antitrust picker

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Antitrust Outline Professor Picker I. Introduction: Restraints of Trade and Development of the Rule of Reason A. Introduction: Goals of antitrust law 1. Some monopolies increase efficiency, reduce information or transaction costs, and eliminate free-rider problems. A primary task of antitrust law is to distinguish between those agreements that pose anticompetitive threats from those that don’t. Two main goals of antitrust law: a. Maximize consumer welfare (Chicago school’s only goal) b. Protect the little guy 2. A secondary task of AL is to minimize cost of antitrust enforcement w/o giving up too much in accuracy. This is why we classify agreements: a. Per se class -- can be approved or condemned w/ a quick look (1) per se test often obscures complexities in joint agreements. Idea of rough justice. Per se rule gets it right often enough, that savings from not having to do full blown analysis each time outweigh the costs of occasionally getting it wrong (2) E.g. Not a defense to a price-fixing charge that cartel members did not have enough market power to reduce output profitability. Yet if 3 out of 50 grocers agree to prices and advertise together, the advertising costs for the 3 would go down and the other 47 grocers would still get market share. Strong efficiency argument but weak antitrust argument. Doesn’t matter. Ct. would probably hold per se illegal and won’t care about procompetitive justifications. b. Rule of Reason class – more detailed industry and market analysis required B. Joint ventures 1

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Page 1: Antitrust Picker

Antitrust OutlineProfessor Picker

I. Introduction: Restraints of Trade and Development of the Rule of ReasonA. Introduction: Goals of antitrust law

1. Some monopolies increase efficiency, reduce information or transaction costs, and eliminate free-rider problems. A primary task of antitrust law is to distinguish between those agreements that pose anticompetitive threats from those that don’t. Two main goals of antitrust law:a. Maximize consumer welfare (Chicago school’s only goal) b. Protect the little guy

2. A secondary task of AL is to minimize cost of antitrust enforcement w/o giving up too much in accuracy. This is why we classify agreements:a. Per se class -- can be approved or condemned w/ a quick look

(1) per se test often obscures complexities in joint agreements. Idea of rough justice. Per se rule gets it right often enough, that savings from not having to do full blown analysis each time outweigh the costs of occasionally getting it wrong

(2) E.g. Not a defense to a price-fixing charge that cartel members did not have enough market power to reduce output profitability. Yet if 3 out of 50 grocers agree to prices and advertise together, the advertising costs for the 3 would go down and the other 47 grocers would still get market share. Strong efficiency argument but weak antitrust argument. Doesn’t matter. Ct. would probably hold per se illegal and won’t care about procompetitive justifications.

b. Rule of Reason class – more detailed industry and market analysis requiredB. Joint ventures

1. Joint ventures (JVs) are agreements among competitors that include some coordination of research, production, promotion, or distributiona. any association of 2 or more firms carrying on some activity that each firm

might otherwise perform aloneb. only some JVs require parties to agree about price or output

2. JVs are condemned when they are thought to eliminate competition between the parties to the venture OR when the JV allegedly excluded nonmember firms from access to a certain mkt.

3. Benefits of innovation – the dynamic efficiency gains that accrue from innovation very likely exceed the static efficiency gains that accrue from a policy that all prices be competitivea. Dynamic efficiency considers impact of market growth or creation of new

marketsb. Innovation may warrant a certain toleration of monopoly, i.e. patents (short

term monopoly)c. Antitrust has not generally discriminated between JVs expressly concerned w/

research and development and JVS designed for other gains4. JVs are created to:

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a. achieve certain economies by allowing them to do something at a lower cost, or by permitting them to do something for themselves that they would otherwise purchase on the marketplace or do w/o

b. price fix, restrict output, or effect monopoly creating market divisionC. Section 1 of the Sherman Act: “Every contract, combination in the form of trust or

otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.”1. Trans-Missouri Freight Ass’n , 1897, p. 69: A consortium of 18 RR companies

entered into a joint agreement, under which the members coordinated schedules, transfer of cargo, and freight rates. Agreement publicly known.a. Lower federal courts upheld the arrangement, emphasizing its efficiency

creating potential. Recognized the need for coordination to best serve public.b. RRs argue that SA was intended to make unlawful those combinations held

unlawful at common law – combinations which are an unreasonable restraint of trade

c. Justice Peckham, speaking for the Court, adopts a plain meaning construction of Section 1 that gives it a limitless scope. Almost any contract could in some sense be seen as a restraint of trade. Restraint condemned regardless of any justification.

d. Peckham also raises issue of appropriate goals of antitrust law, especially the extent to which AL should be concerned to protecting the structure of production. He is quite willing to sacrifice lower prices and the corresponding benefits to protect small dealers.

e. Case raises issue of should we carve out exceptions to AL for different industries, especially those like RRs which are natural monopolies? RRs have huge fixed cost and face the problem of the empty core. What is this? This may mean that social optimum is not possible to achieve w/o collusion.

2. Addyston Pipe and Steel Co. , 6th Cir. 1898, p. 75: 6 manufacturers of cast iron pipe entered an agreement under which the price at which the pipe was sold in “reserved” territories was determined by the association and the member to whom the business was assigned paid a fixed bonus to the association. Other members submitted fictitious bids to customers to give appearance of competition. Bonuses were distributed on basis of tonnage capacities. Manufacturers said purpose was not to raise prices beyond what was reasonable, but only to prevent ruinous competition among defendants.a. Contracts whose sole purpose is restraint of trade are per se illegalb. If restraint of trade is ancillary to a lawful main purpose of a contact, the

analysis is modified(1) naked restraints (price-fixing) condemned automatically(2) ancillary restraints which facilitate the main purpose of contract are

outside antitrust law b/c pro-competitive and market facilitatingc. Even is association set reasonable prices and even if firms faced ruinous

competition, the agreement is illegal b/c its main purpose a restraint of trade

D. The Rule of Reason

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1. Standard Oil Co. of New Jersey v. United States , 1911, p. 80: Case brought under SA §§ 1 and 2. Company grew over time by acquiring oil refineries throughout the country and dividing companies into subsidiaries. Because of their size, got rebates and discriminatory practices in their favor from RRs. This decision broke up Standard Oil.a. First clear statement that SA does not mean exactly what it says. Rejects plain

meaning argument from Trans-Missouri.b. Agreements to combine (mergers) are not to be treated like price-fixing

agreements and per se condemned. Instead, should be analyzed under rule of reason.

2. Rule of reason analysis recognizes that some consolidations could have procompetitive justifications (closing of inefficient plants, attainment of manufacturing or distributional efficiencies) which must be balanced against likelihood of public injury arising from exercise of market power.

E. The Social Welfare Consequences of Monopoly (see Picker handout for numbers): A monopolist reduces output and increases prices to increase profits, but at the cost of reducing social welfare. In a competitive market, price will equal marginal cost. A competitive seller asks, “is there a consumer willing to pay for the next unit more than it would cost me to produce that unit?” If answer yes, unit will be produced. In contrast, a monopolist sets price where marginal revenue equals marginal cost. This is b/c the monopolist asks himself a different question. He asks, “if I sell an additional unit, will I increase profits?” B/c the monopolist must charge uniform prices, to sell another unit means lowering the price a little bit and sacrificing revenue over ALL the units that he sells. Hence, to maximize monopoly profits, the monopolist will stop selling where marginal revenue equals marginal cost. Bottom line: consumer welfare will be reduced (b/c transfer to producer surplus) and overall social welfare will be reduced by dead weight loss triangle (1/2bh). (Note: if monopolist can perfectly price discriminate, there would be no net social loss b/c no loss of output. There would be a transfer of wealth as consumers would get no surplus and producer would get all surplus, but no deadweight loss.)

II. Price Fixing and Per Se Violations – Sherman Act § 1A. Justification for Per Se rule

1. Where a practice usually results in significant adverse competitive effects, rarely is justified by redeeming virtues, and when there are often less restrictive alternatives available, there is no reason for an extended trial before such practices will be condemned

2. Price-fixing rules tend to misallocate society’s resources, rarely achieve efficiencies that could not occur through less objectionable means, and seldom pass any benefits on to consumers

3. Alternative to simple per se rule of illegality would involve continuing supervision of price by enforcement agencies and the judiciary

4. Class of conduct is only brought under the per se rule after the court has had sufficient experience w/ the conduct to know that it is almost always anticompetitive – a rule of administrative convenience permitting the courts to

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avoid long, extensive investigations that are unlikely to change court’s initial evaluation

5. Only candidates for per se violations anymore are price fixing/output fixing agreements or certain group boycotts/refusals to deal.

B. Issues in Price Fixing Cases1. What constitutes price fixing and how that determination is made2. Is the conduct involved likely to have a substantial and direct effect on price? Is

that effect one that “necessarily” results from the arrangement?3. Are there likely to be substantial redeeming virtues flowing from the practice?4. Could the same or similar redeeming virtues be achieved through reasonably

available and less harmful alternatives?5. How difficult would it be to explore the relevant considerations? (rule of reason)

C. Price fixing – per se illegal under Section 1 of the Sherman Act1. Chicago Board of Trade v. United States , 1918, p. 239: Board adopted “call” rule

prohibiting members from purchasing grain commodities during the time between the close of the call and the opening of the next session at a price other than the closing bid. Before the rule, members fixed their bids throughout the day at prices they saw fit. Court held the call rule a reasonable regulation of business consistent w/ provisions of antitrust lawa. Applied a rule of reason analysisb. Rule created a market by forcing market transactions into a setting where all

buyers and sellers could rely on the same information and bid competitively for commodities exchanged there.

c. Critique to creating market – open information facilitates collusion and allows members of an agreement to detect “cheating” by other members (charging below price)

2. Classic statement of the rule of reason: a restraint is legal if “the restraint imposed merely regulates and thereby promotes competition or whether restraint may suppress or even destroy competition” (p. 240)

3. Court must consider the following factors in rule of reason (p. 240):a. facts peculiar to business to which restraint is appliedb. business’s condition before and after restraint imposedc. nature of the restraint and its effect, actual or probabled. history of the restrainte. evil believed to existf. reason for adopting particular remedyg. the purpose or end sought to be attainedh. intent – not dispositive, but knowledge of intent may help court to interpret

facts and predict consequences4. US v. Socony-Vacuum Oil Co., Inc., 1940, p. 246: several integrated oil

companies agreed to purchase a very small percentage of the total gasoline to raise the spot market, tank car price to artificial levels, and indirectly to raise and maintain prices to jobbers and consumers throughout the Midwest (gas at time was sold at depressed prices). (Basically, large oil companies agree to buy up production of one or more independent oil producers. In the process, the major

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producers could reduce their output proportionately and the total market output would decline, letting prices rise).a. Court applies per se rule to hold combination in violation of SA

(1) no showing of so-called competitive abuses or evils which the agreement was designed to eliminate may be interposed as defense

(2) “any combination formed for the purpose and with the effect of raising, power, illegal per se.” Justice Douglas.

(3) Easy to apply this rule to cartels b/c out in open(4) Mere act of agreeing is sufficient for violation. No need to show effects.(5) Illegality is determined w/o reference to traditional criteria for

ascertaining unreasonable restraints: market power, purpose, anticompetitive effect, justifications.

b. Court held removal of part of gas supply affected market pricesc. Court distinguished § 1 of SA from § 2. Only § 2 concerned monopolization.

Therefore, under § 1, don’t need to show market power to fix prices in order to prove price-fixing conspiracy.

d. Court distinguished Chicago Board of Trade: said Socony affected consumer prices while Chicago a restraint on time period of trading. Call rule in Chicago had no appreciable effect on general market prices.

e. Socony must be subject to certain limited exceptions – see BMI below. Picker thinks that most horizontal agreement situations today that are interesting fall under rule of reason, although Hovenkamp seems to argue that when price set or output reduced, rare to see rule of reason applied.

III. Characterizing Horizontal Agreements – Sherman Act § 1: Deciding whether to apply the per se rule or the rule of reason has turned out to be much more complex than language from cases would imply. Turns on how we characterize the situation. Although the per se rule against price fixing has been maintained, the Court is willing to inquire into the merits of horizontal arrangements.A. Broadcast Music, Inc. v. Columbia Broadcasting System, Inc. , 1979, p. 265: ASCAP

and BMI, associations organized by groups of composers, issue blanket licenses for use of copyrighted music, by which licensees have right to perform/use any of the compositions w/in repertoire. Fees paid by licensees do not reflect amount or type of music used. Fees set at price agreed to by members of BMI/ASCAP. Licensees can directly negotiate w/ individual copyright owners. BMI monitored licensees to see how often a particular composition was performed, and paid the performance right owners in proportion to the number of uses.1. Court refused to apply per se rule against price fixing. Remanded case for

application of rule of reason. On remand, no antitrust violation found.2. Arguments for finding price fixing:

a. 100% of industry split profitsb. copyright owners used association to literally set pricec. licenses were scaled to licensee’s ability to pay (price discrimination)d. since each artist receives revenues based on number of times artist’s song

used, why can BMI charge individual prices for individual songs?3. Arguments against finding price fixing:

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a. Goal of arrangement to expand output and thus is in interests of consumer (buyers obtain lower cost by eliminating transaction costs from individual negotiations)

b. Need to preserve incentives to create music: cost to reproduce one of songs = $0 so MC = 0. Therefore, the optimal social price of song is $0. However, want to encourage song writers to write songs. If we bundle all songs together, may price small users out of market. Why BMI sets prices according to station’s size. No cost to produce any songs, so makes sense to give all songs to all consumers, but want enough revenues to encourage production.

c. Blanket licenses are more efficient b/c lower transaction costs4. Characterization essential here. Is this a price fixing agreement between

individual composers or has BMI created a new market offering a new product?B. Maximum price fixing – Arizona v. Maricopa County Medical Society, 1982, p. 279:

4-3 decision, an agreement between competing physicians setting the maximum fees they may charge for services rendered to patients insured under plans approved by group. Doctors may charge uninsured patients higher fees and may charge anyone lower fees. Arizona claims fee schedules have effect of stabilizing and enhancing prices. Court finds per se illegal.1. Per se illegality of price fixing applies equally as well to maximum price fixing as

it does to minimum price fixing2. Court states in dicta that “if the actual price charged…is nearly always the fixed

maximum price, which is increasingly likely as the maximum price approaches the actual cost of the dealer, the scheme tends to acquire all the attributes of an arrangement fixing minimum prices” (p. 286) If maximum price set too low, may channel distribution through a few large dealers, shutting out smaller players.

3. Court unpersuaded by doctors’ arguments that per se rule shouldn’t be applied b/c they are professionals and b/c court has little antitrust experience in health care industry. Court states “anticompetitive potential inherent in all price fixing agreements justifies their facial invalidation even if procompetitive justifications are offered for some.”

4. Court distinguishes BMI:a. In BMI, it was a necessary consequence of the creation of a blanket license

that prices had to be establishedb. The doctors’ combination does not permit them to sell any new product. They

still sell medical services. 5. Arguments for finding price fixing:

a. price scheme provides same economic rewards to all doctors regardless of skill, experience, training, or willingness to use innovative procedures

b. may discourage new entry into marketc. may discourage new developments by entrepreneurs

6. Dissent argues that Court fails to look at benefits of plan to consumers by acting to contain medical costs and that the plan does not impede competition. Dissent also urges BMI approach, stating that this may be the offering of a new product

C. NCAA v. Board of Regents of University of Oklahoma , 1984, p. 300: Because the NCAA determined TV had an adverse impact on college football attendance, the

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NCAA adopted plan limiting the number of TV appearances per team and setting the recommended fees for different types of telecasts (national the most valuable, regional the less so). Fees didn’t change with the size of viewing audience, hurting big football schools that could have profited from individual negotiations. Lower courts applied the per se rule. S.Ct. rejected per se application and applied the rule of reason. Held agreement unreasonable because fixed prices and limited output.1. Court rejects per se because recognizes that case involved an industry in which

horizontal restraints on competition essential if product to be available at all (must be able to have one standard set of rules of game). Must allow NCAA to define the product. Could argue that these rules change the character of the output instead of reducing the output.

2. Picker’s big issue: how do we distinguish rules that are intrinsic to the product from those that are not? Not all rules that we make can be immune from AL.

3. Court uses quick look approach. Notes that output was clearly reduced by relevant arrangements. In that context, no showing of market power would be required for a violation to be found. Question: why does Picker throw this in here? I thought under § 1 price-fixing agreements, even rule of reason, market power was not an issue. I thought players needed to show procompetitive justification – even if they can show no market power, don’t they need more, a justification, to get past the rule of reason test? Once such showing of output reduction has been made, burden shifts to defendant to provide an affirmative defense of the behavior in question. Since court found no such showing here, found violation of § 1. So if doing rule of reason of analysis, how do you proceed? Do you first say, well D must either have market power or output must be reduced? If D can just stay in business w/ higher price, is that evidence of market power? What if agreement and price at competitive level? Or in other words, what if agreement and under rule of reason, no effect on competition at all? Another way of asking question: under rule of reason, is burden on plaintiff to show anticompetitive effect or on defendant to show procompetitive justification?

4. Note that in finding output was clearly reduced, court had to define relevant market. Found college football to be a separate market based on demographics. NCAA argued that college football not separate market but insignificant number of TV hours so no significant deduction.

5. Court finds NCAA has market power as college ball is a separate market (other products not reasonable substitutes). Court says market power not necessary in price fixing case.

6. Distinguishes BMI b/c BMI increased output and was procompetitive. Here, output reduced. Also, agreement on price is not necessary here to market the product as it was in BMI example.

7. Restraints on telecasts here don’t fit into same category as rules defining game b/c didn’t promote greater equality in NCAA or facilitate game being played. NCAA argues just the opposite – that restraint necessary to maintain character of gain. W/o restraint, NCAA argues all money will go to the big schools, the product mix will change, and the small schools will lose. Product will be fundamentally different.

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8. Real world result: bidding war ensued. Big channels got big schools. Small channels got small schools. More college football on more channels.

9. NCAA’s justification of protecting live ticket sales not consistent with policies of SA.

10. Note: both Maricopa and NCAA show that nonprofits clearly w/in scope of SA

IV. Finding the Agreement – Sherman Act § 1A. Section 1 of the SA requires an agreement to trigger a possible violation of the

statute. In very rare cases, there will be ready evidence establishing the existence of such an agreement. In most cases, however, have to piece together a record to establish such an agreement. This has given rise to a number of issues. Can we infer agreement from behavior alone? What evidence suffices to establish an agreement?1. We should have little confidence that pricing patterns tell us anything essential

about level of competition. From gas station example in class, we know prices may move in perfect synchronization under either competition or collusion. Need something more than parallel behavior, but hard to say exactly what. Picker suggests look to structural indicia that may indicate anticompetitive problem. (eg. In American Column, defendant only had 1/3 of market which conventional wisdom says is not enough to trigger concern. Also, large group participating in info exchange. In large groups, harder to sustain collusive behavior b/c more incentives to cheat and harder to detect.)

2. Interstate Circuit, Inc. v. US , 1939, p. 499: eight distributors of motion pictures deal w/ a large number of theater operators. One of the largest distributors sends identical letters to each of the eight distributors naming all eight as addressees and urging in future film licensing contracts with the exhibitors the distributors place in each contract: 1) a clause requiring the exhibitor to charge at least 40 cent admission for first run films; 2) a clause prohibiting exhibitors from exhibiting two films together as double features. Subsequently, all eight distributors place both clauses in film licensing contracts. S.Ct. hold there was an agreement between distributors.a. Burden put on defendants to show that parallel behavior is not proof of

agreement.b. Picker thinks this case if very hard to distinguish from gas station parallel

behavior case. If agreement were imposed unilaterally on exhibitors, there would be no antitrust violation.

c. Court said it was enough that, knowing concerted action was contemplated, the distributors agreed to the scheme(1) distributors were advised others asked to participate by names on letter(2) each distributor knew all others would have to participate for scheme to

succeed(3) all knew if plan was carried out, would result in restraint of commerce(4) acceptance by competitors of invitation to participate in plan, w/o

previous agreement, is sufficient to establish unlawful conspiracy under SA

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d. The success of the plan depended on all distributors participating. In this case, no discussion or testimony on this issue, but if a modern case, would focus on this. Would have to show that agreement only rational if all agreed.

e. Distributors may try to make BMI type of argument. Restraint is ancillary, designed to enhance competition by creating greater movie attendance.

3. Theatre Enterprises v. Paramount Film Distributing , 1954, p. 507: Action brought under §§ 4 and 16 of Clayton Act. Owner of a movie theater in a suburban area several miles from downtown asks several large film distributors to give it exclusive first runs of successful films. However, each of the distributors refuses. Instead distributors will only give exclusive first runs to large, downtown theaters. Owner of suburban theater sues, claiming distributors have agreed among themselves not to deal w/ his theater. (Concerted refusal to deal can be per se violation of SA.) S.Ct. affirmed judgment for defendant, holding not sufficient evidence of agreement. Each distributor acting in own self-interest would naturally pursue a policy of giving first-run film rights to those theaters that could draw the largest audiences, and all such theaters were downtown.a. Court seems to cut back on quick burden shifting established in Interstate

Circuit. Court expressly holds that conscious parallelism is not enough to establish an agreement for § 1, and appears to allow relatively weak evidence of the absence of an agreement to shift the burden back to the government.

b. In general, court says consciously parallel business behavior cannot support submission to the jury (or a finding of conspiracy) unless conduct is inconsistent w/ independent, non-concerted action

c. Here only evidence was parallel behavior, no “plus”d. Distributors introduced evidence of local conditions which prevented

suburban theater from being successful first-run theater(1) first-run licenses are usually exclusive and granted to non-competing

theaters. Suburban theater in competition w/ downtown.(2) Giving exclusive license to suburban theater economically unsound at

time. Fewer people have access to, less value from advertising.4. The Role of Trade Associations

a. Trade associations engage in a broad variety of activities, many of which are beneficial from a commercial point of view and have no anticompetitive effects: joint insurance arrangements, lobbying activities, arbitration to its consumers, publication of journals.

b. Trade associations also disseminate information about price, terms of sale, output, and other industrial statistics, for benefit of its members. Questions arise as to data exchanged will result in an anticompetitive effect.(1) Info exchanged can be procompetitive in assisting enterprises to know at

what levels they must price to compete effectively. (2) Info exchanged can be anticompetitive when sellers and buyers fewer in

number. Too much info or wrong kind of info can impair competitive market.

c. American Column & Lumber Co. v. United States, 1921, p. 548: Court condemned an exchange among competitors of detailed reports concerning the production and price charged by each for hardwoods. Reports only contained

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past practices, but did require an estimate of future production. On the one hand, lumber producers clearly concerned about overproduction and their motive may have been cartelization. On the other hand, there were 365 members, and they collectively controlled 1/3 of market. Cartelization seems unlikely. Further, many of members were isolated and had poor knowledge of market conditions. Many buyers, by contrast, were large and well informed. Price information exchanged may have been concerned w/ protecting the little guy and making market more competitive.(1) Majority of court condemned agreement

(a) Meetings showed concern w/ overproduction(b) No specific agreement among participants concerning price or output(c) Enforcement maintained through restraint of business honor and social

penalties(d) Reports went only to sellers, not to buyers, and sellers had advantage

of analysts at meeting to discuss future trends. Important b/c if reports public, as w/ stocks, more info tends to create efficient markets and benefit consumer. Here, info was public, but not as easy for buyers to obtain.

(e) Because reports frequently disseminated, cheating would be easy to discover

(f) Prices went up huge amount during this period (Ds argue b/c due to external factors)

(2) But is agreement to share information itself a price-fixing agreement?(a) Holmes dissent

(i) SA does not set itself up against knowledge(ii) Natural trade and weather conditions increased prices(iii) No attempt here to override normal market conditions, but to

attain them(b) Brandeis dissent

(i) SA does not condemn any lessening of competition or require competition to be pursued blindly

(ii) Purpose of plan was to make rational competition by allowing intelligent trading

(iii) Allowed participants to deal w/ each other on equal footing(iv) Stability in prices in public interest(v) Enables small competitors to compete

(3) Picker’s comments:(a) Would look at fact only controlled 1/3 of market which is not enough

to trigger concern(b) Large group of participants in plan so hard to maintain cartel behavior(c) Do we want to be worried about the structure of production – how

much should we be looking out for little guy?

V. Particular PracticesA. Refusals to Deal – FOGA, Klor’s, and Radiant Burners establish a per se rule finding

that group boycotts violate § 1 of the SA. More recently, however, the Court has

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moved away from a per se analysis for group boycotts. In Northwest Wholesale Stationers (1985), the Court held that given the substantial possible efficiencies associated w/ purchasing cooperatives, it would be a mistake to categorically forbade such efforts. The Court also understood that such a cooperative would necessarily need membership rules to be effective. As a result, the Court concluded that a plaintiff in such a case must make a showing of denial of access to an essential facility or that the cooperative has market power. Absent an essential facility, rule of reason analysis will apply. How broad is this holding? Does it only apply to things like purchasing cooperatives or groups that have substantial efficiencies but need rules to define group?1. Fashion Originators’ Guild of America v. FTC , 1941, p. 363: High end group of

dress designers want to protect designs from copy artists. No federal copyright protection so employ self-help: group collectively refuses to sell to retailers who also purchase copies. Set up registry, establish tribunal for violations, send out “shoppers” to police retailers. Case brought under § 5 of the FTCA which states “unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.” S.Ct. upheld FTC’s refusal to listen to FOGA’s free rider defense, thus effectively applying the per se rule (reasonableness of practices not considered).a. Free rider problem – design pirates let FOGA designers to all the research and

design. Wait for FOGA dress to come to stores, buy one, and reverse engineer it.

b. Court holds FOGA’s plan runs contrary to policy of SA:(1) narrows outlets to which garment and textile manufacturers can sell(2) narrows sources from which retailers can buy(3) subjects nonparticipants to an organized boycott(4) plan has effect of directly suppressing competition from the sale of copied

designs. Destroys competition of Guild members.c. Picker wants to focus on property rights aspect of case. Private scheme of

protection to ensure fashion marches on – isn’t that a good thing? Can argue lack of property rights protection from federal gov’t in two ways: 1) Congress didn’t protect dress designs so may not consider worthy of protection. May feel anticompetitive concerns outweigh property right. 2) Gov’t a monopoly when it comes to property right creation and ajudication and we know the harms of monopoly – output reduction.

d. What is consequence of FOGA’s behavior? Retailers are only allowed to sell one or the other – the high end or the knock-offs. Market segmentation results. Neiman Marcus v. Wal-Mart. But is this necessarily anticompetitive? Retailers may want to specialize so may not be hurt and consumers are not denied access to any type of dress.

e. Critique to (c.) however is that the manufacturers’ ability to dictate market segmentation, may set up structure to anticompetitive behavior later on.

f. Picker suggest this analysis is sufficiently complicated that per se analysis really may not be sufficient

g. Is FOGA good law after BMI? BMI after FOGA. Issue never been ajudicated. FOGA could argue very costly to prepare original designs and

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that design houses will eventually be driven out of business if they can’t control free riding. Under BMI, does court have responsibility to examine merits of contention?

2. Klor’s Inc. v. Broadway-Hale Store, Inc., 1959, p. 368: Plaintiff owned a small appliance store located very near to defendant’s larger appliance store. P alleged D used its “monopolistic buying power” to force major appliance manufacturers to refuse to deal w/ P or else only to deal w/ on discriminatory terms. Court held this stated a cause of action under the per se rule, although case never tried. a. Did Klor’s have a good case? Why would huge manufacturers such as

General Electric and Maytag bow to the pressure of a medium sized department store not to deal w/ a pesky smaller competitor? If Klor’s were underselling Broadway-Hale, so much the better for GE b/c sales volume would go up.

b. Free riding problem may have been occurring: Klor’s was probably engaged in free riding. Underselling Broadway-Hale by taking advantage of point of sale services given there. Once customer had received education about what he should buy at Broadway-Hale’s expense, customer would walk across the street to Klor’s and buy at lower price. In that case, if major manufacturers wanted each of dealers to demonstrate their products and provide adequate point of sale services, they might have disciplined Klor’s for free riding. But such decisions would ordinarily be unilateral, in that they would benefit each manufacturer whether or not the other manufacturers did the same thing.

c. Manufacturers also would not want to agree to kill off distributors one by one b/c would end up w/ only one distributor to sell to – a monopsony not in GE’s best interest

d. Klor’s must be understood in context of small business. Strain in cases worried about structure of production – want to protect the little guy. Klor’s can be interpreted as bold statement about protecting the little guy. However, if there is no limit to this principle, antitrust may not be the proper venue for this concern.

e. Case has been bitterly criticized. No evidence behavior affected competition.f. What are the limits on Klor’s? Must manufacturers sell to all distributors?

Status of Klor’s unclear today.3. Radiant Burners, Inc. v. Peoples Gas Light & Coke Co. , 1961, p. 376: an

association of gas heater manufacturers and natural gas utilities (AGA) evaluated products that burned natural gas. The AGA placed its “seal of approval” on products which it judged to be safe. The plaintiff, a manufacturer of a gas heater, was denied approval. P sued, alleging that 1) the standards applied by AGA were arbitrary; and 2) the effect of nonapproval was that member gas utilities refused to supply gas to facilities that used the heater. The Court held that the allegation of both of these factors—the arbitrary decision making and the forced removal of the product from the market—was sufficient to state a cause of action for a per se violation of AL.a. Issue of standard setting: extremely complicated. In later decisions, where

the standard setting is conducted in a nonarbitrary way, courts have generally

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approved it, particularly if the consequence of rejection is only denial of a seal of approval and not an attempt to force product off the market.

b. Note that certification group must have power to say no if certification is to mean anything. Doesn’t seem like type of case where per se analysis should be applied as facts need lots of investigation.

c. Northwest Wholesale Stationers , a later decision, see below, appears to require a rule of reason approach in this case today, unless defendant association has market power.

d. May also look at Radiant Burners as protection of small business.e. Supreme Court hasn’t recently addressed issue of standard setting.

4. Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 1985, p. 379: the Supreme Court held that a concerted refusal to deal involving discipline and expulsion of a member of a buying cooperative should be analyzed under the rule of reason b/c the cooperative had no market power. Northwest is a purchasing cooperative made up of 100 retailers. P is a wholesaler/retailer and was a member of the cooperative. Anyone who wants to buy from coop can at list price, but at end of yr. members get a rebate based on volume of their purchases. NW amended its laws to prohibit members from engaging in both wholesale and retail but grandfathered P in. P violated a bylaw and was expelled w/o notice or an opportunity to challenge expulsion. Court analyzing expulsion from cooperative in this case, not analyzing whether existence of coop itself is antitrust violation.a. Court backs away from a per se analysis of any group boycott. Looks to

structural characteristics instead:(1) “essential facility” – if coop has monopolized an essential facility, then

court will apply per se analysis(2) if coop has market power, court will apply per se analysis(3) absent an essential facility or market power, court will apply rule of

reasonb. Court recognizes that cooperative allows participating retailers to achieve

economies of scale in purchasing and warehousing that would otherwise be unavailable to them, making market more efficient

c. Cooperative must be allowed to establish and enforce rules in order to function effectively.(1) expulsion of P may have been for violating bylaw that allows coop to

monitor P’s creditworthiness(2) expulsion may have been to gain a competitive advantage

d. Note: § 4 of the Robinson-Patman Act explicitly allows patronage rebates as a form of price discrimination. A cooperative association can return to its member the whole or part of the net earnings resulting from its trading operations in proportion to their purchases or sales through the association

B. Joint Ventures – a joint venture is any association of two or more firms for carrying on some activity that each firm might otherwise perform alone. Joint ventures subject to antitrust scrutiny are ones that involve competitors. Some joint ventures can be anticompetitive while some JVs can be procompetitive. Joint ventures may facilitate price fixing, territorial division, or refusals to deal. (Basically, may engage in

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monopoly behavior resulting in dead weight loss). Joint ventures may also allow producers to achieve efficiencies in production that lower production cost, a procompetitive effect. 1. Efficient joint ventures with inefficient refusals to deal: some joint ventures are

clearly efficient. However, the refusals to deal created by joint venturers are clearly anticompetitive. The optimal form of relief, in such a case, is an injunction that permits the joint venture to continue, but forces the members to deal w/ outsiders.a. Associated Press v. United States , 1945, p. 418: A joint venture of about 1200

newspapers. AP gathered news on behalf of its members, wrote stories and transmitted stories by wire service to member papers. Part of news gathering done by AP’s own employees, part done by member newspapers. Not allowed to sell news to nonmembers. US did not challenge JV itself, b/c acknowledged very efficient. Instead, challenged AP’s regulations concerning new members. If a newspaper from a city not already serviced by AP wanted to join, entry was easy. If a newspaper from a city already serviced by another AP newspaper wanted to join, the competing newspaper had the right to object. The S.Ct. held these regulations violated § 1 of the SA.(1) efficiencies obvious – saving cost of sending more than one reporter to

scene of news(2) if newspaper from city already w/ AP newspaper want to join, AP

newspaper won’t like it. They don’t gain any advantage from it, and their competitor will now be more efficient. Also, may create temptation to free ride.

(3) Picker suggests setting up two networks (UPI and AP). One newspaper towns have access to both networks while two newspaper town have one paper w/ UPI and one w/ AP. No free-riding problem, and consumers still have access to all the news. (However, w/ three newspaper towns, still have free riding problem)

(4) Other suggestion is that w/ one network and two newspaper towns, impose a wall between two newspapers. Any news the papers gather will go to AP but not the other paper. Lose advantage of internetwork competition though that two networks would provide.

(5) Court says must have open, non-discriminatory membership rules. Basically using a rule applied frequently to natural monopolies. Gain efficiencies, but lose refusal to deal.

(6) Picker notes that property rights at issue here. In some sense, AL defining your property right. If newspapers A through D built up AP network, why don’t they have right to exclude anybody they want?

(7) Real world result – AP threw open membership rules. Everyone flocked to it b/c it the biggest. UPI went bankrupt.

b. SCFC ILC, Inc. v. Visa USA, Inc ., 10th Cir. 1994, p. 423: Visa USA provides payment services to its 6000 members which individually issue credit cards to consumers. Sears, a competitor offering its own credit card, the Discover Card, wanted to become a Visa USA member and also issue Visa cards. The question presented by case is whether Visa’s refusal to admit Sears to its joint

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venture is a violation of § 1 of the Sherman Act. Court determined exclusion did not trigger § 1 liability b/c Visa had no market power in issuers market and had procompetitive justifications for not admitting Sears.(1) Two levels of markets at stake in credit cards: internetwork markets (Visa

v. Mastercard v. Discover Card) and intranetwork markets (competition between issuers of a certain card). New DOJ suit filed looking at internetwork issues which Picker thinks more interesting. New suit alleges Visa/MC has 75% of market and practice of duality (ability to issue both cards) means no competition between networks.

(2) Back to our case which deals w/ issuer level:(a) Visa must be able to have standards to determine who may issue their

cards(b) Does AP mean that Visa must have open membership? AP had free

rider concern, while Visa does not. Doesn’t this cut in favor of Visa having open membership?

(c) If Sears let in, then Sears has no incentive to set up own network (decreases competition on network level). So if we think internetwork competition is good, may want to have tough regulations on membership.

(d) In AP looked advantageous to only have one network b/c had natural monopoly characteristics. In Visa, not obvious how many networks we should have. Have to wait for resolution of new case.

(e) Should I be taking away anything else from this case? Question: Picker says don’t worry too much about distinguishing between joint ventures and refusals to deal. Does this mean joint ventures are sometime per se illegal, or, given Northwest Wholesalers and the fact that JVs can have strong procompetitive justifications, always under rule of reason?

(f) Court in Visa looks at BMI and Northwest Wholesale Stationers and says they were joint ventures both analyzed under rule of reason, so we’ll use rule of reason here also. Court first analyzes whether Visa has market power at issuer level and concludes that it doesn’t. Since no market power, court looks at procompetitive justifications in Visa’s favor and finds them convincing.

C. Efforts to Influence the Government – Noerr-Pennington doctrine creates an antitrust immunity for collective efforts to influence gov’t policy, even if the consequences of those policies turn out to harm competition or particular competitors. The difficulty of separating important democratic rights to petition the government from otherwise forbidden activities under the SA creates a strong presumption of immunity for these activities. However, the Court does create an exception for sham activities.1. Eastern R.R. Presidents Conference v. Noerr Motor Freight, Inc., 1961, p. 447:

Supreme Court held antitrust laws do not prohibit people from associating together (“conspiring”) in order to convince the legislature or executive branch to take action, whether or not that action sought would be anticompetitive. The Court concluded the SA would not reach an alleged conspiracy among railroad

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companies to campaign to the legislature to place anticompetitive restrictions on trucking companies, the result of which would be to put the railroads in a more favorable market position. (RRs conducted publicity campaign to defeat truckers’ bill)a. Basis for decision not First Amendment, but rather Court’s construction of the

AL. Concluded AL never intended to be used to prohibit people from exercising their constitutional right to petition the government.

b. To hold otherwise would be to allow SA to regulate political activity, not business activity.

c. Legality is NOT effected by any anticompetitive motive RR may have had.d. Third-party technique (using biased voices and representing them as

independent persons) may be unethical but not SA violatione. Where restraint on trade is the result of valid gov’t action, as opposed to

private action, no violation of SA can be made out.f. Picker critiques: says why should we allow group disadvantage to take place

just b/c the method chosen to achieve it? Maybe we should be very cautious in our inquiry, but this doesn’t mean we shouldn’t inquire at all. Points out that we could allow RRs to petition individually but not in combo.

g. Sham exception – p. 454 “There may be situations in which a publicity campaign, ostensibly directed toward influencing governmental action, is a mere sham to cover what is actually nothing more than an attempt to interfere directly with the business relationships of a competitor and the application of the SA would be justified.”

h. May be able to bring action under FTCA § 5 – unfair competition b/c much broader statute.

2. Allied Tube & Conduit Corp. v. Indian Head, Inc., 1988, p. 457: NFPA publishes the National Electric Code that establishes requirements for design/installation of electrical wiring systems. NEC is the most influential electrical code in US and often adopted word for word by may state and local governments. Allied makes a plastic conduit. Fearing plastic conduit would displace steel conduit, manufacturers of steel conduit packed the NFPA meeting to defeat proposal to approve plastic conduit. Court holds that Noerr-Pennington immunity does not apply.a. NFPA is not to be treated as quais-legislative body simply b/c many

legislatures adopt code. NFPA has no official authority from gov’t conferred upon it.

b. Just b/c rounding up supporters is an acceptable and constitutionally protected method of influencing elections doesn’t mean rounding up economically interested persons to set private standards must also be protected

c. Private standard setting process is an exercise in market power. Association includes consumers and manufacturers of electrical conduit so any agreement to exclude plastic is an implicit agreement not to trade in plastic

d. Noerr immunity does not apply to every action designed to influence gov’t action

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e. Dissent argues efforts of association are designed to influence passage of state laws, that greater chance of success here to influence gov’t than in actual Noerr case, and that private association contributes to public interest

f. Once again, Picker points out difficulty w/ standard setting. On one hand we don’t want people w/ financial interests setting the standards b/c we fear they are not objective. On other hand, we do want experts making the decision and experts are likely to have a stake in the outcome.

g. Could try to argue that Noerr immunity should attach to NFPA b/c state has implicitly delegated authority to NFPA

h. Court took very narrow view of immunity in Allied Tube which seriously circumscribes doctrine’s protection.

D. State Action Immunity: in Parker v. Brown, the Court decided that the framers of the AL did not intend to interfere too substantially in the ability of the individual states to displace competition in certain markets by creating regulatory regimes of various kinds. (Federalism concerns narrow scope of Sherman Act.) 1. Parker v. Brown , 1943, p. 1105: the Court held that a California state-mandated

“allocation” scheme that reduced the supply of raisins grown in the state could not be condemned by the antitrust laws, even though if the scheme had been carried out by purely private parties, it would have been a cartel subject to condemnation under § 1 SA.a. If regulated commerce intrastate, state can regulate itb. SA is prohibition of individual action, not state actionc. State regulations qualify for immunity w/o regard to their efficiency or

anticompetitive impactd. Effects of state’s regulation: lowers output and raises price. This helps out of

state producers b/c now they can raise their price. Producers are happy, but consumers are unhappy. Picker says, so what, let the political process take care of it. However, burden falls disproportionately on consumers out of state b/c have no voice in CA’s political process. Picker thinks this is Parker’s weakness—case not sensitive to in v. out of state consumers.

e. Exception to state action immunity -- if state actual “market participant” (i.e. running raisin farm itself) we get very concerned b/c state has both decision making power and economic incentive.

2. California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 1980, p. 1113: S.Ct. held that a state legislative scheme which permitted wine producers and wholesalers to set the retail prices of their products did not qualify for the state action exemption b/c the scheme was not actively supervised by state itself. A resale price maintenance case.a. Court amplifies Parker by setting out two part test to see if state action

immunity applies:(1) the challenged restraint must be one clearly articulated as part of state

policy; and(2) the state must actively supervise the program

b. Court holds that state has delegated rate setting, w/o any substantial oversight from state, so fails prong (2).

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c. Picker criticizes this test. Why should it matter how many hoops the state jumps through to define what markets look like. If state has power to review and just refuses to exercise it, why should that be relevant? Is the question evidentiary (we’re trying to make sure private parties haven’t captured state processes for private purposes) or is it that fundamentally we just don’t really trust the states?

d. Test of active supervision vague. Not clear what counts.e. Rules for states don’t necessarily carry over to cities here – see p. 1119, n. 51.

3. Southern Motor Carriers Rate Conference v. U.S., (1985), p.1115: the Court decided the activities of a legislatively authorized “rate bureau” qualified for state action exemption, even though the state legislation merely authorized and did not compel the activities. Since historically the state action doctrine only applied to conduct mandated by the state, the court did not make a blanket rule that state compulsion is but found in this particular case mere authorization led to a more competitive result.a. Now clear that the effective requirement is authorization, not compulsion, to

meet first prong of Midcal test.b. Court noted that not sufficient for state regulatory agency to simply authorize

joint rate making. That authorization had to appear somewhere in state statutory scheme creating agency. However, once agency created, state does not have to micromanage its affairs.

4. FTC v. Ticor Title Insurance Co ., 1992, p. 1120: Defendants performed title searches on real estate property and sold title insurance. They jointly proposed rates to state insurance regulators through rate bureaus for such activities. State regulatory scheme included a “negative option” whereby proposed rates became effective automatically after a specified time period unless agency voiced an objection. Evidence showed rate filings subject to minimal scrutiny from state regulators. Court held scheme failed to meet active supervision prong of Midcal test.a. Negative option not enough b/c potential for state supervision not substitute

for decision by the state.b. Unclear whether effective review job by the state would have met test.

E. Vertical Arrangements -- § 1 Sherman Act1. Introduction : Resale price maintenance and vertical nonprice restraints are two

kinds of contractual agreements between vertically related firms. They both involve restrictions imposed by an upstream party (usually a manufacturer) on how the downstream party (usually a distributor or retailer) resells the merchandise covered by the agreement. Both restrictions are analyzed as contracts in restraint of trade under § 1 of the Sherman Act.a. Resale price maintenance (RPM) is supplier control of the price at which

merchandise is resold by the dealer. Some RPM arrangements are more explicit than others. Some involve a written contract while others involve subtle coercion imposed by a supplier on its dealers. The Supreme Court decided in Dr. Miles Medical Co. that RPM is per se illegal under the AL, although certain exceptions have been judicially created.

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b. Vertical nonprice restraints involve supplier control of the location, sales territories, or customers of its dealers. Vertical nonprice restraints can take a number of forms, including vertical territorial division, location clauses, vertical customer division, “air tight” restrictions, and exclusive and nonexclusive territories. Since 1977, when GTE Sylvania was decided, vertical nonprice restraints have been decided under the rule of reason. Very few have been found illegal.

c. Economic analysis of vertical restrictions: See Picker handout for Class 12.(1) The problem of double marginalization: two monopolies (a manufacturer

and retailer) are worse than one monopoly (an integrated manufacturer and retailer). Stacking one monopoly on another (not integrated) means quantity will drop, price will rise, consumer surplus will drop, and social welfare will drop when compared w/ one integrated monopoly. This is due to the fact that the stand alone retailer makes its decisions based on the costs it actually faces from the monopolist manufacturer (the wholesale price which includes monopoly profits and the marginal retail costs of sales) rather than the actual cost of producing a unit of the good. The retailer ignores the monopoly profits the monopolist has built in (think of as a trickle through problem) so sets price higher than it would, reducing output. Vertical integration eliminates this problem (although still stuck w/ one monopoly outcome).

(2) Situation with monopolist manufacturer and competitive retail sector: results come out exactly as same as integrated monopolist outcome.

(3) RPM – setting RPM is one way to prevent undercutting by retailers who try to free-ride on services provided by others (see handout and ask about this)

2. Dr. Miles and Colgate: Dr. Miles says minimum RPM per se illegal if you agree w/ retailers on resale price while Colgate says RPM not illegal if manufacturer unilaterally decides resale price and refuses to deal w/ price cutters. Still good law today.a. Dr. Miles Medical Co. v. John D. Park & Sons Co ., 1911, p. 584: minimum

resale price maintenance is per se illegal under the Sherman Act.b. US v. Colgate & Co ., 1919: Colgate announced it would not deal w/ stores

that undercut Colgate’s posted retail price. S.Ct. held government didn’t allege illegal RPM b/c it didn’t mention the existence of an agreement between the supplier at issue and the resellers. If a seller acts unilaterally, i.e. w/ no agreement, RPM does not fall w/in § 1 of the Sherman Act b/c § 1 requires an agreement.

3. Maximum RPM: Albrecht said per se illegal. State Oil Co. v. Kahn overrules Albrecht and says maximum RPM subject to rule of reason. Minimum RPM only per se violation left. Two procompetitive justifications for:a. Market nicheb. Knocks down mini-monopoly of exclusive dealership – prevents dealers in

monopoly position from charging monopoly prices that supplier gets no part of, and from reducing supplier’s output

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4. Continental T.V., Inc. v. GTE Sylvania Inc., 1977, p. 599: S.Ct. overrules Schwinn (which held per se rule should be applied to vertical nonprice restraints) and created a rule of reason for vertical nonprice restraints. Still good law today. Sylvania was a struggling TV manufacturer w/ 1% of national market who sought to improve market performance by selling exclusively through a small group of carefully selected retailers. The purpose was to minimize competition between Sylvania dealers located in the same city and enable them to compete better w/ other brands. Sylvania limited the number of dealers in an area and required each dealer to sell its products only from locations specified in the franchise contract. Its market share increased to 5%. Continental was a retailer in San Francisco who became unhappy when Sylvania licensed an additional dealer in the area. Continental cancelled orders and opened an unauthorized store. Sylvania terminated its franchise.a. Court held should apply rule of reason to all nonprice vertical restrictions

(1) Court explicitly overruled Schwinn which applied per se rule to NVR.(2) White, in dissent, suggests Schwinn should have been distinguished and

not overruled. Schwinn had tons of market power while Sylvania had no market power and nothing to suggest any monopoly power at retail level.

b. Court thinks rule of reason appropriate b/c vertical restraints can have both anti and procompetitive effects. Possibility of procompetitive effects justifies rule of reason. Talking about two different levels of competition, intrabrand and interbrand.(1) intrabrand competition (competition among retailers who distribute same

manufacturer’s goods) may be lessened(a) when talking about “lessening intrabrand competition” here, Court

must thinking in terms of a reduction in the number of dealers that serve an area

(b) If Sylvania dealers had tried to charge a monopoly price for its TVs, they would have lost customers to manufacturers of other TVs.

(c) Most plausible explanation for vertical territorial restrictions when manufacturer has no market power is that they ensure dealer compliance with distribution contracts

(2) interbrand competition may be increased as shown by Sylvania’s increase in market share.

(3) Picker thinks crystal clear that facts are on Sylvania’s side here – that restrictions are welfare enhancing. Says antitrust law looks more at interbrand competition than intrabrand competition.

c. Free riding concern: Sylvania worried about free riding. May want product marketed in certain ways. Says to retailers, you must provide X services, which raises retailers price. Competitors can undercut and eventually, no one will offer services.

d. Presumptive rule that vertical territorial restraints are legal. To defeat presumption, plaintiff should show:(1) interbrand collusion at either dealer or manufacturer level, or(2) restraints posed at behest of powerful dealer, or

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(3) supplier has market power and restraints are being used to facilitate intrabrand collusion or inefficient price discrimination

e. Courts today usually proceed as follows:(1) Ensure there is qualifying vertical nonprice agreement to invoke rule of

reason(2) Assuming no horizontal agreement found, court estimates D’s market

power in products made subject to restraint(3) If no market power found, case dismissed. If market power found, D

must produce credible justification(4) If justification given, P can only win if there is a specific showing of

anticompetitive effect in interbrand market5. Monsanto Co. v. Spray-Rite Service Corp ., 1984, p. 645: Reaffirms basic judicial

rule that resale price maintenance is per se illegal, whether or not the defendant had market power, and regardless of the defendant’s motives, such as the need to combat free riding. Shows difficulty of walking line between Dr. Miles and Colgate in dealing with issue of what evidence required to show “agreement” between manufacturer and some of its distributors to maintain resale prices and terminate price cutters.a. Facts: Monsanto manufactures chemical herbicides. Spray-Rite was

distributor. Monsanto announced that it would supply only distributors whose primary activity was sales to retailers and whose salespeople were well educated. Spray-Rite was a discount operation. Spray-Rite brought action under §1, alleging Monsanto had conspired to fix resale prices w/ distributors. Monsanto alleged Spray-Rite had been terminated b/c salespeople poorly trained. S.Ct. held evidence sufficient to find an agreement and therefore per se violation.(1) Monsanto concerned w/ free riding. Wants certain point of sales services

that Spray-Rite may not be providing, instead choosing to free ride off of other retailers.

(2) Court of appeals held there was sufficient evidence to satisfy Spray-Rite’s burden of proving conspiracy(a) evidence of numerous complaints from competing distributors about

price cutting practices of Spray-Rite(b) testimony of Monsanto official

(3) Supreme Court affirms judgment but says Court of Appeals adopted wrong standard. (a) Can’t infer an agreement from existence of complaints or fact that

termination came in response to complaints b/c that could deter legitimate conduct under Colgate.

(b) Must be more than complaints. Must have evidence that tends to exclude the possibility that the manufacturers and nonterminated distributors were acting independently.

(c) Applying standard, Court held an agreement b/c substantial direct evidence of agreement.

(4) Picker points out that a lot of the time this whole issue is just punted to jury, making it very difficult for Monsanto to decide what to do ex ante.

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6. Business Electronics Corp. v. Sharp Electronics Corp ., 1988, p. 654: BE was an authorized Sharp dealer. Sharp operated a system of suggested retail prices and dealers could sell below those prices, which BE did. A competing Sharp dealer complained to Sharp about BE’s practices and said to Sharp: make a choice, BE or us. Sharp made the choice and terminated BE’s dealership. Very slippery issue. Is this a resale price restriction under Dr. Miles, or is this a vertical nonprice restriction (exclusive dealership) under GTE Sylvania? Court refuses to apply per se rule. Instead, characterizes as exclusive dealership agreement, a nonprice vertical restraint, and applies rule of reason.a. Court reasons that no agreement between other dealer and Sharp on resale

prices.b. In order to render per se illegal an agreement between a manufacturer and a

dealer to terminate a second dealer, first dealer must agree to set its prices at some level, even if not specific. First dealer can’t maintain freedom to set whatever price it chooses.(1) Critique is that agreement to terminate price cutter “about price” even

though no specific price named(2) Counter is that anytime manufacturer agrees to give one retailer exclusive

dealership at cost of other retailer or agrees w/ one dealer to terminate another for failing to comply w/ contractually obligated services, opening itself up to claim of RPM.

c. Question: we talk about troubling consequences here of whether characterized as horizontal or vertical. When do we talk about a vertical restraint actually masking a horizontal restraint?

7. Essential points from vertical restraint:a. Non-price v. price an incredibly thin line. Clear from Sharp that decision to

dump BE had something to do w/ price. Picker believes line not sustainable. Dr. Miles either needs to be recharacterized or dumped in order to fully embrace Sylvania.

b. Line between vertical and horizontal restraints can also be slippery.

VI. Single FirmsA. Monopolization and Market Definition – § 2 of the Sherman Act

1. § 2 of the Sherman Act: “Every person who shall monopolize, or combine to conspire with any other person or persons, to monopolize any part of the trade or commerce among the several states, or with foreign nations, shall be deemed guilty of a felony…”

2. United States v. Aluminum Co. of America (Alcoa), 2d Cir. 1945, p. 154: Alcoa obtained licenses to two patents facilitating the manufacture of aluminum and giving Alcoa monopoly power in aluminum market. a. Alcoa may be as close to a “pure monopoly” single firm case as we’ll get.

Was sole domestic producer of virgin aluminum ingot. b. Learned Hand tried to distinguish when a great competitor effectively

“competes” his way into a monopoly v. achieving a monopoly through illegal means. Trying to distinguish “monopoly” v. “monopolizing.” When

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monopoly “thrust” upon the monopolist is not a violation of § 2. Monopoly that is willfully acquired constitutes the violation of monopolizing under § 2.

c. Hand blames Alcoa for anticipating market demand and building plants ahead of that demand. In his view, that sufficed for a § 2 violation. (In modern terms, would be characterized as strategic preemption or strategic entry deterrence.) In that framework, incumbent commits to capacity by sinking costs in an effort to deter entry that would otherwise result. The potential entrant may be conferring a benefit on consumers, but may have little ability to recover a chunk of the benefit, especially in the face of committed capacity.

d. Fact that monopolist’s power not used to extract more than a fair profit is no defense to monopolizing.

e. Percentages required to constitute monopoly : Judge Hand states in a very influential footnote, “That percentage (over ninety) is enough to constitute a monopoly; it is doubtful whether sixty or sixty-four percent would be enough; and certainly thirty-three percent is not.”

f. Posner’s critique of opinion – thinks it’s wrong. If business sees opportunity to grow but worried may gain monopoly power, will respond by cutting output and raising prices, exactly the result we don’t want.

g. Hard to figure out what constitutes “monopolize” – monopoly plus intent? In Alcoa case, Alcoa had no competitors so couldn’t have had intent to drive them out.

h. But if Alcoa did use strategic preemption to keep competitors out, Hand probably got it right. Alcoa using monopoly power to restrain competition. Picker thinks Alcoa knew strategic consequences of building extra capacity.

i. Note: a firm’s current share of market does not necessarily reflect firm’s power to reduce output and raise price. If supply is highly elastic, then other suppliers could enter market quickly or increase production of substitutes. However, large fixed costs act as barrier to entry in Alcoa case.

j. Foreign imports place some cap on prices Alcoa could charge, but Alcoa could raise prices w/in limits of tariff and distribution costs that foreign competitors have to face

k. Natural monopoly issue: is Alcoa a natural monopoly? Characteristics of NM are high costs to entry, low marginal cost, making it better to have one producer than many. Hard to tell if Alcoa is a natural monopoly….I missed this. Court is reluctant to break up b/c worried Alcoa natural monopoly.

l. How do we remedy this? Aluminum a bit of public good. Alcoa created public marketplace, invested in R&D to figure out uses for aluminum. A bit of a free riding concern. If entrants can just enter and take away from Alcoa, Alcoa may never invest in first place.

m. Opinion draws very aggressive line. Seems to include in prohibited sweep some activities we may want business people to engage in.

3. United States v. E.I. Du Pont De Nemours & Co . (DuPont), 1956, p. 171: DuPont accused of monopolizing trade in cellophane. DuPont produced almost 75% of US cellophane. Cellophane constituted less than 20% of all flexible packing material. Issue is what is the relevant market for determination of monopoly? DuPont argues it cannot control price of cellophane or exclude competitors from

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market in which cellophane is sold. Market should be defined as flexible packing materials. Government says cellophane and other wrapping materials are neither substantially fungible nor like priced. Court held DuPont did NOT violate § 2 SA.a. Hand’s number’s say 90% enough for monopoly, while 60-65% not. This

case suggests 75% is enough.b. Court not focused on percentages, though, but looking at entry barriers and

price sensitivity.c. Conventional measure of market power is the Lerner index which is:

(P – MC)/P which = -1/elasticity of demand. In a competitive market, L = 0 while in a noncompetitive market P>MC, so the greater the difference, the more market power.

d. Cross-elasticity of demand = change in percentage of Quantity of X over change in percentage of Price of Y.

e. Court focuses on cross-elasticity of demand between cellophane and other flexible packaging materials. Picker states this is too narrow an inquiry. Substitutes for cellophane when cellophane is at a monopoly price may not look like good substitutes for cellophane if it was at a competitive price. Looking for substitutes of cellophane at monopoly price has tendency to increase number of substitutes, increase relevant market, and lower tendency for liability.

f. Supplier side response – court also misses this. How easy is it for suppliers to enter and make cellophane or substitute?

g. Court eventually focuses on functional characteristics of cellophane and other flexible packaging material to conclude that they all form one market. In this broader market, DuPont found to lack market power.

h. Since then, cross-elasticities between products has been approach courts have used to define markets

B. Predatory Pricing – Picker has listed at §2 CA, thinks natural home is §2 SA1. Essential idea behind predatory pricing is that a firm w/ monopoly power reduces

prices in the short run below some measure of cost to drive a competitor from market w/ plan of raising prices after exit to recoup first-stage losses.

2. Supreme Court has expressly determined what the appropriate measure of cost should be, although average variable costs are frequently used.

3. Predatory pricing can involvea. an agreement in violation of §1 SAb. an element of monopolization or an attempt to monopolize in violation of §2

SAc. a substantial lessening of competition in violation of §3 CAd. an unfair method of competition under §5 FTCAe. an element of an illegal price discrimination in violation of RP Act (§2 CA).

4. Must not have too aggressive predatory pricing policy because predatory pricing also consistent w/ price cutting in many cases. Don’t want to discourage companies from lowering prices.

5. Intent is an uncertain indicator here. In all instances, price cutting is motivated by same desire—to win customers and get more market share.

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6. Predatory pricing can work in certain situations however. See handout. A firm might engage in PP if there is a possibility that the second firm will misinterpret what first firm is doing. If second firm really thinks first firm crazy and exits market. Becomes rational to act crazy.

7. Brooke Group (Liggett) v. Brown & Williamson Tobacco , 1993, p. 675: Cigarette market highly concentrated. L’s market share declining, so introduces new product, a generic line of cigarettes. Gets overall market share up to 4% and market share of generics up to 97%. B&W enters. L said B&W cut prices on generic cigarettes below cost and offered discriminatory volume rebates to wholesalers to force L to raise its own generic cigarette prices and introduce oligopoly pricing. Size of B&W volume rebates enabled retailer to pass savings on to consumers. Started rebate war. Case brought under §2 CA (RP) which outlaw price discrimination and §2 SA. Court held no predatory pricing b/c L was unable to prove B&W had a reasonable prospect of recovering its losses from below-cost generics.a. Court of appeals held that in this type of market, oligopoly, should be a per se

rule of nonliability b/c predatory pricing not rational behavior for oligopolist. S.Ct. disagrees. Holds no per se rule of liability, but still holds in favor of B&W. S.Ct. end result looks a lot like court of appeals rule of per se nonliability.

b. Predatory pricing as Loch Ness monster: been alleged, but no one knows what it looks like.

c. Two-part test:(1) Price below some appropriate measure of cost(2) Reasonable possibility of recoupment of losses

d. How does court actually go about determining whether prices are too low? What is the correct measure of price? Case uses average variable cost, but no resolution that is the correct measure. Extremely difficult to figure out costs and allocate them correctly. Court must be very careful in this calculation because doesn’t want to deter lowering prices in competitive situations.

e. Average cost v. average variable cost as right measure: If price is less than AC, you are losing money. However, AC = TC/Q so includes fixed costs. Fixed costs are sunk costs and don’t figure in decision making. Should be focusing on costs you can control at the margin. If price is greater than AVC, you’re still making money on incremental sales. AVC is not easy to calculate however.

f. Predatory pricing difficult to prove:(1) in order to recoup losses, firm must be able to sustain monopoly price

later on(2) if barriers to entry are low or remaining competitors can increase

production easily, firm probably won’t be able to maintain monopoly prices long enough to recoup

g. Oligopoly market is especially difficult to prove PP: in oligopoly, B&W would have to rely on tacit collusion among remaining firms to ensure it could recoup. Difficult b/c remaining firms can free ride on B&W’s PP. Let B&W

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sustain all the costs, then all remaining firms can enjoy share of supracompetitive profits. Economically irrational.

C. Tying and Forcing -- §1 Sherman Act1. The economics of tying:

a. Fixed proportions case : a monopolist can extract the full monopoly profit from the monopolized good and it does not need to tie that good to a second good. (E.g. Left shoe monopolist w/ a MC =1. Right shoes produced in competitive market where MC =1. Consumers value a pair of shoes at $102. Left shoe monopolist can charge $101 for the left shoe, right shoe producers can charge $1, monopolist has still extracted all consumer surplus). If tying going on in a fixed proportions market, must be for other reasons.

b. Variable proportions case : a monopolist may be able to increase profits by tying as tying will often serve as a form of price discrimination. The social welfare consequences in this case are ambiguous (sometimes social welfare increased and sometimes decreased).

2. Eastman Kodak Co. v. Image Technical Services, Inc ., (1992), p. 730: K sold high-end copiers to businesses. Also sold replacement parts and serviced K copiers for a fee. To eliminate competition from independent service organizations (ISOs), K refused to make parts available to customers unless they agreed to purchase service from K as well. Thus, despite the fact that K faced competition from others in market for machines, those who already bought K copiers were locked in to the aftermarkets for part and service to those copiers. ISOs filed claim under §1 of SA that K had unlawfully tied service of K machines to sale of parts. Court expressly does not decide which market is “tying” market, equipment or parts. Leaves issue open, prompting dissent to note this leaves all OEMs w/ power over own brand in derivative aftermarkets open to antitrust liability. a. Court frames issue as “does a defendant’s lack of market power in the primary

equipment market preclude, as a matter of law, the possibility of market power in derivative aftermarkets.”

b. Tying violates §1 SA if:(1) there are two distinct products (test: is there sufficient consumer demand

so that it is efficient for a firm to provide tied product w/o tying product? E.g. Service w/o parts)

(2) firm has tied the products(3) seller has appreciable economic power in tying product market(4) if arrangement affects a substantial volume of commerce in the tied

marketc. Kodak wants court to adopt a legal rule that says because it has no market

power in equipment market, K precluded from having monopoly power in derivative aftermarkets.(1) K argues any rise in price in service and parts would be offset by a

corresponding loss in profits from lower equipment sales as consumers purchased equipment w/ more attractive service costs

(2) Court refuses to find such a rule because:(a) Lock in effect – once you have equipment, stuck w/ parts and service

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(b) Sophisticated v. unsophisticated consumer – Kodak’s argument relies on sophisticated consumer, one who estimates life cycle costs of equipment. Court also notes acquiring this information could be very costly to consumer, giving him incentive not to do so.

(c) Court thinks K could be charging a “middle, optimum” price in which profits from higher price in parts and service more than offsets losses from lower equipment sales

(d) Way we characterize case is crucial. If tying market is equipment, K has no market power. However, if tying market parts, K has monopoly power over K parts and tying becomes more likely.

(e) Court finds that manufacturer’s power over its own brand of equipment sufficient as “monopoly power” w/in §2. This means that “single-brand power over aftermarket products ‘market power’ sufficient to permit an antitrust plaintiff to invoke the per se rule of tying.”

(f) If parts can be found as the tying product, opens up every manufacturer of durable goods to same claim. Expands antitrust docket considerably.

(g) Is this a per se rule or rule of reason against tying? Ambiguous what court is actually doing, although characterizes it as per se. Probably closer to per se than rule of reason.

(h) Picker thinks variable proportions cases should definitely be done under the rule of reason.

VII. Exclusive Dealing -- §3 CA and §5 FTCAA. Entire Clayton Act is devoted to the idea of incipiency, meaning we should try and

address conduct before it gives rise to a full-blown monopoly (before Sherman Act will pick them up). The problem with this, though, is that it requires us to be quite confident that we can forecast how a particular situation will develop. And, by definition, it creates much greater intrusion by the government into the marketplace, as we would end up regulating many cases that, given the changing tides of fortune, would not result in a monopoly. §5 FTCA is also concerned w/ incipiency. However, the FTC’s powers under §5 are much broader than under §§ 1 and 2 of the Sherman Act.1. §3 CA: Unlawful for a person engaged in commerce to make a sale or contract

for sale of goods “on the condition, agreement, or understanding that the lessee or purchasor shall no use or deal in the goods, wares, … of a competitor of the lessor or seller, where the effect of such lease, sale, or contract for sale … may be to substantially lessen competition or tend to create a monopoly in any line of commerce.” NOTE: §3 CA applies only to goods, not to services.

2. §5 FTCA: “Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.”

B. Standard Fashion Co. v. Magrane-Houston Co., (1922), p. 758: 1st §3 CA case heard by S.Ct. SF, one of dominant producers of patterns for sale, enters into a contract w/ retailer in one-horse town, where retailer agrees to sell ONLY SF’s patterns (won’t

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sell any of SF’s competitors). SF has locked up about 40% of retailers through contract. Court holds contract is within §CA 3.

1. This is a one-horse town – one retailer.a. Does a contract create monopoly? Or does the local situation create the

monopoly? The town only has one store.b. Store has the bargaining power in this situation.c. Overall, SF only has 40% of retailers. Wouldn’t meet Hand’s

requirements.d. SF has procompetitive reason for wanting exclusive contract. W/ retailer

as agent, want retailer to have incentive to sell your pattern. If retailer selling 10 brands of patterns, may not care which brand it sells.

2. Court seems to have some theory of monopoly as a spring: at first SF is only at 40% and then all of a sudden, springs to 100%. Picker doesn’t buy this.

3. What are standards for “tends to monopoly”? Think of looking at a pattern over time, want to catch cases where we say, oh, the end result here is monopoly.

4. Picker thinks difficult to come up w/ workable administrative scheme, but thinks court embraced the idea that 40% will lead to monopoly too quickly.

5. ISSUE: at what point in the timeline is it appropriate for court to assume monopoly will result from current practices?

C. FTC v. Brown Shoe Co ., (1966), p. 773: Brown, the second largest shoe manufacturer in US, induced retailers to join their franchise program by giving them certain benefits such as lower insurance rates and better product info. Ct. found FTC had authority to issue cease and desist order under §5 FTCA, because Brown’s practices may conflict w/ basic policies behind SA and CA, even if the current practices don’t actually violate SA and CA. 1. Decision shows that §5 FTCA much broader than even §3 CA. Still aimed at idea

of incipiency.2. Case most explicit authority on FTC’s ability under §5 to prevent unfair methods

of competition beyond reach of SA and CA3. Picker criticizes decision:

a. Retailers were free not to accept franchise agreement and could still get Brown’s shoes

b. Brown Shoe not on road to monopolizing. Had only 650 shoe stores out of 70,000. Picker thinks we should be much further down path to monopoly.

D. U.S. Healthcare, Inc. v. Healthsource, Inc . (1st Cir. 1993), p. 778: Both parties HMO’s. Healthsource offered doctors more money if they signed exclusivity agreements. Could provide service to individual customers, but could not be a member of another HMO. 87% of Healthsource’s 300 doctors signed. Court said no violation of AL. This is a §1 SA case, not a §3 CA case. Why? Not a good, but a service.1. Note: this is a vertical arrangement.2. Buyer is imposing condition here, instead of seller. (§3 CA, if it applied, treats

these two situations differently)3. Healthcare wants to argue this is a per se violation b/c a group boycott, but source

of constraint here is Healthsource, not doctors.

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4. Purely vertical arrangements, where a supplier or dealer makes an agreement to exclusively supply or serve a manufacturer, are not group boycotts.

5. Court applies “quick look” – somewhere in between per se rule and rule of reason:a. Exclusive dealing arrangements serve many benign purposes: assurance of

supply or outlets, enhanced ability to plan, reduced transaction costs, creation of dealer loyalty

b. Danger of exlusive arrangements is that they may foreclose too much of supply or outlet so that existing or potential competitors may be limited or excluded, reinforcing market power and raising prices.

c. Must evaluate probable effect.d. Here court said there was no foreclosure of supply so no need to examine

other factors such as motive for clause, or balance between benefits and harms.

VIII. Attempts to Monopolize -- §2 Sherman ActA. Section 2 of SA is triggered by both successful monopolization and also by attempts

to monopolize. (“who shall monopolize, or attempt to monopolize”). This substantially broadens the reach of that section.

B. Lorain Journal Co. v. United States , (1951), p. 844: LJ is only newspaper in town, has dominant position. Radio enters and newspaper says make a choice – advertise w/ us or radio, not both. Newspaper read by 99% of Lorain so some local business people considered advertising in it essential. Court held this was a violation of §2.1. Picker points out case shows property rights are not unqualified. It’s their paper,

and yet they are still not allowed to make this choice. 2. Does it matter how newspaper got monopoly here – “thrust upon” by virtue of

being only gig in town.3. If LJ had used another method, such as volume discounts, would have lowered

price and increased volume of advertising. These are competitive results so AL approves, and may have achieved same result of running radio out of town. NOTE: this raises issue that how you characterize is essential. Can achieve same results in AL but what box you’re put in has a huge effect on whether your actions will be considered legal.

C. Aspen Skiing Co. v. Aspen Highlands Skiing Corp., (1985), p. 816: AS and ASH entered agreement to offer an all-area ski ticket. Divide profits based on skier usage of each mountain, then by fixed percentages. Eventually AS reduced percentage offered to AHS by too much and AHS refused to deal. AS continued to offer 3-area ticket, excluding Highlands. AS refused to sell 3-area ticket to AHS, even at retail price, precluding ability of AHS to offer skiers an all-area ski ticket. Court held AS violated §2.1. Picker says case stands for the proposition that a firm without valid business

reasons that deviates from prior practice and refuses to cooperate with smaller rivals violates §2.

2. AS defense is that they don’t have to deal with one of their competitors. They can do what they want w/ their own property.

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3. Companies already tried under §1 SA price fixing. Result was had to decide price unilaterally before negotiations began.

4. Lorain was forcing customers to make a choice while AS is not. However, AS is giving customers specific incentives to choose one way.

5. Unclear under what circumstances you can refuse to deal w/ competitor. Court points to two things:a. History of dealingb. Other mountains in similar areas use all-area ticket.

6. Picker says Court of Appeals incorrectly relied on essential facilities doctrine (owner of property owns essential facility and therefore has duty to share it w/ others). Incoherent doctrine here b/c what is essential facility? Who must you share it w/, all rivals or vertically related firms?

D. Spectrum Sports, Inc. v. McQuillan , (1993), p. 850: Ms were granted exclusive rights to manufacture and distribute sorobothane by patent holder. M told S that they had to relinquish their athletic shoe distributorship as condition for retaining the right to develop and distribute equestrian products made from sorobothane. S didn’t give up shoe business. Ultimately, M denied S access to sorobothane and their business failed. Jury said M violated §2 SA.1. Decision sets out current test for attempted monopolization:

a. that the defendant has engaged in predatory or anticompetitive conduct withb. a specific intent to monopolize and c. a dangerous probability of achieving monopoly power.

2. How do you know when a dangerous probability of achieving monopoly power? Look to relevant market and defendant’s ability to destroy competition in that market. How much market power is actually need to meet test is left open.

3. Decision leaves Picker cold, thinks totally uninteresting.4. Is rejiggering your distribution scheme an AL violation?5. Note: this opinion and test contained w/in it insensitive to difference btwn.

vertical and horizontal integration.

IX. Mergers and Acquisitions -- §7 Clayton ActA. Horizontal Mergers – DOJ Horizontal Merger Guidelines on pp. 942-65 and Section

4 Efficiencies Revision in Supp. 1-3.

1. Horizontal mergers directly reduce the number of competitors in the market so the law focuses on whether the merger raises the concentration of firms in the industry to a level or in a manner that increases the likelihood of anticompetitive conduct by remaining participants (e.g. through raising barriers to trade or by facilitating collusion).

2. CA §7 makes unlawful the acquisition by a person of “the stock … or the whole or any part of the assets of one or more persons engaged in commerce” where “in any line of commerce” or “in any section of the country” the effect of the acquisition may be “substantially to lessen competition, or tend to create monopoly.”

3. Merger cases old. Last merger case Supreme Court heard was in 1977.

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4. Hart-Scott-Rodino Act passed in 1976. Requires massive filings, but very few mergers actually challenged. A pre-merger review process (used to be we only review post-merger).

5. Economics of mergers: a trade-offa. On one hand, merger pushes down average costs (more firms share sunk

costs) and lowers pricesb. On other hand, merger reduces competition which can result in some

deadweight lossesc. We don’t know which effect is bigger – the reduction in price (efficiency

gain) v. the reduction in output (efficiency loss).6. Determination of market power in mergers:

a. Used to use concentration ratios where you simply add up the largest market shares.(1) 2 firm concentration ratio (35%, 20%) so 55%(2) 4 firm concentration ratio (25%,25%, 20%,10%) so 80%

b. HHI index – now relied on my DOJ and FTC. You square the relevant market shares and add the result. (1) e.g. 4 firms w/ shares (40%,20%, 10%,10%) so HHI = (40)² + (20)² +

(10)² + (10)² = 2200(2) Not a perfect measure, a proxy

c. US v. Philadelphia National Bank , (1963), p. 875: Court invalidated merger between two commercial banks based on §7 CA. Banks subject to federal and state gov’t regulation. PNB and Girard and 2nd and 3rd largest banks in Philadelphia. There are 42 total banks. Court considered relevant market a 4 county area. If merger went through, merged banks would have 36% of areas assets, 36% of deposits, and 34% net loans. If merger went through, top two banks in area would have 58% of assets and top four banks would have 78% of assets. Highly concentrated market. Merging banks argued it could not serve some companies’ lending needs b/c of inadequate lending limits of banks of area. Thus, it needed to be able to merge to compete nationally.(1) §7 test is if merger “may substantially lessen competition” “in any line of

commerce in any section of the country.”(2) Test court applies: “merger which produces a firm controlling an undue

percentage share of the market and results in a significant increase in the concentration of firms in that market is so inherently likely to lessen competition substantially that it must be enjoined in the absence of evidence clearly showing that the merger is not likely to have such anticompetitive effects.”

(3) PNB suggest that if any sector of market harmed by merger, can’t go through. Anticompetitive effects in one market cannot be justified by procompetitive effects in another.

(4) Court heavily relying on market share data as basis of decision. 1992 Guidelines still maintain importance of market share but also concerned w/ other issues

(5) Court does not consider tradeoff between efficiency gain and efficiency loss. Only looking at loss.

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(6) Court states that merger will result in single bank controlling at least 30% of commercial banking business in four-county area. Don’t specify the smallest market share which would threaten undue concentration, but sure 30% presents that threat. Footnote on p. 884 has other sources suggesting 7% up to 20%.

B. 1992 Guidelines on Horizontal Mergers – represent a move from case-based to regulatory approach toward mergers. Guidelines, so not binding, but very influential. 5 basic steps:1. Market definition:

a. Identify relevant products at issueb. Identify what markets those products are in (products market)c. Identify geographic marketd. How do you perform above three steps? Assume product is Pepsi. Test

guidelines have is to talk about the product in question. Assume a hypothetical monopolist who raises the price by a “small but substantial and nontransitory” amount. (Guidelines say 5%). If raises price and most people substitute Coke for Pepsi, then include Coke in product definition. Keep doing iterations of this until reach a point where an increase in price over all the products in your product definition doesn’t cause all consumers to shift. This is the ability to exercise market power. You are done when it is profitable for hypothetical monopolist to increase prices by 5%.(1) Note that tons of data needed here. Very difficult to get.(2) Do same process for determination of geographic market.

2. Supply response: focus on firms that participate in relevant market. a. In short run, look at uncommitted suppliers (can get in quickly w/ low sunk

costs). If they can enter easily and quickly, limit the monopolist’s ability to raise price and exercise market power.

b. Contestable Markets theory – don’t judge market power by how many players currently in market but by how many others might be able to enter easily

c. In long run, look at how difficult entry would be3. Market share and concentration – use of HHI index. To calculate change in HHI

just multiply the shares of the firms by each other and then by 2 (2ab)HHI Increase <50 (50,100) HHI Increase >100

Post merger HHI < 1000 No challenge No challenge No challengeHHI (1000,1800) No challenge No challenge High scrutinyHHI >1800 No challenge High scrutiny Presumed unlawful

4. Market efficiencies argument – modified in 1997. See handout. Considers issue of when merger causes harm in one market but great benefits in another market. Footnote 2 says agencies will exercise prosecutorial discretion under certain circumstances. (PNB says opposite but this is probably more sensible as policy decision.)

5. Exception for failing firms and exiting assets6. Note: guidelines don’t really address issues that arise when companies have more

than one product. What if do merger analysis for each product and guidelines

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take you in different directions? May have to attempt to restructure the deal to solve some of the problems.

Notes on anticompetitive effects of horizontal mergers (Nutshell p. 354, 397):

Basic concerns:1. elimination of competition between the merging firms2. Substantial market power of the merged entity3. By increasing the concentration in the relevant market, the merger may strengthen

the ability of the market’s remaining participants to coordinate their pricing and output decisions

Point 3: Merger is likely to permit the exercise of market power through coordinated interaction (problem of oligopolistic interpendence)

Criteria to determine whether tacit collusion is probable : Whether the post merger market in conducive to solving the three basic problems that beset efforts by competitor to coordiate their conduct:

a. Can the firms reach consensus on the terms of collective action ?b. Can they deduct deviations from these terms ?c. Can they punish cheaters ?

Relevant factors: I) product homogeneity or heterogeneity ,ii) the availability of information about specific transactions, individual firm pricing and output decision throughout the industryiii)patterns of common pricing or marketing practicesiv) ability of buyers to implement effective counterstrategies

Certain structural factors on the market will make it easier for oligopolists to coordinate their behavior. These factors affect the relative payoffs from cooperating, cheating and competing:

a. Barriers to Entry: When barriers to entry are high. A cartel is more stable because it need not add new members to maintain control over the market.

b. Open Sales: Transparency of prices makes it easier for firms to detect cheating. The simple detection ameliorates the enforcement.

c. Homogeneous Products: Agreements must account for less variables with identical products, making cheating more difficult to hide.

d. Lumpy Sales: Lumpy sales refer to markets where large buyers or long term contracts account for a large share of sales (e.g. airplanes). Lumpy sales increase incentive to cheat, making collusion less likely.

e. Static Demand: When demand is fixed, rivals can detect cheating by looking at their own sales.

f. Similarity: When rivals are similarly situated, they are more likely to have similar preferences regarding prices and output.

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Point 2: Merger is likely to reduce competition through unilateral conduct, even though the ability of market participants to coordinate their behavior is not enhanced– exercise of market power through the merged entity

d. Merger creates substantial market powere. Guidelines presume that adverse unilateral price effects are most likely to

occur in markets with substantial product differentiation wheni. a significant share of sales in the market are accounted for by

consumers who regard the products of the merging firms as their first and second choices

ii. market concentration outside “safe harbor” areasiii. Merging firms have an combined market share of at least 35%

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