Ch. 39 - Antitrust Laws

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Antitrust Laws

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Rules that govern competition.

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Sherman Act

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An act passed by Congress in 1890 to prevent extreme concentrations of economic power.

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Chicago School

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A theory of antitrust law first developed at the University of Chicago. Adherents to this theory believe that antitrust enforcement should focus on promoting efficiency and should not generally be concerned about the size or number of competitors in any market.

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The major provisions of the antitrust laws are:

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1. Section 1 of the Sherman Act prohibits all agreements "in restraint of trade."
2. Section 2 of the Sherman Act bans "monopolization". The wrongful acquisition of a monopoly.
3. The Clayton Act prohibits anticompetitive mergers, tying arrangements, and exclusive dealing agreements.
4. The Robinson-Patman Act bans price discrimination that reduces competition.

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Clayton Act

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Passed by Congress in 1914, because the courts were not enforcing the Sherman Act as strictly as it had intended. The purpose of the Clayton Act was to clarify the earlier statute.

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Robinson-Patman Act

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Passed in 1936, is an amendment to the Clayton Act.

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Two categories of the violations of the antitrust laws

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Per se
Rule of reason

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Per se violation of an antitrust law

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An automatic breach. Courts will generally not consider mitigating factors.

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Rule of Reason Violation

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An action that breaches the an anticompetitive impact

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Managers typically consider two different approaches in developing a competitive strategy

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1. Cooperative strategies that allow companies to work together to their mutual advantage.
2. Aggressive strategies, to create an advantage over competitors.

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Three types of cooperative strategies are potentially illegal

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1. Horizontal Agreements among competitors
2. Vertical Agreements among participants at different stages of the production process.
3. Mergers and joint ventures among competitors.

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Horizontal agreement or merger

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An agreement or merger between two potential competitors.

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Vertical agreement or merger

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An agreement or merger between two companies at different stages of the production process, such as when a company acquires on of its suppliers or distributors.

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Four Horizontal Strategies

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1. Market division
2. Price-fixing
3. Bid-rigging
4. Refusal to deal

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Two Vertical Strategies

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1. Reciprocal dealing
2. Price discrimination

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Three types of mergers

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1. Horizontal mergers
2. Vertical mergers
3. Joint ventures

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Market Division

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Any effort by a group of competitors to divide its market is a Per se violation of the Sherman Act.

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Price-Fixing

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When competitors agree on the price at which they will buy of sell products or services, their price-fixing s a Per se violation of the Sherman Act.

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Bid-Rigging

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In bid-rigging, competitors eliminate price competition by agreeing on who will submit the lowest bid. Bid-rigging is also a Per se violation.

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Refusals to Deal

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An agreement among competitors that they will not trade with a particular supplier or buyer. Such an agreement is a rule of reason violation of the Sherman Act.

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Reciprocal Dealing Agreement

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An agreement under which Company A will purchase from Company B only if Company B also buys from Company A. These agreements are rule of reason violations of the Sherman Act.

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Price Discrimination

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Under the Robinson-patman Act, it is illegal to charge different prices to different purchasers if: The items are the same and the price discrimination lessens competition. However it is legal to charge a lower price to a particular buyer if: The cost of serving this buyer are lower or the seller is simply meeting competition.

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Horizontal Merger

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involves companies the complete in the same market.

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Vertical Merger

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involves companies at different stages of the production process.

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Joint Venture

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a partnership for a limited purpose - the companies do not combine permanently, the simply work together on a specific project.

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Aggressive Strategies

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A strategy to gain an unfair advantage over competitors.

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Monopolization

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to acquire a monopoly in the wrong way.

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Three questions to determine of a monopoly is illegal

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1. What is the market? Without knowing to market, it is impossible to determine if someone is controlling it.
2. Does the company control the market? Without control, there is no monopoly.
3. How did the company acquire or maintain its control? Monopolization is illegal only if gained or kept in the wrong way.

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What is the market

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To determine what market you are in ask "how high can your prices rise before your buyers will switch to a different product?"

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Does the company control the market

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No matter what your market share, you do not have a monopoly unless you can exclude competitors or control prices.

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How did the company acquire or maintain its control

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Possessing a monopoly is not necessarily illegal; using "bad acts" to acquire or maintain one is.

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Predatory Pricing

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

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To win a predatory pricing case, the plaintiff must prove three elements

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1. The defendant is selling its product below cost.
2. The defendant intends that the plaintiff go out of business.
3. If the plaintiff does go out of business, the defendant will be able to earn sufficient profits to recoup its prior losses.

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Tying arrangement

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an agreement to sell a product on the condition that the buyer also purchases a different (or tied) product.

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A tying arrangement is illegal if

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1. The two products are clearly separate.
2. The seller requires the buyer to purchase the two products together.
3. The seller has significant power in the market for the tying products.
4. The seller is shutting out a significant part of the market for the tied product.

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Exclusive dealing contracts

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A contract in which a distributor or retailer agrees with a supplier not to carry the products of any other supplier. Exclusive dealing contracts are subject to a rule of reason and are illegal only if they have an anticompetitive effect.

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In determining if agreements have an anticompetitive impact on the market, a court will consider the following factors:

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1. The number of other distributors available.
2. The portion of the market foreclosed by the exclusive dealing agreements.
3. The ease with which new distributors could enter the market.
4. The possibility that Amy could distribute the product herself.
5. The legitimate business reasons that might have led the distributor to accept an exclusive contract.

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Resale price maintenance (RPM)

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means the manufacturer sets minimum prices that retailers may charge. RPM is a Per se violation of the Sherman Act. A manufacturer may not enter into an agreement with distributors to fix prices.

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Vertical maximum price-fixing

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when a manufacturer sets the maximum price a distributor may charge. This is a rule of reason violation of the Sherman Act.

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Chapter Conclusion

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The purpose of the antitrust laws in the US is to keep businesses on a narrow road. On the one hand, they may not swerve to one side and work too closely with competitors. Nor may they swerve to the other side and attack competitors too aggressively. Although managers sometimes resent the constraints imposed on them by antitrust laws, it is these laws that ensure the fair and open competition necessary for a healthy economy. In the end, the antitrust laws benefit us all.

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Chapter Review #1
There are two categories of antitrust violations:

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per se and rule of reason. Per se violations are automatic; courts do not consider mitigating circumstances. Rule of reason violations, on the other hand, are illegal only if they have an anticompetitive impact.

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Chapter Review #2

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Any effort by a group of competitors to divide their market is a Per se violation of the Sherman Act. Illegal arrangements include agreements to allocate customers, territory, or products.

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Chapter Review #3

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Price-fixing and bid-rigging are Per se violations of the Sherman Act.

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Chapter Review #4

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Every company generally has the right to decide with whom it will do business. However, the Sherman Act prohibits competitors from joining together in an agreement to exclude a particular supplier, buyer, or even another competitor, if the agreement would hurt competition.

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Chapter Review #5

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Under a reciprocal dealing agreement, a buyer refuses to purchase goods from a supplier unless the supplier also purchases items from the buyer. Reciprocal dealing agreements violate the Sherman Act if they foreclose competitors from a significant part of the market.

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Chapter Review #6

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The Robinson-Patman Act prohibits companies from selling the same item at different prices if the sale lessens competition. However, a seller may charge different prices if these prices reflect different costs.

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Chapter Review #7

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Under the Clayton Act, the federal government has the authority to prohibit anticompetitive mergers and joint ventures.

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Chapter Review #8

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Possessing a monopoly need not be illegal; acquiring or maintaining it through “bad acts” is.

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Chapter Review #9
To determine if a company is guilty of monopolization, ask three questions:

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•What is the market?
•Does the company control the market?
•How did the company acquire its control?

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Chapter Review #10
To win a predatory pricing case, a plaintiff must prove three elements:

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•The defendant is selling its products below cost.
•The defendant intends that the plaintiff go out of business.
•If the plaintiff does go out of business, the defendant will be able to earn sufficient profit to recoup its prior losses.

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Chapter Review #11
A tying arrangement is illegal if:

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•The two products are clearly separate
•The seller requires that the buyer purchase the two products together
•The seller has significant power in the market for the tying product, and
•The seller is shutting out a significant part of the market for the tied product.

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Chapter Review #12

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Efforts by a manufacturer to allocate customers or territory among its distributors are subject to a rule of reason. These allocations are illegal only if they adversely affect competition in the market.

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Chapter Review #13

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An exclusive dealing contract is one in which a distributor or retailer agrees with a supplier not to carry the products of any other supplier. Exclusive dealing contracts are subject to a rule of reason and are prohibited only if they have an anticompetitive effect.

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Chapter Review #14

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When a manufacturer enters into an agreement with distributors or retailers to fix minimum prices, this arrangement is called resale price maintenance. RPM is a Per se violation of the law.

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Chapter Review #15

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Vertical maximum price-fixing is a rule of reason violation of the Sherman Act. It is illegal only if it has an adverse impact on competition.

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Practice Test #1

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Harcourt Brace Jovanovich (HBJ) granted BRG an exclusive license to market HBJ's bar review materials in Georgia and to use HBJ's trade name. HBJ agreed not to compete with BRG in Georgia, and BRG agreed not to compete with HBJ outside the state. HBJ was entitled to receive $100 per student enrolled by BRG and 40 percent of revenues over $350 per student. Did this agreement violate the antitrust laws?

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Practice Test #2

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Fifty bakeries in New York formed an association. They developed a system of distribution under which stores were only allowed to buy from a single baker. A store that wanted to shift to another baker had to consult the association and pay cash to the former baker. The association also decided to raise the retail price of bread from 75 to 85 cents. All the association's members printed the new price on their bread sleeves. Are the bakeries in violation of the antitrust laws?

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Practice Test #3

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Fifty restaurants in Boston threatened to stop accepting the American Express card if the company refused to reduce the commission it charged on each purchase. Visa International, one of American Express's rivals, offered to pay the group's legal expenses. American Express then lowered its commission. For restaurants that processed more than $10 million in annual volume, American Express reduced charges from 3.25 percent to 2.75 percent. Rates for restaurants processing less than $10 million but more than $1 million a year fell to 3 percent. The company did not lower rates for restaurants with volume lower than $1 million a year. Have either the restaurants, Visa, or American Express potentially violated the antitrust laws?

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Practice Test #4

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Reserve Supply Corp., a cooperative of 379 lumber dealers, charged that Owens-Corning Fiberglass Corp. violated the Robinson-Patman Act by selling at lower prices to Reserve's competitors. Owens-Corning had granted lower prices to a number of Reserve's competitors to meet, but not beat, the prices of other insulation manufacturers. Is Owens-Corning in violation of the Robinson-Patman Act?

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Practice Test #5

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BAR/BRI is a company that prepares law students for bar exams. With branches in 45 states, it has the largest share of the bar review market in the country. Barpassers is a much smaller company located only in Arizona and California. BAR/BRI distributed pamphlets on campuses falsely suggesting Barpassers was near bankruptcy. Enrollments in Barpassers' courses dropped, and the company was forced to postpone plans for expansion. Does Barpassers have an antitrust claim against BAR/BRI?

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Practice Test #6

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YOU BE THE JUDGE WRITING PROBLEM American Academic Suppliers (AAS) and Beckley- Cardy (B-C) both sold educational supplies to schools. B-C's sales began to plummet, and it was rapidly losing market share. The company responded by reducing its catalog prices 5 to 12 percent. It also offered a discount of 25 to 40 percent in states in which AAS was making substantial gains. What claim might AAS make against B-C? Is it likely to prevail in court? Argument for AAS: B-C has committed predatory pricing. The company is selling below cost for the purpose of driving us out of business. Argument for B-C: Even if we were to drive AAS out of business, we do not have enough market power to recoup our losses.

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Practice Test #7

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Two medical supply companies in the San Francisco area provide oxygen to homes of patients. The companies are owned by the doctors who prescribe the oxygen. These doctors make up 60 percent of the lung specialists in the area. Does this arrangement create an antitrust problem?

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Practice Test #8

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After acquiring the Schick brand name and electric shaver assets, North American Phillips controlled 55 percent of the electric shaver industry in the United States. Remington, a competitor, claimed that the acquisition of such a large market share was a violation of the law because the increased competition from Phillips would decrease Remington's profits. Does Remington have a valid claim?

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Practice Test #9

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Videos of Jurassic Park and Snow White and the Seven Dwarfs were due in stores the same month. The stores ought to have been delighted at the prospect of having two blockbusters to sell, but instead they were worried—how to price the videos? Both Disney (Snow White) and MCA/Universal (Jurassic Park) were longtime proponents of MAP—minimum advertised pricing. In other words, if retailers sold the videos at prices below $14.95, the studios would not subsidize their advertising budgets. Many retailers would have liked to sell the videos at $14.95, but they were afraid competitors would undercut them. To make matters even more complicated, they had all heard rumors that Disney planned to take other steps against retailers who ignored MAP, such as delaying shipment of the next hit—The Lion King. Is MAP legal? What if the studios take “other steps”?

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Practice Test #10

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An 18-year-old woman with a mental disability and her mother (the Nelsons) brought a malpractice suit against one of the doctors at the Monroe Regional Medical Center. As a result, the Monroe Clinic notified the Nelsons that it would no longer treat them on a nonemergency basis. The patients then went to another local clinic, which was later acquired by Monroe. The merged clinic refused to treat the Nelsons on a nonemergency basis, so the Nelsons were obliged to seek medical treatment in another town 40 miles away. Has Monroe violated the antitrust laws? Whether or not the Monroe clinic has violated the law, is it ethical to deny treatment to a patient?

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Practice Test #11

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ROLE REVERSAL Prepare a short-answer question based on an article you have found in the newspaper that involves an antitrust issue.