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ANTITRUST LAW OUTLINE
Fall 2006
I. COMPETITION AS AN ECONOMIC MODEL
Summary: Competition as an ideal
1.
Efficiency: -- chief economic value of competition – allows the optimal allocation of society’s resources
according to consumer demand. Also, competition is considered a stimulus to efficiency – it leads to a large # of
economic units, which is favored by many for noneconomic values such as individual liberty and local control of
businesses, which could be usurped by concentrated industries and huge corporations.
2.
Innovation and Stability: it’s controversial. Some economists argue that some degree of monopoly is more
conducive to innovation than competition (ex. patent law).
3.
Equity and Fairness: the ideal of market economy is that consumers can purchase goods and services at prices
equal to the cost of their production, that the quality and quantity of products offered for sale will reflect consumers’
preferences, and that people will have economic opportunities to enter an industry if they choose. These are
achieved in an economic system where power is diffused among many producers and consumers.
A. Basic Economic Analysis
1.
Demand: quantity of a particular good consumers are willing to buy at each respective price.
a. Factors that influence demand:
i. Consumer tastes
ii. Income of consumers
iii. Price of other goods and services
b. Goods, services used to produce other goods, services – principal factors determining D for goods or
services used in the production of other goods or services would include: D for final good or service,
productivity of the good or service in making the final product, and the productivity and cost of other
goods or services that could be substituted for the good or service in question.
c. Slope of D curve – downward, b/c the higher the price, the lower the smaller the quantity.
d. Industry demand – the Sum of demands for goods or services of all the individual firms in any industry.
2.
Elasticity of Demand: measure of the responsiveness of the amount of goods demanded to changes in the price
of the good or service. Price elasticity of D is defined as: “% change in quantity taken, divided by the % change in
price, when the price change is small.” If elasticity is negative it means that a price increase causes a decrease in
quantity demanded.
a. Factors determining elasticity:
i. Availability of close substitutes for the goods or services
ii. # and variety of uses to which the good or service can be put, and
iii. the price of the good or service relative to the buyer’s income.
b. Elastic v. inelastic – elastic = when a small change in price causes a large change in quantity demanded.
Inelastic = when quantity demanded is unresponsive to price changes.
3.
Cross-elasticity of demand: measures the relation of demand for two different goods or services. Defined as:
% change in the quantity of the given product taken by buyers, divided by the % change in price of another
product.
a. Positive or negative cross-elasticity – positive when two goods are substituted for each-other (Ex. butter
and margarine). Negative – when two goods complement each other (ex. autos and tires. Decrease in the
price of cars will probably cause an increase in the number of tires demanded).
b. Distinct products or markets – two products with very high cross elasticities of D are apt to be
considered such close substitutes as to be in fact the same “product” for all practical purposes.
i. Criticism: in determining the relevant market, it must be remembered that cross
elasticities may and do vary at different prices for the product. At a given price, the crosselasticity of demand b/w cellophane and other wrapping material might be quite high; but at
lower prices, the cross-elasticity could be quite low, indicating that the relevant market might in
fact be just cellophane, instead of all flexible wrapping paper.
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4.
5.
Cost Concepts
a. Opportunity cost – Accountant’s cost – original purchase price less depreciation over time.
Economist’s – cost is the equal to the value of resources if they were consumed in their best alternative
use, i.e. opportunity costs which include the cost of capital invested by a firm, since the capital could have
earned interest if it had been invested elsewhere.
i. Ex. owner of building uses the space for her own clothing store business. But , the owner could
rent the building to a store chain for $1,500. hence, the opportunity cost of the building is $1,500
a month.
ii. Comment: B/c opportunity costs are difficult to assess, courts tend to use accounting costs.
b. Fixed Costs
i. Cannot be varied except over a long period and are relatively independent of the amount of
output. They are spread over the number of output produced, so that as output increases, the
proportion of fixed cost per unit decreases.
1. Ex. investment in the plant, equipment, top management personnel
c. Variable Costs
i. can be varied in a relatively short period of time and are more or less a direct function of the
firm’s output.
1. Ex. costs of materials used, ordinary labor hired, power utilized etc.
d. Average Costs = total cost/quantity of output. Average variable costs (AVC) and average fixed costs.
i. Short-run average cost curve – relates average costs to various levels of output, given the firm’s
scale of plant
1. generally U-shaped – it is inefficient to produce a very small output with a large scale of
plant, so one’s output causes the average cost curve to fall to some point. After that
point, principle of diminishing returns takes effect, when on input is held constant, at
some point the productivity of other inputs will begin to decrease.
ii. Long-run average cost shows the relation b/w average cost and quantity of output over the long
run, in which the firm can vary its plant size.
1. also generally U-shaped, larger scales of plant are, up to a point, more efficient
(economies of scale); while beyond some point, a firm generally suffers administrative
inefficiency and other size problems.
iii. Constant returns – occur where long-run average cost remains constant for all outputs. In this
case, a firm is equally efficient at any size.
iv. The optimal (i.e. most efficient) level of output from a social standpoint would be to have all
firms operating at the lowest point on their long-run average cost curve.
e. Marginal Costs – change in a firm’s total costs for each unit change in output. Depending upon the AVC,
the MC of an additional unit may be greater, less, or the same as that for the preceding unit.
Revenue Concepts
a. Total revenue = Price x Quantity (assuming all output sold at the same price)
b. Average Revenue = total revenue divided by the number of units sold. Thus, average revenue equals
price, and the average revenue curve for a firm is the same as the firm’s demand curve.
c. Marginal Revenue – change in total revenues obtained by selling one additional unit of output. If the
firm faces a perfectly elastic demand curve, it can sell its product at one and only one price – b/c of perfect
competition. In that case, the marginal revenue curve is identical to the average revenue curve. If the DCurve facing the firm is downward sloping, however, marginal revenue is less than average revenue b/c,
in order to sell one more unit of output, the firm has to decrease its price on all units of output.
i. Ex. Widget Co. can sell 50 widgets at $1.50 each, for a total of $75.00. if Widget Co. wants to
sell a 51st widget, it must cut the price to $1.49 not only on the 51st widget but also on the 50
preceding units. Total revenue for 51 widgets is $75.99, thus, the marginal revenue from the 51st
widget is $.99.
B. MARKET STRUCTURES
1.
Generally: market structure is a function of:
a. Number of buyers and sellers
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2.
3.
4.
5.
6.
7.
8.
b. Degree of product differentiation (i.e. whether the products of firms in the industry are basically similar or
different
c. Entry conditions (i.e. how difficult is it to enter the industry as a new enterprise)
Perfect Competition – very large number of sellers. In such a market the individual seller must take the market
price as given – he can sell as much or as little as he likes at that price w/out altering the price. if he raises his price
above the market price, however, he will not be able to sell his goods. Necessary conditions for perfect competition:
a. Sufficient number of sellers (and buyers) so that no one seller (or buyer) can influence the price of what
he buys or sells. (the actual number required for a given market depends on several economic factors)
b. No barriers to entry into the market for new firms
c. A uniform product offered by all sellers
d. All buyers and sellers having perfect knowledge of market conditions (i.e. no buyer will pay more to
buy from one seller than he would have had to pay another, out of ignorance)
i. Comment: no real life perfectly competitive market, just a model to assess actual economic
performance.
Monopoly: market with ony one, or with one large, dominant seller of a product with no very close substitutes.
It can ordinarily exist over a significant period of time only if there are barriers to entry of other firms in the market.
Barriers might be:
a. Legal – patent, franchises, etc
b. Natural – there may be large economies of scale, so that a new firm would need to capture a large share of
the market in order to minimize production costs and compete with the existing firms (scale economy
barriers to entry), or the amount of initial capital necessary to begin production may be prohibitive
(absolute cost barriers).
Oligopoly: market with a small number of sellers – more than one, but few enough so that a single seller can
influence the price of what she sells. For oligopoly to persist over time, there must be barriers to entry of new firms.
Monopolistic Competition: similar to perfect competition but one fact different – the sellers in this market offer
differentiated products. B/c each seller’s product is relatively distinct, buyers may prefer it over others. Thus, the
seller retains some discretion to raise the price w/out losing all his customers.
Monopsony: a monopoly on the buyer’s side of the market; i.e. there is only one buyer (Wal-Mart). Also, there
can be an oligopsony – only a few buyers with some influence over price.
Cartels: they result from an agreement of the firms in an industry to set an agreed price and/or to produce agreed
quantities of output.
Bilateral monopoly: market where a monopolistic seller faces a monopsonistic buyer.
C. FUNCTIONING OF THE PRICE SYSTEM
1.
Three basic functions of Price System
a. Rationing of available goods – when the supply of goods and services is fixed, the price in the system
serves to allocate this supply among consumers and over time, much like an auction. The market clearing
price will be determined by he “forces of supply and demand.”
b. Assigning society’s limited resources to production of goods and services most desired by
consumers -- if consumers desire a certain product, they will bid up the price for it, which in turn
increases profitability of producing the product, causing more resources to be devoted to such production.
The desirable end result is that it becomes equally profitable to make all goods and services in the
economy; if one product is more profitable to make than another, more resources will be devoted to that
product.
c. Distributing scarce economic goods and services among members of society – price system
determines how much income people will receive through the prices paid to factors of production, i.e.
labor, land, and capital. The price system also determines how much that money income will purchase in
consumer markets. The concept of equity implies that prices paid by consumers to producers should just
cover the costs of producing economic goods and services. If prices are too high – if they exceed costs –
the effect is to transfer income from consumers to producers.
2.
Effect of Market Structure on Functioning of the Price System: under all market structures, fist basic function
of the price system is achieved equally well. For the second and third functions, market structure becomes crucial.
a. Under perfect competition: if perfect competition prevails, society’s resources will be optimally
allocated, and prices will comply with the economic standards of equity.
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i. Profits – any firm will maximize its profits by producing that quantity at which marginal costs
equals marginal revenue. Since the marginal cost is usually rising, a firm will produce up to – but
not beyond – the pint where producing an extra unit adds more (or at least as much) to revenue
than it adds to cost.
ii. Output – since a firm under perfect competition can sell as much or as little of its product as
desired at the given market price (i.e. marginal revenue equals the price), the firm will producee
the output at which marginal cost equals the price.
iii. New firms – if firms in the industry are making profit (i.e. if the price exceeds average cost), then
other firms will be induced to enter (the allocating function of the price system). This will
increase the amount sellers are willing to supply and drive the market price to the point where
price equals average cost.
iv. Optimal resource allocation – society’s resources are said to be optimally allocated in perfect
competition b/c the value of the goods will equal the marginal cost of the goods. Society would
not be better off by devoting more resources to the production of the goods, since the cost of
producing another unit (the marginal cost) would exceed the value (the price).
v. Result – in a competitive equilibrium, firms in an industry are charging prices exactly equal to
the cost of production, including a normal or “fair” rate of profit. Hence the consumers are
paying no more for the goods than they are worth. This concept of economic equity or fairness is
based upon a price theory of value.
b. Under Monopoly: if the society’s goods are produced under monopoly conditions, resources will not be
optimally allocated. With an unchecked monopoly, too few of society’s resources will be devoted to
producing that particular good.
i. Restricted output – monopolist restricts output b/c he faces a falling marginal revenue curve: to
sell more output, he must drop his price to all buyers in the market.
ii. Profits – monopolist maximizes profit by selling that quantity at which marginal cost is exactly
equal to marginal revenue. If the monopolist sold less, the marginal revenue from selling one
more unit would be greater than the marginal cost of producing that extra unit.
iii. Pricing – for any given quantity the price is determined by the demand or average revenue curve.
iv. Poor Resource allocation – society’s scarce resources are not optimally allocated in this case,
b/c the price of the good exceeds the marginal cost of producing it. society would be better off it
if devoted more resources to the production of the good, up to the optimal point, which is the
competitive result. monopolist harms society in two ways:
1. charging prices that are too high and
2. producing too little output.
v. Result -- b/c the monopoly profit-maximizing price is greater than the long-run average cost of
production, the monopolist earns excess profits, thereby effectively transferring income from
consumers of the product to the producer. In the competitive result, the price is equal to the
average cost, so that firms in the industry earn only a normal rate of profit, and consumers pay
only what the product is worth.
c. Under Cartels: depending on the agreement, a cartelized industry can behave just like a monopolist in
restricting output and misallocating resources. In some respects a monopoly can be better than a cartel,
b/c a monopoly can take advantage of economies of scale.
i. Note: members of cartel have an incentive to cheat by cutting their prices and expanding output.
If only one member of a cartel cheats, it can capture a greater shared of the market while
maintaining a price above the competitive level. If all the cartel members cheat by expanding
output, the industry price will fall toward the competitive price.
d. Under Oligopoly – each firm in considering the consequences of the proposed action must take into
account the reactions of other firms in the industry. In general, however, it is thought that oligopoly tends
to result in restricted output (though to a lesser extent than in a monopoly situation).
i. Price rigidity – one possible assumption about the behavior of oligopolists is that a firm’s
competitors will immediately meet any price cut by that firm but will not necessarily follow a
price increase. The principal characteristic of oligopolistic behavior under this assumption is
price rigidity: firms are hesitant to lower or raise prices, and even increases or decreases in cost
may not result in a change in price.
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ii. Price Leadership -- firms in the industry will tacitly follow the price movements of the leader
firm (which is usually the largest in the industry). This assumption is also frequently borne out in
the actual behavior of certain oligopolistic industries.
iii. Result – oligopolists who sell differentiated products tend to compete on the basis of product
changes, improvements, and advertising, rather than on price. as a consequence of this nonprice
competition, consumers may have to pay higher prices to cover the costs of excessive advertising,
style changes, etc.
e. Under Monopsony – generally occurs where one firm producing a final product is the sole buyer of an
item used in the manufacture of the final product. In this case, the monopsony will result in
underutilization of the monopsonized input and a corresponding restriction of output in the final product.
i. Inputs: monopsonist cannot buy as much of the input as she desires at a constant price b/c she
faces the entire supply curve for the product (which is rising); i.e. the more of the input she buys,
the higher the price she must pay for all inputs.
ii. Profits: it will maximize her profit by using the monopsonized input up to the point where the
marginal cost of the input equals the marginal revenue product of that input.
1. note: marginal revenue product is a function of the productivity of the input in
producing the final output and the value of that output (i.e. the price, if the monopsonist
sells competitively; or the marginal revenue, if she sells monolistically).
iii. Results: monopsonized input is underutilized b/c the price of the input is less than its value in
producing the final product (marginal revenue product). Monopsonly thus results in
underutilization of the monopsonized input, overutilization of other inputs, and restrictions of
output of the final product.
iv. Comment: one important type of monopsony power is that of employers in the market for labor
since in many localities there is only one or a few major employers. Labor unions have been
exempted from the A-T laws so that workers can organize to bargain collectively with their
employer, creating a form of countervailing market power.
II. HORIZONTAL RESTRAINTS – COLLABORATION AMONG COMPETITORS
A. INTRODUCTION
1.
Overview: Section 1 of Sherman Act has been applied by the S.Ct. to prohibit agreements that unreasonably
restrain trade.
a. PS unlawful:
i. price fixing,
ii. market allocations, and
iii. group boycotts.
1. Under this approach the courts limit inquiry into the subjective intent of the parties,
relevant markets, market power, on the theory that some agreements are so objectionable
and so lacking in competitive justification that they must be eliminated.
b. RoR:
i. joint ventures,
ii. trade associations,
1. are evaluated under the totality of circumstances b/c their effects are more ambiguous on
the market.
2.
Horizontal Restraints – primary concern of A-T to preserve competition and promote competition among firms
in the same industry.
a. Necessity of agreement – unilateral action does not violate Section 1
b. Basic Elements of a Section 1 Claim:
i. An agreement or concerted action
ii. That unreasonably restrains trade and (either PS or RoR)
iii. That has an effect on interstate commerce
3.
Rule of Reason v. PS violations
a. RoR test – only agreements that unreasonably restrain trade (Standard Oil)
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4.
5.
6.
i. Rationale: an all inclusive application would make it unworkable b/c it would outlaw many
business behaviors that are socially and economically beneficial.
ii. Effect: acknowledges that there’s a range of economic effects that may result from different
kinds of restraints in different market structure, thus RoR requires a case by case analysis.
iii. Does not permit a broad inquiry that would balance anticompetitive effects of an agreement
against its alleged social or political benefits. Inquiry: is the challenged agreement one that
promotes or one that suppresses competition.
1. Ex. Engineers – Ds argued that the otherwise anticompetitive bidding rules should be
saved b/c they were designed to ensure public safety. Held: once an agreement has been
found to have substantial anticompetitive effects, Ds cannot defend by acknowledging the
restraint on competition and then arguing that public safety or some other social benefit
is served by the agreement.
iv. Factors considered: to measure and evaluate a challenged restraint’s impact on competition,
courts will consider: the structure of the industry, facts peculiar to the firm’s operation in the
industry (including firm’s power and position), history and duration of the restraint, reasons why
the restraint was adopted, and the effects on the competitive market, including price output.
(CBT & Engineers).
1. Note: many RoR cases do not seem to analyze a firm’s market power carefully and
expressly.
PS Violations
a. Certain types of business agreements, are violation as a matter of law
i. Rationale: certain agreements almost always result in substantial restraint of trade w/out any
redeeming procompetitive effect.
ii. Effect: shorter trials and bright-line standards are given to the businesses.
iii. Application: only after considerable experience with certain business relationships do courts
characterize them as PS violations. (Topco).
Problems of Characterization – important step to determine whether PS or RoR applies.
a. PS category
i. First step should be to determine whether CONDUCT OR EFFECT fits w/in a recognized PS
category. If so, then the category needs not go any further.
1. Ex. Two competitors agreed to allocate the Georgia bar review course market
exclusively to one of them. Held: PS illegal; anticompetitive effect of the arrangement
clear from the fact that the price for the review course jumped from $150 to $400 after
the agreement.
a. NOTE: NCAA – in addressing plan to limit the # of intercollegiate football
games, the S.Ct. observed that the plan constituted horizontal price fixing
and output limitation, which would be illegal PS. However, the Court
reasoned that the horizontal restraints were necessary to even have the “product”
of college football, and the Court applied the RoR analysis to determine that plan
violated Section 1.
b. RoR Category
i. If the purpose or effect is unclear, or the D is able to make a plausible argument that the
agreement or conduct (i) enhances the market by making it More Competitive or (ii) increases
efficiency through integration,
a. then a RoR analysis should be conducted, balancing the anticompetitive harms
and the procompetitive benefits.
2. Ex. BMI -- practice could not be characterized as price fixing b/c courts had little
experience with this type of marketing, and because the ASCAP blanket scheme
arguably created efficiencies through integration, the RoR analysis should be applied.
Quick-Look RoR
a. Intermediate standard. Applied when PS condemnation is inapproapriate but where no elaborate
industry analysis is required to demonstrate the anticompetitive character of an inherently suspect
restraint.
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i. Note: courts will not employ Q-L if the D has a plausible pro-competitive justification (see
Brown) for their concerted action. Court held that a dental association’s rule requiring several
disclosures if a dentist wanted to advertise a price discount should not be condemned under Q-L
b/c although the rule could possibly have anticompetitive effects, it could also enhance
competition by eliminating deceptive advertising.
b. Effects: b/c court must decide in each case whether to apply PS or RoR, Ds almost always will have
some opportunity to argue that the restraint is pro-competitive.
Summary: Modes of analysis for Horizontal Restraints
Analysis
PS violation
Restraints
(a) Price fixing
(b) Output restrictions
(c) Market divisions
(d) Some group boycotts
(a) Agreements that facially restrain competition
(b) Some group boycotts
(a) All horizontal agreements that do not fall in any of the
above categories
Q-L test
RoR Test
B. PRICE FIXING AMONG COMPETITORS
1.
PS Violations: any combination or agreement b/w competitors, formed for the purpose and with the effect of
raising, depressing, fixing, pegging, or stabilizing price of a commodity in interstate or foreign commerce, is PS
illegal.
a. Ex. Socony Oil – to avoid temporary depressions in gasoline prices caused by over supply, major oil
companies agreed to purchase surplus gasoline from independent refiners who lacked storage facilities;
such agreement was illegal PS as a price fixing conspiracy.
b. No justification that there are some economic benefits are permitted. They are all banned b/c of their
actual or potential threat to the central nervous system of the economy. Socony. This rule has
consistently been applied to reject noneconomic justifications for price fixing.
i. Ex. not a defense that the price fixed was actually a “reasonable” price. Addyston Pipe; Trenton
Potteries.
ii. Ex. not a defense that the purpose of the price fixing was to end “ruinous competition” in the
marketplace, or to eliminate iinstability of prices which plagued both producers and consumers.
Socony.
iii. Ex. No 1st Amendment protection in a price fixing boycott. Where attorneys who had accepted
court appointments to represent indigent Ds, refused to accept new appointments to increase fees,
such conduct violated section 1. The first Amendment offered no protection b/c the purpose of
the boycott was to fain an economic advantage for the participants.
1. NOTE: it’s immaterial that adherence to the fixed price schedule was not
mandatory and that no penalties were imposed for deviation therefrom.
2.
Exceptions—Making a Market More Competitive: if a credible argument can be made that an agreement has
the purpose and effect of making a market function more competitively or of creating integrative efficiencies, the
effect on prices may be viewed as an ancillary restraint and subject to a rule of reason analysis. Some
commentators have rationalized CBT and Appalachian in this manner.
a. Ex. BMI and NCAA cast doubt upon the breadth of Socony test. The restraints in BMI and NCAA were
both formed for the purpose and with the effect of raising or stabilizing prices. The S.Ct. applied the RoR
to both cases, striking down the NCAA and leaving the BMI intact. In Brown, Court of Appeals reversed
a lower court’s application of “Q-L” rule of reason test to an agreement among colleges to make uniform
determinations as to the amount of financial aid and scholarships to be available to particular students
(PS restraint). Citing public interest in the furtherance of higher education and several procompetitive
justifications for the practice offered by the Ds the court held the case required full RoR scrutiny.
Exam Tip:
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If facts trigger this exception, doesn’t mean that the D has beat the antitrust trap, merely means that the rather
than finding a PS violation, the court will analyze the facts under the RoR, and depending on the results of that
analysis, the agreement may be allowed or struck down.
3.
Exception for Regulated industries
a. Businesses that have government-regulated prices may be allowed to fix prices or rates w/out violating AT laws if the appropriate governmental agency has determined that the rates are in the “public interest.”
4.
Evidence of Unlawful Purpose or Anticompetitive Effect Sufficient: violation can be established by proof of
either (1) an unlawful purpose or (2) an anticompetitive effect. Thus, if the purpose of an agreement is unlawful (to
restrain competition by affecting price), it is not necessary to establish market power to set or influence prices
(Socony).
5.
What Constitutes Price Fixing
a. Minimum prices: ex. minimum fee schedule adopted by bar association.
b. Maximum prices: agreement among competitors fixing resale prices for a commodity is just as illegal
as an agreement fixing minimum prices. Even though competitors are free to sell at less than maximum,
presence of maximum price tends to stabilize prices and distort resource allocation.
i. Ex. Maricopa – agreement b/w doctors and insurers fixing maximum prices for the doctor’s
prices – illegal PS.
c. Negotiable list prices: an agreement among auto dealers to use common list prices has been held PS
illegal, even though the list price was merely the starting point for customer bargaining.
d. Production limits: agreement b/c competitors on how much they will sell or produce is likewise illegal
price fixing scheme, even though no specific fixed price is agreed upon. NCAA.
e. Purchase Price Limits: agreement among buyers on the price they will offer is illegal PS as a price
fixing scheme, as is an agreement among buyers to limit purchases (so as to depress the market price).
f. Elimination of competitive bidding: although an agreement (including an agreed-upon ethical canon)
does not expressly fix prices or even a specific method of calculating fees, it will nevertheless constitute
price fixing and PS violation of the Sherman Act if it prohibits competitive bidding. Engineers.
g. Elimination of Short Term Credit: concluding that credit terms are an inseparable part of the price of a
product, Court held that an agreement among beer distributors to eliminate free short term credit on sales
to retailers was tantamount to an agreement to eliminate discounts, and thus falls squarely w/in the
traditional PS rule against price fixing.
6.
Importance of Initial Characterization: B/c of the strict rules governing price fixing, A-T Ds frequently try to
characterize their agreement as something other than a naked agreement to fix prices so that they can avoid the PS
rule.
C. DIVISION OF MARKETS
1.
PS Violation: any agreement (explicit or tacit) among businesses performing similar services or dealing in
similar products whereby the available market is divided up and each is given a share is illegal PS. Addyston and
Topco.
a. Rationale: an agreement among competitors to divide the market for a particular product gives each an
effective monopoly in his share of the market. Even though other competitive products may be available,
each firm has the power to fix prices etc.., as to a particular product.
2.
No Justification Permitted
a. Similar to price fixing, no justifications of defenses are recognized. In Topco – immaterial that the
purpose of the territorial market division was to enable small grocers to compete with supermarket chains.
i. Note: criticized b/c Court failed to balance the loss of intrabrand competition (among member
stores who sold Topco brand products) against the gains of increased interbrand competition (b/c
smaller stores selling Topco brand products could better compete against larger grocery chains).
Others have argued that Topco should have been analyzed under the RoR b/c it was in reality a
joint venture with integrative inefficiencies.
ii. Free rider: horizontal market divisions may be justified by the need to prevent “free riding”
among distributors, since free riders take advantage of product advertising and service provided
by other nearby distributors.
3.
Direct or Indirect Divisions: both are illegal
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4.
a. Ex. indirect division – Sealy mattresses were sold only through franchised dealers. However, the
franchises owned and controlled the franchisor, and so they controlled the franchisor’s marketing
operations and were able to divide up the national market for Sealy mattresses as they saw fit.
Type of market divisions: illegal if they divide territories, customers, and/or products.
D. GROUP BOYCOTTS AND CONCERTED REFUSALS TO DEAL
1.
2.
3.
General: individual free to choose with whom to deal, except when such refusal amounts to monopolization or
an attempt to monopolize. When a group of competitors (two or more) agrees not to deal with a person or firm
outside the group, deal only on certain terms, or coerce suppliers or customers not to deal with the boycotted
competitor, there’s a combination in restraint of trade (Klors).
PS vs. RoR
a. PS: # of earlier cases seems to establish the rule that group boycott it’s PS illegal (Klors) and one recent
case seems to reaffirm it. (See FTC v. Superior Court Trial Lawyers Association where the court held the
agreement PS illegal w/out any demonstration that the attorneys had market power)
i. NOTE: courts may hesitate to find a group boycott precisely b/c it’s illegal PS. Ex.
BankAmericard Corp. had a bylaw prohibiting member banks from joining any other national
bank credit card system. Trial court held the bylaw PS violation of section 1. but the appeals
reversed, b/c the bank credit card industry was relatively new and important, and b/c it was
reluctant to find a PS violation on the record presented to it for summary judgment.
ii. NOTE: not PS violation for a single buyer to purchase from one supplier instead of the
preferred supplier’s competitor.
b. RoR: Some early cases rejected the application of PS to group boycotts. Ex. Northwest Wholesale –
unless the P could show the probability of an anticompetitive effect, the challenged practice could not be
classified as PS illegal. No anticompetitive effect unless the cooperative had market power.
i. Comment: Some courts suggest that PS applies when
1. boycotting firm has cut off access to a supply, facility, or market necessary for the
boycotted firm… to compete
2. the boycotting firm possesses a “dominant” position in the market (dominant in this
case is undefined term but it’s chosen to stand for something different from antitrust’s
term of art “monopoly) and
3. the boycott cannot be justified by plausible arguments that it was designed to enhance
overall efficiency.
a. This seems inconsistent with the purpose of PS rule that is to relieve courts of
the burden to determine whether the Ds have market power and whether their
agreement has demonstrable anticompetitive effects. Sum: difficult to predict
whether courts will apply PS or RoR.
c. Quick Look
i. Ex. Indiana Federation of Dentists – agreement by dentists to refuse to submit X-Rays to dental
insurers reviewing their bills. While the court did not apply PS, it did condemn the dentists’
agreement b/c it lacked procompetitive justifications.
Self-Regulation by Industries: wherever industry-wide self-regulation operates as a boycott or unreasonable
restraint, it is unlawful.
a. Ex. FOGA: activities of a trade association of clothing and garment manufacturers in boycotting retailers
who sell cloth or garments involving piracy of design or style were held contrary to the policy of the
Sherman Act. Trade association was attempting to exercise “law enforcement” powers against retailers
who sold pirated designs. Such designs were not protected by © laws and what the association was doing,
was eliminating competition. It was immaterial that the copying might be tortious under state law.
b. Ex. American Medical Association: rules of ethics against salaried practice and prepaid medical care was
held to violate section 1 b/c AMA was not a “law enforcement agency” and cannot “destroy competing
professional or business groups” in the name of self-discipline and control.
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4.
5.
Heavily regulated industries: where the government extensively regulates an industry, courts are more likely to
uphold rules imposed by industry groups or trade associations.
a. Ex. Court refused to invalidate on antitrust grounds the NY Stock Exchange rules limiting membership on
the Exchange. It held that PS rule did not apply to heavily regulated industries such as exchanges.
Political Boycotts: boycotts motivated by political rather than commercial purposes are generally beyond the
reach of the Sherman Act. They may be also protected by First Amendment.
E. JOINT VENTURES BY COMPETITORS
1.
Definition: it is an undertaking by two or more business entities for some limited purpose – something short of a
complete merger or combination – e.g. joint sales agency or joint research.
2.
Unlawful Purpose – Illegal PS: if the purpose of the combination is illegal PS, the joint venture is likewise
illegal PS.
a. Ex. Two daily newspapers in a city formed a jointly managed subsidiary that ran all departments of their
businesses except news and editorials. The subsidiary also set advertising and subscription rates for both
papers. B/c price fixing is illegal PS, so was the J-V.
3.
RoR applied
a. If the purpose and effect of the combination produces plausible integrative efficiencies, the joint
undertaking is judged by the section 1 “RoR.”
i. Note: most J-V are evaluated under a RoR.
b. Test: under RoR, the question is whether the restraint on competition created by the combination is
really necessary to achieve the lawful purpose, or whether there are other means to achieve the
purpose which are less restrictive of competition. This requires the court to balance the anticompetitive
effects of the combination against any legitimate interest to be served thereby.
c. Applications:
i. Joint research: typically analyzed under RoR b/c even though they pose a risk of
anticompetitive behavior, they also promise the possibility of integrative efficiency and added
innovation.
1. ex. Joint research and development venture b/w two competitors in the defense industry
resulted in the production of a new airplane that neither venturer could have produced
alone.
ii. Morgan Case: investment banking firms charged with section 2 conspiracy to monopolize and
section 1 conspiracy to restrain trade. Firms formed syndicates to underwrite corporate securities
offerings, and the syndicates included resale price maintenance agreements and provisions for
stabilizing the prices of the securities during the period of the offering. Held: restraint reasonable
b/c limited in duration and necessary to pool the capital of several firms to undertake the risk of
underwritings.
iii. Distinguish –AP News – 1,200 newspapers belonged to AP. While membership was open to all
newspapers, the veto clause in the bylaws allowed any member to block the membership of a
competing newspaper. Court found that the exclusionary clause was a substantial barrier to entry
of new firms into the newspaper business, and rejected the argument that owners of property are
free to choose their associates.
1. Comment: membership clause had a clearly anticompetitive thrust and was not intended
to protect the newspapers’ investment in the AP.
iv. Ex. Court condemned the joint ownership of movie theaters by production companies b/c each
producer gave the other a preference in the exhibition of movies.
d. Industry structure important: joint activities may have different effects, depending on the structure of a
particular market and its general performance. For example joint activities by large firms in an
oligopolistic market might be viewed as an unreasonable restraint of trade b/c they aggregate significant
power and raise barriers to entry. Different conclusion might be reached if the industry were more
competitive generally and joint venturers comprised only a small share of the overall market.
F. DISSEMINATING INFORMATION AMONG COMPETITORS
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1.
2.
General: b/c data dissemination takes place through trade associations, “agreement” is generally unclear. The
central question is whether the exchange constitutes an unreasonable restraint of trade. When analyzing the
exchange of information, pay attention to:
a. whether the exchange helps perfect the market or creates efficiencies, or whether it facilitates
cartelization and lessens competition.
Exchange of information on prices: very suspect and likely to be held a violation of section 1. factors that
indicate unlawful activities are:
a. Exchange of information about current or future prices (as opposed to past prices)
b. Identification of parties, as well as price, in sales transactions and
c. Highly concentrated or oligopolistic market structure with relatively few cases
i. Ex. American Column – court held unlawful an “open competition plan” of 365 hardwood
manufactures (controlled 1/3 of market) under which members reported the details of individual
sales (including identity of the buyer) and of production, inventories, and current price lists – all
of which were regularly dissiminated. Monthly meetings were held at which estimated future
production and price tends were discussed. At these meetings an expert frequently analyzed the
data and warned against “overproduction.” After the plan was instituted, prices increased
substantially.
ii. Ex. Maple Flooring – association disseminated information on average costs, freight rates, and
the terms of past transactions w/out identifying individual sellers or buyers. Meetings were held
but future prices were never discussed.
1. Analysis: much of the information in the American Column case could only have had an
anticompetitive purpose, while the activities of Maple trade association were evidently
supervised by an astute antitrust lawyer. However, the information on average cost and
freight rate in Maple Flooring arguably was aimed at fixing a uniform marked-up price.
iii. Ex. Container Corp. – Paper box manufacturers who controlled 90% of the market voluntarily
exchanged information on the most recent price charged or quoted to a particular customer. This
exchange had the effect of stabilizing prices, b/c competitors normally would quote that customer
the same price or one slightly lower. Though stopping short of finding this a PS violation, the
court held that the agreement violated section 1 b/c “the inferences are irritable” that the
exchange of information had an anticompetitive effect – price being “too critical, too sensitive a
control…”
1. Comment: in view of the sensitivity of this area, many antitrust lawyers advise their
business clients not to exchange or explain price information with competitors.
Exam tip:
When competitors exchange future price information on an exam, it should be a red flag that section 1 has been
violated. If competitors are exchanging information regarding past transactions or shipping costs, the activity may
well be lawful.
3.
Exchange of information other than price: if the exchange of information is other than price, the courts may
be more lenient. Such practices are usually held to violate section 1 only where aimed at lessening competition,
policing a cartel, or facilitating interdependent pricing.
a. Ex. Cement Manufacturers – court upheld a trade association’s dissemination of information concerning
contractors who abused the free delivery options traditionally given by cement manufacturers to contracts
bidding on construction Ks. Court noted that such information was not designed to lessen competition but
to prevent fraud upon members (i.e. by protecting members from delivering more cement than needed on
a specific job, and thus receiving a lower price).
i. NOTE: where the exchanged info is aimed at suppressing competition, the result will be contra.
The court held unlawful the circulation by an association of retail lumber dealers of the names of
wholesalers who also sold directly to consumers. Court reasoned that a conspiracy not to deal
with such wholesalers could be inferred from the exchange.
G. WHAT CONSTITUTES AN “AGREEMENT, “COMBINATION” OR “CONSPIRACY” AMONG
COMPETITORS.
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1.
2.
General: price fixing, market division, and group boycott are examples of “Ks, combinations, or conspiracies”
The concept of agreement is critical section 1 cases. Sometimes a conspiracy or agreement can be proved by direct
evidence. Direct evidence includes copies of the actual written Ks at issue, videotapes, testimony of witnesses.
Often the evidence is circumstantial and must be inferred. So, important to clarify what is meant by agreement.
Especially true in cases of price leadership or “conscious parallelism” in price or other terms of sale by firms in an
oligopolistic market structure.
Interdependent Conscious Parallelism among Competitors: Ex. Interstate Circuit – large theater chain
simultaneously announced to a group of distributors that it would not deal with any distributor unless the distributor
agreed not to distribute prime films to second-run theaters competing with the exhibitor, except on specified
conditions. Each distributor, knowing that a similar proposition had been made to his competitors, accepted the
exhibitor’s terms. Court found unlawful agreement among competitors.
a. Circumstantial Evidence of Agreement: In Interstate, court stressed the knowledge of distributors
and the motive for concerted action (i.e. each D would benefit by the action only if all the other Ds
participated), the substantial unanimity of the distributors in reaching virtually identical and complex
arrangements with the exhibitor, and the failure of the distributors to testify concerning the presence or
absence of any agreement. Court held that it was enough that knowing that concerted action was
contemplated and invited, the distributors gave their adherence to the scheme and participated in it. Thus,
consciously parallel action that is interdependent may provide the basis for inferring agreement.
i. NOTE: parallel action in Interstate was truly interdependent b/c the benefits of the action accrued
only if all the Ds participated – there was no explanation for a firm taking such actions
independently.
b. Mere Conscious parallelism not sufficient: crucial question is whether the D’s conduct stemmed from
independent decision or from an agreement, tacit or express. To be sure, business behavior is admissible
circumstantial evidence from which the fact finder may infer agreement. But it’s NOT true that proof of
parallel business behavior conclusively establishes agreement.
i. Note: Theater Enterprise -- behavior of each D could be explained on the basis of independent
business judgment.
c. Plus Factors – in addition to conscious parallelism, an A-T P attempting to prove an agreement must also
establish the presence of “Plus Factors,” which provide the basis for inferring that the parallel business
conduct was the result of an agreement. Common plus factors:
i. Communication among Ds
ii. Economic motive for concerted action
iii. Ds acting in contravention of their individual economic interest.
iv. Simultaneous action and radical departure from previous business practices.
Exam Tip:
(1) Was there an agreement?
(2) Was there direct evidence of an agreement?
(3) If so, can state that there is an agreement and move on to the issue of whether it unreasonably restrains trade.
(4) If no direct evidence, then state that fact and consider whether there’s circumstantial evidence from which the
court can infer an agreement – i.e. conscious parallelism and the plus factors.
d. Economic Rationality of the Conspiracy Theory
i. Proving conspiracies with indirect of circumstantial evidence was probably made more difficult
by the S.Ct’s decision in Matsushita Electric Industrial. Court held that for conspiracy charges to
survive motions for summary judgment, alleged conspiracies must make economic sense and
evidence must establish that Ds were not acting independently.
3.
Expanding Concept of “Combination” -- in addition to “Ks” and “conspiracies,” combinations in restraint of
trade violate section 1 of the Sherman Act. For many years it was assumed that “combinations” added nothing to
the scope of section 1, but some cases imply an independent meaning for the term.
a. Ex. acquiescence by a group of retailers to minimum resale prices, where such acquiescence was secured
by the manufacturer’s threats of termination, constituted a “combination” in violation of section 1.
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4.
5.
Intra-Corporate Conspiracy -- generally conspiracies condemned by the antitrust laws are conspiracies b/w or
among separate economic entities. Thus, a corporation cannot conspire with itself or with its employees, nor
can employees or a corporation “conspire with each other” w/out the presence of independent parties.
a. NOTE: anticompetitive activities w/in an entity (or by a single individual), though they fall short of a
conspiracy, may still be an illegal “attempt to monopolize” under section 2.
Inter-Corporate Conspiracies – conspiracy cannot exist b/w a corporation and its wholly owned subsidiary
under section 1 of the Sherman Act. A parent and its wholly owned subsidiary have a complete unity of interest,
and so there is no justification for section 1 scrutiny. (Copperweld).
a. Partially-owned subsidiary –post-Copperweld issues include whether a corporation can conspire with its
partially-owned subsidiary and whether sister corporations (corporations owned by the same parent) – can
conspire in violation of A-T laws. Two subsidiaries wholly owned by the same parent cannot conspire.
(Advanced Health-Care Services).
III. MONOPOLIZATION
1.
Overview: Section 2 of Sherman Acts deals with unilateral actions by a firm to acquire or to maintain
monopoly power.
a. Note: mere possession not forbidden. To violate it must:
i. Possess monopoly power (ability to raise price and/or exclude competition)
ii. in a relevant market (for a particular product in a particular geographic area) AND
iii. Take some purposeful and intentional action (such as predatory pricing) to acquire or
maintain that power.
1. Distinguish from: growth or development of a superior product, business acumen or
historic accident.
b. Attempts to monopolize:
i. Firm must engage in anticompetitive conduct with specific intent to monopolize, and a
dangerous probability must exists that the firm could monopolize a relevant market.
2.
Monopolization by a single firm
a. Firms with monopoly power are able to reduce output and thereby raise prices for goods or services. This
results in higher profits that would be earned in competitive market structure.
3.
Monopoly Power in a Relevant Market -- To determine if D has monopoly power, P first must define the
relevant market, which will often determine the outcome of a monopoly. P will argue for a narrow market
definition to make D appear the dominant player, whereas D will argue for an expansive market definition, to make
her share seem smaller and lead court to conclude that it’s not a monopolist. Relevant market = product market
+ relevant geographic market.
a. Relevant Product Market – largely determined by consumer choices and the extent to which physically
dissimilar products can fulfill the same consumer need, i.e. what products are viewed as interchangeable?
i. General Rule: commodities reasonably interchangeable by consumers for the same purposes
make up the “part of the trade or commerce” monopolization of which may be illegal. Ex.
Cellophane – government brought an action alleging that duPont was monopolizing the
cellophane market with 75% under its control. D argued that relevant market was the flexible
wrapping materials and that it controlled 20% of that market. S.Ct. agreed that the relevant
market was flexible wrapping materials, not merely cellophane. Ct. stressed cross-elasticity of
demand, competition with other products, and the functional interchangeability of those
products.
1. Criticism: high cross-elasticity of Demand b/w products may indicate that a monopolist
is already extracting the full amount of monopoly profits and it’s only for that reason that
consumers find other products to be substitutes.
ii. Narrower product market: Ex. professional championship boxing matches constitute a market
distinct from professional boxing matches generally, b/c such matches are the “cream” of the
boxing business and hence are a separate market.
1. Ex. NCAA v. Board of Regents – college football broadcasts were held to constitute a
separate market b/c “intercollegiate football telecasts generate an audience uniquely
attractive to advertisers and … competitors are unable to offer programming that can
attract a similar audience.”
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Exam Tip:
B/c of the numerous factors involved in defining a relevant market, there’s often room for considerable
disagreement, and thus make a fact-based determination. What products do customers find interchangeable?
Under what conditions? How far are consumers willing to travel for a substitute?
b. Relevant geographic market -- defined by the area in which the D and competing sellers sell the
product. Depending on the case, the relevant market may be local, regional, or national. Q. to what
geographic area can purchasers practically turn for a product or service?
i. Submarkets – where a number of local sellers compete with nationwide sellers. The court may
deem the submarket a relevant market.
ii. Factors in determining the relevant market -- price data, transportation costs, delivery
limitations, customer convenience and preference, and the location and facilities for other
producers and distributors. A geographic market is relevant for monopoly purposes where these
factors show that consumers w/in the geographic area cannot realistically turn to outside sellers
should prices rise w/in the defined area.
iii. Single-customer markets – typically does not exist absent unique characteristics that
distinguished this customer from others.
c. Proving Monopoly Power – it’s the power to control prices or exclude competition in the relevant
market.
i. Economic definition of Market Power – it’s a function of the elasticity of the D-curve. The
more elastic the D, the less market power the firm has.
1. M-P in competitive markets – D-Curve infinitely elastic, such a firm has no power at
all. Prices are beyond its control, if it tried to raise the prices, it would lose all of its sales.
2. M-P in imperfect market – monopolist, oligopolist – can raise their prices w/out losing
all their customers.
a. Note: for the monopolist, power to raise prices is limited only by the present
and potential availability of other products that consumers find “acceptable” i.e.
substitutes. For the oligopolist and monopolist competitor, competition from
other sellers or from potential entrants to the market are additional limitations on
market power.
3. Lower costs give seller market power – b/c it can sell profitably at lower prices (have
more sales, more profit). If such a seller lowers the prices and captures the entire market,
this is not a violation of Section 2, since the monopoly would be due to efficiency, a type
of superior “business acumen.” This holds unless the price charged is predatory.
ii. Measuring Market Power – at some point Market Power becomes Monopoly Power, which is
marked by high monopoly profits over an extended period of time and the failure of other
goods or services to respond as substitutes.
1. market share -- it can be a principal sign of monopoly power
a. sufficient -- in excess of 70% strongly suggestive of monopoly power and
generally held to be sufficient. (Alcoa – 90%; United shoe – 75%)
i. note: market share not the only determinant. A 100% market share has
not been found to constitute monopoly power where there where NO
barriers to entry b/c if entry it’s easy, the D cannot raise prices or rival
firm will enter market to compete.
b. doubtful – 40%-70% more uncertainty some courts have found monopoly
power others have not.
c. insufficient – below 40% generally not enough to prove monopoly power.
d. Other factors:
i. No or low barriers to entry – examples of barriers to entry: government regulation, IP rights,
and lack of access to necessary inputs.
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4.
ii. No future market potential – ex. coal company that has nearly depleted its coal reserves.
Doesn’t matter if past sales have been great.
Purposeful Act Requirement – Prohibited Market Behavior: act or conduct referred to is that by which the
alleged monopolist obtained and/or maintains a monopolistic position. These acts are interchangeably called:
anticompetitive conduct, exclusionary conduct, and/or predatory conduct.
a. Acts that violate the antitrust laws – if the monopolist engaged in predatory or other coercive conduct
that itself violated the A-T laws o e.g. acts constituting a restraint of trade under Section 1 – sufficient to
establish a violation of Sherman Act, section 2.
b. Deliberate or purposeful – acts and conducts otherwise lawful, might violate section 2 where the
company having monopoly power purposefully and intentionally acquired, maintained, or exercised that
power – unless it is shown that the monopoly power was either (i) attained by superior skill, foresight or
industry, or (ii) thrust upon the D b/c of a thin market or economies of scale.
i. Note: specific intent not required. As Alcoa makes clear, there’s no violation of section 2
unless it is shown that the monopolist deliberately and purposefully exercised his monopoly
power to acquire or maintain the market (as distinguished from inadvertent or accidental
conduct). But specific intent to monopolize is not required.
c. Determining if conduct is “anticompetitive” -- exclusionary comprehends at the most, behavior that not
only (1) tends to impair the opportunities of rivals, but also (2) either does not further competition on the
merits or does so in an unnecessarily restrictive way. (Aspen Skiing).
i. Note: primary way for P to satisfy the monopoly conduct is by pointing to cases that have found
that D’s conduct in the case at hand it’s similar to the D’s conduct in those cases.
d. Examples of Anticompetitive Conduct
i. Exclusionary Conduct Impairing Competition – if conduct unnecessarily impairs or restricts the
ability of competitors to compete. Ex. Alcoa – Ct. thought it sufficient that the firm kept
increasing its production capacity to supply all Demand, before a competitor could enter the field.
Likewise, in United Shoe – D’s lease only policy and the extended terms of lease were viewed as
exclusionary.
1. note: expending into new markets is not anticompetitive.
ii. Predatory Prices – prices below average or marginal costs. Charges of predatory pricing must
make economic sense (i.e. the P must present evidence that a predatory pricing scheme carries a
reasonable chance of success at a reasonable cost to the D) for such charges to survive a defense
for summary judgment. (Matsushita).
1. Definition of below-cost pricing – if monopolist prices above marginal cost, only less
efficient firms will be harmed, thereby maximizing social welfare by avoiding the
wasteful idling or productive resources. Average variable costs, can be substituted for
marginal costs b/c of the difficulty in ascertaining marginal costs.
a. Ex. Pricing above both incremental costs and average costs is lawful – see
Barry Wright Corp.
iii. Refusals to Deal – generally no requirement that firm deal with competitors but there are
exceptions:
1. Essential facilities – if company possesses exclusive access to a facility that is essential
to competition and that it could feasibly share, the company may be required to provide
access to that facility. Only if the control of the facility carried with it the power to
eliminate competition will it be considered essential.
2. Canceling existing deals
a. ex. Aspen Skiing – monopolist (owned 3 out of 4 skiing facilities) found to
violate Section 2 when it attempted to force its sole rival to accept deep
concessions or it would not participate in the program.
i. Limitations: presence of a regulatory scheme may allow a refusal to
deal to escape A-T violations.
SUMMARY: monopolization – prima facie case
1.
P must first determine:
a. Relevant product market
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2.
5.
b. Relevant geographic market
then P asks
a. does D have monopoly power (i.e. does the power to control prices or exclude competition) in that
relevant market? (look for high market share)
i. NO – no prima facie case
ii. YES – are there barriers to entry into that market?
1. NO – no prima facie case
2. YES – has D acquired or maintained its monopoly power through anticompetitive
conduct?
a. NO – no prima facie case
b. YES – can establish a prima facie case.
Attempts to Monopolize
a. In general: prima facie case has to demonstrate that:
i. D has engaged in predatory or anticompetitive conduct with
1. D must seek monopoly power though means other that “business acumen”, i.e. the D
must be using “unfair means”
ii. A specific intent to monopolize and
1. specific intent to exclude competitors and gain monopoly power. It can be inferred from
conduct.
Exam Tip:
Distinguish b/w monopolization vs. attempt to monopolize. To prove monopolization, all a P must show is a deliberate
and purposeful act – i.e. not accidental. However, for attempt to monopolize, P’s proof must be more substantial; P must
prove the D’s specific intent to exclude competitors.
iii. A dangerous probability of achieving monopoly power (Spectrum Sports)
1. employment of methods, means and practices, which would if successful, accomplish
monopolization, and which though falling short, nevertheless approaches so close as to
create a dangerous probability of it.
a. ex. of unfair means
i. the inducement of others to boycott one’s competitors – Lorain and
Klor’s
ii. discriminatory pricing
iii. refusal by a manufacturer with a dominant market position to deal with
an independent dealer, after the dealer refused to sell out to the
manufacturer.
SUMMARY: attempted monopolization – prima facie case.
1.
2.
P must first define:
a. Relevant product market
i. i.e. what products are reasonably interchangeable?
b. Relevant geographic market
i. Where can purchasers practically turn to for their product?
P then asks:
a. Is there a dangerous probability of the D monopolizing the relevant market?
i. NO – no prima facie case
ii. YES – has the D engaged in anticompetitive conduct?
1. NO – no prima facie case
2. YES – did the D have the specific intent to monopolize the market (i.e. exclude the
competitors?)
a. NO – no prima facie case
b. YES – P can establish a prima facie case for monopolization.
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IV. VERTICAL RESTRAINTS
1.
2.
3.
General rule: if parties are competitors, or firms at the same level, it is a horizontal restraint. If there are
multiple levels in the production or distribution chain, it is a vertical restraint.
statutory provisions:
a. Section 1 of Sherman Act
b. Section 3 of Clayton Act
c. If monopolization – section 2 of the Sherman Act
modes of analysis
a. PS
i. Minimum price fixing
1. ex. Monsanto – PS violation for buyer to contractually set the minimum price at the
which the retailer can sell the product
a. Economic analysis: typically manufacturers are not interested in protecting the
profits of retailers by setting a minimum price b/c the more retailers compete, the
lower the price of product, the more of the manufacturer’s products will be sold,
thus increasing profit for the manufacturers. In some circumstances, the
manufacturer will want to set a minimum price
i. Retailer recommendation: customers tend to rely on retailers
recommendation and manufacturer may want to assure profits to dealer
as incentive for dealer recommendation. Also, the manufacturer may
wish to have the retailers provide advertising or a substantial amount of
service and advice, and w/out the retial price maintenance, arguably
customers will take the advice (free ride) and go to a place where prices
are lower that did not advertise or where service and advice is not
supplied.
ii. Anticompetitive risk: resale price maintance may have been instigated
at the request of retailers to help establish or police a cartel whose
interest is in selling a product at higher than competitive prices.
b. Exceptions:
i. Consignment arrangements – when the owner of product entrusts the
consignee to sell the goods, but the consignee never takes ownership of
the product and can return the product to owner. Valid consignment
plans that are not disguised price maintenance schemes are permitted,
sham arrangements will be invalidated.
1. Ex. US v. General Electric – valid when GE placed patented
light bulb with retailer paying him a commission. Held:
genuine agency relation existed b/c the risk of loass or price
decline was with GE, and hence no illegal resale price
maintenance was involved.
2. Ex. Simpson v. union Oil – court distinguished GE based on:
(1) risk of loss in Simpson passed to retailers and (2) GE –
patent case.
ii. Unilateral Refusals to Deal -- manufacturers are free to announce
“suggested retail prices” as long as they are merely suggested and the
action is truly unilateral. If seller announces that it will cease dealing
with customer who fails to adhere to the suggested retail price:
1. Early View – Colgate – Held: action lawful as long as there
was no agreement obligating customer to sell at a specified
price. affirmed a person’s right to choose with whom to deal
and announce in advance the circumstances under which she’ll
refuse to deal.
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2. Modern view – some cases have limited (but not overruled)
Colgate by finding de facto agreements. Any active exhortation
of customers to adhere to suggested retail price or any elaborate
system of suspension and reinstatement of retailers who fail to
adhere and then agree to do so will constitute an agreement and
unlawful resale price maintenance.
a. Agreement need NOT involve P – ex. Monsanto –
Court found that there was sufficient evidence of an
agreement b/c the manufacturer and the complaining
retailers.
b. Colgate still good law and manufacturers are free to
take UNILATERAL ACTIONS to terminate
discounting dealers. Most likely to survive when:
i. Manufacturer clearly announces a termination
policy and
ii. Strictly adheres to it in all circumstances.
Exam tip: where manufacturer sets a price for resale of its product,
First step: is it suggested or required price?
if not required by K or enforced by manufacturer in other ways – Probably NOT an antitrust.
If it is required then:
Second step: is it minimum or maximum? If minimum – PS violation, if maximum, then use ROR to
determine its validity.
2. Tying arrangements: under tying arrangement seller refuses to sell product A (the
“tying” product) to a customer unless the customer agrees to buy product B (the “tied”
product) from the seller. The seller is said to “tie” or condition the sale of the desired
“tying” product to the purchase of the “tied” product. Buyers are “coerced” and suppliers
“foreclosed.”
a. Types of tying arrangements:
i. Relationship b/w tying and tied:
1. Products that are used in fixed proportions, e.g. nuts and bolts
2. Tied product may be designed to be used with the tying
product, e.g. software with a personal computer
3. Tied and tying products may be usable together or separately,
e.g. fertilizers and seed
ii. Ways of achieving tying arrangements
1. Contractual – seller says that it will not sell the tying product
unless the buyer also purchases the separate tied product
2. technological – seller physically integrates the tying product
and tied products, so that anyone purchasing the tying product
necessarily purchases the tied product simultaneously. (US v.
Microsoft)
b. Requirements for an Illegal Tie:
i. Separate tying an tied products;
1. to determine if the products are separate courts do NOT focus
on the “functional relation b/c them but rather on the character
of demand for the two items” ex. Jefferson Parish Hospital.
There must be sufficient demand for the two products for firms
to provide them separately. Ex. Eastman Kodak Co. v. Image
Technical services. There are cases when D can successfully
argue that product is a single one (car and spare tire, picture
tube and television).
a. Ex. Fortner Enterprise – Court rejected D’s argument
that prefabricated homes and loans for purchase of
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homes and real estate development were a single
product. While such an argument makes sense for
most purchases where credit is extended by the seller,
here the court found that the credit could reasonably be
viewed as a separate and tying product b/c its terms
were favorable and the amount was for more than
purchase of the homes, since real estate development
and acquisition costs were also advanced.
b. EX. Auto and auto sounds have been held to be
separate products.
c. Ex. copier replacement parts and copier service can be
separate products if evidence establishes that the two
are, or have been sold separately.
d. Exception: in the context of technological integration,
it can be difficult to determine if separate products. If
integration of two formerly separate products creates
a more efficient new product, the integration may not
constitute tying (US v. Microsoft).
ii. Conditioning on the arrangements or coercion or force by seller;
1. Courts split on requirement. Some hold that written K
containing the condition is sufficient. Others require proof of
actual coercion, as opposed to sales pressure by the D. The
conditioning or coercion element is probably satisfied if the
bundled products are prices so that the purchase of the products
individually is not economically viable.
iii. Sufficient economic power in the tying product market to restrain
competition appreciably in the tied product
1. early cases: Court focused on the D’s market power for the
tying product -- unique products were presumed to give Ds
market dominance. Ex. patented salt machine in International
Salt, © films in Loews, land sold by Northern Pacific.
2. modern trend: Courts now emphasize the power of the Ds to
force consumers to make choices they would not make in a
competitive environment. Test seems to stress the ability of the
Ds to influence decision making in the market for the tied
product. (Jefferson).
3. Note: the fact that D has offered unique terms on the tying
product, is NOT sufficient to show market power. Ex. United
States Steel offered no-interest loans (the tying product) to
developers who purchased United States Steel prefabricated
houses (tied product). S.Ct. held that such credit terms did not
establish the company’s market power in the credit field,
merely indicated a willingness to provide cheap financing. P
had to show that D had some cost advantage over competitors
before such terms would indicate market power. (Fortner).
a. Ex. Ps were a group of independent service
organizations which, even though not affiliated with
the seller/manufacturer, attempted to compete with it in
the servicing of copiers. Ps claimed that the D had
impermissibly tied the servicing of its machines to the
sale of replacement parts by limiting the availability of
those parts to P, which made more difficult for P to
compete in the servicing of copiers. Court found that a
genuine issue existed as to the seller/manufacturer’s
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market power in the separate markets for services and
parts for its machines, even though it had no such
power in the market for the sale of copiers (Eastman
Kodak).
iv. Tying arrangement must affect more than an “insubstantial” dollar
volume of commerce in the tied product market. (more than de
minimis amount of commerce)
1. usually satisfied by showing that more than a de minimis $$
value is involved, market share analysis, generally is not
required.
a. Ex. $500K was found substantial in International
Salt and $68K was found “not insubstantial” in
Loews.
b. Note: relevant figure is the total volume of sales tied
by the sales policy under challenge, not the position of
this total accounted for by the particular P who brings
suit.
2. most circuits require that the tying seller have a direct economic
interest in the tied product
3. some circuits require that the P prove that the tying arrangement
has an anticompetitive effect.
a. NOTE: a tying arrangement that does not violate PS
Test can still violate under RoR.
c. Reasons to Use Tying Arrangements
i. To extent market power – a firm may be able to use its monopoly
power in the market for one product to create monopoly power or
monopoly profits in its sales of another product by tying sale of the two
products together. Ex. A firm that has a patent can tie a product to the
sale of patented good. Theoretically, he monopolist may be able to
reduce or eliminate competition for the tied product and to create a
monopoly for itself in the market for that product.
ii. To protect products, image, or goodwill – firm may fear that its
products will be serviced poorly by untrained or unauthorized operators,
and to eliminate that risk it may refuse to distribute replacement parts to
independent service providers. In the franchise context, franchisor may
require its franchisees to purchase tied products (such as napkins,
ingredients, etc) to ensure that all franchisees deliver a consistent
product.
iii. To engage in price discrimination or to evade other price controls:
1. Price discrimination – ex. Company has patents on high quality
printers, but not the cartridge. If company leases the printer to
all its users at the same rental rate but requires those users to
purchase print cartridges from their company, it can effectively
charge heavier users more for the lease of the printer, even
though all leases are written at same rental rate.
2. Evade price regulation – regulated firms can use tie-ins to
evade price regulation. Ex. Cable TV firm’s monthly statute
are set by statute. firm might try to circumvent price restriction
by requiring its customers to lease converter boxes at
unregulated, inflated rates.
iv. To take advantage of efficiencies and economies of scale – there’s a
tension b/w law against tie-ins and economic reality since most products
are combination of several separate products and services which might
be able of being sold separately. Ex. Car makers and engines,
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customers would not want to buy them separately. It is more efficient to
have the engines made and sold by the manufactures with the car.
Although courts do not generally acknowledge efficiencies or
economies of scale as justifications for tie-ins, they do address the issue
implicitly when they determine whether the tying item and the tied item
are separate products.
d. Statutory prohibitions
i. Clayton Act, section 3 – …it is unlawful for any person to lease or sell
commodities or fix a price thereof “on the condition or agreement…that
the lessee or purchaser thereof shall not use or deal in
the…commodities of a competitor… of the lessor or seller, where the
effect may be to substantially lessen competition or tend to create a
monopoly in any line of commerce.
1. applies only to goods or commodities and NOT
a. services,
b. intangibles
c. real property
2. Even though statute refers to “condition” or “agreement” a
formalized arrangement is not required. Any leverage the
seller has with the customer to foreclose the customer from
dealing with the seller’s competitors will suffice.
3. coercion REQUIRED – where the customer voluntarily buys
both products from the same source, and no element of
coercion is present, the purchases cannot amount to a tying
arrangement. However, an illegal tie has been found where a
buyer voluntarily takes both products b/c the seller has the
requisite economic power or leverage and used it to induce
purchase of the tied product. Despite the absence of a written
K, court held that the use of seller’s power could be inferred
from:
a. coercion
b. resolute enforcement of a policy to “influence”
buyers to take both products
c. widespread purchase of both products by buyers.
ii. Sherman Act, Section 1 – covers arrangements involving services,
intangibles, or real property not covered by Clayton Act.
iii. Note: the PS rule in tying arrangements is not the same as it is in
the context of horizontal price fixing. In tying cases courts require
a detailed inquiry into market definitions and the existence of
market power (sth they don’t do in other PS cases).
Exam Tip:
State that courts usually find tying agreements illegal PS. However, still need to discuss each element of a tying
claim, including market definitions and market power. Thus the analysis will seem more analogous to the RoR
than PS rule.
b. Rule of Reason
i. Maximum price fixing – it used to be PS (Albrecht).
1. ex. State Oil v. Khan – Court subjected maximum price fixing to the RoR b/c
manufacturers wouldn’t set a price that was too low, and that courts could distinguish
maximum price setting from minimum price setting.
a. Economic analysis: manufacturer has a clear interest in setting a maximum
resale price, b/c if the retailer has market power and will charge a higher price
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and sell less than would be sold under conditions in perfect competition, this
reduces the sales and profits of the manufacturer. Manufacturer can:
i. Attempt to break the retailer’s market position (e.g. by entering retailing
himself), or
ii. Use whatever bargaining power to force retailer not to sell above a set
maximum price.
b. Anticompetitive effect: the so-called maximum price may be tacitly treated by
the manufacturer and retailer as an agreed minimum. Also, a maximum price
has the effect of distorting resource allocation and reducing the likelihood of new
entry into the market.
ii. Nonprice restraints
1. Generally: while it may be lawful for a manufacturer to choose to whom it may sell the
goods, not lawful for her to impose restrictions on how the buyer can resell those goods.
Formerly PS applied (Schwinn Rule), now RoR applies to nonprice vertical restraints
whether customer, territorial, or location.
a. Rationale: certain nonprice vertical restrictions may foster interbrand
competition and thereby have redeeming competitive virtues, even though they
reduce or eliminate intrabrand competition.
i. Ex. In applying RoR, courts have focused on the totality of
circumstances, and have stressed the distinction b/c intrabrand and
interbrand competition drawn in Sylvania. (emphasis of A-T law is to
protect interbrand competition).
ii. Ex. A manufacturer’s threat to terminate a retailer for “transshipping”
the manufacturer’s merchandise to other retailers not approved by the
manufacturer, was not unlawful. The manufacturer’s valid interest in
the “quality and image it wished to project for its products” and in
preventing counterfeiting were more than adequate to overcome any
anticompetitive effects of the “no transshipment” policy. [Trans Sport,
Inc. v. Starter Sportswear, Inc]
iii. Ex: a brewer’s nonprice territorial restrictions upon its wholesalers had
a greater competitive effect on interbrand competition than their
anticompetitive effects on intrabrand competition and therefore did not
violate section 1. the purpose of the brewer’s restriction was to increase
its interbrand competitiveness by causing its wholesalers to distribute
more effectively and efficiently.
b. Trend in favor of Ds: the trend manifests itself in many subtle ways including
the manner in which the courts characterize certain Ds’ actions. Assume a
manufacturer sells its products both directly to customers and indirectly through
independent distributors. If the manufacturer terminates one distributor for
underbidding the manufacturer and other distributors, should the case be treated
as Horizontal conspiracy to allocate markets, which would be PS illegal, or as a
vertical nonprice restraint, which is subject to the RoR? In Smalley & Co. v.
Emerson & Cuming, Inc., court held it was a vertical restraint and granted the
manufacturer’s motion for summary judgment (compare w. Topco where
arrangement held to be Horizontal and PS illegal).
iii. Exclusive dealing arrangements
1. Sole outlets – exclusive distributors
a. In general a manufacturer may lawfully pick and choose those with whom he
will deal. However, the legality of any such arrangement may depend upon the
extent of INTERBRAND competition. If there’s no interbrand competition (i.e.
the manufacturer has no competitors), intrabrand competition (i.e. competition
among the manufacturer’s dealers) may be considered much more important,
and thus a manufacturer’s right to deal with whom she pleases is more restricted.
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b. Ex. Business Electronics – Although there was an agreement b/w manufacturer
and retailer to terminate another retailer for price cutting, that agreement not
illegal PS unless it included a specific agreement on prices to be charged by the
retailer.
c. Market Power Required – under a RoR inquiry, a claim that TV network
violated antitrust laws by distributing its signal only through a particular local
station, failed b/c the TV network did not have market power.
c. Affirmative Defenses Offered by D
i. New Industry
1. Tying is sometimes allowed when “instituted in the launching of a new business with a
highly uncertain future.” The tie is justified as necessary to assure proper functioning of
special equipment. As the business becomes established, tying may no longer be
justified. Ex. Jerrold Electronics – cable antenna manufacturer required installers to
purchase service K to assure proper functioning of system; held legal in the beginning,
but not after the business became established.
ii. Quality Control for Protection of Goodwill
1. Rarely succeeds. The only situation in which the protection of goodwill may necessitate
the use of tying clauses, is where the specifications for a substitute would be so detailed
that they could not practically be supplied. Standard Oil. But see Trans Sport where D’s
goodwill sufficient to justify “no transshipment” policy.
iii. Software Products
1. Court in Microsoft held that the PS rule against tying arrangements should not apply to
platform software products, e.g. computer operating systems, b/c it may inhibit efficient
innovation. These cases should be evaluated under RoR.
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