Sherman Act (1890) – Criminal Statute with felony consequences – has civil remedies
Section. 1: Every contract, combination, or conspiracy in restraint of trade is illegal
Requires agreement among two or more competitors
Usually applies to horizontal arrangements
Clayton act (1914)
FTC act (allows it to be a co-enforcer of anti-trust law)
Robinson-Pactman act (amended § 2 of Clayton act to create prohibition of price discrimination)
Consumer surplus is defined as difference between the maximum price that a consumer would be willing to pay, and what the market price is
Issues
Sometimes a seller is smarter than another
Sometimes a single seller is all that is necessary
Sometimes two or more forms can more productively work together
Getting a monopoly, or organizing a group of sellers into a price fixing conspiracy is often self-defeating
Enforcement might not be particularly productive use of enforcement resources
All of these issues say that we know a lot more about consumer's demands and seller's costs
Per-se rules: if conduct falls with in the parameters, than the defendant can't explain it (e. g. if they did it, it is illegal)
At other periods there were rules of reason
Conduct of a particular player was evaluated in context: what public harm might flow from a given practice
If there were no negative impacts, the practice was found not to be illegal
If there were public benefits, the court compared the public harm to the public benefits
When people say today that there is less anti-trust enforcement than there used to be -- the rule of reason is less dominant
Fewer things are per-se illegal
The change over the last 20 years in anti-trust law – there has been a change to evaluating particular practices in context
Finding that certain things are subject to a rule of reason analysis
Broad categories
Horizontal arrangements: arrangements amount firms at the same level of the production or distribution process – all the retailers or manufactures
Typically competitors: what these firms do together directly affects competition
Issues ( can come up in other contexts)
Price fixing
reasonableness of the rates not a defense
types
naked price fixing (seems to have no justification other than the desire of the producers to come up with common prices
this allows the firm to achieve together what competition would prevent them from achieving
if this were legal, firms would have hard time coordinating their conduct
difficult
incentive to cheat
some say that it shouldn't be illegal
it might prevent "ruinous competition"
could be a reduction in transaction costs
we have said that this conspiracy to fix prices would be per-se illegal
bid-rigging practice is illegal (most likely to be charged criminally)
dancing-partner arrangements
conspiracies to reduce stabilize
all agreements relating to price were per-se illegal if either the purpose or the effect of the agreement
raise
depress
fix
peg
stabilize prices
illegal whether or not the competitors had any reasonable prospect of being successful
requirements (or)
contract: agreements amount computer makers to set maximum prices would be illegal as well
maximum prices could really be signals for minimum prices
could be discouragement from improving the quality of the good
combination single firms can coordinate their pricing
in the past, it was per-se illegal for subsidiaries to set their prices
when the price agreement is between corporations with identical common ownership, there is no conspiracy under § 1
conspiracy: proof of agreement can be hard
does the fact that they all are charging the same price show that they conspired to do that
conscious parallelism: if it is so obvious, it could be a de-facto arrangement – supreme court rejected this approach
proof of some agreement is necessary
very little is required:could be as much as an agreement to always respond to the answer as to what they were currently charging
basing point pricing systems, in which each competitor quotes its price in which each competitor quotes its price from which they were given – that kind of pricing system or quotation system is another arrangement or a form of agreement or a form of agreement, would facilitate agreements
price-signaling seems to be the big issue
issue is whether they are engaging in a conversation with their competitors
rule of reason exceptions
if there is little-danger of the evils associated with the price fixing: fixed price being paid inter-day
small period
price of the grain was set in competition each day on the exchange
positive benefits (on exchange) – made it possible for more firms to engage in the grain trade
the analysis was that with the rule of reason, the likely harm for the practice was sufficiently small that it was worth asking what benefits would exist
the question is whether the price fixing did not violate section 1
agreements that make transactions possible may get the rule of reason -- even if the pricing was arbitrary and formulaic
one could argue that the system, at least in individual cases might have been unfair
Patents: agreements to make it possible for the process to be used at all
so long as it goes no further than sub-license and cross-licensee, it is better to have this sort of common pooled approach to a problem than to lose the use of the technology altogether
Establishing of base rules (e. g. intercollegiate athletics)
rules of a game might be okay
it was not reasonable to establishing a common television contract
if there is such a large market share (70-100%) that the adverse impacts were seen to be greater than any public benefits
in these cases the court applied a per-se rule to the prices
analysis
adverse consequences
if the market power is large, it can be per se illegal
if the harms are small, look to see what public benefits there may be to the practice
Market division: § 1 of Sherman
Usually per se
Rule of reason exceptions to market divisions
Ancillary restraints doctrine of judge Taft
If a restraint is simply something necessary to make it possible to carry out another arrangement among companies that is pro-competitive or desirable
They agreed that these are where they would be the only ones that they would be the competitors – these would be an illegal market division
Allowing the firms to organize in this way permitted them to compete with larger national companies might increase all competitions
There could be an argument where divisions create creditable competition
An abandonment of a market (in exchange for a cut of the increased prices) – but found that an abandonment of a market by one firm, and taking a cut of the increased prices by another firm was per-se illegal
– check Palmer
there is no supreme court authority on this
Group boycott: group of firms that say they won't deal with another firm, or only deal with them on certain conditions
Per-se illegality, however, group boycotts can't be held to be illegal, beaus there are weird results that might happen
Happens quite a bit in life
Access to cooperative buying arrangements
Can't use boycotts as a substitute for tort action
Need the following requirements
Cut off of access to something truly necessary for the firm to compete
E. g. a firm being cut off from telephone access
Boycotting firms dominant in the industry
A situation in which the firms doing the boycotting are the firms which you have to deal with if you are doing the boycotting at all
If there is no likelihood that under a rule of reason analysis one could find an analysis in favor of this
Question is whether this is the cut off of something that we need to compete? – e. g. access to something is necessary
Is this a situation where there is no efficiency
E. g. conspiracy not to send dental x-rays can be per se illegal
Boycotting firms could be numerous, so that they dominant the industry
Kept the price up
No efficacy or good things
Does not need to have market power – as there could be alternatives
Analysis
Whether the arrangement is engaged in by a large part of the industry, that it is reasonable to believe that there are going to be significant anti-competitive consequences
If the public harm is less severe, and one can find pro-competitive justifications
E. g. smaller groups gaining market credibility, it may be very appropriate to apply a rule of reasons
Monopolization: crime to monopolize, attempt to monopolize or conspire to monopolize
It may be the monopolist is efficient
Under section 2, when the statute talks about monopolizing or attempting to monopolizing, is it describing the status of having a monopoly
For the most part, the courts have spoken as though it was the conduct that was illegal, rather than the status of being a monopolist
Spectrum
Based on conduct
Doubts were waged, when a company tried to keep prices up, and lost market share – but there was actually monopolistic behavior
In this case, US steel was found to be a good monopolist – it was producing the economic consequences
Real questions:
Defining what the market share was
Defining the market
Have to ask the question as to what is in competition with the product that we are looking at
Questions are at what part of the price curve there is substitution
Is it at the current price, or at any other price
Assumption can be incorrectly made that this is happening at monopoly prices
Becomes a conduct defense: Evil can be simply just to seek to retain a high market share (even just explaining what new uses)
Monopolization would be found if
Large market share obtained by the competitor was obtained by actions in violation of sec. 1
Monopoly would be illegal even if unexercised, even if there was an intent to exercise the power
The use of the market share would be illegal if used to foreclose competition, grain competitive action, or destroy a competitor
Old cases: It doesn't matter whether or not the consumers are getting the best prices
Today it isn't illegal to be big – the defense is based on conduct
It is only illegal to engage in some practice that seems to have no business purpose
Where the companies had no legitimate business purpose for failing to include, other than to disadvantage competitors and public it violated § 2
Need for cooperation as to necessitates
Predatory pricing: very hard to tell low prices charged by a predator vs. An efficient actor
Areeda Turner: we should only condemn predatory prices in which the seller cost was selling below it LRAVC – because anything above those prices would be the thing that firms might be willing to charge in order to get additional business
Hard to calculate actual cost
Has to be rational amount of losses being incurred (e. g. 20 years too much) because there has to be a way to recover the loss
The focus was what one would have to pay to get a monopoly on this basis
For § 2; Question is whether or not one can recover their prices at the end of the game
Attempted monopolization: only applies to firms that are not very big
Single-firm boycotts of people who do something (e. g. conduct business)
The attempt to monopolize is not available for each and every bad practice for which a competitor engages, it is only available where there is a dangerous probability where the action will lead to a monopoly – such that § 2 would be implicated
Today it is a conduct offense – have to come up with some theory by which the conduct of that firm is not justified as an ordinary business practice – but rather is focused as an effort to make life difficult or impossible for a competitor
Horizontal Merger (permanent combinations of firms that might otherwise have tried to form a cartel) – § 7 of Clayton act – only a civil remedy – statute says "what is the effect in any section of the country"
No person may acquire the commerce or stock of any corporation in an attempt to create a monopoly
This can be a form of permanent price fixing
There is no per se rule
Mergers can produce real efficiencies
Might have a situation where a firm was failing – e. g. its assets would leave the industry
Context of markets
Producers and sellers of shoes merged (vertical and horizontal shoes merged) to form a new company that had well under 10% of the market of shoes-- the court said that in Amending section 7, as it has done in the late 40s, to deal with mergers that were thought to be serious was trying to plug loopholes in the statute, and they were trying to reach all kinds of mergers – they were trying to arrest a rising tide of concentration of industry
They wanted to require the courts to look at the context of the merger
E. g. divided the market into three sections (types of shoes)
Divided market geographically
If the combined merger is larger than 30% -- shifts burden
Potential Competition: getting rid of potential competition, was as important as getting rid of actual competition by merger
Application to conglomerate mergers (Mergers of firms who are not competitors):
Potential competition – that one would always have had to consider the possibility of competitors entering the business
The size of the company just formed was of sufficient scope that it made it difficult for anyone to enter the firm which they were producing
Merger guidelines
HSR process
Firms now required to report their intention to merge to Justice
Five issues
Concentration in the industry
What will be the market share of the combined firms – and how many other firms there are in the industry
Old connection ratios (largest two firms shares, and the largest four)
Now HHI: sum of the squares of the market share of each firm
Whether the increased concentration is likely to produce bad effects
E. g. hazard of oligopoly in a given industry
Creation of conditions under which an oligopoly can operate
Ease of entry
Are there efficiency gains
Is either of the merger partners a failing company – do we need to permit the merger to permit the alternative inefficiencies
Vertical: involve firms at different production levels (probably most cases are horizontal restraints), rule of reason can be applied where the adverse effects, where the ability to reach purchasers are willing to pay more, a rule of reason can be applied
Arrangements between people at different levels of the production or distribution process
They are not arrangements among competitors
The effect on competition is not necessarily more indirect
Issues:
Resale price maintenance (price fixing) (§ 1) -- vertical counterpart to price fixing -- needs a contract or a conspiracy - Min MRP is per se illegal, but territorial allocation (about the same economically) is subject to a rule of reason
minimum
Dr. Miles: Seller of patent medicine required all of the wholesalers and retailers to sell the goods at the manufactures preset prices (note, court found that the consignment was scam)
Motives
Higher price could convey an aura or quality
Trying to protect dealer margins
Prevent free-riding
Argument against: produce could be the only one being hurt by this (especially with uniform good) – little social problem
Argument for
This could be the same thing as the retailers asking the producers to force them to raise prices (this would be the social ill)
Could be that if everyone did this, this would be the effects of a horizontal conspiracy – same economic consequences
Exceptions: note: exceptions minimized because of Parke Davis which holds (use of wholesalers to help the manufacture bring the retails into compliance is really mullet-firm activity)
Colgate rule (now probably defunct): it would not do business with any retailer who abide by the price list (no agreement, or affirmative act) (e. g. if you don't do this, you won't get any more shipments)
General Electric: Consignment idea could be a defense
Consignment exception is now dead with a large organization (antique consignment OK) – Samson v. Union Oil
Maximum price maintenance might be subject to a rule of reason
Could be an exception where
There might be good reasons for the dealer to keep the price of the product low
It could be the situation where if the price is too much the manufacture could end up hurting
Consumers wouldn't be hurt if Del said that one had to lower their price to the thousand dollar level – State Oil v. Kahn
Maximum resale price maintenance is no longer per se illegal
Please visit
Non-price restrictions (e. g. tettitorial)
Allocation of territories (vertical equivalent of market division)
If there is only one place to buy something, this could be the same as saying it is price fixing
Territorial allocation gives special incentive to the dealers to stimulate inter-brand competition, even though it does eliminate competition between dealers
White Motors first recognized this (refusal to grant summary judgment)
Sylvania:
territorial allocation will be analyzed under rule of reason
Will compare competition among distributors, with public benefit from increased competition among producers of different kinds of products
Most of the time, the courts have found that the territorial allocations were proper
Business Electronics v. Sharp:
Free-rider problem being resolved in front of burdened company
Non-price termination is under rule of reason
Dealing with free riders is a non-price decision
Price restraint are still illegal
needs to be an agreement for RPM
dissent was that one could characterize a cut in price as a termination
Tying (no counterpart in horizontal area) – except when it comes to monopolization, under §1 of the Sherman Act, and § 3 of Clayton
Bad things
These things tend to exclude some producers from the market
Could be additional burden on the consumer
This is an extension of a monopoly
Could be deemed to be a patent misuse
International Salt: can't tie the tied product to the non-tied product
Good things
Might be used as a means of metering the use of the machine
IBM: might want to know how many cards are being used on the machine
Quality control of inputs to equipment
Result: You can, and must, use quality control standards other than requiring the use of your product, and can't use it for metering
Whether in fact it protects the public is a question of debate
Courts have held that the only time you can tie is when you have a certain market power, where the buyers must have your product (e. g. a new product)
Issue
Whether or not they are, in fact, two products (e. g. car and tires)
Time Pickayune (buying a product in a morning product and an evening one are the same product)
Franchise cases
Carvel: Product is same item as franchise
Chicken Delight: One is only buying the style and methods, but the raw material (not distinctive) is different
If there are two products
Per-se: Northern Pacific; you have an illegal typing arrangement, if the seller has sufficient power in the tying product to restrain competition in the tying product. There needs to be a "not insubstantial amount of commerce"
$200k was a "not insubstantial" amount
at least nominally, you have to say that typing is per se illegal
Jefferson Parrish: Anesthesia is the same product as surgery (but lacking market power)
Tying is still per se illegal, and even though they are being tied
because Jefferson Parrish only had 30% of the market – it lacked the market power -- it lacked sufficient power with respect to the tying product
Kodak (tying replacement parts) (Kodak: because you can be held to have market power in the parts for your own machine, it may turn out to be a lot easier to find the kind of market power to render something per se illegal)
Manufacture didn't have market power in the market for the equipment
Since the manufacture did have a market power in its own parts, what was tied was the service of the machines to the parts
In this case, the rules were changed in mid-stream
Most customers weren't sophisticated enough
Exclusive arrangements (requirements contracts) under rule of reason as to what proportion of the market for the total supply are foreclosed
Contracts serve the interests of both parties to the contracts, rather than forcing something on the buyers
Dealt with under a rule of reason
This is deal with as a "proportion of the market basis"
Standard Stations: the fact that all the firms in the industry were engaging in requirements
Tampa Power: will look at the percentage of all the coal in the country
This could create a significant reduction in the number of firms
Jefferson Parish (minority): will look at what the total supply of those contracts
Vertical mergers -- § 7 of Clayton act
Issue of foreclosing market opportunities for other firms that would like to sell a certain amount of the other product
Brown Shoe
If one vertically integrates, they might improve their ability to sell shoes for less, there might be a benefit to consumers
Violation of the Clayton act
Creation of entry barriers
Creation of an oligopoly: Whether it makes it easier for the manufactures to collude by reducing the total number of firms in the industry, making the oligopoly for the efforts of firms to coordinate their behavior in the absence of an agreement that much easier
