Antitrust

“Is there not a causal connection between the development of these huge, indomitable trusts and the

horrible crimes now under investigation? …Is it not irony to

speak of the equality of opportunity in a country cursed with bigness?”

Louis D. Brandeis,Supreme Court Justice

Sherman Act - Passed in 1890◦ To prevent extreme concentrations of economic

power Chicago School

◦ Adherents argued that the market should decide the most efficient size for each industry

Post Chicago School◦ Competition alone may not be enough to protect

consumers

Major provisions of the antitrust law:◦ Section 1 of the Sherman Act prohibits all

agreement “in restraint of trade”◦ Section 2 of the Sherman Act bans

“monopolization”—the wrongful acquisition of a monopoly

◦ The Clayton Act prohibits anticompetitive mergers, tying arrangements, and exclusive dealing agreements

◦ The Robinson-Patman Act bans price discrimination that reduces competition

Violations of antitrust laws are divided into:◦ Per se: An automatic breach of antitrust laws◦ Rule of reason: An action that breaches antitrust

laws only if it has an anticompetitive impact Any conduct overseas that has an

anticompetitive impact in the United States is a violation of U.S. law provided that the:◦ Foreign actor intended to affect the U.S. market◦ Foreign conduct has a direct and substantial

effect on the U.S. market

In developing a competitive strategy, managers consider two approaches:◦ Cooperative strategies that allow companies to

work together to their mutual advantage◦ Aggressive strategies - Designed to create an

advantage over competitors

Potentially illegal types: ◦ Horizontal agreements: An agreement among

competitors◦ Vertical agreements: An agreement among

participants operating at different stages of the production process

◦ Mergers and joint ventures

Market division◦ Any effort by a group of competitors to divide its

market is a per se violation of §1 of the Sherman Act Price fixing and bid rigging

◦ When competitors agree on the prices at which they will buy or sell products or services, their price fixing is a per se violation of §1 of the Sherman Act Bid-rigging is a per se violation Conscious parallelism: When competitors who do not

have an explicit agreement nonetheless all make the same competitive decisions

Refusals to deal◦ A refusal to deal violates the Sherman Act if it

harms competition

Reciprocal dealing agreements:◦ A buyer refuses to purchase goods from a supplier

unless the supplier also purchases items from the buyer

Price discrimination◦ Under the Robinson-Patman Act, it is illegal to

charge different prices to different purchasers if: The items are the same The price discrimination lessens competition

◦ It is legal to charge a lower price to a particular buyer if: The costs of serving this buyer are lower The seller is simply meeting competition

The Clayton Act prohibits mergers that are anticompetitive◦ Horizontal mergers: Involve companies that

compete in the same market◦ Vertical mergers: Involve companies at different

stages of the production process◦ Joint ventures

A partnership for a limited purpose—the companies do not combine permanently, they simply work together on a specific project

Monopolization◦ Under §2 of the Act, it is illegal to monopolize or

attempt to monopolize To determine if a defendant has illegally

monopolized, ask:◦ What is the market?

Product market: Consists of other items that a purchaser can buy

Geographic market: Other areas where a purchase could be made

◦ Does the company control the market? No matter where your market share, you do not have

a monopoly unless you can exclude competitors or control prices

◦ How did they acquire or maintain control? Possessing a monopoly is not necessarily illegal

Using bad acts to acquire or maintain one is

Occurs when a company lowers its prices below cost to drive competitors out of business

To win a predatory pricing case, the plaintiff must prove three elements:◦ The defendant is selling its products below cost◦ The defendant intends that the plaintiff goes out

of business◦ If the plaintiff does go out of business, the

defendant will be able to earn sufficient profits to recoup its prior losses

Illegal under §3 of the Clayton Act and §1of the Sherman Act if:◦ The two products are clearly separate◦ The seller requires the buyer to purchase the two

products together◦ The seller has significant power in the market for

the tying product◦ The seller is shutting out a significant part of the

market for the tied product

Tying Product

• In a tying arrangement, the product offered for sale on the condition that another product be purchased as well

Tied Product

• In a tying arrangement, the product that a buyer must purchase as the condition for being allowed to buy another product

Allocating customers and territory◦ Vertical allocation is illegal when it adversely

affects competition in the market as a whole Exclusive dealing agreements: A

contract in which a distributor or retailer agrees with a supplier not to carry the products of any other supplier◦ Under §1 of the Sherman Act and §3 of the

Clayton Act, exclusive dealing contracts are subject to a rule of reason Are illegal only if they have an anticompetitive effect

The manufacturer sets minimum prices that retailers may charge◦ Also called vertical price fixing◦ Prevents retailers from discounting◦ Rule of reason violation

When a manufacturer sets maximum prices◦ A rule of reason violation of the Sherman Act

““Although managers sometimes Although managers sometimes resent the constraints imposed on resent the constraints imposed on them by antitrust laws, it is these them by antitrust laws, it is these laws that ensure the fair and open laws that ensure the fair and open

competition necessary for a healthy competition necessary for a healthy economy. In the end, the antitrust economy. In the end, the antitrust

laws benefit us all.”laws benefit us all.”