Antitrust - Pierce - Fall1999_3

8/20/2019 Antitrust - Pierce - Fall1999_3

1/55

ANTITRUST

Prof. Pierce

Fall 1999

I. Introduction to Antitrust Law

A. General Background Information1. Benefits of Competition

a. Allocative Efficiency - Amount produced varies depending on what consumers want as shown y what they arewilling to pay

. !roductive Efficiency- !roducing goods at the lowest costc. Innovation-"irms have an incentive to develop new and etter products

#. Goals of Antitrust $awsa. Avoid increases in price

. Avoid decrease in %uantityc c. Ensure transfer of wealth to consumers

&. !re-'herman Act Casesa. (he Case of )onopolies *+ing,s Bench 1#/

i. Background• 0ueen wanted to limit manufacturing of playing cards arguing that card playing has a negative

effect on the poor

• Granted monopoly on the sale to Bowes which was suse%uently given to 2arcy after it e3pire

• Goal was to discourage people from playing cards y granting a monopoly which woul

result in higher prices

• 2arcy sued to enforce monopoly against someone who egan importing and selling playing

cards

ii. 4olding

• Grant of monopoly is void as a violation of common law

• )onopolies result in higher prices lower %uality less wealth to consumers and more wealth to

monopolist

• 0ueen does not have the power to do this ut legislature may

. )itchell v. 5eynolds *+ing,s Bench 1611/i. Background

• ! leased a akeshop for five years on condition that the lessor would not compete during the

term of the lease

• 2 argued that this impermissily prevents him from eing ale to practice his trade

ii. 2ecision

• )ay have a reasonale restrain that is ancillary to a legitimate transaction

• 5estraint must e reasonale and specific and cannot e too road• Although it is a + in restraint of trade enefits sufficient to 7ustify it

• If not rule + terms would e shorter

• 2 could sell ! the akery along with the reputation and then open store across street

depriving ! of reputation he ought

4. Sherman Act

a. 'herman 8 1

• 9Every contract comination in the form of trust of otherwise or conspiracy in restraint of trad

or commerce among the several states or with foreign nations is herey declared to e illegal.:

1


2/55

• 9contract: must have two or more actors to make a contract

• 9in restraint of trade: read literally every + restrains trade; courts consider whether

the restraint is too much in light of the 7ustification for the restraint

. 'herman 8#

• 9Every person who shall monopoli' v. EC +night *1D/

*1/ Background

• American 'ugar ought or entered into + to uy every sugar refinery in the >' e3cept one controls

D of sugar refining market*#/ 4olding

• Fot a violation of 'herman

• 'herman prohiits if the act is in Interstate Commerce and sugar refining is not IC. It is a local usines

for state and local regulation.*&/ 'ignificance (oday

• !rofessional aseall is a sport *not usiness/ and is not touchale y commerce clause and therefore is

not IC and untouchale y 'herman

• Courts view of IC has greatly e3panded ut contracted a little with $ope<

. American Banana *1DD/*1/ Background

• >nited "ruit created cartel controlling tropical fruit market

• 1 control of ananas in >'

#


3/55

• American Banana started anana plantation in !anama

• !lantation destroyed y soldiers from !anama and Costa 5ica

• >" paid lots of to these governments

*#/ 4olding

• 'herman does not e3tend to conduct in foreign countries especially when done in concert with foreign

officials *FH $HFGE5 GHH2 $A@/

• 5ationale for holding may e that only way to enforce would e through military force

. )odern and Evolving iew of Interstate Commerce *'ummit 4ealth v. !inhas/ *p. 6/a. Background

• Cast of Characters !inhas *doctor/ )idway *one of many ig hospitals/ 'ummit *owner of )idway/

)edicare Insurance Companies

• 4ospital has a two doctor rule when performing complicated eye surgery have to have two doctors in the

room

• Fow insurance companies will not reimurse the second doctor anymore

• )idway and 'ummit said the rule is essential for safety

• @hen !inhas refused to have second doctor in with him anymore hospital said okay if he,s not in there ut

we are going to charge for him regardless *oopsJ/

. 4olding• 5ule Infected by Interstate Commerce

• Big hospital with out of state patients 'ummit owns lots of hospitals all over oth uy stuff

from out of state

• 5ememer 'herman only applies to things in interstate commerce

• 4owever there was a four 7ustice dissent eginning of effort y conservative 7udges to reverse e3cessive

interstate commerce decisions in favor of federalism

• 5ememer since D# three 7ustices have left and conservatives now have one more vote

• 'o infected with interstate commerce may no longer e the law

c. 4ow is this an antitrust caseK

• (he peer review committee was aout to come out with findings that would e circulated saying he is a ad

doctor • !inhas says they are trying to punish him for lowing the whistle on wasteful second doctor rule

• 'herman 81 Conspiracy

• 4ospital wants to say 'tate Action !rotection ut lower court says does not fit Lc not a neutral

decision

6. Clayton Acta. 8# 5oinson !atman Act

• !rohiits price discrimination that sustantially lessens competition or to a monopoly:

• 'upported and sole focus was to stamp out ig usiness no one enacted this to support mark

efficiency

•

(argets %uantity discounts to large retailers. 'mall usinesses support while economists don,t.• Basically makes it a violation to charge less to ig retailers than to mom and pop shop ut low

prices are good

• udges do not elieve in law either ut have to follow it

• Economists say it is an anti-competitive antitrust law results in higher prices

. 8&c. 86

• prohiits mergers or ac%uisitions that have a reasonale proaility of sustantially lessening

competition within a market

• 'tandard? sustantially lessen competition *effort to stop monopoly efore its inception/

&


4/55

• Courts can invalidate mergers only if they threaten to reduce competition in a sustantial market y a

sustantial amountd. $aor >nions

• E3empt to antitrust laws

• (herefore groups *doctors/ want to e classified as employees so they can engage in collective

argaining without violating antitrust laws

. "(C Act *1D1M/a. Creates the "ederal (rade Commission . !rohiits unfair or deceptive trade practicesc. !ower to enforce antitrust laws concurrent with power of ustice 2epartment

• 2evelops su7ect matter e3pertise aove 2H is some areas

D. General Background on Cartelsa. 2efined

• Group of firms that otherwise would e competitors who reach an agreement to ehave as though they

are a single firm

. Implementing

• )ust reach an agreement to restrict one another,s output

• If an agreement is reached *which is often very difficult/ the most profitale strategy for an individual

firm is to cheat and e3ceed output leads of collapse of many cartels *not to mention violence/

• !ower of an effective cartel is largely dependent on its aility to get a government to enforce the rules o

the cartel

1. 2istinction etween !er 'e and 5ule of 5easona. !er 'e iolations

• In caught engaging in the conduct violation of 'herman

• (he activity has such a high potential to do ad and such a small potential for good that no need to

e3amine particular facts . 5ule of 5eason

• Conduct is illegal only if it is an unreasonale restraint on trade

• Government must prove that conduct caused adverse effects and 2,s motive was to restrain trade

• 2 gets the opportunity to 7ustify its actions y pointing to eneficial effects

11. Advantages and 2isadvantages of !er 'e and 5ule of 5easona. !er 'e 5ule

• !redictaility short trial easier to enforce

• But may sweep too roadly and stop eneficial activity

. 5ule of 5eason• 4ard to predict complicated and long trial

• 4ard to apply easy to get wrong and takes so long may e irrelevant y time you decide

• Better to alance out good and ad activity

1#. 2istinction Between 4ori


5/55

1&. Analy


6/55

*M/ International trade in the industry

• (he more international trade the less likely can form a cartel Lc more firms and competition

1M. Conflicts etween !atent and Antitrust *'ee GE and 'tandard Hil *Indiana//a. Antitrust $aw

• )onopolies are ad Lc they artificially increase prices decrease %uantity and shift wealth from consumers

manufacturers/

. !atent• )onopoly is good here Lc someone has spent time andhas come up with some new socially eneficial thin

• @ant to encourage people to come up with socially eneficial inventions

c. 'olution *easy to say and hard to apply/

• 4older of patent should e allowed to reap profit of monopoly ut no more

• !rolem is that some get more out of monopoly than should

d. )odern 2ay 2ilemma

• !rolem

• 4undreds of entities hold patents on tens of thousands of 2FA strands and a researcher need access to

hundreds of those patents to test new drugs

• @e need a genetic map of entire human ut very hard to discover partial strands create an incentive tfind them patent

• By the time a researcher gets patents on all the strands he needs to do research it may e economically

infeasile to continue *discourages people from engaging in this/

• 'olutionsK

• Each entity pools their patens and engage in cross licensing and offer scientists pool of patens for a sing

price

• 'ounds like a cartel and an immensely powerful one at that *hold key to cure disease/

1. !rice 2iscrimination

B. Foerr-!ennington 2octrine1. General 5ule

• If competitors 7oin in comination for the purpose of influencing gov,t decision-making their action is protecte

from antitrust challenge even if their underlying intention is to restrain competition or gain an advantage overcompetitors

• !ierce said not a violation for group of competitors to get together and try to destroy eliminate or outlaw

competition through the influence of pulic opinion or government officials

• 2efense is grounded in 1st Amendment right to petition government

#. Easton 55 !residents Conference v. Foerr )otor "reight *1D1/a. Background

• (ruckers are trying to get state law passes so it is easier to pass through states due to lower costs• 55 is trying to lock this Lc want to make sure rivals have to pay higher costs

• Conspiracy to get gov,t to raise rivals costs

. 4olding

• Fot a violation of 'herman Lc it is against the Constitution to tell people they cannot get together and

petition the government

• oint efforts to influence pulic officials do not violate the anitrust laws even though intended to eliminate

competition

$. California )otor (ransport v. (rucking >nlimited *1D61/ %Sham &'ce(tion)


7/55

a. Background

• (rucking companies through administrative and 7udicial harassment had attempted to prevent competitors

from otaining operating privileges

• (ruckers needed a certificate from state regulators to transport a certain path

• @hen any firm not in their organi


8/55

&. Argument Against !er 'e iolation

• (his ehavior may e a result of increased costs and shift in demand these things effect everyone in the

market

• )ay e a symptom of a cartel ut also may e symptomatic of perfectly competitive market

M. 5ule

• Conscious parallelism alone is never a violation of antitrust laws ut if e3change of information and

communication is added there may e a violation

• C! alone is amiguous

• @ith communication more likely to e cartel ehavior considered as a factor when trying to estalish

a violation

#. *ori+ontal Restraints

1. Price Fi'in!

1. >' v. (rans-)issouri "reight Ass,n *1D6/a. Background

• 55 7oined together to form an association

• Agreed to charge the same rates

• Fo one was allowed to give a discount

• 4ad to file their rates with IC Commision *regulatory scheme enacted y Interstate

Commerce Act/ . 4olding

• 'herman 81 prohiits every agreement in restraint of trade not 7ust unreasonale agreements

c. 'ignificance

• 5easonaleness of rates is not a defense to an antitrust action

d. Impact of 'mall firms

• Court thinks that y doing this it will protect small firms

• Small firms benefit from cartel among large firms

• 'mall firm is ale to charge the higher prices that the cartel has artificially set

•

2o not need to worry aout competition Lc large firm are not competing with each other orwith the small firms

• By halting the anti-competitive practices among large firms smaller firms are negatively

impacted Lc the larger firms must now compete with each other and in turn prices will godown driving smaller firms who cannot compete due to economies of scale out of the mark

(est for when antitrust law should apply vs. )arket su7ect to price-controls *regulatory scheme/?1. Is there a natural monopolyK

a. Characteri' v. Addyson !ipe N 'teel Co. *1D/a. Background

• )idwest makers of iron pipe allocated markets among themselves

• 4ori


9/55

• All hori


10/55

• ery hard to determine adverse effects of rule like this one

• Easier to prove aggregate effects

M. American Column N $umer *1D#1/a. Background

• )emers of trade association accounted for & of manufacturing market

• 4eld regular meetings

• )emers engaged in a cooperative program where they each provided the association with detailed

reports on past present and future prices sales and production

• Association compiles the information and circulates a summary to all memers

• Information only availale to the sellers *not made availale to the uyers or the pulic/

• Included a plea to 9use the spirit of cooperation: instead of 9lind vicious competition/

• Fo e3press agreement to restrict output or maintain prices

• (o attract new memers claimed to have raised prices and increased profits for its memers *very stupi

thing to do/

. 4olding

• iolation of 'herman 81

• Court found that the 9purpose and effect were to restrict production and to encourage memers to unite

in pressing for higher and higher prices:

• Court oserved that the e3tensive interchange of reports supplemented y monthly meetings

certainly constituted a comination through which agreements actual or implied could readily e arrived at and maintained

• A firm would not release this type of information without getting something in return

• E3change of valuale information seems inconsistent with the conduct of firms engaging in

competitive marketplace

• E3changing this type of information will always e viewed as highly suspicious

. )aple "looring )anufacturers Ass,n v. >' *1D#/a. Background

• )emers of ass,n controlled 6 of the total production of flooring• Association re%uired detailed reporting of past pricing etc.

• Association provided reports of aggregate data to memers uyers and the government

• 4eld regular meetings

. 4olding


• Court notes important distinction etween providing aggregate data and providing the raw firm-specific

data

• )ore difficult to use aggregate data as part of a cartel

• If any memer did have access to the raw data more likely to e an antitrust violation

• Also important that they provided the information to uyers and the appropriate government agency *as

opposed to in American Column/

c. General !rinciples for (rade Associations

• (iming

• )" most data reported and disseminated was historical data

• AC data included present prices cpacity rate and future pro7etions

• @ith only historic data firm can guess at trend for factors ut with present and future info can

concretely know and change your actions

• Information 2isseminated to )emers

1


11/55

• )" only disseminates the aggregate data while the ass,n does receive all the firm-specific

information

• AC gives very specific numers to memers *like what each firm was producing at each of its

plant/

• Importance?

• In a price fi3ing cartel specific information is important to help put cartel together and

important for detecting violations of cartel rules

• Aggregate info is useful for strategic decision making also eneficial in turn to the

pulic *it is socially eneficial for firms to e well-informed and not increase capacitywhen the industry as a whole has e3cess capacity/

• Access to the data

• )" information given to memers 2H "(C attorney generals shows lack of intent to

violate and reinforces claim that it is for socially eneficial purpose and helpful info used forlawful purposes/

• AC got specific data only to memers

• )eetings !olicy

• Can hold regular meetings

• 'hould not talk aout prices cost or specific customers

• )ake sure rules are well known

• )" had rules and did not violate them while A" did not have rules

. 'tandard Hil *Indiana/ v. >' *1D&1/ *patent case/a. Background

• "our large oil companies 7oined together to form a patent pool consisting of their processes for cracking

gasoline allows each firm to use the other,s patents

• Allow other firms to get a license on the patent pool for a royalty as a undle ut none individually

• (his occurred due to a settlement of an 1 infringements cases they had filed against one another

. 4olding• Behavior 4ori' v. (renton !otteries Co. *1D#6/a. Background

• (renton produced toilet owls formed trade ass,n that controlled # of the market

• Got together and agreed on prices 4ori


12/55

. 4olding

• easonableness cannot be used as a defense to a price fi'ing claim

• Court seems to e emracing some sort of per se rule *although technically it wasn,t applying a

per se rule/ *does not overrule prior decisions ut foreshadows a per se rule/

• 'ome practices are so likely to cause damage and so unlikely to not have any eneficial effects

that the court is 7ustified in not re%uiring a showing of ad faith

• Implies that y definition a price fi3ing agreement is per se unlawful ut uses limiting phrase of 9if

effective: to couch its reasoning

• !ower to fi3 prices is the power to control the market price fi3ing arrangements as in this case pose

serious threats to competition *especially with large market share/

• Also characteristics of market make it etter for prosecution homogeneity and degree of price

elasticity of demand *will pay for Lc it is a necessity and no sus/

. +eogh v. Chicago N Forthwestern 5ailway Co. *1D##/ *FIL&, RAT& ,-"TRIN&)a. Background

• 5ailways estalished their rates together typically ovious hori


13/55

• Cartel will never get rid of e3cess capacity will likely worsen it

D. >' v. 'ocony-acuum Hil *1DM/a. Background

• Hil companies agreed to reduce the supply of petroleum products *which would in turn increase prices/

*went to meetings with secretary of commerce and were encouraged to do this/

• ery informal understanding

• 4ori


14/55

• Implicit agreement among firms violates 'herman 81

• Fot a conscious parallelism case Lc court found some sort of agreement

• Fumerous factors comine to make this practice illegal under 'herman 81

• Court appears to e applying a %ualified per se rule *where additional factors are considered/

also could e viewed as a truncated version of the rule of reason *where court does not considerintent/

• "actors to consider

•

'tructure of )arket

Hligopoly• Fumer of firms and the percentage of the market they account for

a. 4ard to use ad hoc e3change with 1 firms to facilitate a cartel ut much easier with say

• 4igh !rice Inelastic 2emand relatively modest restriction in output produces a relatively

large increase in price

• )akes it more tempting to form cartel

• Changing the price will not change demand so you can charge more and still se

aout the same amount

• "ungile Commodity

• Easier to put together a cartel when commodity fungile Lc easier to reach

agreement on the terms and easier to police the agreement Lc less complicated

• E3cess Capacity in the )arket

• 'uggests artificially holding ack capacity to inflate prices

• "irms charging too much so people are not uying Lc price high evidenced y

e3cess capacity

• 2ownward (rend in !rices

• @hile this suggests competitive prices you can still have a cartel and have pric

going down

• An industry having downward prices naturally and cartel is slowing down the

decrease in prices

• $ow Barriers to Entry

• E3istence reduces incentive to engage in cartel ehavior people can easily

come in and undersell you

• $ots of entry in time where e3cess capacity does not make sense

c. Changes in the !er 'e 5ule

• Before this case you have committed a per se violation if OOOOOOO *i.e. engage in hori


15/55

1&. Fational 'ociety of !rofessional Engineers v. >' *1D6/a. Background

• Hrganiniversity *&rd Cir. 1DD&/a. Background

• Ivy $eague schools and )I( formed an agreement as the 9Ivy Hverlap Group: which effectively set the

price at which each would offer needy students financial assistance as an inducement to enroll

• (hey would only discount there price when there was a certified need and agreed on formulas on how to tre

need

• Agreed on amount for overlapping students

• Classic Cartel agreeing on prices will charge consumers

. 4olding

• 4ori


16/55

• Factors

• Each factor alone is not enough to support courts holding. Hnly together do they create enough enefit

to outweigh the latant effect on prices.*1/ Q $aw and its policies

• Q confers a monopoly to create incentives

• court is not saying here that it is then okay for monopoly owners to get together and make a ig

monopoly songs compete with one another and this competition limits monopoly rents

•

But in asence of this arrangement Q owners could not collect the rents they are entitled to

no incentive then to create if no money*#/ 2H consent decree

• In decree B)I agrees to change some of its practices allow Q owners to also license their

songs

• 2ecree implicitly says activity is okay

• B)I argues ! is ound y that

• Although not technically ound consent decree tells you 2o7 spent lots of time and money and

said they may not like the practice ut it is okay *2H knows the stuff much etter than court/

*&/ (ransaction Costs

• $icensing marketing and enforcement would e too costly without this procedure

• @ithout this arrangement Q owners could not get anything from their Q

c. 2issent

• Blanket license is too road may e okay for small ar ut not for CB' Lc easy to know what they are

playing and collect from themd. @hy 4ori


17/55

*&/ discourage market entry Lc the ma3imum price may e too low to create incentive for entry

• 'ignificance of Insurance companies okaying the deal court is 7ustified in saying won,t attach a lot of

significance*1/ )ay view as in their est interests

• 4elp prevent from doctor,s overcharging

*#/ 5educes their transaction costs Lc don,t have to + individually with all doctors*&/ @hen 6 of doctors offer a deal may e tough to turn it down even if they wanted to

c. 4ypos*1/ Insurance company enters into +,s will all doctors in AR and sets the ma3imum price it will pay for a procedur

• If uyer and seller *different level/ have a ma3imum price vertical ma3imum price fi3ing

• (oday Fot per se illegal

*#/ All insurance companies ge together agreeing to do individual + with doctors at ma3imum price

• 4orinion E3empt ut in order to %ualify for e3emption must e an employee and drs. Ar

not employees*M/ 1 doctors form a partnership * of market/ and the !artnership negotiates contract with each of the

insurance co. and partner ship agrees on fi3ed prices for each procedure

• implicit %ualification of 'C prohiition on 4ori


18/55

• 5estricts the numer of games that can e shown

• 5estricts the numer of times each team can appear on (

• "i3es the price per game

• FCAA,s defense should e treated differently ecause 7ust an association of non-profit institutions

. 4olding

• Court applies rule of reason analysis product is competition itself

• 5elevant product is competition itself

•If there was not competition among the teams people would not watch the games

• BLc of this many of the rules FCAA has are 7ustified to sell its product the competition amon

the schools

• Can only have 11 players on the field

• )ust e a student in good standing

• Terms of TV contract are not necessary for furthering the purpose of promoting competition must allow

market competition to determine which games are televised

• 4orinilateral BoycottK

1


19/55

• $egal Lc need a + to full under 'herman *9+ in restrain of trade:/

• Companies have a right to decide who they want to sell to *7ust cannot enter into an agreement with

others agreeing not to sell to them/

#. Associated !ress v. >' *1DM/a. Background

• A! is a cooperative of over 1# newspapers from throughout the country

• A! reporters put there stories on the A! wire so that all memers can use them

• A!,s y-laws prohiited memers from selling news to non-memers

• By-laws also allowed memers to lock admission to the cooperative of any competitor newspaper

Group oycott

. 4olding

• A!,s ylaws are a group oycott %er se illegal

• Court says group oycotts almost always do harm and very rarely do good

• 1rgani$ations cannot be arbitrarily or for anti-competitive reasons be e'cluded from essential

services

• Illegal even though there are other similar news services availale *>!I/

• Fot eing ale to uy news from the largest news agency can have serious effects on th

pulication of competing newspapers

c. Argument in support of A!,s y-laws

• !revents free-riders who will 7oin so that they can tae advantage of the reporters hired y a

competing newspaper *the stories written y those reporters will e posted on the wire and thecompetitor can then use them/

• (his free rider would e ale to hire fewer reporters having less costs can sell

papers for less

&. 'ilver v. FP'E *1D&/a. Background

• 'ilver had formed companies to trade onds and over-the-counter securities

• Feeded to use private-wire connections to other organi


20/55

• +lor,s was a small local discount store competing against Broadway-4ale a large national

department store

• +lor,s was selling appliances at lower price than Broadway-4ale

• B4 told distriutors not to sell to +lor,s *if they continued to sell to them they would no longer uy

from that distriutorO . 4olding

• Court characterinilateral oycott is legal here we have individuals deciding not to sell to +lor,s

*)otives? want to sell to +lor,s Lc sell more ut see B4 as a more stale customer donwant to lose/

c. "ree-5ider Argument

• 2 argued manufacturer is allowing discount store a free ride on marketing efforts of department

stores

. Forthwest @holesale 'tationers v. !acific 'tationery *1D/a. Background

• Forthwest is a cooperative association with 1 memers that does the purchasing and warehousing

for each of its memers

• 5ules aout memership

*1/ in order to remain a memer cannot go into usiness of wholesaling yourself

• does not make sense to let memers compete with coop

*#/ cannot change ownership without checking with coop first

• memers owe coop and worried aout risk that new owner would default on

oligation• !acific was e3pelled from association without any prior notice

. 4olding

• Group oycott when throw someone out you are essentially oycotting them

• 0roup boycotts are per se illegal only if the group has mar,et power

• Fo potential for ad effects unless have market power

• Cannot decrease competition

• @hen no market power not per se illegal

• !otential for pro-competitive effects economies of scale decreased cost ale to

compete more efficiently

c. 4istory and writing around 'ilver,s due process re%uirement

• Hriginally group oycott per se illegal

• (hen in 'ilver per se illegal unless group uses procedure that complies with due process and does so

for a legitimate reason *here no due process/

• 2istinguishes 'ilver on two grounds

*1/ FP'E had market power and there is no evidence of that here don,t care aout grou

oycott when no market power *#/ Group oycotts are okay if legitimate reason and no similar 7ustification with a uyers

coop *whatKKKKKKKKK/

#


21/55

. 5othery 'torage v. Atlas an $ines *1D/*2.C. Cir./a. Background

• Atlas controlled of the market

• 5othery was one of many independent moving companies who functioned under Atlas, name

• Atlas provided uniforms e%uipment training advertising etc.

• Atlas adopted a rule that prohiited any of the independent firms from moving someone on their ow

account unless they set up a separate corporation

• 2idn,t want them free-riding off the Atlas name

• 5othery violated the new rule e3pelled from Atlas

• 5othery files suit Atlas violates vertical minimum price fi3ing hori+ reinsurance companies

• Between >' insurance companies and >+ reinsurance companies

• >+ was having to pay a ton out due to 'uperfund law

• 'upported y >+ regulators they >+ reinsurance cos. 2emand every CG$ policy rewritten

• Hnly one type of policy and if >' insurance company doesn,t take it then won,t reinsur

them

• Allege conspiracy in restraint of trade in violation of 'herman 81

. Court,s 2ecision*1/ )cCarran-"erguson Act

#1


22/55

• 5ule

• E3empts all state regulated insurance companies from antitrust laws unless conduct at

issue is oycott coercion or intimidation

• >' T >' conspiracies

• Every >' insurance company is state regulated conspiracy of >' insurance

companies is e3cepted

• >' T >+ conspiracies

•

@ithin state regulation e3ception• >+ T >+ conspiracies

• Fot in scope of )" Lc none are state regulated

*#/ @hat does 9oycott: meanK

• )a7ority refusal to do usiness in an area that is unrelated to a dispute

• Fot possile to know effect of this decision

• Boycott is not when two groups that fight and group says won,t deal with you

on that issue*&/ E3traterritoriality

• 'herman applies to conduct that happens outside the >' if?

*1/ Conduct violates 'herman T and*#/ 4as an adverse affect on the >' markets

*M/ 2octrine of Comity

• 5ule? Even when >' courts could assert 7urisdiction they will not when it would put >

court,s in conflict with foreign law *reali


23/55

• 5emedy granted is not very effective invalidate +

c. Geographic )arket

• Court failed to consider the geographic market

• If market is the whole world then decision would make sense

• But at time of this decision market was proaly not that ig

• 2ue to high transportation costs *like cast iron pipes/ and tariffs it is highly unlikely th

the three firms compete with each other

•

(oday the arriers to trade are not as high and the decision would make sensed. !arent-'usidiary

• At this time courts viewed division of a company differently than susidiaries

• BLc there is not distinction since the same conduct undertaken y division would e legal the same

conduct should e valid if engaged in y susidiaries

• Copperweld

• If 1 wholly owned susidiary then an agreement of this nature is no a violation

under 'herman 81. (reated as same parties and it takes two parties to violate 'herman81.

• @holly owned su may e regulated under 'herman 8#

• A su of less than 1 ownership may e considered to e a separate entity

overlapping ownership of less than 1 can have a violation of 81

• 2oes not overrule (imken Lc they were partly owned sus

#. >' v. (opco Associates *1D6#/a. Background

• Cooperative association of # small and medium-si


24/55

• Before making it illegal the court should re%uire that the participants account for a significant share

of the market and is engaging in the ad ehavior

&. !almer v. B5G of Georgia *1DD/a. Background

• 4 offers ar review courses all over the country B5G enters market in Georgia

• 4 offers to stop in GA if B5G gives side payment on courses in GA and never enter another market

• !rices in Georgia skyrocket

. 4olding

• #ori$ontal mar,et allocation is per se illegal

• Agreement y firms not to compete in each other,s territories is anti-competitive and unlawful on it

face wLo regard to whether the parties split a market within which oth do usiness or whether theymerely reserve one market for one and another for another

$. 7ertical Restraints

A. Resale Price 3aintenance

1. 2r. )iles *1D11/? 'till Good $awJ

a. Background• 2r. )iles produced numerous non-prescription drugs

• 2r. would only sell to retailers if they would sell his product for no less than a certain amount

• ertical minimum price fi3ing

• @ould only sell to wholesales if they would also agree to sell his products for no less than a

certain amount . 4olding

• ertical )inimum !rice fi3ing is per se illegal

• ertical resale price maintenance should e treated the same as hori


25/55

• 5etailers forcing the manufacturer to re%uire retailers to sell at a specific price

asically a form of hori' *1D&1/ *2o $ater/#


26/55

. +lor,s v. Broadway-4ale 'tores *1DD/. >' v. !arke 2avis N Co. *1D/

a. Background

• !ark 2avis distriutes drugs through wholesalers and retailers

• !rovided a list of minimum prices for their products

• 'aid would not deal with those who did not adhere to the list

• Government argues vertical minimum price fi3ing

. 4olding


• 5nilateral vertical minimum price fi'ing plus communication is per se illegal

• >nlike Colgate the fact that there was communication means there as an 9agreement: seem

to e a de facto overruling of Colgate and looks like court is going ack to 2r. )iles

• )echanics?

• (he initial letter written to retailer descriing deal will not make a +

• @hen try to enforce minimum price it ecomes an offer and acceptance form a + and then

per se illegal

6. Alrecht v. 4erald *1D/ *Hverruled y 'tate Hil v. +ahn/a. Background

• 4erald distriutes its papers through dealers who uy the papers and resell them

• + with distriutor has a territorial restriction and a ma3imum price term

• Alrecht egan charging more than the ma3imum price specified y 4erald

• 4erald hired a new distriutor to compete with him

• Alrecht sued 4erald for 'herman 81 violation

. 4olding

• 6ertical ma'imum price fi'ing is per se illegal

• ustification for imposing ma3imum price distriutors have a monopoly and could take advantage y

charging very high prices newspapers does not want its circulation to go down

• If eliminate territorial restriction still a 7ustification for imposing ma3imum price

• 2ealers would develop a natural monopoly Lc inefficient to have customers all over the city

. )onsato v. 'pray-5ite *1DM/a. 4olding

• ertical price restraints are per se illegal

• )ust have an agreement to violate 'herman 81

• "o be an agreement ta,es more than 7ust communication to fall in per se category

• )ust e a direct communication or a formal contract

• 9direct or circumstantial evident of a conscious commitment to a common scheme to achieve an

unlawful o7ective: and 9the distriutor communicate it ac%uiescence or agreement:

D. Business Electronics Corp. v. 'harp Electronics Corp. *1D/

a. 4olding• Hnly thing that counts as an agreement is a formal contract where manufacturer and distriutor

say will never sell manufacturer,s product elow a certain price

• 'o can enter into a pure at will distriution agreement and then follow up with letters

saying will terminate you if sell elow a certain price and not violate antitrust laws

• By making it so easy the case seemed like it has the effect of overruling 2r. )iles

• 2ealer and Agent distinction is eliminated was eliminated in 'ylvania *vertical non-price

conte3t/ ut now court applies vertical minimum price fi3ing and vertical non price as the sameso can e confident that distinction is eliminated in all conte3ts

#


27/55

1. 'tate Hil v. +han *1DD6/ *Hverruling Alrecht/a. Background

• 'tate Hil was giving its franchise outlets territorial restrictions and a ma3imum price condition *same

situation as Alrecht/ . 4olding

• 6ertical ma'imum price fi'ing is analy$ed under a rule of reason analysis

• Fo longer per se illegal ut still can have a violation

• !ierce says


28/55

#. >' v. 'chwinn *1D6/ *overruled in Continental 1D66/a. Background

• 'chwinn,s market share dropped from ##. in 1D1 to 1#. in 1D1

• !lan reduce numer of distriutors choose only those committed to selling product and give

them a territorial restriction

• !lan works and their market share staili


29/55

• Court now says the distinction is irrelevant form of implementation has no effect on the

performance of the market oth have same effect

• Fo longer okay to impose a minimum price y selling through an agent on consignment same

effect as if manufacturer had enforced a minimum price

f. 2issent

• Even though only overruling vertical territorial restraint court will say vertical minimum price fi3in

is not per se illegal

• (wo practices have the same effect induce sales people to sell product decrease intra-rand

competition and increase inter-rand competition

". T2in! and &'clusie ,ealin!

1. International 'alt v. >' *1DM6/a. Background

• I' has salt processing machines covered y a patent

• $eases the machines with a re%uirement that the person leasing the machine must use I',s salt in the

machine

• Gov,t argues this is illegal tying arrangement under Clayton 8& and 'herman 81 *due to contracts

etween lessor and lessee/

. 4olding• iolation of Clayton 8& and 'herman 81

• $ooks like court is saying it,s per se illegal ut it is not completely clear

• Court could not think of any legitimate purposes of arrangement

• Clayton (8 %rohibits ) "ying one product to another * e9uirements Contracts 8 but only

when they tend to lessen competition or tend to create a monopoly

• Chief Antitrust Concern arrangement makes it more difficult for competing manufacturers to fin

outlets for their products and are in effect 9foreclosed:

c. !ossile Effects of (ie-ins in this case*1/ E3tension of monopoly power taking monopoly in one market and e3tending it to another marke

•

!ierce argued there,s not possile way to increase monopoly rents y tying a productyou don,t have monopoly power in to a product you do have monopoly power in*#/ )ethod of Basing $ease !ayment on Amount of 'alt and only I' purchased

• (his ensures they are not using salt of a lesser %uality that may in7ure the machine whil

they are lamed easy way to protect reputation

• By forcing them to use your salt it is easier to monitor how much they are using the

machine and therefore how much to charge them if could use others salt electricians

could unhook and then hard to monitor

• Can charge lease rate corresponding to deterioration

• 'etting price at different levels ases on value different customers attach to the product

method of implementing 5amsey !ricing

*&/ )ethod of Increasing Barriers to entry

• If dominant firms are tying products it makes it more difficult for someone to enter one

of the markets without simultaneously entering the other market

• !ierce said most likely prolem of tie T in *higher arriers to entry/

#. 'tandard Hil v. >' *1DMD/ *e3clusive dealing/a. Background

• 'tandard had #& of gasoline market in CA

• 'old half of its gas through company-owned service stations and half through

independent stations

#D


30/55

• Entered into re%uirement contracts with independent stations re%uiring them to uy gasoline from

'tandard and only sell 'tandard,s products

• Gov,t aruged violation of 'herman 81 and Clayton 8& *arguing re%uirements contracts are the same

as tie-ins/

• Argued Internat,l 'alt stands for a per se prohiition on tie-ins

. 4olding

• iolation of Clayton 8&

• e9uirements contracts will be per se illegal if the party has a substantial share of the mar,et

• 'tandard,s #& of market was considered to e a sustantial share

• Court is not going to e%uate tie-ins and re%uirements contracts

c. 2issent

• @ith this rule 'tandard will 7ust uy more stores and 1 of those selling their gas will e

company owned

• Feed a more restrictive standard need a igger share of market to e per se illegal or 7ust have a

rule of reasond. 5ationale for Fot applying a !er 'e 5ule )ay have social enefits

• 5e%uirements contracts facilitate planning

• Buyer can count on source of supply

• 'eller can count on market to sell goods

&. (imes-!icayune v. >' *1D&/a. Background

• !ulished two editions of the newspaper

• 5e%uired advertisers who want to put ads in the morning paper to also uy ads in the evening paper

• Gov,t argued (imes was using its monopoly in the morning market to force advertisers to uy ads in

the evening paper illegally tying its two products

• Action rought under oth 'herman 81 and Clayton 8&

. 4olding

• 4o tying e'isted b:c this was a singly product

• "ow #s can argue no tie$ins b%c we are selling one integrated product with multiplecomponents rather than two products tied together

• Concluded that the newspaper,s advertising was fungile *an ad in the morning paper

was no different than ad in evening paper and therefore they occupied the same market/

• Also must have market dominance with tying product

M. >' v. errold Electronics *1D1/a. Background

• 4ave product giving people in rural areas decent ( reception

• 'elling n antennae and signal ooster as one integrated unit

• Government argues violation of Clayton 8&

• Hne product or (wo . 4olding

• (his was a single product when first put in the market ut over time ecame two separated products

• But this seems counterintuitive why would a manufacturer want to make something less

integrated over time

• 'C got this one wrong making two discrete products into one technologically

advanced product

• )entioned )icrosoft here *notes later/

• 4eld test for tying was different under 'herman than under Clayton

&


31/55

. 'usser v. Carvel Corp. *1DM/*Mth Cir./a. Background

• (o use Carvel,s trademark franchisees must also use Carvel,s ice cream and cones *part of franchis

agreement/

• Argued this was an illegal tie-in *tying ice cream and cones to Carvel trademark/

. 4olding

• Agreement legal items re%uired to e purchased were a single product with the trademark

• Carvel only had 1 of the market Fo market dominance

• 'ocial enefit helps protect name reputation *cannot sell lower %uality products with your name

connected to them/

. 'iegel v. Chicken 2elight *1D61/*Dth Cir./a. Background

• "ranchisees re%uired to uy their cooking e%uipment dry-mi3 coating for the chicken and special

packaging from the franchiser . 4olding

• Agreement is illegal

• (ie-in illegal Lc it has a sustantial share of the market in three separate products

6. !rincipe v. )c2onald,s *1D/*Mth

Cir./a. Background

• )c2onald,s re%uired franchisee to enter into a lease for a uilding

. 4olding

• Even though )c2onald,s has a sustantial share of the market re%uirement in legal

• "he franchise itself is one product includes Big )ac fries everything/

• $iterally every franchise is a tie-in ut circuit courts say franchise is one product so no

tie in

• 'ocially Beneficial effect of franchise

• >niformity

• +now what you are going to get and who will like it

• !rice

. Forthern !acific 5ailway v. >' *1D/a. Background

• $eased land on the condition that lessees use F! to ship all commodities produced or manufactured

on the land as long as F!,s rates were e%ual to those of competitors

• Gov,t argued this re%uirement violated 'herman 81

• Couldn;t bring a Clayon claim b:c only applies to goods

• 55 is a service

• $and is not a good

. 4olding

•

5e%uirement violates 'herman 81• #ave to show that the tie-in effects “not insubstantial” amount of commerce *!ierce said T little

different in ook/

• 2id not specify a market that it has to effect

• !ierce says amount of commerce is irrelevant what matters is share of the market

• !ierce says tie-in only matters wen firm has a sustantial share of market of product it i

using a the tying productc. 5eality Check

• (ie in was an enforcement mechanism used to find out who was charging elow allowale rate

&1


32/55

D. >' v. $oew,s *1D#/a. Background

• $oew,s conditioned the licensing or sales of commercially popular films to television stations on th

acceptance of a lock of films including movies with limited appeal

• Fo a la carte

• 2H challenged as a tie-in for violating 81 of 'herman

. 4olding


• !ierce says no difference etween having to uy si3 packs of lifesavers to get you

coconut fill and what is happening to $oew,s

• 'hould not e an antitrust suit or concern for antitrust authorities

• @hen someone has a Q on a product it has monopoly power satisfies 9sufficient economic

power: part of tie-in test

• Also has aility to restrain competition in the market for the tied product *the unwanted movies/

1. "ortner I v. >' 'teel *1DD/a. Background

• >' 'teel trying to enter housing market

• @ould provide low cost financing for a development if the developer will include a certain percentage of >' 'teel homes in its development

• "ortner got the financing and later accused >' 'teel of violating 'herman

• Argued it was an illegal tie-in of the homes and the financing

. 4olding

• ! stated a sufficient cause of action to avoid ' *on remand found to e an illegal tie-in/

• (ying is per se illegal on if?

*1/ ! must prove 2 had 9sufficient economic power: to effect tie-in

• 2oesn,t re%uire monopoly power or even dominant position

• &ssue on remand

• Class notes say this can e proven y low price ut !ierce says if sufficienteconomic power they would raise price

• Court gave e3amples of inaility of competitors to offer the same product

profitaly or local lending institution would regard such financing as too risky*#/ 9Fot Insustantial: amount of interstate commerce is effected

• Court found 1D is sales of tied product to the 2 to e not insustantial

11. "ortner II *1D66/a. Background

• "ortner I on remand @hat is sufficient economic power meanK

. 4olding

• 4eed mar,et power with respect to the tying product to have an illegal tie-in

1#. efferson !arish 4ospital v. 4yde *1DM/ *p. #/a. Background

• efferson !arish had e3clusive contract with a firm of anesthesiologists that gave them the e3clusive

right to provide anesthesiology service for the hospital

• 4yde was kicked out of the group and filed suit arguing this was an illegal e3clusive dealing and ti

in in violation of 'herman 81 . 4olding

• 'tandard is per se violation

• 5e%uirements?


33/55

*1/ (wo !roducts if only one product cannot e tied together

*#/ Feed market dominance in the tied product*&/ And a dangerous possiility of success in getting market power in the tied product

c. Hne !roduct of (wo Is there a tie in at allK

• )a7ority says separate products Lc can e and often are purchased separately *!ierce says this is

true/

• 2issent argues only one Lc there is not a market for surgery without anesthesiology

d. 2oes 2 have market dominance in the tied productK

*1/ (o determine must know 2,s market share which can only get y knowing relevant geographicmarket

*#/ 5elevant Geographic )arket for surgical services?

• (he more complicated the surgery the larger the market

• Considerations if going to e in hospital for a week want your family to go and visit

you so proaly a very small geographic market

• 4ere determined have & of relevant market not sufficient power in the tying

product markete. (hrough tying of surgery *market dominance/ with tied product *ane./ must also prove a dangerous

possiility of success in getting market power in tied product

• Concurrence thinks should also consider eneficial effects to consumers ut do not know if

ma7ority agrees with thisf. E3clusive 2ealing Contracts

) e'clusive dealing contracts are governed by the rule of reason

• here have an e3clusive dealing contract in anes. services

* Feed to know to what e3tent e3clusive dealing contracts foreclose mar,ets

• All e3clusive dealing contracts foreclose some part of a market need to determine

e3tent of the foreclosure

• )arket foreclosure other hospitals are foreclosed from this group of anesthesiologis

and anesthesiologists are foreclosed from hospital

• If foreclosure small no adverse effect on market

8 (o 2etermine )arket "oreclosure?*a/ !roduct )arket anesthesiologists

*/ Geographic )arket for anesthesiologists


34/55

• !rohiited independent companies who make parts to sell to I'H,s potential 'herma

81 prolem

• +odak argues tied photocopier to provision of parts and service

• BLc no market power in photocopier they would win

• I'H,s argue tie-in etween service of its machines and replacement parts of its machines

• >nder efferson !arish would easily win Lc have monopoly in replacement parts and

dangerous likelihood of otaining market power in tied product

. 4olding

• Court looks at aility of +odak to succeed in gauging consumers

• Even if +odak tries to collect on monopoly power it still has to compete with other

copiers

• Even with lower sticker price if information is availale consumers will e ale to look

at price over life of product

• 2istinction etween smart consumers and dum consumers

• 'mart consumer will do research and compare total cost of owning different machines

• Court is apparently saying there is potential for there to e enough dum consumers tha

strategy may work

• @hile smart consumers protect the dum one may e so many dum consumers in this

market that strategy may work *government/

• 'eem to ignore the efficiency defense *possily indicating that this defense may no apply in tie-

ins

c. 2issent *Advantages to (ie-ins/

• !rotect reputation and %uality

• @hen reak down it is hard to know if ad copier or ad service

• By eing provider of service removes amiguity

• Easier for small usinesses to finance

• Get valuale information and feedack on %uality of machine

• 4elps in redesign

d. 5eactions to Case

• 4ard to know which strategy is most effective *providing service yourself or letting others do it

• If go with letting others and then change your mind may e antitrust violation

• 'o start with doing it all yourself *and then can always switch/

• 'trategy 'C though may have ad effects is ecoming more widespread

• @en people tried to e3pand this case to when people started with doing it all themselves the

circuit courts re7ected

• )aye actual violation in this case was in changing policies and starting y cooperating

with competition and then stopping *Aspen 'kiing/

4. 3ono(oli+ationA. Attem(tin! to 3ono(oli+e

1. 'tandard Hil v. >' *1D11/a. Background

• (rust controls D of oil refining capacity

• Comination of 4ori


35/55

• 'tandard Hil,s conduct violated the rule of reason

• )otive was ad effect was to restrict output increase profit and transfer wealth away

from consumers

• )onopoly power alone is not illegal only when used for improper purpose

c. 5emedy

• "orced 2ivestiture take company apart

#. (erminal 55 Case *1D11/a. Background

• 1M 55 went together to uild only 55 and switching yards across )ississippi into 't. $ouis

• Hnly the 1M 55 can use the facilities and are very stingy on letting others use it

. 4olding

• (he 55 facilities were essential facilities owners must provide e%ual access to competitors

*non-memers of association/

• Appropriate remedy is to give access to the non-memers on fair terms

• (oday the rates of use are set y regulatory agencies Lc if all owners to set they will set them s

high that there in effect is no access

• Feed to charge rate that wold give incentive to uild ridge ut also rate law enough to give

accessc. ,efinin! &ssential Facilit2

• "acility that cannot e duplicated economically y competitors

• @ithout the facility it is very hard to compete in the industry

&. >' v >' 'teel Corp *1D#D/a. Background

• >' steel formed a holdng company which accounted for of steel production in the >'

• Each company within holdin co. remained independent ut agreed to the same prices

• Arranged periodic dinners with other companies *the 9Gary 2inners:/

• >sed those dinners to try to set industry prices

• By time case reached trial >' 'teel only had M1 of the market an indication of law arriers to entr

. 4olding

• ule of eason Applies conduct not illegal

• (o iolate 'herman 8# Feed

*1/ !ower and*#/ Conduct

• 'i


36/55

• 4ad patents and 2ominated the aluminum production industry

• 2H argued Alcoa,s e3istence as the sole domestic producer violated 'herman 8#

. 4olding

• iolation of 'herman 8#

• &lements for iolation of Sherman 6#

*1/ possess monopoly power in the relevant market*#/ engaging in ad conduct that contriuted to the monopoly status

• Alcoa can,t use the 9thrust upon: or the 9natural growth: defenses

• Simply being a very large company with a large percentage of the mar,et doesn;t constitute an

antitrust violation must engage in bad conduct for the purposes of staying large

• Hften si


37/55

• 2oing whatever is possile to avoid a monopoly ut the monopoly is thrust upon is

monopoly results from all other firms aandoning the market

• (o use this defense ased on this decision?

*1/ must engage in inefficient operations*#/ shouldn,t utilinited 'hoe manufactured machines used ot make shoes

• Controlled 6 of the market

• "actors contriuting to >nited 'hoe,s market share

• !atents

• Economies of scale

• 'uperior products and services

• $easing agreements *would only lease machines not sell them/

. 4olding

• iolation of 'herman 8# *what aout 81K/

• >nited 'hoe had a large market share and engaged in conduct *the leasing contracts intended tomaintain its status/

• (wo 5e%uirements?

*1/ !ower to e3clude competition*#/ E3ercise of that power

• >sing an unreasonale restraint of trade as a means of e3cluding others in order to maintain a monopoly

power is a violation of 'herman 8#

• Court,s 5emedy >nited 'hoe must reform its contracts to allow for the sale of the machines

eliminate high cancellation fee and service re%uirement

• $ead to a decrease in its market share to M ut it still remained the dominant firm

• 2H later sued again arguing it was still too dominant court ordered divestiture eventual

led to the destruction of the shoe manufacturing industry in the >'

c. Court,s 5ationale and Criticism*1/ 2uration of $ease is $ong (erm

• Concern leterally restraining trade for the period of the lease

• Benefit Can charge lower rates Lc have security that will get ack and these lower charges he

e3plain why shoe making is competitive *lower arriers to entry/

*#/ 5ental !rice ased on 5ate of >tili


38/55

• Concern puts machines within the reach of larger numer of uyers and puts company in positio

to get larger proportion of market

• Benefit Can put machine of mre shoe makers and this means more competition

• )akes sense to charge this way Lc measure of wear and tear of machine payments

correspond with deterioration of e%uipment

• Illustrative of Common !ricing *5amsey/ different prices to different customers

ased on value customer attaches to the product the firm makes

*&/ $ease says if use some other firms e%uipment impose a penalty per shoe

• Concern restraint of trade

• Benefit protects co. Lc they get paid ased on the use of the machine *people could rent for a

long time and use some one else,s machine

*M/ 5ental Includes 'ervice

• Concern sophisticated machine co. wanting to get in competition would have to also offer

service ut hard to provide service with a little market share *harder for cos. (o enter the market/

• Benefit co. has a vested interest in machine Lc will get it ack Lc get paid ased on utili


39/55

*/ however given the gloal scope of phone service others have the aility toenter

*c/ thus merger would lose 1 of possily . Fot a prolem*&/ 5esult of Act

• !ierce said competition will result due to new technology and not this

. Predator2 Pricin!

1. >tah !ie v. Continental Baking Co. *1D6/ *!redatory !ricing Case/a. Background

• (hree different national firms ecame more vigorous competitors in the >tah pie market

• 'ole pies in >tah for less than in other markets *CA/

• Everyone kept lowering their prices result of a competitive market

• >tah !ie,s market share decreased from in 1D to M.& in 1D1

• >tah !ie no longer has the monopoly it once had and can,t charge a monopoly rent

• >tah !ie files suit under 'herman 8# and Clayton 8#

. 4olding

• Illegal predatory pricing in violation of Clayton 8#

• 5e%uirements? *not sure if formal re%uirements/

*1/ !rice discrimination charging less in one market or to one customer than another *#/ )ust lessen competition or tending to creating a monopoly

• "actors court relies upon?

• (he three national firms were charging less money for pies in >tah than in California

• But this in not unusual at all

• !rices depend on demand curves >( market may e more competitive and have to

sell for less to compete there

• (hree companies were not doing anything ad in >tah they were lowering prices

• Charging prices elow average cost *includes overhead/

• (his is routinely done average cost is irrelevant in pricing decision and includes cost

already incurred and ehind you

• )arginal cost is the important cost you can avoid y not producing one more unit• @hen e3cess capacity every firm is selling elow average cost

• 2ecrease in >tah !ie,s market share from to M

• But isn,t this 7ust a conse%uence of eing faced with effective competitionK

c. Predator2 Pricin!

*1/ 2escription

• "irm charges a very low price for the product or service with the aim of forcing someone else o

of usiness and then raises prices in order to earn monopoly profits*#/ ohn )cGee,s argument against predatory pricing

• Barrier,s to entry will e low firms who e3it due to predatory pricing will sell their e%uipme

for little to firms who will then enter • $osses in predatory pricing period must e lower than gains during monopoly period without

attracting new entrants )cGee says gains will not e3ceed losses Lc new firms will enter the

market destroying monopoly profits

• Hnce a firm gets a monopoly the threat of new entry will keep the firm from e3ploiting its

advantage for very long

• It takes a very long time to get to a monopoly position in this way and will e very costly th

high costs re%uired to drive out opponent will e very difficult to earn ack through monopoly profits strong argument that predatory pricing is a stupid usiness argument

*&/ Farrow Circumstance where may work Airlines

&D


40/55

• Can drive out star up companies easily e reducing prices on route in competition *2allas to

Cleveland/

• 'ends a message to all other star ups to not try in all markets

• But cannot tell airline they cannot lower prices when competition socially eneficial

• Even though possile should not e a violation of antitrust laws Lc too tempting to do what

>tah !ie did result would e firms agreeing to raise their prices should not have predator

pricing suit Lc can result in classic horitah !ie

• Compare marginal costs rather than average costs

• @hile marginal cost is hard to measure it is very close to variale costs which is easier to measure

• ariale costs will e lower than average cost

• (est no price that is aove firms variale cost can e predatory

#. Aspen 'kiing Co. v. Aspen 4ighlands 'kiing Co. *1D&/ *proaly an essential facilities/a. Background

• 'kiing owns U skiing areas in Aspens and 4ighlands owns V

• (wo 7oined together in a 7oint marketing arrangement in which they offered a 7oint ski ticket that could

e used on all of the mountains• Arrangement fell apart would could not agree on profit splitting

• 4ighlands sued skiing arguing that it had monopoli' and susidi


41/55

• Court recogni' companies

• Pou lose money in the predatory pricing period hard to 7ustify that these firms have

een intentionally losing money for #1 years

•

)ust think you can regain the money with cartel prices

ut >' firms still have Mof the market

• By gaining a cartel in apan use that e3tra money to predatory price in the >'

• (his would e economic suicide

• >' consumers would e helped through lower prices

• 4as effect of transferring wealth from apan to >' hard to elieve this would e the

motivation

d. 2issent

• @rong to give apanese western values in it for money

• @hile most economists would say no predatory pricing some would

• uries were iased in W,s against apanese

• Appropriate role of 7uries and e3pert witnesses

M. Brooke Group v. Brown N @illiamson *1DD&/a. Background

• Cigarette industry is a tight oligopoly of si3 firms due to successful anti-smoking campaigns industry

has e3cess capacity

• "irms typically ehave through legal conscious parallelism

• $igget,s responds y producing a generic cigarette Brown follows y putting its own generic cigaret

on the market *only has 1# of market/

• Each egins to lower their price to undersell the other

• $igget sues alleging predatory pricing

. 4olding

• Fo violation of 'herman 8#

• To win a (redator2 (ricin! case/

*1/ !rove 2 charged a price elow some appropriate measure of incremental cost*#/ !rove 2 has a reasonale prospect of recouping their losses

• )aking it much harder to win a predatory pricing case

• Rationale

• !! is rarely tried and successful

M1


42/55

• If !! doctrine that made it easier for ! to win would create an “intolerable ris,s of chilling

legitimate price cutting”

• Court recognitah !ie had ad effect on markets Lc easy for ! to ring and with a

settlement get 4ori


43/55

#. 4art-'cott-5odino Antitrust Act of 1D6a. @ho )ust "ile

• 5e%uires parties of mergers *road interpretation/ to make pre-merger filings with 2H and "(C

• If merger etween companies with net sales or assets of 1 million and 1 million must

file . @aiting !eriod

• Can,t consummate merger for days after filing

• "(C and 2H have days to notify you if they will challenge your merger

• If they will challenge most mergers fall apart

• (hey can force you to provide more data and e3pand the days2H has leverage s

you comply

c. !ossiilities

• If hear nothing y 1st day can go forward with the merger and 2H cannot sue

• A private party can sue however

• ! has to know hard to win Lc takes lots of money and 2H has said merger is okay

• ery few merger that get through clearance will go to court

• Hn Dth day 2H will challenge due to fear of anti-competitive effects

• )ost firms will 7ust say forget it 2H has lots of resources and can stall and stalling

will cause it to fall apart

• But you can say 9see ya in court: mergers have eaten 2H in a few cases

$. *SR Filin!s ,-=5FT" 0uidelines

a. !urpose of Guidelines

• 0uantitative screens that let you know if your merger will e su7ect to close scrutiny or one th

2H will not challenge . 2epends on 44I measure of concentration of market with measure of increased concentration of

market created y merger *1/ 44I X sum of the s%uares of the market share of any firm competing in the market

• 1 firms with 1 *1#

Y 1#

Y etc./ X 1• M firms with # X #

• 4ighest !ossile 44I *pure monopoly/ X 1

• +ust determine ##I for each of the relevant geographic and product mar,ets

*#/ Change in 44I X s%uare market share of post merger firm minus sum of the s%uares of each of thefirms market share

• Basically calculating difference etween pre-44I and post-44I

• If two firms with of the market merge?

• 1# T *# Y #/ X

c. General Concept• 4ighly concentrated markets perform worse than those that aren,t as concentrated

• 44I measures the degree of concentration *used as a screening device/

d. ,-= will unliel2 challen!e a mer!er if/

*1/ !ost merger 44I Z 1

• (his is not a concentrated market

*#/ !ost merger 44I Z 1 ut greater than 1 AF2 Change in 44I Z 1

• 1 is moderate concentration ut only worried if will cause a large change in

concentration

M&


44/55

*&/ !ost merger 44I [ 1 AF2 change in 44I Z

• 4ighly concentrated ut change in concentration is slight

e. Hther Issue in determining whether merger will pass

• @hat definition did you use for relevant geographic and product markets'

• 'C old merger cases are helpful to determine market

• !roduct sustitutes price elasticity of demand

• If 2H agrees with markets and 44I,s fall with threshold then home freeJ

f. If mer!er is outside the safe haror/

*1/ Entry Conditions

• If numers e3ceed the threshold and entry conditions are high will challenge

• If entry conditions are low may not challenge

*#/ Countervailing Efficiencies

• 'how 2H that even if merger may do some harm due to contration in market and entry

conditions are high may still not challenge if resulting merger produces efficiencies

• Economies of 'cale enefits to consumer etc. *A'+ ABH>( )H5E/

*&/ "ailing "irm 2efense• !ossile 7ustification for merger that would create undue concentration

• Economists say let it fail and the doctrine is controversial

• $et firm go under and let anyone e3cept dominant firm pick up useful assets

*M/ ertical Issues

• 2H may challenge vertical mergers

• (hey may have a potential to raise rivals costs through control of essential facilities

. 3er!er "ases

1. Brown 'hoe v. >' *1D#/a. Background

•

)erger etween Brown 'hoe *&rd

largest retailer and Mth

largest manufacturer/ with +inney *thelargest retailer and 1#th largest manufacturer/

• +inney lower-priced shoes

• Brown 'hoes medium priced shoes ut does compete with +inney in some markets

• 2H opposed the merger for three reasons

• # hori


45/55

• 'tandard reasonale proaility of a sustantial lessening of competition or the reasonale

likelihood of foreclosure of a sustantial share of the market

• +anufacturing mar,et *hori


46/55

• ertical integration in an industry is a enefit to consumers Lc consumers will enefit from

economies of scope and coordination

e. "ailing "irm 2efense

• Even if merger is unlawful can defend y showing that one of the two firms would die otherwise

• !ierce says asurd defense let the firm die

• Antitrust laws are to protect competition and FH( competitors

#. >' v. !hiladelphia Fational Bank *1D&/a. Background

• !roposed merger etween the second and third largest anks in !hiladelphia would have created

largest firm controlling & of anking in relevant four county area . Analysis

*1/ !roduct )arkets

• Checking

• 'mall loans

*#/ Geographic )arket

• Checking maye a little eyond local neighorhood

• 'mall loans !hilly metropolitan area

*&/ %uantitative area• would have & of consumer and small loans

• top two firms would have 6 of market

c. 4olding

• +erger which results in a firm gaining an undue > of the mar,et share and which substantially

lessens competition is presumptively illegal under (?.

• If > is large enough and increase in concentration is large enough/ merger is presumptively

illegal absent e'planation

d. Hther Characteristics of the Case*1/ Banks provide other services

•

$arge loans *1)/• Geographic market is entire >'

• Giant loans

• Geographic market is entire world so this merged ank would have tiny part of

the market*#/ "ederal 'tatutes

• Banks can,t do usiness in more than one state and states limit them to one county

• 5esult 1&M anks in >' while other countries 7ust 1

• Hnly FP anks have aility to get large enough to compete in large loan market

*&/ 2ilemma

• If allow merger to take place have highly concentrated market in consumer markets

•

If don,t allow to take place no anks can get large enough to compete in large and gianloan market*M/ 'olution

• 5epeal restrictions on anks

• Fow we have a system where local markets are still unconcentrated there are 1

ma7or anks to choose from ut large enough to participate in large loan market

&. >' v. on,s Grocery *1D/ *no modern significance/a. Background

• (wo grocery store chins would result in 6.M of $A market

M


47/55

. 4olding

• iolation of Clayton 86

• $argely ecause this merger would reduce the numer of independent firms in the

market *political/c. Criticism of Court,s 2ecision

• Appears to e making almost all mergers illegal per se whenever the relevant market showed signs

of concentration

• !reventing mergers such as this may prevent increased efficiencies that could result in lower prices

to consumers

• (oday courts would almost certainly not e concerned aout a merger resulting in a firms with 6.M

of the market

• (oday need only participants decently si' v. !enn-Hlin Chemical *1DM/ *!otential Entrant 2octrine/a. Background

• oint venture etween !enn and Hlin to uild a plant to produce sodium chlorate in kentucky and se

in the 'outheast

• Before the 7oint venture the firms controlled D of the 'outheastern market ut neither sold

sodium chlorate in that market

• Both had previously considered ut not completely re7ected the idea of independentlyentering the market

• 4ad not een a new entrant in 1 years

. 4olding

• Apply Clayton 86 to a 7oint venture

• Potential entrant doctrine

• )erger should e invalidated if one of the firms proaly would have entered the mark

with the other remaining 9at the edge of the market continually threatening to enter:

• Hne on sidelines is a threat and would help keep prices down

• Hne potential entrant on the sideline and that threat created price discipline Lc

they know if prices get too high they may enter

•)ust look to whether there is a reasonale proaility of the firms entering the market

• (hree competitors is etter than # ut M is etter than &

. >' v. Continental Can *1DM/ *conglomerate merger/a. Background

• Continental produced && of nation,s metal containers *#nd largest in industry/

• @ants to uy 4a


48/55

*&/ 2ilemma

• In the first instance you are arguing the product markets are very narrow as to not to include o

companies products

• In the ne3t instance you are arguing the product market is very road so your of the market

will e smaller

. >' v. A$CHA *1DM/a. Background

• Alcoa makes aluminum wire and is trying to purchase stock and assets of 5ome Cale which makecopper electrical cale

• Alcoa makes &. of aluminum wire and does not make any copper wire

• 5ome makes mostly copper wire ut also makes 1.& of the aluminum wire

. 4olding*1/ !roduct )arket copper and aluminum wire not same

• Fot in same product market Lc different types of wire aren,t functionally sustitutes for each

other

• Aluminum has cost advantages for overhead lines

• Copper had much greater consumer acceptance for other uses

*#/ 5esult

• BLc court decided these are different products it is logical to assume that this merger is 7ust a product e3tension for oth firms and that can,t result in a reduction of competition or tend tocreate a monopoly

• But court concluded that this merger violated Clayton 86 Lc adding 5ome,s 1.& of th

aluminum wire market to Alcoa,s share created a firm with to large of a share of thatmarket

• If (ome had 7ust voluntarily divested itself of its 1.& share of the aluminum wire

market this merger wouldn,t have een a prolem

6. "(C v. !rocter N Gamle *1D6/ *conglomerate merger/a. Background

• !rocter and Chloro3 want to merger

• !rocter had M.M of detergent market

• Cloro3 had M. of leach market

• Feither makes the other product

• !roducts are not good sustitutes for each other

• Challenged Lc *1/ increased arriers to entry in leach market Lc advertisement is important in

industry and !NG have strong ad power and *#/ may lose potential entrant into leach market . 4olding

• Even though this merger will have no effect on the concentration of either market it violates Clayto

86 Lc it would lead to a sustantial lessening of competition and a tendency to monopoli


49/55

c. 'cope of decision

• (wo firms with related and comparale products wanting to merge

• Any merger etween related product firms may e shot down on 9potential entrant

theory:

• 4igh arriers to entry theory *advertising economies of scale making it higher/

• Fon-trivial risk with related produces of merger may e shot down

. "(C v. Consolidated "oods Corp. *1D/a. Background

• !roposed merger of C" *retailing and packagingLprocessor/ and Gentry producer of dried onion and

garlic *&& of market/

• ertical integration merger

. 4olding

• iolation of Clayton 86 !ierce says 7unk

• 3aret Foreclosure throu!h reci(rocit2

• C" could condition its purchases from other food processors on their purchase of

dehydrated onion and garlic from Gentry

• (heory is that this will foreclose others from the dried onion and garlic market Lc

processors will e uying from Gentry and consumers will not have a choice

• 4ere a little silly Lc C" only has & of wholesale market and competitors can go toother D6 of market to get their dried onions and garlic

c. 'cope of 2ecision

• Hne firm wanting to merge with any other firm in chain of vertical market

• Court could apply this reasoning to firms not in same market ut in same distriution chain *ertica

Integration )erger 5im/

• But !ierce says that I) are efficiency enhancers with reduced costs increased %uality and

increased consumer wealthd. End of 'upreme Court merger decisions

• 'C did damage to >' economy with merger decisions

•Barred efficiency enhancing mergers

• Corporation,s had high profits and if paid to 'L4 got doule ta3ed so wanted to merge

efficiency enhancing mergers were struck down so did inefficient mergers

• 4ori


50/55

• Brought Clayton 86 antitrust action against Brunswick arguing that its ac%uisition

foreclosed the market to other owling products and manufacturers

• Alleged In7ury y staying open B has hurt them y preventing them from eing a

monopoly and depriving them from monopoly rent *like >tah !ie and 4erald/

. 4olding

• +ust have antitrust standing to bring a private antitrust action

• 5e%uirements for Antitrust 'tanding?

*1/ must show antitrust in7ury of a type that antitrust laws were intended to prevent*#/ )ust e a direct in7ury

• !reventing doule recovery

c. >nited 'tates

• Always has standing

d. Customers

• 2irect customers will usually have standing

• In7ury should reflect anti-competitive effect increased prices decreased output and shifting of

wealth

• If has ad effects the ad effects will e felt y the consumers and they can sue

e. Competitors

• Being forced to fact greater competition is not an antitrust in7ury• $oss of monopoly profits it not an antitrust in7ury *might eliminate >tah !ie and 4erald/

• Antitrust laws were meant to protect competition and not competitors

• )ore difficult now for competitors to ring these suits *when prices go up they are helped Lc they

then can also raise prices and still sell/

• 'ometimes have standing to challenge the conduct of its competitors *tying/ ut this is very rare

1. >' v. 'yufy Enterprises *1DD/ *Dth Cir./a. Background

• Hwner and operator of movie theaters in $as egas egan converting theaters into multiple3es

• Began destroying its single-screen competitors

• !urchased all of its competitors e3cept one D& of market• $ast few of the mergers fell with in the 4-'-5 Act so 'yufy did filings

• 2H and "(C re7ected the filings ut 'yufy did them anyways

• Government filed suit under Clayton 86 and 'herman 8#

• Fote Lc trials take years 'C has advantage over 2H Lc can actually see some evidence of

how merger impacted competition

• 4ere prices had gone down and consumers now had much greater choices

• Government argued monopsony

• )onopsony uyer having power over price and %uantity; monopoly implemented y

uyer instead of seller

• (heory single uyer will depress price and monopsonist due to lower price will

restrict supply and consumers will have less choice

. 4olding


• So long as there is a mar,et with low barriers to entry/ it is impossible to get a monopoly b:c a

soon as you raise prices/ a new competitor will enter the mar,et and undercut you

• Characteri


51/55

• )arket with low arriers to entry and sophisticated sellers

c. )arket had low arriers to entry (ypes of Barriers

*1/ 5egulatory Barriers *most important arrier/

• arious approvals that may e needed

• In the case of movie theaters there are very few

*#/ 4igh Capital Investment T Economies of 'cale needed to Compete

• In some industries need to e a large player to compete

• (o enter market must come in ig *oil refinery/

• In operating theater not ine3isten ut not a formidale arrier

*&/ Access to critical resources

• If cannot get a necessary resource cannot enter the market

• "or movie theater not a prolem

*M/ Fetwork of contracts re%uired

• In order to enter market must estalish complicated network of contracts

d. 'ignificance of $arge 2istriution Companies

• $arge uyers or sellers have options availale to them to prevent a 9monopolist: from eing ale to

e3tract monopoly profits from them• Hptions availale

• "inance a competitor

• Change the market

• Go to an auctioning process

• Competitive idding

11. Efficiencies as a 2efensea. !olicy statement issued y 2H

• Consider efficiency for decades if proaility of anti-competitive effects are small and there are

sustantial efficiency enhancing effects merger will pass

• Balancing anti-competitive effects and efficiency

. convince 2H• Fo anti-competitive effects if there are some effects they will e small

• Efficiency enhancement will e large

• 2H very skeptical of numerical estimates set y firms on efficiency enhancement *firm

will overstate/7I. State Re!ulation

A. State Re!ulation1. !arker v. Brown *1DM&/ %STAT& A"TI-N ,-"TRIN&) *p. 6Ma/

a. Background

• 5aisin cartel with DD.D of all raisins produced and consumed in >'

• California passed a law that made memership in the cartel mandatory

•CA set prices and restricted production

. 4olding

• Fot a violation of 'herman Lc it is a 9state action:

• Congress did not intend to o

Antitrust - Pierce - Fall1999_3

Documents

Transcript of Antitrust - Pierce - Fall1999_3