product and
                  resell to targed buyers, then a hypothetical
                  monopolist would profitably impose a
                  discriminatory price increase on sales to
                  targeted buyers:
                       Then a hypothetical monopolist would
                          profitably impose a discriminatory
                          price increase on sales to targeted
                               This is true regardless of whether
                                  a general increase in price would
                                                   cause such significant
          §1.2 Geographic Market Definition
                §1.21 General Standards
                           In defining the geographic market or markets of a
                                o The Agency will begin with the location of each
                                    merging firm and ask what would happen if a
                                    hypothetical monopolist of the relevant
                                    product at that point imposed at least a
                                    “small but significant and nontransitory”
                                    increase in price.
                                         (incomplete)
          Basically, in summary:
               When the smallest possible market is found, the inquiry stops
               A relevant geographic market is some area in which a firm can
                  increase its price without
                           1. Large number of its customers immediately turning
                            to alternative supply sources outside the area OR
                           2. Producers outside the area quickly flooding the area
                            with substitutes.
                    The best way to assess the size of the geographic market is to
                     look at pricing behavior over a long period of time.
                           If the price in A consistently and quickly rises and falls
                            in response to price changes in Area b, then the two
                            areas should be grouped together in the same market
o c. United States v. Aluminum Co. of America (2nd Cir. 1945)
      Facts:
              ALCOA controlled all production of ingot aluminum in the
                 United States until 1909. Eventually, it averaged over 90%
                 market share.
                           But despite its market power, Alcoa only made a profit
                            of about 10%.
          Ruling:
                     Court said that Alcoa engaged in unlawful monopolization
                Reasoning:
                       The fact that Alcoa is not charging higher prices does not
                        indicate that Alcoa is not repeating benefits from monopoly
                              In other words, even if they are not earning more than a
                               ―fair‖ profit, it doesn‘t mean that they are excused.
                              Alcoa, for example, could just be increasing their costs
                               rather than raising prices
                             Lower prices does not give evidence of lack of
                              monopoly power
                       Two part test applied:
                              1. Did Alcoa possess monopoly power?
                                  o In this case, Alcoa had 90% market share
                                          Court said that this was enough to
                                             characterize a firm as a monopolist
                                                 Court went further to say that:
                                                    (1) it‘s doubtful as to whether 60-
                                                    64% would be enough and (2)
                                                     certainly 33% is not enough (p.
                             2. Did Alcoa engage in exclusionary conduct?
                                  o Court said that Alcoa‘s active expansion along
                                     with the increase in the quantity produced
                                     was the exclusionary practice.
                       What could Alcoa have done to avoid illegality?
                              Not much.
   B. Market Power and the Relevant Market
       o a. The Modern Offense of Monopolization
                The modern test for monopolization (same as above)
                     1. The defendant must have a large amount of market power
                     2. The defendant must have engaged in certain monopolistic,
                       or anticompetitive, acts
          The modern approach says that market share is not the evil that the
           Sherman Act condemns.
               Rather, the evil is that perhaps because it has a large
                percentage, it is able to charge more than a competitive price
                for the monopolized product.
          Market power = the ability to raise price by reducing output.
              Modern approach to measuring market power:
                         Ration of the profit-maximizing price for a seller‘s
                          output to the seller‘s marginal cost at that rate of output.
                             o The reason for this is in perfect competition,
                                prices are drive to marginal cost.
                                     In that case, a seller‘s marginal cost and
                                        its profit maximizing price would be the
                              o Formula: [(P) – (MC)]/(P)]
                                     P = the firm‘s profit-maximizing price,
                                        which we generally assume is the price
                                        that the firm is charging at any given
                                         MC = the firm‘s marginal cost.
                                         If we know a firm‘s marginal cost, then
                                          this formula is easy to use.
                        Large elasticity of demand means that more customers
                         will opt away fwhen the product‘s price goes up, and
                         the less will be the ability of a seller to sell at a
                         supracompetitive level.
o b. United States v. E.I. Du Pont De Nemours & Co. (1956)
      Facts
                  was alleged to have monopolized the market for cellophane.
                  du Pont produced about 75% of the cellophane produced in the
                 du Pont argued that the relevant marked was not cellophane
                  but rather flexible packaging materials which included not
                  only cellophane but also aluminum foil, glassine, pliofilm,
                  greaseproof paper and waxed paper.
             Different wrapping paper had various degrees of acceptance
              among different buyers, and some buyer were far more cost-
              conscious than others.
                    For example, cellophane occupied about 35% of the
                     market for retail meat wrapping and about 50% of the
                     market for retail vegetable wrapping.
                        o By contrast, cellophane only occupied about 7%
                            of the bakery products market.
                        o Cellophane occupied between 75-80% of all
   Ruling:
             First, the Court concluded that the relevant market must
              include products that have reasonable interchangeability
              for the purposes for which they are produced
                    This was the entire market for flexible packaging
                    This view has been largely criticized as the cellophane
             Court concluded that duPont‘s market share was too small to
          warrant a finding that it was a monopolist
   The Cellophane Fallacy
        The Court here, in defining the relevant market, looked at the
          ―fundamental interchangeability‖
                    This is essentially the idea of using the cross-elasticity
                     of demand to determine market power
             The fallacy is that at current market prices, many other
              products were considered substitutes for cellophane
                    This made it appear that competition among these
                     products was strong.
                        o As an example: a small incrase in the price of
                            cellophane would cause a lot of bakers to switch
                            from cellophane to another material.
                    The problem with this approach is the fact that it used
                     current market prices
                            o The current price might already be the
                              monopoly price that the monopolist is
                              already charging.
                                   That is, the monopolist is already
                                     excercising that market power.
                Bottom line: You cannot use the current market prices to
                 evaluate cross elasticity of demand
         Merger guidelines approach might follow the cellophane fallacy:
             Merger guidelines approach:
                       First ask whether a monopolist profitably imposes a
                        small but significant price increase
                            o If yes, then the analysis stops and the market is
                            o If no, include the potential checks to the price
                                increase (such as substitutes)
                This approach might be flawed in potentially following the
                 cellophane fallacy.
o c. Market share as a rough surrogate for market power
      Problem 6.1 p. 629
             How to measure C‘s market share?
                       Total number of sales in the market (3000 gallons)
                           o A sells 500, B sells 500, C sells 2000
                       C‘s Market share is 66.7%
                           o This may raise some monopoly power concerns
                       Another measure
                           o C has 8 pumps out of 20
                                  40% of output
                       Another measure
                           o Look at each pumps capacity
                                  Each pump has 40 cars per pump, each
                                     car filling up 10 gallons
                                          A: 2400
                                          B: 2400
                                          C: 3200
                                  C has 40% of pump capacity (32/80)
                       Defining market share is only a rough surrogate for
                        market power—market share can sometimes be a useful
                        tool for determining market power
                       Note that C has a pump capacity of 3200 gallons while
                        the total sales is 3000 pumps
                            o But also, A and B could supply the entire
                                market without needing C. C does not
                                necessarily have market power to raise price.
                                      C seems to have no market power,
                                         though they may have large percentages
                                       of market share.
o d. Eastman Kodak Co. v. Image Technical Services, Inc. (1992)
      Facts:
             Kodak sold photocopiers in competition with several other
               firms, and had a market share of about 20 to 23%.
                       Note that most courts require market shares far larger
                        than this to support market power claims of any sort,
                        including tying claims.
                This case was a classic example of a ―tying arrangement‖
                       If Manufacturer A and Manufacturer B are seeking the
                        same customer,
                            o A provides both product 1 and product 2
                            o B provides only product 2
                            o Manufacturer A will tie product 1 to product 2
                               in order to lock B out.
                                    The product that the customer really
                                       wants from A is product 1, but A ties
                                        product 1 to product 2.
                The allegation what that Kodak had illegally tied Kodak
                 service to the replacement parts for Kodak machines, and that
                 Kodak was attempting to monopolize the market for its own
                 replacement parts, as well as service.
                       Kodak‘s defense was that, given its competitive
                        position in the primary market, it followed as a matter
                                 of law that Kodak could not have market power in the
                                 market for its replacement parts
                                     o In other words, since Kodak did not have
                                         market power in the equipment market, it could
                                         not have market power in the replacement parts
                                         of those equipments market.
                 Ruling:
                      Court held that manufacturer of photocopiers might hav
                          substantial market power in the market for its own replacement
                 Reasoning:
                      In the original market, Kodak has 20% market share. But in
                        the after markets:
                               Kodak parts market: 80% market share
                               Kodak service markets: 80-95% market share
                        Dissent says that this after markets should not be counted—that
                         is that customers take this into account as a ―package deal‖
                         when purchasing the equipment
                              As a result, this view says that the relevant market share
                               should be 20%.
                        What concerns are there with the after market?
                                One concern is that there may be that there are high
                                 information costs with the original equipment
                                Additionally, there may be high switching costs once
                                 the consumer is locked into the original product
                               These two things indicate that maybe Kodak is
                                exercising more than its 20% of market power.
                        The problem is that when consumers buy the equipment, they
                         may think that they have options as to who to go to for repair.
                         But since Kodak dominates the after market, the consumers‘
                         options are limited
   C. Monopoly Conduct—Barriers to Entry
       o a. United States v. United Shoe Machinery Corp. (1954)
             Facts:
            The defendant obtained a high rate of return from leases of
             machines in which it had no competitors, and a much lower
             rate of return from leases of machines in which competition
             was greater.
                    The defendant supplied about 80% of the machines
                     used to make shoes.
   In this situation, USM did have some monopoly power
         Reasons:
                   The firm is highly innovative
                   The firm has quality service
                The firm has high customer satisfaction
        That is, this firms seems to have earned its monopoly benefits
   This creates a dilemma:
        On one side, we want to keep competitive incentives in place,
             and we do not want to punish a company that achieves a
             monopoly status.
            On the other side, there are problematic effects with allowing a
             monopoly to continue
   Issue:
            When does a company who has earned monopoly power
             fairly cross into illegal monopoly exercise?
                   Court sets forth three approaches to draw this line:
                       o 1. There is a §2 violation if the monopoly was
                           achieved through a §1 violation.
                                 That is, if a dominant firm engaged in
                                    unreasonable restraints of trade
                                    condemned under §1, then the firm
                                    violated §2.
                        o 2. If a firm wins a monopoly without a section
                          violation, then ask:
                               Did the firm use the power or intend to
                                  use the power?
                                       That is, the firm engages in
                                          illegal monopolization when:
                                       (a) it has the power to exclude
                                          competition and
                                     (b) has exercised it or has the
                                     power to exercise it.
                                  In other words—it‘s a violation
                                     of §2 for one to have effective
                                     control of the market to use or
                                     plan to use any exclusionary
                                     practice, even though that
                                     practice is not in violation of §1.
                     o 3. The Alcoa situation:
                           That is, one who acquired an
                                 overwhelming share of the market
                                 ‗monopolizes‘ whenever he does
                                     This is apparently true even if
                                         there is no showing that his
                                          business involves any
                                          exclusionary practices
                                Basically, the only way to escape
                                 illegality in this situation is if the
                                 monopolist shows that they gained the
                                 monopoly through some sort of
                                 legitimate way
                                       (examples such as a superior
                                         product, patent rights, natural
                                         benefits, etc)
                                Enlarging a business, but not doing
                                 anything wrong (like Alcoa) will get you
                                 in trouble.
   Ruling:
        Says that USM is illegal under both approach 2 and approach 3
   Rationale:
        Court said that USM used its leasing arrangements to have a
            substantial market power to exclude.
                 There is a reduced return charge if the lease is kept long
                         Additionally, there are incentives to renew with the
                         The lease required that the machine must be sued to the
                          full capacity
                         Price discrimination across product lines
                         Creating a lease cuts off the secondary market—USM
                          is free from competition in the secondary market
                         Free service
                         Ten year term on the lease
o b. Entry Barriers in Monopolization and Merger Cases
      Even a firm with very large market share cannot earn monopoly
         returns if new firms can easily and quickly begin producing and selling
         the same product.
                 As a result, the successful monopolist must therefore be
                  protected by barriers to entry
          Various definitions for ―barriers to entry‖
               1. Bainian definition:
                        A barrier to entry is some factor in a market that
                         permits incumbent firms to earn monopoly prices (i.e.
                         prices above marginal cost) without attracting new
                 2. Chicago School definition:
                        An entry barrier is a cost of producing (at some rate of
                         output) which must be borne by firms which seek to
                         enter an industry but is not borne by firms already in
                         the industry.
                 Differences between these two definitions:
                         Economies of scale:
                             o Under Bainian defintion, economies of scale are
                                a barrier to entry
                                    This is the case because the fact that the
                                       firms with high outputs have lower costs
                                       than firms with low outputs, and this
                                       tends to discourage entry.
                              o Under Chicago definition, this is not the case
                                               The reason for this is that there is no cost
                                                of entering the market which must be
                                                incurred by new firms that was not
                                                incurred by incumbent firms.
                                               Each of the firms faced the same
                                                situation at the time it entered, so there
                                                are no entry barriers.
                                Another difference
                                    o Bainian view focuses on the market as it exists
                                       and considers whether the incumbents can
                                         charge supracompetitive prices while yet
                                         discouraging entry.
                                     o Chicago school looks at the process by which
                                         firms enter the market, and finds no significant
                                         entry barriers if the process is the same for
                                         newcomers as it was for established firms.
                 High start up costs are not necessarily a significant barrier to entry.
                 Guideline approach to barrier to entry:
                      Extent of probable entry in response to a ―small but significant
                         and nontransitory increase in price.‖
                 It seems as if a barrier to entry must meet three requirements:
                        1. There must be some relatively high cost that the prospective
                         entrant must bear.
                        2. There must be a significant risk of failure
                        3. A significant percentage of these costs must be ―sunk,‖ or
                         unrecoverable, in the even of failure.
   D. Monopoly Conduct—The Problem of Strategic Behavior
       o a. Berkey Photo, Inc. v. Eastman Kodak Co. (2nd Cr. 1979)
             Facts:
                    A ―tie‘in‖ monopolization case
                    Here, there was an R&D joint venture of noncompetitors
                    Kodak and GE jointly developed a flash attachment to go with
                      a new line of cameras developed by Kodak. The parties also
                      agreed not to predisclose details of the new technology to
                    competing camera and flash manufacturers, one of which was
                    the plaintiff.
                   The argument against Kodak was that Kodak was attempting to
                    use its monopoly in the film market to obtain a second
                    dmonopoly in another market (processing market).
                           Also, the fil-processing tie could be seen as raising
                            barriers to entry in the markets for both film and
          Ruling:
               The Court held for Kodak
          Rationale:
               The monopoly that was created will be temporary
          Basic point from this case:
               Product development is treated more leniently by the courts
                  because there is a policy interest in encouraging such
                       The type of short term monopoly in this case was
                       allowed for this reason.
o b. California Computer Products v. IBM Corp. (9th Cir. 1979)
          Facts:
               A ―tie-in monopolization‖ case
               IBM was accused of replacing older computers which had
                  externally attached memory devices with a new generation of
                  computers containing internal memory devices.
               The result greatly injured independent manufacturers of
                  memory devices, who formally had been able to sell their own
                  devices for attachment to IBM computers.
               Basically, IBM had manufactured central processing computer
                    unis and various peripherals such as memories, monitors, and
                            manufactured only disk drives, a type of memory
                            introduced a new line of compters in which the
                            memory and central processing units were assembled in
                            the same box and sold as a single product.
          Issue:
                    Should the development of a new product that eliminates the
                     market for some existing product manufactured by a
                     competitor ever be illegal monopolization?
              No.
       It seems like the Court is saying that intent isn‘t usually regarded in
        R&D situations.
o c. LePage‘s, Inc. v. 3M Corp. (3rd Cir. 2003) (?)
       Facts:
                     offered numerous office supply products and aggregated its
                     discounts across packages of products, such as aggregate
                     purchases of tape, staples, and post-it notes in a one yaer
                offered rebates to prevent people from going to 
                only made tape.
          Ruling:
                was in violation of §2 of Sherman Act
          Reasoning:
               3M‘s bundling of its products via its rebate programs
                reinforced the exclusionary effect of those programs.
o d. Aspen Skiing Co. v. Aspen Highlands Skiing Corp. (1985)
      As a general rule:
                 No firm, not even a monopolist, has a duty to deal with a
          This case, however, says a little bit to the contrary.
          Facts:
                    Case involved a unilateral refusal to deal
                          As opposed to a concerted refusal to deal under §1
                    Here, the monopolist refused to participate in the sale of joint
                     ski slope lift tickets with a competitor.
                            This changed an existing distribution pattern to the
                             detriment of the competitor.
                    Participation would have been profitable to both the
                     monopolist and the competitor.
          Ruling:
          Court held that a monopolist‘s refusal to participate in a joint
           ticket-selling venture with a competitor could be considered by
           the jury as evidence of the monopolist‘s intent to exclude
           competiton by improper means.
   Limitations:
          There are three ways to limit this case on its face
                  1. Here, there was a preexisiting voluntary agreement
                      o This proves that the deal is possible and that it
                      o This also proves that the deal provides benefits
                        to the firms involved
                      o This also shows that there has been reliance by
                      o According to this case, you may want to prove
                        this before condemning a firm with market
                  2. By breaking the deal, you would have to prove that
                   you make the customers wourse off
                  3. Idea that you have to prove that there is no
                   legitimate business reason for entering into the
                       o This shows that the firm with market power is
                          acting with anticompetitive purposes
                       o If the firm is acting with a legitimate business
                        reason, then you do not want to condemn a
                      o One possible legitimate business reason here
                        might have been to get rid of the possible free
                          rider problem if Aspen does deal
                               Also, Aspen may decide that association
                                  would damage Aspen‘s name
                                       Bottom line: it is difficult to
                                         determine what the standard of
                                         legitimacy is.
   Alternate doctrine:
          The essentially facilities doctrine:
                                 In short, this doctrine makes it illegal for the person
                                 operating a properly defined essential facility to deny
                                 access to someone else.
                                But the courts are confused as to what defines an
                                 essential facility
                                Basically, there seems to be three factors:
                                    o 1. The facility is essential to the plaintiff‘s
                                        competitive survival;
                                    o 2. The facility cannot practically be duplicated;
                                    o 3. The facility can be used by the plaintiff
                                      without interference with the defendant‘s use.
                                    o Courts have also held that an additional factor
                                      might be necessary: in order to show a duty to
                                      share an essential facility, the plaintiff must
                                      show that the defendant’s denial was ant
                                      competitively motivated, or that competition
                                      would be improved if access was granted.
                                Also facility could also be ―essential‖ under the
                                 doctrine if:
                                    o 1. The facility is owned or somehow subsidized
                                      by the government OR
                                    o 2. The controller of the essential facility is a
                                      public utility with an exclusive right created by
                                      the government.
   E. The Offense of Attempt to Monopolize
       o a. Introduction
                 The offense of attempt to monopolize is explicit in §2 of the Sherman
                  Act, which condemns every person who shall monopolize or attempt
                to monopolize.
                     So what does attempt means?
       o b. Spectrum Sports, Inc. v. McQuillan (1993)
             Facts:
                     McQuillan was a distributor of athletic and equestrian
                      products. The manufacturer notified McQuillian that
                      McQuillan had to sell its athletic distributorship to maintain its
                      equestrian distribution rights.
         McQuillan refused and was terminated.
   Issue:
         May parties be held liable for attempted monpolization under
            §2 without proof of a dangerous probability that they would
            monopolize a relevant market?
   Ruling:
           The Court affirmed the traditional view that:
                  1. A dangerous probability of success must be
                   established in any attempt to monopolize case AND
                  2. This requires a definition of a relevant produce and
                   geographic market in which the attempt is likely to
   Rule:
           Three elements to find a violation of § 2 for attempts to
                  1. Specific intent to monopolize
                      o Why isn‘t this just enough?
                               The intent, itself, might not be harmful
                                  by itself
                                 If this was the only thing required, it
                                  would chill competitions
                  2. Actual predatory or anticompetitive conduct
                  3. Dangerous probability of achieving monopoly
                      o USSCT has said that this is an independent
                         element from the above two.
                      o THIS IS THE FIRST QUESTION THAT IS
                         ASKED IN ―ATTEMPT TO MONOPOLIZE‖
                          CASES—threshold question
                       o Basic rules of thumb:
                             1. Less than 30% market share:
                                     Courts will reject the ―attempts
                                        to monopolization‖ argument
                             2. 30-50%--Courts will reject unless the
                                  conduct is likely to produce a
                                                3. 50-100% of the market:
                                                        Courts say that there is a
                                                         dangerous probability and the
                                                         court will sustain a claim for
                                                         attempt to monopolize if the
                                                         other two factors are also met.
                                 Reason why all three are required:
                                     o It seems like some competitive benefit can
                                        result if none, only one, or only two are met
   F. Predatory Pricing: Structural Prerequisites
       o a. Introduction
               Definition of predatory pricing
                       Predatory pricing is the offense of driving rivals out of business
                          by selling products at less than their cost, with the expectation
                          of chargin monopoly price in the fugure when the rivals have
                          either left the market or have been coerced into raising their
                          own prices.
       o b. Brooke Group Ltd. v. Brown & Williamson Tobacco Corp. (1993)
               Facts:
                         Highly concentrated cigarette industry, where six firms
                          dominate the market
                         Philip Morris had a 40% share; R.J. Reynolds had about 28%;
                          Brown & Williamson had about 12%.
                         ‘s had about 2.3% share. Later  cut its prics
                         B&W () responded by cutting its prices below its average
                          variable cost.
                                 Purpose seemed to be to get the  to raise their prices
                                  back to oligopoly levels.
                        sued .
                  Ruling:
                       Court found that price discrimination was not illegal when
                           there is no proof that the competitor had reasonable prospect of
                           recouping its investment
                  Reasoning:
                         §2 of Sherman Act could not be implicated because of the
                          lack of market power
                 Rule from this case:
                        Two elements are needed to prove a predatory pricing
                                1. Prices have to be below cost
                                    o But the court doesn‘t set a bench mark for
                                        measuring ―cost‖
                                2. Recoupment element
                                    o The  could reasonably anticipate recouping the
                                       loss that they would sustain from the first
                                     o That is, it makes economic sense for the  to
                                       do this
                        Here, the  fails to meet part 2 of this test:
                              Reason:
                                      o Court says that  would be unreasonable to
                                          think that they could later charge higher prices.
                 Though the Court reject‘s plaintiff‘s argument in this case, the Court
                  does so b/c of the particularity of this market.
                      This claim could work in other types of markets:
                                Example: If there is evidence of there being a tacit
                                 agreement, then in this context, the claim might work
                                     o The reason for this is because the tacit
                                       agreement would try to serve as a way to
                                       discipline those who break the agreement
   G. Predatory Pricing: Identifying the Predatory Price
       o a. Framework
               What‘s the difference between showing attempt to monopolize versus
                  having to show actual monopolization
                        Frameworks:
                                For monopolization, you need to show:
                                    o 1. Market power
                                    o 2. Anticompetitive action
                                    o 3. General intent to act
                                     o General intent to engaged in an act that is
                                       anticompetitive/exclusionary, and you need
                                       market power.
          For attempt to monopolize, you need to show:
               o 1. A dangerous probability of success—look at
                   market power
               o 2. Anticompetitive action
               o 3. Specific intent to monopolize
   Differences:
          Level of intent required
          The level of market power
              o Attempt to monopolize  need more than 50%
              o Actual monopolization  might need
                 something larger
                      One problem with just looking at market
                        share is that when market share is larger,
                        say something like 75%, the two causes
                        of action seem to collapse together
   Framework for predatory pricing
          1. The defendant must believe that the price can be cut
           below some measure to drive away competitors
          2. The defendant must believe that they can recoup lost
           profits and probably more before new entry occurs
          Schematically for predatory pricing:
              o Timeline from beginning to end:
                      First period: predatory period
                      Second period: Drive out competition
                              Example—take a loss of $1M
                      Third period: recoupment period
                              Example—make a profit of
   Problems with going all out after predatory pricing:
          Going all out may chill competition that occurs with
           firms lowering prices to get customers
          In light of this dilemma, how do you determine if a
           price is predatory?
                o In Brooke case:
                         Court says that below cost pricing is the
                          bench mark:
                          For a monopoly market, the
                           benchmark is: if price > marginal
                        For predatory pricing, the
                           benchmark is: if price <
                           marginal cost
                  Remember that if a profit is zero or
                   greater, a firm can survive
                        It is irrational to price below
                           marginal cost because it costs
                          you more to make it.
   Determining cost:
       o It is very difficult to determine marginal cost
       o Instead, courts use average variable costs as a
              Average variable cost = total variable
                 cost / quantity
              total variable cost = total fixed cost +
                 total variable cost
       o Areeda-Turner test for predatory pricing:
             Per se legal: Price > ATC
                     ATC = TC / Q
             Presumptively legal: P > AVC
             Presumptively illegal under §2 of
                Sherman Act: P < AVC
       o Why is AVC a problematic standard to measure
         marginal cost?
             Figure 2 p. 782 CB
                      At higher quantities, the MC and
                       AVC curves depart
       o 9 Circuit approach: (p. 778)
              Even if P > ATC, this might be
               problematic (that is, not per se legal)
               [presumptively legal]
              If ATC < P < AVC, this is
               presumptively legal
                                 If P < AVC, this is presumptively illegal
   Thing to note:
        We are looking for a predatory intent in predatory pricing case.
                 If there is a rational business intent, then the court will
                  generally allow it
                       o Courts defer largely to there being a rationale
                          business intent.
          Also, AVC may not be a good measure of actual costs.
11/1/2007 9:56:00 PM
11/1/2007 9:56:00 PM

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