Download - Trade Practices

Trade Practices

• Common law– Covenant not to compete– Must be reasonable– Society demands laws against predatory

business practices• Legislation

– Laws are vague– Reliance on court interpretation

Antitrust Laws

• Views– Chicago School

• Promote economic efficiency• Large firm size derived from superior competition• Less concern about vertical restraints

– Traditionalists• Promote social goals• Favor more enforcement• Large firms possess economic & political power

Penalties

• Pleas– Guilty, not guilty, nolo contendre

• Nolo contendre same penalty as guilty, but cannot be used in civil cases

• Criminal penalties– Prison– Fines up to $10 million

Penalties

• Civil remedies– Treble damages– Attorney fees

• Equitable remedies– Injunction– Dissolution (cease business)– Divestiture– Divorcement (separate)– Contract cancellation

Sherman Act

• Monopoly– Monopoly power

• Relatively inelastic demand curve• Market share over 50%

– Relevant market• Geographic market• Submarket• Product market

– Purposeful or willful attempt to monopolize– Attempt does not need to be successful, but to have a dangerous

probability of success– Exception: monopoly acquired through superior skill, foresight & industry

Sherman Act

• “Contract, combination, or Conspiracy”– Joint action– “conscious parallelism” does not prove an

agreement to joint action• Rule of reason• Per se violation

Sherman Act

• Horizontal Price-fixing– No defense– Minimum prices – Maximum prices– List prices– Following a price leader– Production limitations– Limitations on competitive bidding– Credit arrangement agreements

Sherman Act

• Division of Markets– Agreement to divide a market– Reduces interbrand competition– Per se violation

• Group Boycotts & Refusals to Deal– Well intentioned– Per se violation; unless firms do not have market power– Anti-competitive

Sherman Act

• Joint ventures– Subject to court consideration

• Exceptions– Noerr-Pennington doctrine– Prior approval

Vertical Trade Restraints

• Resale Price Maintenance– Minimums – rule of reason– Maximums – per se violation– Inhibits intrabrand competition– Consignments usually ok– No enforcement of “suggested retail price”

• Sole Outlets & Exclusive Distributorships– Subject to “rule of reason”– Amount of interbrand competition


• Customer & Territorial Restrictions– Subject to “rule of reason”– Free-rider problems– Interbrand v. intrabrand competition– Market power of manufacturer– More favorable to new manufacturers


• Tying arrangements– Distort competition– Per se violation

• Market power• Tie-in affects substantial amount of commerce

– Defenses• New-industry• Goodwill


• Exclusive Dealing or Requirements Contracts– Inhibit intrabrand competition– Treated more leniently than tying arrangements– Generally ok if manufacturer does not have great

market power– Rule of reason

• Degree of competition decrease• Duration of the agreement• Entry barriers


• Price Discrimination (Robinson-Patman Act)– Purchases must be made at the same time– Can apply to indirect charges– Like grade or quality– Injury to competition– Defenses

• Legitimate cost differences• Meeting the competition

– Illegal for buyers as well

Horizontal Mergers

• Eliminates competition• May increase market power to distort competition• May increase industry concentration• Supreme Court more lenient since the 70’s• Failing company• Small company• International markets

Vertical Mergers

• May block competitors’ access to market• May eliminate a potential competitor (firm

itself)• Eliminate benefits of threatened

competition• Courts historically have not examined

efficiency arguments

Conglomerate Mergers

• Related businesses• Geographic extension

Interlocking Directorates

• Illegal under the Clayton Act– Large firms– Anticompetitive agreements would violate

antitrust laws

Exemptions• State Act

– Must be a formal state policy– Must be supervised by the state

• Petitioning the Government– Exempts political activity

• Unions– Monopolies– Group boycotts

• Specific regulated industries– Insurance– Banking– Airlines– Utilities– Financial services

Federal Trade Commission• Deceptive Advertising

– Claims that can be proven false– Implied representations

• Regulates franchising• Cooling off periods• Unsolicited mail• Sweepstakes/contests• Negative option plans• Mail order merchandise• Telephone solicitations

Lanham Act

• Trademark infringement• Appropriating another’s name of likeness

for commercial purposes• Trade dress infringement• “palming off” or “passing off”