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Transcript
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. 1 2006 Antitrust/Fall 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 2 2006 Antitrust/Fall 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. 3 2006 Antitrust/Fall 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. 4 2006 Antitrust/Fall 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) 5 2006 Antitrust/Fall 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. 6 2006 Antitrust/Fall 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: 7 2006 Antitrust/Fall 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 8 2006 Antitrust/Fall 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. 9 2006 Antitrust/Fall 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 10 2006 Antitrust/Fall 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. 11 2006 Antitrust/Fall 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. 12 2006 Antitrust/Fall 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.” 13 2006 Antitrust/Fall 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. 14 2006 Antitrust/Fall 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 15 2006 Antitrust/Fall 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. 16 2006 Antitrust/Fall 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. 17 2006 Antitrust/Fall 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 18 2006 Antitrust/Fall 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 19 2006 Antitrust/Fall 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, 20 2006 Antitrust/Fall 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 21 2006 Antitrust/Fall 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. 22 2006 Antitrust/Fall 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. 23 2006 Antitrust/Fall