Chapter 45: Antitrust Law

©2001 West Legal Studies in Business. All Rights Reserved.1

Chapter 45:Chapter 45:Antitrust Law Antitrust Law Chapter 45:Chapter 45:

Antitrust Law Antitrust Law


IntroductionIntroduction

• Common law actions intended to limit restrains on trade and regulate economic competition.

• Embodied almost entirely in:– The Sherman Antitrust Act of 1890.– The Clayton Act of 1914.


§§ 1: The Sherman Antitrust Act 1: The Sherman Antitrust Act §§ 1: The Sherman Antitrust Act 1: The Sherman Antitrust Act

• Section 1 and 2 contain the main provisions of the Sherman Act.– Section 1:

» Requires two or more persons, as a person cannot contract, combine, or conspire alone.

» Concerned with finding an agreement.

– Section 2: » Applies both to an individual person and to several people,

because it refers to every person.» Deals with the structure of monopolies in the marketplace.


§ 2: Section 1 of § 2: Section 1 of the Sherman Actthe Sherman Act § 2: Section 1 of § 2: Section 1 of the Sherman Actthe Sherman Act

• Section 1 regulates what are called “horizontal” and “vertical” restraints.


Horizontal RestraintsHorizontal Restraints

• Horizontal restraints are agreements among Sellers (or Buyers) that restrain competition between rival firms competing in the same market .

Seller

Buyer

Seller Seller

Buyer Buyer


Price FixingPrice FixingPrice FixingPrice Fixing

• An agreement between competing firms in the market to set an established price for the goods or services they offer.

• Price fixing is a per se violation of the Act.


Group BoycottsGroup BoycottsGroup BoycottsGroup Boycotts

• Agreement between two or more sellers to refuse to deal with a particular person or firm.

• Group boycotts are per se violations of the Act.

• Case 45.1: NYNEX Corp. v. Discon, Inc.(1998).


Horizontal Market DivisionHorizontal Market DivisionHorizontal Market DivisionHorizontal Market Division

• Occurs when competitors in the same market agree that each will have exclusive rights to operate in a particular geographic area.

• Horizontal market divisions are per se violations of the Act.


Trade AssociationsTrade AssociationsTrade AssociationsTrade Associations

• Trade Associations are industry specific organizations created to provide for the exchange of information, representation of the business interests before governmental bodies, advertising campaigns, and setting of regulatory standards to govern their industry or profession.

• Rule of reason is applied to determine if a violation of the Act has occurred.


Joint VenturesJoint VenturesJoint VenturesJoint Ventures

• A joint venture is an undertaking by two or more individuals or firms for a specific purpose.

• The rule of reason is applied to analyze the agreement if the venture has first been found not to involve price fixing or market divisions.


Vertical RestraintsVertical Restraints

• Vertical restraints are per se anticompetitive agreements imposed by Sellers upon Buyers (or vice versa) that may include affiliates in the entire supply chain of production.

Buyer

Seller

Buyer

Buyer


Vertical Restraints Vertical Restraints [2][2]Vertical Restraints Vertical Restraints [2][2]

• Agreements between firms at different levels of the manufacturing and distribution process.

• Vertical restraints may restrain competition among firms that occupy the same level in chain.

• Vertical restraints that significantly affect competition may be per se violations.


Territorial or Customer Territorial or Customer RestrictionsRestrictions

Territorial or Customer Territorial or Customer RestrictionsRestrictions

• Imposed by manufacturers on the sellers of the products, to insulate dealers from direct competition with each other.

• Territorial and customer restrictions are judged under the rule of reason.

• Case 45.2: T.V., Inc. v. GTE Sylvania, Inc.(1997).


Resale Price Resale Price Maintenance AgreementsMaintenance Agreements

Resale Price Resale Price Maintenance AgreementsMaintenance Agreements

• An agreements between a manufacturer and a distributor or retailer in which the manufacturer specifies the retail price at which retailers must sell products furnished by the manufacturer or distributor.

• This is a type of vertical restraint and is normally a per se violation.

• Case 45.3: State Oil Co. v. Khan (1997).


Refusals to DealRefusals to DealRefusals to DealRefusals to Deal

• Unlike a group boycott, a refusal to deal is an action by one firm against another, and this is usually legal, unless:– the firm refusing to deal has, or is likely to

acquire, monopoly power, and– the refusal is likely to have an anticompetitive

effect on a particular market.


§§ 3: Section 2 of the 3: Section 2 of the Sherman Antitrust ActSherman Antitrust Act§§ 3: Section 2 of the 3: Section 2 of the

Sherman Antitrust ActSherman Antitrust Act• Section 2 of the Sherman Antitrust Act

deals with:– Monopolization.– Attempts to monopolize.

• Predatory pricing.– Attempt by a firm to drive its competitor from

the market by selling its product at prices substantially below the normal costs of production.


MonopolizationMonopolizationMonopolizationMonopolization

• Monopolization in violation of the act requires two elements:– The possession of monopoly power and– The willful acquisition and maintenance of the

power.


Monopoly PowerMonopoly PowerMonopoly PowerMonopoly Power

• Exists when one firm has sufficient market power to control prices and exclude competition.

• Market power is often assessed by the use of the Market-Share Test.– As a rule of thumb, if a firm has 70% or more

of a relevant market, it is regarded as having monopoly power.


The Intent RequirementThe Intent RequirementThe Intent RequirementThe Intent Requirement

• The intent to monopolize is difficult to prove.

• Intent may be inferred from evidence that the firm had monopoly power and engaged in anticompetitive behavior.


Attempts to MonopolizeAttempts to MonopolizeAttempts to MonopolizeAttempts to Monopolize

• Firm actions are scrutinized to determine whether they were intended to exclude competitors and garner monopoly power and had a “dangerous” probability of success.


§§ 4: The Clayton Act 4: The Clayton Act§§ 4: The Clayton Act 4: The Clayton Act

• The Clayton Act deals with:– Price Discrimination.– Exclusionary Practices.– Mergers.– Interlocking Directorates.


Price DiscriminationPrice DiscriminationPrice DiscriminationPrice Discrimination

• Price discrimination is the charging of different prices to competing buyers for identical goods.

• Exceptions:– Charge of lower price was temporary and in good faith

to meet another seller’s equally low price to the buyer’s competitor.

– A particular buyer’s purchases saved the seller costs in producing and selling the good.


Exclusionary PracticesExclusionary PracticesExclusionary PracticesExclusionary Practices

• Exclusive Dealing Contracts.– A contract under which a seller forbids to purchase

products from the seller’s competitors. – Prohibited if the effect of the contract is to

“substantially lessen competition or tend to create a monopoly.”

• Tying Arrangements.– The conditioning of the sale of a product on the buyer’s

agreement to purchase another product produces or distributed by the same seller.


MergersMergersMergersMergers• Horizontal Mergers occur between firms at the same

level in the production and distribution chain.• Vertical Mergers occur between firms at different

levels in the production and distribution chain.• Conglomerate Mergers occur when a firm seeks to:

– Extend its product into a new market by merging with a firm in that market.

– Extend its product line by merging with a firm already producing that product.

– Diversify by acquiring a firm that deals in unrelated products.


Interlocking DirectoratesInterlocking DirectoratesInterlocking DirectoratesInterlocking Directorates

• Occurs when an individual serves on the board of directors of two or more competing companies simultaneously.

• These are prohibited if the two firms meet certain size requirements.


§ 5: The Federal Trade § 5: The Federal Trade Commission ActCommission Act

§ 5: The Federal Trade § 5: The Federal Trade Commission ActCommission Act

• FTCA provides that:– “Unfair methods of competition in or affecting

commerce, and unfair or deceptive acts or practices in or affecting commerce are hereby declared illegal.”

• The Federal Trade Commission enforces the FTCA.


§ 6: Enforcement of § 6: Enforcement of Antitrust LawsAntitrust Laws

§ 6: Enforcement of § 6: Enforcement of Antitrust LawsAntitrust Laws

• Federal agencies that enforce the antitrust laws are:– U.S. Department of Justice (DOJ).– Federal Trade Commission (FTC).


§ 8: Exemption from § 8: Exemption from Antitrust Laws Antitrust Laws

§ 8: Exemption from § 8: Exemption from Antitrust Laws Antitrust Laws

• Most statutory exemptions to the antitrust laws apply to the following areas:

» Labor.» Agricultural associations and fisheries.» Insurance.» Foreign trade.» Professional baseball.» Cooperative research and production» Joint efforts y businesspersons to obtain legislative or

executive action.» And Others.


Law on the WebLaw on the WebLaw on the WebLaw on the Web

• Protecting Competition in Cyberspace– U.S. v. Microsoft (1999-2000) at Findlaw.com.

• Antitrust Division of the U.S. Department of Justice.

• American Bar Association’s Antitrust Website.• The Federal Trade Commission’s “Plain English

Guide to Antitrust Law.”

• Legal Research Exercises on the Web

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Chapter 45: Antitrust Law

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