miller cross 4 th ed. © 2005 by west legal studies in business / a division of thomson learning...

Miller • Cross 4th Ed. © 2005 by West Legal Studies in Business / A Division of Thomson Learning

Chapter 22Chapter 22Promoting CompetitionPromoting Competition

Miller • Cross 4th Ed. © 2005 by West Legal Studies in Business / A Division of Thomson Learning2

The Sherman The Sherman Antitrust ActAntitrust Act

The Sherman The Sherman Antitrust ActAntitrust Act

• In 1890, Congress passed “An Act to In 1890, Congress passed “An Act to Protect Trade and Commerce against Protect Trade and Commerce against Unlawful Restraints and Monopolies”—Unlawful Restraints and Monopolies”—commonly known as the Sherman Act.commonly known as the Sherman Act.

• The Sherman Act was and remains one of The Sherman Act was and remains one of the government’s most powerful weapons the government’s most powerful weapons in the struggle to maintain a competitive in the struggle to maintain a competitive economy.economy.


Major Provisions ofMajor Provisions of the Sherman Act the Sherman Act

Major Provisions ofMajor Provisions of the Sherman Act the Sherman Act

Section 1 - Prohibits contracts, combinations, and conspiracies Section 1 - Prohibits contracts, combinations, and conspiracies in restraint of trade.in restraint of trade.

– Horizontal restraints subject to Section 1 include price-Horizontal restraints subject to Section 1 include price-fixing agreements, group boycotts, horizontal market fixing agreements, group boycotts, horizontal market division, trade association agreements, and joint ventures.division, trade association agreements, and joint ventures.

– Vertical restraints subject to Section 1 Vertical restraints subject to Section 1 include resale price maintenance agreements, territorial or include resale price maintenance agreements, territorial or customer restrictions, and refusals to deal.customer restrictions, and refusals to deal.

Section 2 - Prohibits monopolies and attempts to monopolize.Section 2 - Prohibits monopolies and attempts to monopolize.


Jurisdictional Jurisdictional RequirementsRequirementsJurisdictional Jurisdictional

RequirementsRequirements

The Sherman Act applies only to activities The Sherman Act applies only to activities that have a “significant” impact on that have a “significant” impact on interstate commerce.interstate commerce.


Section 1 of the Section 1 of the Sherman ActSherman Act


The underlying assumption of Section 1 of The underlying assumption of Section 1 of the Sherman Act is that society’s welfare is the Sherman Act is that society’s welfare is harmed if rival firms are permitted to join in harmed if rival firms are permitted to join in an agreement that consolidates their market an agreement that consolidates their market power or otherwise restrains competition.power or otherwise restrains competition.


Per SePer Se Violations Violations vs. the Rule of vs. the Rule of

ReasonReason

Per SePer Se Violations Violations vs. the Rule of vs. the Rule of

ReasonReason• Per sePer se Rule: Rule:

– Applied to restraints on trade that are so inherently Applied to restraints on trade that are so inherently anticompetitive that they cannot be justified and are anticompetitive that they cannot be justified and are deemed illegal as a matter of law.deemed illegal as a matter of law.

• Rule of Reason:Rule of Reason:

– Applied when an anticompetitive agreement may be Applied when an anticompetitive agreement may be justified by legitimate benefits.justified by legitimate benefits.

– Under the rule of reason, the lawfulness of a trade Under the rule of reason, the lawfulness of a trade restraint will be determined by the purpose and effects restraint will be determined by the purpose and effects of the restraint.of the restraint.


Section 1 - Section 1 - Horizontal Horizontal RestraintsRestraints

Section 1 - Section 1 - Horizontal Horizontal RestraintsRestraints

• A horizontal restraint is any agreement that in A horizontal restraint is any agreement that in some way restrains competition between rival some way restrains competition between rival firms competing in the same market.firms competing in the same market.

• Price FixingPrice Fixing: any agreement among competitors to : any agreement among competitors to fix prices is a fix prices is a per seper se violation. violation.– Case 22.1 Freeman v. San Diego Association of Case 22.1 Freeman v. San Diego Association of

Realtors (2003).Realtors (2003).

• Group BoycottsGroup Boycotts: agreement to not deal with a : agreement to not deal with a vendor or third party.vendor or third party.– Case 22.2 Nynex Corp. v. Discon, Inc.Case 22.2 Nynex Corp. v. Discon, Inc.


Section 1 - Vertical Section 1 - Vertical RestraintsRestraints

Section 1 - Vertical Section 1 - Vertical RestraintsRestraints

• A vertical restraint of trade is one that results A vertical restraint of trade is one that results from an agreement between firms at different from an agreement between firms at different levels in the manufacturing and distribution levels in the manufacturing and distribution process.process.

• Vertical relationships encompass the entire Vertical relationships encompass the entire chain of production: inventory, chain of production: inventory, manufacturing, manufacturing, distribution, retail sales. distribution, retail sales.

• Retail Price Maintenance Agreements.Retail Price Maintenance Agreements.– Case 22.3 State Oil Co. v. Khan (1997).Case 22.3 State Oil Co. v. Khan (1997).




• Section 2 condemns “every person who shall monopolize, or Section 2 condemns “every person who shall monopolize, or attempt to monopolize.”attempt to monopolize.”

• There are two distinct types of behavior that are subject to There are two distinct types of behavior that are subject to sanction under Section 2:sanction under Section 2:

Monopolization

Attempts to Monopolize


MonopolizationMonopolizationMonopolizationMonopolization

• The possession of market power in the relevant The possession of market power in the relevant market and intentional acquisition or maintenance market and intentional acquisition or maintenance of the power, as distinguished from growth or of the power, as distinguished from growth or development as a consequence of a superior development as a consequence of a superior product, business acumen, or historic accident.product, business acumen, or historic accident.– Case 22.4 United States v. Microsoft Corp. (2001).Case 22.4 United States v. Microsoft Corp. (2001).

• A violation of Section 2 of the Sherman Act A violation of Section 2 of the Sherman Act requires that both of these elements be established.requires that both of these elements be established.


Attempts to Attempts to MonopolizeMonopolizeAttempts to Attempts to MonopolizeMonopolize

Definition:Definition:– Any activity by a firm to eliminate competition Any activity by a firm to eliminate competition

and gain monopoly power.and gain monopoly power.


The Clayton ActThe Clayton ActThe Clayton ActThe Clayton Act

• In 1914, Congress attempted to strengthen federal In 1914, Congress attempted to strengthen federal antitrust laws by enacting the Clayton Act.antitrust laws by enacting the Clayton Act.

• The Clayton Act was aimed at specific The Clayton Act was aimed at specific anticompetitive or monopolistic practices that the anticompetitive or monopolistic practices that the Sherman Act did not cover such as:Sherman Act did not cover such as:– Price DiscriminationPrice Discrimination

– Exclusionary PracticesExclusionary Practices

– MergersMergers

– Interlocking DirectoratesInterlocking Directorates


Section 2 – Section 2 – Price DiscriminationPrice Discrimination

Section 2 – Section 2 – Price DiscriminationPrice Discrimination

As amended in 1936 by the Robinson-Patman Act, As amended in 1936 by the Robinson-Patman Act, prohibits price discrimination that substantially prohibits price discrimination that substantially lessens competition and prohibits a seller engaged lessens competition and prohibits a seller engaged in interstate commerce from selling goods of in interstate commerce from selling goods of similar grade and quality to two or more buyers at similar grade and quality to two or more buyers at different prices when the result is a substantial different prices when the result is a substantial lessening of competition or the creation of a lessening of competition or the creation of a competitive injury.competitive injury.


Section 3 –Section 3 – Exclusionary Exclusionary

PracticesPractices

Section 3 –Section 3 – Exclusionary Exclusionary

PracticesPracticesProhibits exclusionary practices, such as Prohibits exclusionary practices, such as exclusive-dealing contracts and tying exclusive-dealing contracts and tying arrangements, when the effect may be to arrangements, when the effect may be to substantially lessen competition.substantially lessen competition.


Section 7 - MergersSection 7 - MergersSection 7 - MergersSection 7 - Mergers

Prohibits mergers when the effect may be to Prohibits mergers when the effect may be to substantially lessen competition or to tend substantially lessen competition or to tend to create a monopoly.to create a monopoly.


Horizontal MergersHorizontal MergersHorizontal MergersHorizontal Mergers

• The acquisition by merger or consolidation of a The acquisition by merger or consolidation of a competing firm engaged in the same relevant competing firm engaged in the same relevant market.market.

• Will be unlawful only when a merger results in the Will be unlawful only when a merger results in the merging firms holding a disproportionate share of merging firms holding a disproportionate share of the market, resulting in a substantial lessening of the market, resulting in a substantial lessening of competition, and if the merger does not enhance competition, and if the merger does not enhance consumer welfare by increasing efficiency of consumer welfare by increasing efficiency of production or marketing.production or marketing.


Vertical MergersVertical MergersVertical MergersVertical Mergers

• The acquisition by a seller of one of its The acquisition by a seller of one of its buyers or vice versa.buyers or vice versa.

• Will be unlawful if the merger prevents Will be unlawful if the merger prevents competitors of either merging firm from competitors of either merging firm from competing in a segment of the market that competing in a segment of the market that otherwise would be open to them, resulting otherwise would be open to them, resulting in a substantial lessening of competition.in a substantial lessening of competition.


Conglomerate Conglomerate MergersMergers

Conglomerate Conglomerate MergersMergers

The acquisition of a noncompeting The acquisition of a noncompeting business.business.


Section 8 – Section 8 – Interlocking Interlocking DirectoratesDirectorates

Section 8 – Section 8 – Interlocking Interlocking DirectoratesDirectorates

Prohibits individuals from serving as Prohibits individuals from serving as directors on the boards of two or more directors on the boards of two or more competing companies simultaneously.competing companies simultaneously.


The Federal Trade The Federal Trade Commission ActCommission Act

The Federal Trade The Federal Trade Commission ActCommission Act

It provides: “Unfair methods of competition It provides: “Unfair methods of competition in or affecting commerce, and unfair or in or affecting commerce, and unfair or deceptive acts or practices in or affecting deceptive acts or practices in or affecting commerce are hereby declared illegal.”commerce are hereby declared illegal.”


Enforcement of Enforcement of Antitrust LawsAntitrust Laws

Enforcement of Enforcement of Antitrust LawsAntitrust Laws

Antitrust laws are enforced by:Antitrust laws are enforced by:– Department of Justice.Department of Justice.– Federal Trade Commission. Federal Trade Commission. – Private Parties, who may be awarded treble Private Parties, who may be awarded treble

damages and attorneys’ fees.damages and attorneys’ fees.


Exemptions from Exemptions from Antitrust Laws Antitrust Laws

Exemptions from Exemptions from Antitrust Laws Antitrust Laws

• Labor unions Labor unions • Agricultural associations and fisheriesAgricultural associations and fisheries• Insurance—when state regulation existsInsurance—when state regulation exists• Export trading companiesExport trading companies• Professional baseballProfessional baseball• Oil marketingOil marketing• Cooperative research and productionCooperative research and production• Joint efforts by businesspersons to obtain legislative or Joint efforts by businesspersons to obtain legislative or

executive actionexecutive action• Other activities, including certain national defense actions, Other activities, including certain national defense actions,

state actions, and actions of certain regulated industriesstate actions, and actions of certain regulated industries

miller cross 4 th ed. © 2005 by west legal studies in business / a division of thomson learning...

Documents

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