Download CHAPTER 47: ANTITRUST LAW

Chapter 45
Antitrust Law
Introduction
Common law actions intended to limit
restrains on trade and regulate economic
competition.
Embodied almost entirely in:
The Sherman Antitrust Act of 1890.
The Clayton Act of 1914.
§ 1: The Sherman Antitrust Act
Section 1 and 2 contain the main provisions of
the Sherman Act.
Section 1:
• Requires two or more persons, as a person cannot contract,
combine, or conspire alone.
• Concerned with finding an agreement.
Section 2:
• Applies both to an individual person and to several people,
because it refers to every person.
• Deals with the structure of monopolies in the marketplace.
§ 2: Section 1 of
the Sherman Act
Section 1 regulates what are called
“horizontal” and “vertical” restraints.
Horizontal Restraints
Horizontal restraints are agreements among
Sellers (or Buyers) that restrain competition
between rival firms competing in the same
market .
Price Fixing
An agreement between competing firms
in the market to set an established price
for the goods or services they offer.
Price fixing is a per se violation of the
Act.
Group Boycotts
Agreement between two or more sellers
to refuse to deal with a particular person
or firm.
Group boycotts are per se violations of
the Act.
Horizontal Market Division
Occurs when competitors in the same
market agree that each will have
exclusive rights to operate in a particular
geographic area.
Horizontal market divisions are per se
violations of the Act.
Trade Associations
Trade Associations are industry specific
organizations created to provide for the
exchange of information, representation of the
business interests before governmental bodies,
advertising campaigns, and setting of
regulatory standards to govern their industry
or profession.
Rule of reason is applied to determine if a
violation of the Act has occurred.
Joint Ventures
A joint venture is an undertaking by two
or more individuals or firms for a specific
purpose.
The rule of reason is applied to analyze
the agreement if the venture has first
been found not to involve price fixing or
market divisions.
Vertical Restraints
Vertical restraints are
per se anticompetitive
agreements imposed by
Sellers upon Buyers (or
vice versa) that may
include affiliates in the
entire supply chain of
production.
Vertical Restraints [2]
Agreements between firms at different levels of
the manufacturing and distribution process.
Vertical restraints may restrain competition
among firms that occupy the same level in
chain.
Vertical restraints that significantly affect
competition may be per se violations.
Territorial or Customer
Restrictions
Imposed by manufacturers on the sellers
of the products, to insulate dealers from
direct competition with each other.
Territorial and customer restrictions are
judged under the rule of reason.
Resale Price
Maintenance Agreements
An agreements between a manufacturer
and a distributor or retailer in which the
manufacturer specifies the retail price at
which retailers must sell products
furnished by the manufacturer or
distributor.
This is a type of vertical restraint and is
normally a per se violation.
Refusals to Deal
Unlike a group boycott, a refusal to deal
is an action by one firm against another,
and this is usually legal, unless:
the firm refusing to deal has, or is likely to
acquire, monopoly power, and
the refusal is likely to have an anticompetitive
effect on a particular market.
§ 3: Section 2 of the
Sherman Antitrust Act
Section 2 of the Sherman Antitrust Act
deals with:
Monopolization.
Attempts to monopolize.
Predatory pricing.
Attempt by a firm to drive its competitor from
the market by selling its product at prices
substantially below the normal costs of
production.
Monopolization
Monopolization in violation of the act
requires two elements:
The possession of monopoly power and
The willful acquisition and maintenance of the
power.
Monopoly Power
Exists when one firm has sufficient
market power to control prices and
exclude competition.
Market power is often assessed by the use
of the Market-Share Test.
As a rule of thumb, if a firm has 70% or more
of a relevant market, it is regarded as having
monopoly power.
The Intent Requirement
The intent to monopolize is difficult to
prove.
Intent may be inferred from evidence
that the firm had monopoly power and
engaged in anticompetitive behavior.
Attempts to Monopolize
Firm actions are scrutinized to determine
whether they were intended to exclude
competitors and garner monopoly power
and had a “dangerous” probability of
success.
§ 4: The Clayton Act
The Clayton Act deals with:
Price Discrimination.
Exclusionary Practices.
Mergers.
Interlocking Directorates.
Price Discrimination
Price discrimination is the charging of different
prices to competing buyers for identical goods.
Exceptions:
Charge of lower price was temporary and in good faith
to meet another seller’s equally low price to the buyer’s
competitor.
A particular buyer’s purchases saved the seller costs in
producing and selling the good.
Exclusionary Practices
Exclusive Dealing Contracts.
A contract under which a seller forbids to purchase
products from the seller’s competitors.
Prohibited if the effect of the contract is to
“substantially lessen competition or tend to create a
monopoly.”
Tying Arrangements.
The conditioning of the sale of a product on the buyer’s
agreement to purchase another product produces or
distributed by the same seller.
Mergers
Horizontal Mergers occur between firms at the
same level in the production and distribution
chain.
Vertical Mergers occur between firms at
different levels in the production and
distribution chain.
Conglomerate Mergers occur when a firm seeks
to:
Extend its product into a new market by merging with a
firm in that market.
Diversify by acquiring a firm that deals in unrelated
products.
Interlocking Directorates
Occurs when an individual serves on the
board of directors of two or more
competing companies simultaneously.
These are prohibited if the two firms
meet certain size requirements.
§ 5: The Federal Trade
Commission Act
FTCA provides that:
“Unfair methods of competition in or affecting
commerce, and unfair or deceptive acts or
practices in or affecting commerce are hereby
declared illegal.”
The Federal Trade Commission enforces
the FTCA.
§ 6: Enforcement of
Antitrust Laws
Federal agencies that enforce the
antitrust laws are:
U.S. Department of Justice (DOJ).
Federal Trade Commission (FTC).
§ 7: U.S. Antitrust Laws in a
Global Context
U.S. laws apply to U.S. companies doing
business in foreign nations.
Foreign persons may have the right to
sue in U.S. court for violations of
antitrust law.
Extraterritorial violations by U.S.
companies will give rise to antitrust
violations if there is a “substantial effect”
on U.S. interstate commerce.
§ 8: Exemption from
Antitrust Laws
Most statutory exemptions to the antitrust laws
apply to the following areas:
•
•
•
•
•
•
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Labor.
Agricultural associations and fisheries.
Insurance.
Foreign trade.
Professional baseball.
Cooperative research and production
Joint efforts y businesspersons to obtain legislative or
executive action.
• And Others.
Case 45.1: Continental TV
v. GTE Sylvania
(Vertical Restraints)
FACTS:
Sylvania sold its televisions directly to franchised
retailers which did not include an exclusive
territory. Sylvania retained the discretion to
increase the number of retailers in an area.
Continental, a Sylvania franchisee, withheld all
payments due for Sylvania products when the
manufacturer licensed a franchisee in close
proximity.
Sylvania sued Continental for damages and return
of secured merchandise.
Case 45.1: Continental TV
v. GTE Sylvania
(Vertical Restraints)
HELD: FOR SYLVANIA.
U.S. Supreme Court ruled that the legality of all
similar restraints would be subject to the rule of
reason.
Vertical restrictions reduce intrabrand competition
by limiting the number of sellers of a particular
product competing for the business of a given
group of buyers, but promote interbrand
competition by allowing the manufacturer to
achieve efficiencies in the distribution of products.
Case 45.2: State Oil v. Khan
(Vertical Restraints)
FACTS:
Khan leased a gas station under a contract with
State Oil which also supplied gas to Khan for
resale.
State Oil set suggested retail prices and sold gas
to Khan for 3.25 cents per gallon less. Khan could
sell the gas at a higher price, but he would have to
pay State Oil the difference.
State Oil terminated the contract and Khan sued
for price fixing.
Case 45.2: State Oil v. Khan
(Vertical Restraints)
HELD: FOR STATE OIL.
U.S. Supreme Court vacated the decision
of the appellate court and remanded.
The Court held that vertical price-fixing is
not a per se violation of the Sherman Act
but should be evaluated under the rule of
reason.
Case 45.3: U.S. v. Microsoft
(Monopolization)
FACTS:
In 1994, Netscape began marketing Navigator, the
first popular graphical Internet browser. Navigator
worked with Sun Microsystems, Inc.’s Java
technology.
Java technology enabled applications to run on a
variety of platforms, which meant that users did
not need Windows.
Microsoft Corporation perceived a threat to its
dominance of the operating system market and
developed a competing browser, Internet Explorer
(Explorer).
Case 45.3: U.S. v. Microsoft
(Monopolization)
FACTS (cont’d)
Microsoft required computer makers who wanted
to install Windows to also install Explorer and
exclude Navigator.
Microsoft commingled browser code and other
code in Windows so that deleting files containing
Explorer would cripple the operating system.
Microsoft offered to promote and pay Internet
service providers to distribute Explorer and
exclude Navigator.
Case 45.3: U.S. v. Microsoft
(Monopolization)
FACTS (cont’d)
Microsoft also developed its own Java
code which would only run on windows.
The U.S. Department of Justice and a
number of state attorneys general filed a
suit in a federal district court against
Microsoft, alleging, in part, monopolization
in violation of Section 2 of the Sherman
Act.
Case 45.3: U.S. v. Microsoft
(Monopolization)
HELD:
The court ruled against Microsoft. Microsoft
appealed to the U.S. Court of Appeals for the
District of Columbia Circuit.
The Court of Appeals rejected Microsoft’s
arguments. The court responded, “Microsoft’s
pattern of exclusionary conduct could only be
rational if the firm knew that it possessed
monopoly power.” This conduct included
Microsoft’s restrictions on the computer makers’
Windows licenses.
Case 45.3: U.S. v. Microsoft
(Monopolization)
HELD (cont’d)
“Microsoft’s efforts to gain market share in one
market (browsers) served to meet the threat to
Microsoft’s monopoly in another market (operating
systems) by keeping rival browsers from gaining
the critical mass of users necessary to attract
developer attention away from Windows as the
platform for software development.”
This also included Microsoft’s other actions
welding Explorer to Windows. In part, the court
reasoned that the commingling of the browsing
and other code deters computer makers “from preinstalling rival browsers, thereby reducing the
rivals’ usage share and, hence, developers’