Chapter 20

Antitrust Law

Antitrust Law• Antitrust law restricts attempts

by competitors to restrain competition and injure competitors.

• Antitrust statutes can be unclear, thereby requiring the courts to determine what really constitutes antitrust law

• Therefore “Antitrust Law” refers to antitrust statutes and the interpretation of these statutes by the courts.

The Sherman Act• Passed by Congress in 1890.• Regarded as a way to reduce

concerns that large business interests dominated industry.

• Private parties may sue.• The major sections of the Act

are so broad that one could find almost any business activity to be illegal.– No restraint of trade– Cannot monopolize or

attempt to monopolize

The Clayton Act

• Enacted in 1914• Wanted government to have the ability to attack a

business practice early in its use to prevent a firm from becoming a monopoly.

• Practices are illegal that “substantially lessen competition or tend to create a monopoly.”

• Private parties may sue—treble damages.

The Federal Trade Commission Act

• Enacted in 1914• Established the FTC as an agency

to investigate and enforce violations of antitrust laws.

• Declares it illegal to be engaged in “unfair methods of competition” - any business activity that may create a monopoly by unfairly eliminating or excluding competitors from the marketplace.

Exemptions

• NOT ALL BUSINESSES ARE SUBJECT TO ANTITRUST LAWS• Clayton Act exempts some activities of nonprofit and certain agricultural,

fishing and some other cooperatives.• The Export Trading Company Act allows limited antitrust immunity for

sellers of exports. Domestic producers may be allowed to join together to enhance their ability to export products to other countries.

• Parker doctrine allows state government to restrict competition in public utilities, professional services, and public transportation.

• McCarran-Ferguson Act exempts insurance (as long as states regulate).• Noerr-Pennington doctrine: lobbying to influence a legislature is not

illegal.• Most labor union activities are exempt.

Remedies Available

Government can:• restrain a company or individual

from performing certain actions• force a company to sell part of its

assets• force a company to let others use

its patents or facilities• cancel or modify existing business

contracts• only plaintiffs suffering injuries

caused by anticompetitive behaviors of firms can recover damages under the law

The Per Se Rule and The Rule of Reason• Per Se Rule means that a certain

business agreement, arrangement, or activity will automatically be held to be illegal by the courts.

• Rule of Reason means that the court will look at the facts surrounding the business practice before deciding whether it helps or hurts competition.

• Courts consider:– Business reasons for the restraint– The restraining firm’s position – Structure of the industry

Mergers (Source of Monopoly concern)

Merger – When two or more firms come together to form a new firm.

Horizontal merger – The two or more firms were competitors before the merger.

Mergers should not be permitted to create or enhance market power.

Premerger notification to Antitrust Division of Department of Justice or FTC.

Standard Oil Co of New Jersey v. U.S. (1911) (in text)

• Government sued under Sections 1 & 2 of the Sherman Act to break up Standard Oil Trust which controlled as much as 90% of production, shipping, refining and selling of petroleum products, thus allowing the Trust to fix the price of oil and monopolize interstate commerce.

• The Trust was ordered to cease and desist in actions which violate the Sherman Act AND the Trust was broken up so that companies would operate independently and compete with each other.

Determining Market Power

Product and Geographic Markets – percent of relevant market controlled by the firm

Product Market – a monopoly exists when there is only one firm producing a product for which there is no good substitute

Geographic Market – generally limited to the area where consumers can reasonably be expected to make purchases

When Mergers Are Allowed• Merger guidelines – Major reason to approve merger

is that it will enhance the efficiency in the market, benefiting consumers by better resource allocation.

• Failing firm defense – If one of the firms involved in a merger has been facing bankruptcy or circumstances that threaten the firm, the Court will look more favorably upon the merger. The firm must show:– not likely to survive without merger– no other buyers, or this one will least affect competition– tried and failed at all other ways to save firm

• Power buyer defense – Merger that increases concentration can be defended by showing that the firm’s customers are sophisticated and powerful buyers.

Horizontal Restraints of Trade• When businesses at the same level of operation come together

in some manner, they risk being accused of restraining trade.• Collection of rival firms that come together by some form of

agreement in attempt to restrain trade (restricting output & raising prices) is called a cartel.

• Examples:– Mergers– Horizontal price-fixing– Exchanges of information– Territorial restrictions– Cartels such as Organization of Petroleum Exporting Countries (OPEC)

Price-Fixing• Firms selling the same product agree to fix

prices; the agreement will almost certainly violate the Sherman Act.

• Should Per-Se IllegalPer-Se Illegal apply or Rule of ReasonRule of Reason?• In United States v. Trenton Potteries: When

competitors get together to fix prices, there is a violation of the Sherman act – whether or not the prices they set are reasonable.

• Most price-fixing is a horizontal arrangement that is per se illegal.

Freeman v. San Diego Association of Realtors

• Multiple Listing Service (MLS) often used by real estate agents to share info re: properties via computerized database.

• Agents subscribe to MLS to list properties and see info about properties.• Before 1992, 12 MLSs served San Diego, buying data services from 4 different

database operators.• 11 MLS associations combine, creating Sandicor; all subscribers have access to

all San Diego properties – cost less than maintaining separate databases.• 11 MLSs still sign up agents & collect fees, but Sandicor sets rules.• No price cutting is allowed. When MLSs compared costs, they found largest

MLS spent $10/month per subscriber, while 2 small ones spent $50/month per subscriber.

• Fee for all was set at $44 per subscribing agent, paid to Sandicor.• That price was less than the $50 per subscriber the small operators incurred,

so lower-cost MLSs agreed to cover losses the smaller MLSs incurred. • A service that had cost of $10/month to some MLSs now was $44, and

Sandicor was profiting millions in excessive fees.

Freeman v. San Diego Association of Realtors, cont.

• Freeman and other San Diego real estate agents sued, saying price of service is inflated.

• Freeman offer to Sandicor to market MLS info thru a new service center at a lower price to subscribers was rejected.

• Freeman sued for conspiracy in restraint of trade and price fixing. District court dismissed. Freeman appealed.

• HELD: Reversed and remanded.• Sandicor charges subscribers for their use of MLS; its MLS fee

includes the support services provided by associations.• The support fee Sandicor in turns pays the associations for support

services fixed at level more than 2X what would cost the most efficient association to provide them.

• Sandicor charges MLS subscribers $44 per month; an association collects this fee from subscribers and hands it over to Sandicor; Sandicor then returns $22.50 to associations as the support fee.

• Can’t turn a horizontal agreement to fix prices into an innocent act just by changing the way the books are kept.

Information Sharing

Information Sharing• One problem in antitrust law is deciding whether the trading of information

among businesses helps or restrains the competitive process. • U.S. v. United States Gypsum Co.~ The gypsum companies defended their

practice of verifying competitors’ prices as a good-faith effort to meet competition. The court did not apply a per se rule against such price information exchanges; it warned that such exchanges would be examined closely and would be allowed in limited circumstances.

Conspiracy to Restrict Information• May also be illegal to band together to restrain nonprice information.• FTC v. Indiana Federation of Dentists ~ Court held that dentists’ organization

policy requiring members to withhold X-rays from dental insurance companies is a conspiracy in restraint of trade upheld under rule of reason.

Todd v. Exxon Corporation• 14 oil companies conducted surveys of the salaries they paid to

managerial, professional and Technical (MPT) employees.• Reps of the companies met to talk about jobs, and consultant

analyzed and distributed data to 14 firms.• Todd and other employees sued under § 1 of Sherman Act saying

purpose of sharing info was to hold down MPT salaries.• District Court dismissed. Plaintiffs appealed. Reversed.• Price fixing is per se unlawful. If can prove an agreement to fix

salaries, then there’s a violation.• Data exchange claims are close cousins of traditional price fixing.• If plaintiff can prove 1) defendants exchanged info deemed

anticompetitive and 2) activities had an anticompetitive effect on MPT labor market, then may have a cause of action.

• Court should consider whether plaintiff showed “anticompetitive effects” on the market power of the defendants. Must also consider if data are made publicly available. If so the exchange is more likely to be approved by the court.

Territorial Restrictions

• Occurs when firms competing at the same level of business reach an agreement to divide the market to eliminate competition among those firms.

• These are often held to violate antitrust law.

• An activity that is legallegal if undertaken by a single firm may be illegalillegal if undertaken by a group of firms.

Vertical Restraints of Trade• Vertical restraints of trade concern

relationships between buyers and sellers (producers, distributors and retailers).

• A company that does more than one function internally, such as manufacturing and distribution, is not constrained by the antitrust laws.

• Examples of vertical restraints of trade include vertical price fixing and vertical non-price constraints.

See Exhibit 20.3

Vertical Price Fixing• Usually trying to control price at which

product is sold to consumer.• Resale Price Maintenance – (RPM) - an

agreement between a manufacturer, supplier and retailers of a product under which the retailers agree to sell the product at not less than minimum price.

• Once a producer or supplier sells a product to a retailer, it cannot fix or otherwise dictate the price the retailer will charge consumers.

Pros and Cons to Resale Price Maintenance

• Small retailers favor RPM because they are more likely to have the same prices as the mass merchandisers, i.e. Mom’n’Pop can compete with Wal-Mart.

• Producers of well-known, established products often favor RPM because it allows retailers to earn higher profits for the sale of their products.

• Mass retailers oppose RPM because they have grown large by slashing retail prices and taking customers away from smaller stores.

• Dr. Miles case: Supreme Court held that manufacturer cannot “fix prices for future sales”. Cannot set prices further down the sales chain. (Now not per se illegal. See Leegin)

Vertical Nonprice Restraints

• Manufacturers frequently impose non-price restraints on their distributors and retailers. – Example: Coke and Pepsi have territorial

restrictions on the sale of the manufacturer’s products. Delivery in competition with another bottler is grounds for revocation of the franchise agreement.

• Customer restrictions may be imposed on distributors and retailers when manufacturer elects to sell directly to a certain customer. – The court applies the rule of reason in such cases.

Leegin Creative Leather Products v. PSKS• Leegin designs, makes & distributes leather goods with brand name “Brighton.”• Sold across country, to mostly small, independent specialty stores.• Leegin refused to sell to retailers that discounted below suggested prices.• Allowed products not selling well that the retailer did not plan on reordering to

be discounted.• Leegin told stores “In this age of mega stores . . . consumers are perplexed by

promises of product quality & support of product which we believe is lacking with these large stores. “ Avoid “sale, sale, sale,” etc.

• Leegin policy: Consistent prices allowing selected retailers to earn profits & support the Brighton brand.

• Leegin discovered that Kay’s Kloset, discounted Brighton brand by 20%.• Asked Kay’s to stop price cutting below suggested retail price. Kay’s refused.

Leegin stopped selling to Kay’s.• Kay’s sued Leegin for violating Sherman Act.• Trial court would not allow expert testimony about economic benefits of Leegin

policy.• Held the resale price maintenance was per se violation.

Leegin Creative Leather Product s. v. PSKS, cont.

• Jury awarded Kay’s $1.2 million damages – tripled punitive damages. • Appeals court affirmed. Leegin’s appealed.• Held: Reversed and case remanded.• Promotion of interbrand competition is important because antitrust laws want to protect

such competition. One manufacturer’s use of vertical price restraints eliminates intrabrand price competition; irrelevant for such a small firm.

• Leegin’s practice has potential to give consumers more options so they can choose among low-price low, service brands; high-price, high-service brands; and brands that fall in between.

• Absent vertical price restraints, retail services that enhance interbrand competition might be under-provided.

• This is because discounting retailers can free ride on retailers who furnish services and capture increased demand those services generate.

• Resale price maintenance, also can increase interbrand competition by facilitating market entry for new firms and brands.

• Vertical price restrains are to be judged according to the rule of reason.

Tying Arrangements (Tie In Sale)• Agreement by a party to sell a product (the tying product) conditioned

that buyer purchases a different (complementary or tied) product.• Tie-ins meet a rule of reason test so long as competitive alternatives

exist.• If a tie-in creates a monopoly when there are no or few good

alternatives, it is likely illegal; if products or service are tied together when there are other competitors, the tie-in will likely pass the rule of reason test.

• Supreme Court is likely to impose a per se illegality only when three conditions are met:– The seller has market power in the tying product– Tied and tying products are separate– There is evidence of substantial adverse effect in the tied product market

• In other situations: rule of reason is to be employed.

Boycotts• Boycott: When a group conspires to prevent the

carrying on of business or to harm business.• Any group can promote this – consumers, union

members, retailers, wholesalers or suppliers.• Act together to inflict damage on a business.• Boycott is used to force compliance with a price-

fixing scheme or other restraint of trade.• Usually fall under per se rule.

Robinson-Patman Act• Enacted in 1936, it amends the Clayton Act.• The controversial section 2(a) basically states

that a seller is said to engage in price discrimination when the same product is sold to different buyers at different prices.

• Price Discrimination - many cases under Robinson-Patman are alleged economic injuries either from a firm charging different prices in different markets or from bulk sale discounts given to larger volume retailers.

• Predatory pricing - when Company A attempts to undercut Company B in an effort to drive Company B from the market. When B is gone, A raises prices again.

• To win a predatory pricing case a plaintiff must present strong evidence showing that Defendant priced below cost Below cost pricing created a genuine prospect for the

defendant to monopolize the market Defendant would enjoy monopoly long enough to recoup

losses suffered during price war • Are the volume discounts given to large-volume retailers

legal? Defenses -• Cost justification - Difference in transportation costs – a) more

expensive to drive further and b) it’s cheaper per unit to deliver 500 refrigerators versus 10. Not used much.

• Meeting competition - Firm cuts its price in order to meet competition. It must be done in good faith, not in an effort to injure competitors but to stay competitive. Used more successfully.