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Module 15
Antitrust Law
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Learning Objectives
Upon successful completion, the student will be able to:
Explain anti-trust law;
Describe Clayton Act;
Analyze enforcement of antitrust law;
Describe Monopolization;
Identify remedies to monopoly.
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The Sherman Act
Passed by Congress in 1890.
Regarded largely as a way to reduce concerns that large business
interests dominated some industries.
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
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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.”
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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
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Exemptions
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.
Noerr-Pennington Doctrine says lobbying to influence a legislature is not
illegal.
Most labor union activities are exempt.
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Enforcement
Sherman Act –
Violations of Sections 1 and 2 of the Sherman Act can be felonies.
Private parties or the government can seek injunctive relief under the
Act in a civil proceeding.
Private parties who have been harmed by a violation of the Sherman
Act can sue for treble damages
Clayton Act – Private parties may bring civil actions; often FTC
issues cease and desist orders that prohibit further violations by a
party.
FTC Act – Penalties range from an order preventing a planned
merger to substantial civil penalties.
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The Per Se Rule and The Rule of Reason
Per Se Rule certain business agreements or activities are
automatically held to be illegal by the courts (especially price fixing).
Rule of Reason 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 business’ position in the industry
Structure of the industry
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U.S. v. Apple Inc.
2009 Apple was preparing to introduce the iPad. Wanted to compete
with Amazon’s Kindle. Encourage iPad owners to buy e-books.
Amazon was selling all books, including best sellers, for $9.99. Some
sales were at a loss. Amazon willing to incur losses as a strategy to
attract loyal Kindle users.
Book publishers (the “Big Six” firms dominated the market) did not like
Amazon’s pricing. Apple agreed with Big Six to sell new releases for
$19.99 and $14.99, depending on category.
Big Six stopped doing business with Amazon for best sellers.
Department of Justice and 33 states sued Apple and Big Six for
conspiring to raise prices across the e-book market. Only Apple
proceeded.
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U.S. v. Apple Inc. (2)
Trial Court: Found that heads of Big Six met regularly to discuss
common issues, including Amazon problem.
One executive wrote to Steve Jobs, “Amazon is definitely not liked
much because of selling below cost.” Executives discussed Apple offer
– that it was a better deal.
“Apple wanted quick and successful entry into the e-book market & to
eliminate retail price competition with Amazon.”
In exchange: “It offered publishers an opportunity (called an agency
Trial Court held: Apple organized a conspiracy to raise e-book prices
and so violated the Sherman Act. Apple appealed.
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U.S. v. Apple Inc.
Section 1 of Sherman Act bans restrains on trade “effected by a
contract, combination, or conspiracy.”
Question: Did the challenged conduct stem from independent
decision or from an agreement?
Need to determine if there was “a conscious commitment to a
common scheme designed to achieve an unlawful objective.”
Apple portrayed its Contracts with the publishers as, at worst,
“unwittingly facilitating” their joint conduct. Apple claimed all it did
was attempt to enter the market on profitable terms.
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U.S. v. Apple Inc. (2)
Apple offered each Big Six publishers a proposed Contract that
would be attractive only if the publishers acted collectively.
Under Apple’s proposed model, publishers stood to make less
money per sale than under wholesale agreements with Amazon.
Publishers were willing to take the loss because the model allowed
them to sell new releases and bestsellers for more than $9.99
Apple was aware that its proposed Contracts would entice
publishers only if they perceived an opportunity to shift Amazon to
their model.
.
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U.S. v. Apple, Inc. (3)
Although Sherman Act prohibits every agreement “in restraint of
trade”:
Intent was to “outlaw only unreasonable restraints.”
Plaintiff must prove that scheme by conspirators “constituted an
unreasonable restraint of trade either per se or under the rule of
reason.”
Evidence is sufficient to support the conclusion that agreement to
raise e-book prices was a per se unlawful price-fixing conspiracy. . .
.“
AFFIRMED.
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Mergers
Merger – When two or more firms come together to form a new firm.
Horizontal merger – The firms were competitors on the same level of
business before the merger.
Mergers should not be permitted to create or enhance market
power.
Premerger notification to the Antitrust Division of the Department of
Justice or the FTC.
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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
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Potential Competition
The Supreme Court has stated
That the possibility that the two companies are potential competitors
may be enough to stop a merger.
FTC v. Procter & Gamble (in text):
Merger between Proctor & Gamble and Clorox was prohibited because
of “potential competition.”
The Court wanted Clorox to be faced with the threat of strong potential
competition by a company like P&G.
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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 is facing
bankruptcy or financial threats the firm, the Court will look 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 – A merger that increases concentration can be
defended by showing that the firm’s customers are sophisticated and
powerful buyers.
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Horizontal Restraints of Trade
When businesses at the same level of operation come together in
some manner, they risk being accused of restraining trade.
Rival firms that come together by some form of agreement in
attempt to restrain trade (restricting output & raising prices) is called
a cartel.
Restraints include:
Mergers
Price-fixing
Exchanges of information
Territorial restrictions
Cartels such as Organization of Petroleum Exporting Countries (OPEC)
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Price-Fixing
Firms selling the same product agree to fix prices; the agreement
will almost certainly violate the Sherman Act.
Should Per-Se Illegal or Rule of Reason apply?
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 per se illegal horizontal arrangement.
work.
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Exchanges of Information
Information Sharing
Does sharing information among businesses help or restrain
competition?
U.S. v. United States Gypsum Co.~ The gypsum companies
defended their practice of verifying competitors’ prices as a goodfaith effort to meet competition. The Supreme 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.
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Exchanges of Information (2)
Conspiracy to Restrict Information
May be illegal to band together to restrain non-price 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.
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Todd v. Exxon Corporation
14 oil companies organized to gather information about salaries they
paid to managerial, professional and Technical (MPT) employees.
Reps of companies met to talk about jobs. Consultant analyzed and
distributed data to the firms – data used to set salaries.
Todd sued under Sec. 1 of Sherman Act saying purpose of sharing
info was to hold down MPT salaries. District Court dismissed the
suit. Plaintiffs appealed.
HELD: Remanded. Price fixing is per se illegal. If can prove an
agreement to fix salaries, then there’s a violation.
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Todd v. Exxon Corporation (2)
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 demonstrated
“anticompetitive effects” on the market power of the defendants.
Must consider if data made public. If so, the exchange is more likely
to be approved by the court.
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Territorial Restrictions
Occurs when firms competing at the same level of business reach
an agreement to divide the market geographically to eliminate
competition among the firms.
Territorial Allocations: These are often held to violate antitrust law.
An activity that is legal if undertaken by a single firm may be illegal if
undertaken by a group of firms.
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Vertical Restraints of Trade
Vertical restraints of trade concern relationships between buyers
and sellers (producers, distributors and retailers)—firms up and
down the business chain. Includes vertical price fixing and vertical
non-price constraints.
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.
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Resale Price Maintenance
Small retailers generally favor RPM because it gives them a better
chance to compete with big box stores and big chains by earning
higher margins.
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 working on small margins.
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Leegin Creative Leather Products vs. PSKS
Leegin makes & distributes leather goods under the brand name
“Brighton.” Sold mostly to independent specialty stores.
Leegin refused to sell to retailers that discounted Brighton goods
below suggested prices (RPM).
Leegin: “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.” Consumers are confused by the
popular “sale, sale, sale,” etc. Leegin policy: Consistent prices
allowing selected retailers to earn profits and support the Brighton
brand. Leegin would tell retailers when to have sales.
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Leegin Creative Leather Products vs. PSKS (2)
Leegin discovered that Kay’s Kloset discounted Brighton brand by
20%. Told 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.
Jury awarded Kay’s $1.2 million damages.
Held: Reversed and remanded.
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Leegin Creative Leather Products vs. PSKS (3)
A manufacturer’s use of vertical price restraints (RPM) eliminates
intrabrand price competition. This has the 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 restraints are to be judged according to the rule of reason.
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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 courts apply the rule of reason in such cases.
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Exclusionary Practices
Various practices are designed to indirectly exclude competitors
from a particular market.
Such practices, which include tying arrangements, exclusive-dealing
agreements, and boycotts, may violate antitrust laws if their net
effect is anti-competitive.
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Tying Arrangements (Tie In Sale)
Agreement by a party to sell a product (tying product) conditioned
that buyer purchases a different (tied) product.
Tie-ins meet a rule of reason test if 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.
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Tying Arrangements (Tie In Sale) (2)
Supreme Court is likely to impose a per se illegality only when three
conditions are met – Vertical Restraint Guidelines
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.
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Boycotts
Boycott: When a group conspires to prevent the carrying on of
business or to harm business.
Any group can promote this – consumers, unions, retailers,
wholesalers or suppliers.
Act together to inflict damage on a business.
Boycott is often used to force compliance with a price-fixing scheme
or other restraint of trade.

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Robinson-Patman Act
Enacted in 1936, it amends the Clayton Act.
Controversial law 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 allege 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
prices again.
Analysis has been extended to “predatory bidding”
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Price Discrimination
To win a predatory pricing case a plaintiff must present evidence
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?
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Price Discrimination (2)
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.
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.
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Henderson v. Johnson & Johnson
18 retail pharmacies sued Johnson & Jonson and other
pharmaceutical makers.
J&J gave discounts on prescription drugs to “favored purchasers”
Primarily HMOs that dispensed drugs directly to their clients rather than
sending them to drug stores for prescriptions.
Drug stores contended lower prices offered by the drug makers is a
violation the Robinson-Patman Act. As they paid higher prices it hurt
their ability to compete.
J&J admitted the practice. Contended it had minimal impact.
District Court: Dismissed the suit.
Drug stores appealed.
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Henderson v. Johnson & Johnson
AFFIRMED: Type of competitive injury that appellants assert is
“secondary line injury.” An injury to competition between different
purchasers of the same product.
“Secondary line injury” price discrimination, must show
1) the seller discriminated in price as between the two purchasers;
2) product sold to competing purchasers was of the same grade and
quality; and
3) the price discrimination had a prohibited effect on competition.
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Henderson v. Johnson & Johnson (2)
Injury is the diversion of sales from disfavored purchaser to a
favored purchase. Impact must be substantial to affect competition.
If loss is de minimis, then practice cannot have “substantial” effect
on competition.
Plaintiffs occasionally lost customers, but only about 3%–
deminimus.
This price discrimination did not harm competition.
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