Chapter 37Antitrust Law

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What is a monopoly? What is market power? What type of activity is prohibited by §§ 1 and

2 of the Sherman Act? What are the four major provisions of the

Clayton Act? What federal agencies enforce the federal

antitrust laws? What are four activities that are exempt from

antitrust laws?

Learning ObjectivesLearning Objectives

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IntroductionCommon law actions intended to limit

restrains on trade and regulate economic competition.

Embodied almost entirely in:The Sherman Antitrust Act of 1890.The Clayton Act of 1914.

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The Sherman Antitrust ActSection 1 and 2 contain the main provisions of

the Sherman Act.Section 1:

• Requires two or more persons, as a person cannot contract, combine, or conspire alone.

• Concerned with finding an agreement.Section 2:

• Applies both to an individual person and to several people, because it refers to every person.

• Deals with the structure of monopolies in the marketplace.

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Section 1 of the Sherman Act

Analysis: Per Se Violations vs. Rule of Reason.

Some activity is so blatantly anticompetitive that it is a per se (on its face) violation (price fixing).

Other activities can be analyzed by “rule of reason” to determine reasonableness.

Section 1: Horizontal Restraints

Agreements among Sellers (or Buyers) that restrain competition between rival firms competing in the same market .

Seller

Buyer

Seller Seller

Buyer Buyer

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Horizontal RestraintsPrice Fixing

An agreement between competing firms in the market to set an established price for the goods or services they offer.

Price fixing is a per se violation of the Act.

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Horizontal RestraintsGroup Boycotts

Agreement between two or more sellers to refuse to deal with a particular person or firm.

Group boycotts are per se violations of the Act.

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Horizontal RestraintsMarket Division

Occurs when competitors in the same market agree that each will have exclusive rights to operate in a particular geographic area.

Horizontal market divisions are per se violations of the Act.

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Horizontal Restraints Trade Associations

Industry specific organizations created to provide for the exchange of information, representation of the business interests before governmental bodies, advertising campaigns, and setting of regulatory standards to govern their industry or profession.

Rule of reason is applied to determine if a violation of the Act has occurred.

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Horizontal RestraintsJoint Ventures

Undertaking by two or more individuals or firms for a specific purpose.

The rule of reason is applied to analyze the agreement if the venture has first been found not to involve price fixing or market divisions.

Section 1 -- Vertical RestraintsPer se anti-

competitive agreements imposed by Sellers upon Buyers (or vice versa) that may include affiliates in the entire supply chain of production.

Buyer

Seller

Buyer

Buyer

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Vertical Restraints Agreements between firms at different levels

of the manufacturing and distribution process. Vertical restraints may restrain competition

among firms that occupy the same level in chain.

Vertical restraints that significantly affect competition may be per se violations.

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Vertical RestraintsTerritorial or Customer Restrictions:

Imposed by manufacturers on the sellers of the products, to insulate dealers from direct competition with each other.

Territorial and customer restrictions are judged under the rule of reason.

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Vertical RestraintsResale Price Maintenance Agreements

An agreements between a manufacturer and a distributor or retailer in which the manufacturer specifies the retail price at which retailers must sell products furnished by the manufacturer or distributor.

This is a type of vertical restraint and is normally a per se violation.

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Vertical RestraintsRefusal to Deal

Unlike a group boycott, a refusal to deal is an action by one firm against another, and this is usually legal, unless:• the firm refusing to deal has, or is likely to

acquire, monopoly power, and• the refusal is likely to have an

anticompetitive effect on a particular market.

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Section 2 of the Sherman ActSection 2 of the Sherman Antitrust Act

deals with:Monopolization.Attempts to monopolize.

Predatory pricing.Attempt by a firm to drive its competitor from

the market by selling its product at prices substantially below the normal costs of production.

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Section 2 -- Monopolization

Monopolization in violation of the act requires two elements:The possession of monopoly power andThe willful acquisition and maintenance of the

power.

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Section 2 -- Monopolization

Monopoly PowerExists when one firm has sufficient market

power to control prices and exclude competition.

Market Share Test is often used to assess market power.

• As a rule of thumb, if a firm has 70% or more of a relevant market, it is regarded as having monopoly power.

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Section 2 -- Monopolization

Intent RequirementThe intent to monopolize is difficult to prove.Intent may be inferred from evidence that the

firm had monopoly power and engaged in anticompetitive behavior.

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Section 2 -- Monopolization

Attempts to MonopolizeFirm actions are scrutinized to determine

whether they were intended to exclude competitors and garner monopoly power and had a “dangerous” probability of success.

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The Clayton ActThe Clayton Act deals with:

Price Discrimination.Exclusionary Practices.Mergers.Interlocking Directorates.

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Section 2: Price Discrimination

Price Discrimination Charging of different prices to competing buyers for

identical goods.Exceptions:

Charge of lower price was temporary and in good faith to meet another seller’s equally low price to the buyer’s competitor.

A particular buyer’s purchases saved the seller costs in producing and selling the good.

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Section 3: Exclusionary Practices

Exclusive Dealing ContractsA contract under which a seller forbids to purchase

products from the seller’s competitors. Prohibited if the effect of the contract is to

“substantially lessen competition or tend to create a monopoly.”

Tying ArrangementsThe conditioning of the sale of a product on the buyer’s

agreement to purchase another product produces or distributed by the same seller.

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Section 7: MergersHorizontal Mergers occur between firms

at the same level in the production and distribution chain.

Vertical Mergers occur between firms at different levels in the production and distribution chain.

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Section 7: MergersConglomerate Mergers occur when a

firm seeks to:Extend its product into a new market by

merging with a firm in that market.Extend its product line by merging with a firm

already producing that product.Diversify by acquiring a firm that deals in

unrelated products.

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Section 8: Interlocking Directorates

Occurs when an individual serves on the board of directors of two or more competing companies simultaneously.

These are prohibited if the two firms meet certain size requirements.

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The Federal Trade Commission Act

FTCA provides that:“Unfair methods of competition in or affecting

commerce, and unfair or deceptive acts or practices in or affecting commerce are hereby declared illegal.”

The Federal Trade Commission (http://www.ftc.gov) enforces the FTCA.

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Enforcement of Antitrust Laws

Federal agencies that enforce the antitrust laws are:U.S. Department of Justice (DOJ).Federal Trade Commission (FTC).

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Exemption from Antitrust Laws

Most statutory exemptions to the antitrust laws apply to the following areas:

• Labor.• Agricultural associations and fisheries.• Insurance.• Foreign trade.• Professional baseball.• Cooperative research and production• Joint efforts y businesspersons to obtain legislative or

executive action.• And Others.