BAR Exam - AntiTrust Outline Cheat Sheet
BAR Exam - AntiTrust Outline Cheat Sheet
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Antitrust Outline II III Lindblom The Market System the central tenet of the market system is coordination a Usevalue existence people used to produce only for themselves with the focus on the value to them of everything produced i In a market economy the relevant value is the exchange value ie its value to someone else 1 Encourages specialization b Functions ofa modern effective economy i It allocates resources ii Effectively iii In a complex society iv That utilizes a division of labor c Eight Bones providing the skeleton of the market i Liberty Property with government enforcement of property rights Quid pro quo Money common unit of exchange Sales Intermediaries e g trucking companies Entrepreneurs innovators and Collectives ie firms d Role of the state in a market economy i Preserve liberty enforce contracts build infrastructure maintain a stable monetary system offer bankruptcy subsidize e Corporation a command economy within a market economy island of authority i Topdown authoritarian direction is most efficient The four efficiencies ranked from lowest to highest social importance a Allocative efficiency achieved when the existing stock of goods and productive output are allocated through the price system to those buyers who value it the most in terms of willingness to pay or willingness to forego other consumption i Antitrust focuses mostly on the seller s behavior in output markets 1 Goal is marginal cost pricing output efficiency 2 Leastcost decisions b Production rocess efficiency achieved when goods are produced using the most cost effective combination of productive resources available under existing technology i Technology plays a large role ii the production of goods at least cost using existing technology iii More important than allocative because it increases social wealth over the whole range of output rather than only at the margin c Adaptive efficiency concerned with the kinds of rules that shape the way an economy evolves through time i The ability of institutions to adapt to change in the rules of the game as laid down by the courts legislature society etc ii No one knows how to solve all of society s problems but a society that permits the maximum generation of trials will be most likely to solve its problems eventually d Innovation efficiency achieved through the invention development and diffusion of new products and production processes that increase social wealth Goals of antitrust policy To promote and protect competition Efficient allocation of society s available goods and services Decentralized power Freedom of opportunity limit barriers to entry Consumer welfare protecting consumers from unfavorable wealth transfers Fostering innovation Protecting individual firms quot 39quot 39 39 39 39P IV Sherman Act 1890 p 1415 a Section 1 every contract or conspiracy in restraint of trade is illegal b Section 2 monopoly or an attempt to monopolize is illegal i Two elements burden on the P for both Grinnel 1 Possession of monopoly power in the relevant market and a Generally at least 50 market share 2 Willful acquisition or maintenance of that power a As distinguished from growth or development as a consequence of a superior product business acumen or historical accident b Only general intent required you knowingly committed the act irrelevant whether you knew it was illegal or not i Ex restrictive agreements acquisition of rivals Grinnel c Weigh pro vs anticompetitive effects and consider lessrestrictive practical alternatives ii US v Aluminum Co of America in order to fall within 2 D must have both the power to monopolize and the intent to monopolize l The possession of monopoly power standing alone is not suf cient for a 2 violation 2 But there was a 2 violation here because through its expansion D intentionally excluded other rms from entering the relevant market c Miscellaneous i History 1 18801920 growth of the Modern Business Enterprise business of enormous size 2 What caused this a Use of fossil fuels instead of animalhuman power b Invention of the railroad and telegraph 3 Result fewer larger companies and some oligopolies ii Purposes of the Sherman Act 1 Check the growth of MBEs 2 Protect consumers 3 Protect small business iii Chicago School the only concern should be maintaining allocative efficiency 1 Politicalsocial concerns are irrelevant iv Sherman the law of selfishness in the absence of competition disregards the consumer V Rule of Reason test a If private plaintiff under Clayton Act first ask is there an antitrust injury i Two elements 1 Injuryinfact actual damages 2 The injury was the type that the antitrust laws were intended to prevent ii If this can be shown P can sue for treble damages injunction and attorneys fees b Characterization is the offense illegal per se or is a rule of reason analysis more appropriate i Per se is applied where a practice results in adverse competitive effects has very few signi cant redeeming virtues and where less restrictive alternatives are available ii In all other cases a rule of reason analysis is more appropriate 1 If rule of reason is a quick look sufficient NCAA c Define the relevant markets i Product geographic ii Consider the market structure of each relevant market 1 Barriers to entry How many rms 2 Look at the merger guidelines VI iii Burdens of productionpersuasion on P d Are we in a circuit that requires a showing of market power in order to find a violation under the rule of reason i Burdens on P ii If not you still have to consider market power to assess the anticompetitive effects of a challenged practice iii If we are in a circuit that requires a showing of market power then 1 Generally less than 30 is insufficient e Is the challenged agreement anticompetitive If so how and to what degree i Anticompetitive an arrangement which hurts one of the efficiencies ii Burdens on P f Does the agreement have any procompetitive effects How and to what degree i Procompetitive an arrangement which improves one of the efficiencies ii Burden of production is on D iii Burden of persuasion is on P because P must ultimately show that the overall impact is anticompetitive g Are there any lessrestrictive practical alternatives i Ie are there other means by which the procompetitive effects could be achieved without the anticompetitive effects ii Burdens on P h Balance the pro and anticompetitive effects i Burden of proof is on P to show that anticompetitive effects outweigh the pro competitive effects Market Power a Market power the ability to profitably reduce output below the competitive level of production and the corresponding power to raise or maintain prices above the competitive level when consumers bid up the price of the constricted supply i But market share is not dispositive of market power consider 1 Absence of entry barriers abnormal profits historical trend fragmented competition corporate conduct b Monopoly power a great deal of market power i Can be achieved either by a monopolist or a cartel 1 Both entities can restrict output c Conduct evidence direct evidence of market power i Raising prices in periods of declining demand with no loss of sales volume ii Engaging in effective price discrimination not possible with competition d Consequences of market power i Monopoly overcharge difference between monopoly price and competitive price ii Deadweight loss loss to society due to restricting supply below the efficient level achieved in a perfectly competitive market iii Producer surplus difference between marginal cost competitive price and the price that the monopolist charges 1 As opposed to consumer surplus difference between the amount the consumer is willing to pay and the amount actually paid iv Bork transfer of consumer surplus into producer surplus should not be a concern of antitrust law but rather tax statutes which deal with wealth transfers v Schumpeter producer surplus may be used to fund additional innovation and development and may be beneficial in the long run 1 Posner surplus may also be used to erect barriers to entry in the market and strengthen the monopolist s position VII Defining the relevant market a Relevant product market consider i Nature of the product ii Available substitutes fungibility 1 Cellophane Fallacy firm with significant market power will normally set a price just high enough so that if it raised the price another notch the price increase would not increase pro ts because of the business that would be lost a Ergo merely looking at crosselasticity of demand is elusive a rise in price will always cause a loss of customers b What must be determined is whether the alleged monopolist is charging a competitive price iii US V EI DuPont de Nemours the relevant market is composed of commodities reasonably interchangeable by consumers for the same purpose 1 Cellophane is reasonably interchangeable with wax paper 2 No monopoly power in the relevant market no Sherman Violation iv US V Grinnell relevant product market is accredited central station service business no distinction between fireburglary the cluster of services is what counts V Int l Boxing Club V US relevant market is championship boxing matches not all boxing matches 1 Physical identity of the products is the same but the markets are distinguishable by average purse Nielson ratings etc Vi Syufy Enterprises V American Multicinema relevant market is industryanticipated topgrossing motion pictures not all first run films Vii US V Microsoft relevant market is the licensing of all Intelcompatible PC operating systems worldwide 1 Doesn t include nonIntel nonPC products because those are more expensive and have fewer applications b Relevant geographic market consider i Barriers to entry in Alcoa foreign ingot was not included in the relevant market because tariffs imposed a significant barrier to entry and thus made foreign competition irrelevant c Barriers to entry factors which place new entrants at a cost disadvantage relative to established firms within an industry i Firstmover advantages Alcoa 1 Plants built distribution network in place control of supply of raw materials learning by doing skilledtrained workers ii Patents iii Trade secrets DuPont only D knew how to make cellophane iv Product differentiation consumer loyalty V Network capabilities Vi Government regulations e g didn t allow new airlines to form up until 1978 without government license Vii Labor unions which control the supply of labor d Disclosing information to competitors i Berkey Photo V Eastman Kodak D monopoly is not required to predisclose to competitors advance information about a new product line ii In re Intel D cuts off competitors from received product info it previously disclosed to them court finds this to be unreasonable exclusionary behavior 1 Once the arrangements were initiated D couldn t then discriminate among its customers VIII Price Fixing a Cartel an association of firms cooperating to fix prices or other terms of trade i Collaboration of horizontal competitors ii Conditions favoring cartelization 1 Low costs of organizationmaintenance of cartel 2 Size of cartel not overly burdensome 3 Low price elasticity of demand a Ie No good substitutes for the product Durability consider a Possibility of defection b Entry and growth of outsiders see below i Perfect contestable market entry is unimpeded and cartelization is impossible 5 Coordination centralized administration iii Barriers to entry which favor cartelization 1 Slow speed of entry allows for ample reaction time 2 Cost and demand disadvantages a High entrance costs patents or other legal licenses scarce resources product differentiation customer loyalty 3 Economies of scale a Minimum viable scale smallest annual level of sales that entrant must achieve to make entry profitable i Large MVS less entry 4 Sunk costs entry is a financially risky proposition to the extent that entry costs cannot be recovered if entry fails b Per se rule on price fixing applied where a practice results in adverse competitive effects has very few significant redeeming virtues and where less restrictive alternatives are available i What is illegal per se 1 Price fixing 2 Agreements to restrict output 3 Dividing markets geographically 4 Allocating customers by seller 5 Following standardized pricing formulas or methods ii Questions to ask before applying per se rule 1 Does the practice have a substantial and direct effect on price 2 Does this effect necessarily result from the practice 3 Are there substantial redeeming virtues that justify the practice 4 Could these same virtues be achieved through reasonably available and less harmful alternatives iii Don t need to define relevant markets or show market power 1 NCAA the absence of proof of market power does not justify a naked restriction on price or output a This naked restraint on price and output requires some competitive justification even in the absence of a detailed market analysis iv US v SoconyVacuum Oil Under the Sherman Act a combination formed for the purpose and with the effect of raising depressing fixing pegging or stabilizing the price of a commodity in interstate or foreign commerce is illegal per se 1 Government need not show market power or anticompetitive effect c What constitutes price fixing i Regulation of the professions 1 What constitutes a profession 39gt a Possession of skilled and specialized knowledge and training b Representation by the professional that he will use that knowledge solely for the benefit of the client c Monopoly over the practice of that specialized field 2 National Society of Professional Engineers V US condition of membership that requires members not to discuss fees with clients until engineers are hired is illegal per se a The practice was an absolute ban on competitive bidding b Fears of unethical behavior are insufficient to do away with competition entirely 3 AMA V FTC AMA prevents members from advertising prices or from offering prices that are too low a Illegal under ruleofreason b Per se approach rejected the regulation of professional services justifies differences in treatment 4 CA Dental v FTC the FTC has jurisdiction over nonprofit professional organizations rule of reason used a D charged with restricting pricequality advertising of its members b But the anticompetitive effect is not obvious i Asymmetry of information in markets for professional services magnify the dangers of misleading advertising 5 First Amendment issues a Bates v State Bar of Arizona rules prohibiting lawyer from advertising prices violates First Amendment ii Blanket Licenses 1 BMI vColumbia Broadcasting BMI s blanket licenses not a per se l violation should be rule of reason because there are some economic benefits a Process efficiency songbysong transactions are expensive iii Ancillary price restraints where the pricefixing term is only a small part of the overall agreement can be held to be reasonable 1 Restraint may be necessary to serve a legitimate purpose e g in joint ventures see NCAA 2 Discussed in Addyston Pipe where court rejected D s arguments that its restraints were merely ancillary iv Conspiracy cases usually analyzed under the rule of reason 1 Chicago Board of Trade v US rule of reason applied to Call Rule a The test is whether the restraint imposed merely regulates and thus promotes competition or whether it suppresses or even destroys competition b Factors to consider i Facts peculiar to the business ii Its condition before and after the restraint iii The nature of the restraint iv The history of the restraint v The reason purpose or intent of the restraint vi The restraint s effect actual or probable v Joint Sales Agencies 1 Appalachian Coals v US rule of reason applied to coal producers using a joint sales agency a A cooperative enterprise which carries with it no monopolistic menace is not to be condemned as an undue restraint merely because it may effect a change in market conditions where the change would be in mitigation of recognized evils and would not impair but rather foster fair competitive opportunities 2 Virginia Excelsior Mills joint sales agency a per se l violation because producers agreed to preestablished pricesquantities a No violation if producers remained independent b Most cases use rule of reason instead vi Joint Ventures 1 Texaco no per se violation when a lawful approved by state legislature and integrated joint venture sets the prices at which the joint venture sells its products a Joint ventures are regarded as single rms not competitors when they pool their capital and share the risk of loss IX Division of markets among competitors a Examples i Allocating fixed percentage of available business to each distributor ii Dividing sales territory geographically illegal per se iii Allotting certain customers to each distributor illegal per se b Timken Roller Bearing v US division of territories and fixed prices are illegal even when ancillary to a joint venture i agreements providing for an aggregation of trade restraints are illegal c US v GM GM dealers collaborated to divide up geographic territories i Horizontal collaboration is a conspiracy in restraint of trade d US v Sealy horizontal territorial allocation organized among licensees of Seely product was a per se violation of Section 1 e US v Topco horizontal market division is per se illegal even in the absence of price fixing i Cooperative association of small supermarket chains get together to compete with the Big Boys 1 Joint venture is not economically integrated Topco s function was simply to serve as a purchasing agent for its members a All chains operated independently b No pooling of resources c No common name 2 But each member agrees to sell Topco brands only in their territory and all members could veto potential applicants ii Per se violation of Section 1 1 Agreement between competitors at the same level of market structure to allocate territory and minimize competition f General Leaseways v National Truck collaboration among truck leasing companies prohibited members from affiliating with full service truck leasers and also imposed geographical limitations i Per se Section 1 violation 1 D cannot show that the arrangement is merely ancillary to a lawful main purpose g Palmer v BRG horizontal market division is per se illegal i Purpose and effect of bar review companies division of markets and agreement notto compete was to raise the price of bar courses 1 And empirical evidence showed this to be the case X Refusals to deal a Overview i Generally addressed under rule of reason consider economic purpose and effect of the arrangement 1 Northwest Stationers joint venture that was deemed to be procompetitive ii But per se does apply in one area naked concerted refusals to deal 1 Superior Court Trial Lawyers no efficiency accomplished b Unilateral Section 2 no conspiracy i In the absence of any purpose to create or maintain a monopoly a firm has discretion to independently refuse to deal ii US V Colgate D manufacturer refuses to deal with distributor who doesn t follow D s suggested prices 1 Judgment for D 2 Unless he s trying to monopolize D can refuse to do business with anyone he wants a Court has since made many exceptions to this rule c Concerted Section 1 conspiracy i Applies only to horizontal not vertical conspiracies l NYNEX V Discon ATampT purchases removal services from NYNEX instead of Discon even though NYNEX charged more kickback scheme a No Section 1 violation concerted refusal to deal cases limited to horizontal agreements this was vertical b Freedom to switch suppliers is at the heart of the competitive process ii Is market power required 1 Northwest Stationers P expelled from cooperative buying agency without any means to challenge expulsion essentially a concerted refusal to deal a Not per se illegal unless the cooperative possesses 1 market power or 2 exclusive access to an element essential to effective competition b Essentially P must show that his expulsion placed him at a severe competitive disadvantage c Use rule of reason 2 Rothery Storage v Atlas DC Circuit if P can t show market power there is no case a Without market power other firms will take over the abandoned business created by the reduced output of services b Differs from NCAA 10th Indiana Federation 7th c Circuits are split know which one you re in 3 SCFC v Visa Visa refuses to admit Sears into its VISA USA program a No Section 1 violation because Visa does not have market power i Market power used as a filter in ruleofreason analysis d Montague v Lowry association of tile dealers prevented members from buying or selling to nonmembers i Illegal under Section 1 especially since applicants to the association were subject to arbitrary rejection no specific eligibility requirements e Fashion Originators Guild v FTC textile designersmanufacturers refuse to deal with those who copy their designs i Sec 5 FTC violation per se 1 Narrows buyingselling outlets for members 2 Acted as an extragovernmental agency legislature controls patentcopyright protection 3 Purpose was to destroy competitors f Klor s v BroadwayHale retail stores and manufacturers entered into concerted refusal to deal with P a small business i Per se Section 1 violation even though harm to consumer is immeasurable 1 Horizontal agreement among manufacturers 2 Interfered with P s freedom to make purchases in the open market and thus interstate commerce ii Monopoly can be creeping driving out one small business at a time and this process should be regulated g Associated Press V US illegal joint venture where news gathered by 1200 newspapers is shared but members are prohibited from selling to nonmembers i Partiallyopen joint venture in restraint of trade 1 Effect seriously limit the opportunity of a competing nonAP newspaper to enter certain cities barrier to entry firstmover advantages 2 Court enjoins continued observance of AP bylaws a Even though there are some efficiencies obtained i Lower transactions costs no worldwide reporters ii The Sherman Act was specifically intended to prohibit independent businesses from becoming associates in a common plan which is bound to reduce their competitor s opportunity to buy or sell the things in which the groups compete h US v Parke Davis D didn t just announce a suggested retail price and refuse to do business with retailers who disregarded it but went further by refusing to deal with wholesalers who failed to comply as well i Result was an organized retail price maintenance conspiracy i Toys R Us v FTC horizontal conspiracy orchestrated by manufacturer D major toy manufacturers agreed not to sell to price clubs i Illegal per se ii No need to show market power iii Free rider defense only applies when the dealers are paying for the services rendered D here was the manufacturer iv Different from Business Electronics which did not involve a conspiracy among multiple dealers under Vertical NonPrice Restraints j Refusals to license i Radiant Burners v Peoples Gas Light amp Coke D association refused to license P s quality product 1 Judgment for P D acted totally anticompetitive with an effect on innovative efficiency 2 Product not evaluated objectively 3 Association had a vested interest in limiting competition ii Structural Laminates simply adopting a standard absent a showing of discrimination or manifestly anticompetitive and unreasonable conduct is not a per se violation 1 Standards must be objective and fair a And standards might even promote competition k Professional associations i FTC v Indiana Federation of Dentists 7th Cir conspiracy among dentists to refuse to submit Xrays to insurers is an unfair method of competition under Section 5 of the FTCA 1 Rule of reason more appropriate when dealing with professional associations a Association is a horizontal agreement that is anticompetitive b Anticompetitive effects absent the conspiracy dentists complied with insurance companies requests 2 Absence of market power does not justify a naked restriction on price and output D had no market power here 3 P does not need to show higher prices the concerted effort to withhold information is enough to disrupt the pricesetting mechanism 4 Quality of care argument D says insurers will make decisions harmful to consumers a Rejected like in Society of Professional Engineers restricting information will not prevent a consumer from making a bad decision ii FTC V Superior Court Trial Lawyers Ass n lawyer boycott with the purpose of restricting output and thus raising prices for legal services is a per se violation of Section 5 of the FTCA 1 Per se horizontal arrangement is a naked restraint of trade 2 Rejects 1 Amd argument a Every horizontal arrangement regardless of motive poses some threat to the free market b Distinguish racial boycotts in those cases the boycotters sought no special advantage for themselves only equal treatment XI Joint Ventures a Overview i A joint venture is a cooperation among firms usually accompanied by some actual integration of managerial or production resources to achieve some useful business objective more efficiently than either firm could achieve alone ii Similar to concerted refusals to deal they exclude competitors from the jointly created product technology or facility thus placing them at a competitive disadvantage iii Difference between joint ventures and cartels cartels don t integrate resources in an attempt to increase efficiency 1 Cartels are simply naked agreements iv Open joint ventures those which firms must be a part of to compete 1 Q often the solution is simply to open up membership since the joint venture provides so many efficiencies v Research and production joint Ventures 1 Provide important innovation efficiencies 2 National Cooperative Research and Production Act collaborative joint research and development activities should be viewed under a rule of reason vi Common antitrust problem what if production costs and thus price are reduced but monopoly power is created in the process b NCAA v Board of Regents 10th Cir rule of reason violation for NCAA s restriction of schools ability to televise games i D restricted prices and outputs both per se violations 1 But some activities like sports can only be carried out jointly common schedules so monopolization may be necessary 2 D says the arrangement is ancillary to a lawful main purpose ii Unlike BMI the agreement is not necessary to the market 1 No increase in efficiency by limited broadcast of games c Texaco no per se violation when a lawful approved by state legislature and integrated joint venture sets the prices at which the joint venture sells its products i Joint ventures are regarded as single firms not competitors when they pool their capital and share the risk of loss d US v Terminal Railroad Ass n violation of Sherman restraint of trade where 14 railroads consolidate to operate Miss River bridges as a unified system i Since the number of bridges are limited the consolidation is too much of a hindrance on interstate commerce XII Oligopoly a Overview i An oligopolistic market is one in which there is a small number of dominant sellers each with a large market share 1 Marked by interdependent pricing sellers have an incentive to avoid competition and so they collude ii How do we identify oligopolies 1 Large corporations not mom n pops 2 Interdependence no price takers 3 Competitors have mutual interests and mutual con icts a Such as maintaining barriers to entry 4 Bargaining between firms either explicit or tacit iii Courts may infer agreement for a Section 1 analysis 1 Conscious parallelism where firms consciously follow the price changes of another is not enough 2 P must also show plus factors the additional facts required to be proved as a prerequisite to finding that parallel action amounts to a conspiracy In re Baby FL1 Lh a D s acted contrary to their economic interests and b were motivated to enter into a pricefixing conspiracy 3 Then ask is there sufficient evidence of agreement to allow a jury to draw an inference of oligopoly iv Necessary elements of price coordination 1 Agreement on what to charge 2 Knowledge of what other firms are doing so cheaters can be detected 3 Ability to discipline cheaters v Measure the oligopoly within the framework of the four efficiencies b Interstate Circuit v US court correctly infers an agreement where D president sent letter to group of exhibitors suggesting limits on timesprices to show films i Result essentially forced lowincome theatres out of business ii Okay to infer agreement even with no formal offeracceptance l The letter is the signal iii It is sufficient that concerted action was contemplated and invited c In re Baby Food Antitrust Litigation evidence of plus factors still not enough to bring the case to a jury i Parallel price increases ii Evidence that the increases were deliberate iii Reciprocal exchanges of price information d Theatre Enterprises v Paramount P claims horizontal conspiracy among competitors to restrict firstrun films to downtown Baltimore i No conspiracy conscious parallelism alone does not conclusively establish an agreement or conspiracy under Section 1 e Bell Atlantic v Twombly threshold standard for pleading a complaint that will survive a l2b6 failure to state a claim motion i Allegation of parallel conduct without more is insufficient ii P must show plausible grounds to infer an agreement simply enough to justify a reasonable inference iii Reaffirmation of Theatre Enterprises iv Difficult burden for P to meet XIII Facilitating practices practices that make it easier for oligopolists to tacitly agree by altering the incentives of market participants a Structural factors that affect price coordination i High concentration where there are only a few competitors coordination is more likely to succeed ii Barriers to entry where barriers are high the cartel is more stable iii Open sales when sales are public and prices are known to all market participants firms can detect cheating more easily iv Homogenous products when rivals sell identical products the number of variables for which an agreement must account is reduced v Lumpy sales where large buyers or long term contracts account for a large share of sales firms have more incentive to cheat making collusion less likely in the first place b Examples of facilitating practices i Information exchange 1 Eliminates uncertainty about a rival s actions 2 Examples verifications of price quotations advance notice of price changes ii Incentive management 1 Example monetary penalty on price discounts a Makes price cuts selfdefeating iii Mostfavorednation clauses provide the buyer with insurance protection in case the seller offers a lower price to another customer 1 Discourages sellers from lowering prices and thus stabilizes the high oligopoly price iv Meeting competition clauses provide the buyer with insurance protection against a lost opportunity in case he is offered a lower price by another seller 1 Acts as an information exchange device buyers notify sellers of rivals lower prices and sellers can adapt immediately 2 Eliminates any detection lag v Delivered pricing seller refuses to quote a price that is without regard to freight costs 1 Eliminates placement competition the ability of closer sellers to charge less 2 Makes tacit collusion easier because everyone knows what everyone else is charging a Eliminates freight differentials as a bargaining subject vi Basing point pricing sellers all agree on some central basing point and quote freight charges based on that location 1 Same as above but in addition it allows sellers to punish a defector by making his location the basing point c Boise Cascade v FTC adopting in parallel a delivered pricing system is not enough to find a violation of FTCA Sec 5 unfair comp i In order to show a violation P must demonstrate an agreement among D s to adopt the system d Ethyl Corp v FTC once you have conscious parallelism in a pricing arrangements e g most favored nation clauses look for plus factors i Anticompetitive intent or purpose ii Absence of independent business rationale iii Conduct contrary to the D s independent selfinterest iv Presence or absence of motive to enter into a conspiracy e Todd v Exxon information exchange in violation of Sec 1 of Sherman i D s exchange information about salaries with specificity towards similar interchangeable employees ii Conspiracy to fix salaries would be a per se price fixing violation iii Instead the violation here is an illegal exchange of information 1 Use rule of reason f Blomkest Fertilizer V Potash sufficient information to go to jury on Sec 1 claim i Abundant evidence of motive and opportunity to conspire ii Acts that would be contrary to the actor s selfinterest in the absence of a conspiracy but which make economic sense as part of a conspiracy provide the crucial type of plus factor evidence necessary to exclude the possibility of independent action 1 In this case revealing to competitors the amount of price discounts privately negotiated with buyers XIV Trade associations and information exchange a Trade associations can be treated like joint ventures i Even where information is exchanged among members ask Is the behavior pro or anticompetitive ii Procompetitive assists members to know at what levels they must price in order to compete effectively 1 Stock exchange perfect data dissemination iii But where there are too few members you may have an oligopoly l Twocount charge a Per se Section 1 for conspiring to fix prices b Ruleofreason Section 1 for exchanging price information b Maple Flooring v US legal exchange of information pertaining to average costs i Info did not list members by name and only included past and closed accounts c Cement Manufacturers v US legal exchange of information pertaining to available supply of cement held by each member i Info needed to prevent certain abuses purchasers refusals to accept orders d Sugar Institute v US illegal exchange of price information when the agreement required members to adhere to priceterms openly announced in advance i Cut off all opportunities for competition e US v Container Corp of America two firms rather than whole industry exchange information about current prices charged and quoted to particular customers i Sufficient to show Section 1 conspiracy unlawful per se f US v US Gypsum no per se violation for exchange of info among competitors i Consider factors 1 Structure of industry 2 Nature of information exchange a Current price information is the most anticompetitive and usually per se b But the further you are from priceoutput information the safer you are g Copperweld Doctrine there cannot be price fixing between a firm and a 100 owned subsidiary i Need two actors to form a conspiracy under Section 1 and here there s only one actor acting in unity of purpose XV Vertical restraints manufacturer limits the amount of competition among its distributors a Three types of vertical restraints i Vertical price fixing manufacturer sets either a max or min price ii Vertical market allocation manufacturer establishes territories where dealers may sell or classes of customers to whom they may sell 1 Airtight each dealer has exclusive territory 2 Location clause specifies dealer s place of business but sets no limits on who it can sell to 3 Primary responsibility clause agreement to achieve a certain target after which it may sell anywhere to anyone iii 4 Profit passover clause dealer must pay a portion of its profits from outside its area to other dealers Exclusive dealership agreements manufacturer agrees not to sell in competition with the dealer and not to establish another dealership in the assigned area b Anticompetitive effects of vertical restraints i ii Same effects as horizontal price xing among dealers as in GM Prices will tend to stabilize at the manufacturer s level c J ustifications 1 ii iii iv Different incentives once the manufacturer sells to the dealer he doesn t stand to profit from less dealer competition Attracting dealers assured profits induce dealers to stock and promote the manufacturer s brand Free rider one who reaps the benefits of another s activity without bearing the costs 1 Manufacturer can prevent the free rider problem by imposing vertical restraints a Customers can t go to Dealer A for fancy showroom then Dealer B for cheaper prices 2 Free rider defense only applies when the services being rendered cannot be reimbursed e g information advertising a Also only applies when the dealer not the manufacturer is paying for the services Product image and loss leaders unfair to allow the dealer to sell the manufacturer s product at discount prices 1 Price reductions may reduce sales seen as being a cheap product d Vertical price restraints i ii State Oil v Kahn use rule of reason for a vertical restraint that imposes a maximum resale price 1 The primary purpose of the antitrust laws is to protect interbrand competition Leegin use rule of reason for a vertical restraint that imposes a minimum resale price 1 Market power not required but it is a signi cant factor to consider e Vertical nonprice restraints 1 iii White Motor v US use rule of reason for vertical territorialcustomer restraints 1 But per se for horizontal territorial limitations Continental v GTE Sylvania use rule of reason when manufacturer restricts the number of franchises granted to any given area and also imposed territorial restrictions on those franchises 1 Departure from rule of reason must be based upon demonstrable economic effect 2 Vertical restrictions can both a Reduce intrabrand competition by limiting the number of sellers competing for the business of a given group of buyers and b Increase interbrand competition by allowing the manufacturer to achieve certain efficiencies in the distribution of his products 3 Distribution efficiencies induce dealers to invest in capital and labor and limit the freerider effect a Service and repair b Advertising leads to efficiency in information exchange US v Colgate D manufacturer refuses to deal with distributor who doesn t follow D s suggested prices 1 Judgment for D 2 Unless he s trying to monopolize D can refuse to do business with anyone he wants f a Court has since made many exceptions to this rule iv Monsanto V SprayRite D manufacturer terminates a pricecutting distributor following complaints by other distributors l D liable conspiracy existed to maintain resale prices and terminate price cutters a But P had to show more than termination a conscious commitment to a common scheme designed to achieve an unlawful objective v Business Electronics Corp v Sharp Electronics no violation unless there is an agreement between the manufacturer and dealer that the manufacturer maintain a certain price level 1 Basically just do not agree on a set level of retail prices Exclusive sellingdealing arrangements contractual arrangement under which all but one dealer is eliminated i Is the arrangement the result of a horizontal conspiracy to set prices or a vertical resale price maintenance agreement 1 Factors to consider a Market power b Extent of foreclosure i P must show significant foreclosure that unreasonably restricts competitors Ease of replicating distribution scheme Duration Level of concentration Use of exclusive dealing arrangements by competitors Barriers to entry History of entry 1 Justifications for the arrangement ii As always consider the efficiencies and the pro and anticompetitive effects 1 Benefits to the seller in a requirements contract a Price certainty seller knows what the price will be b Possibility of longer more reliable production runs i Easier to plan ahead 9 production efficiency c Low transaction costs don t have to constantly renegotiate contracts 2 Benefits to the buyer a Certainty of supply i Lower storage costs lower inventory b Planning certainty 3 Anticompetitive effects of a requirement contract a Entire segment of products is taken off the market for the duration of the contract b Foreclosure of distribution if the good dealers are all taken new entrants are foreclosed from the market iii Packard Motor Car v Webster when an exclusive selling arrangement is not part of an attempt to monopolize and competition exists at the manufacturerdealer levels the arrangement is reasonable 1 Here the terminated dealer could have sold other cars 2 Exclusive contract for selling Packards does not create a monopoly iv Valley Liquors v Renfield Importers D s decision to restrict distribution to 12 distributors per county is reasonable 1 Implies a decision to emphasize nonprice competition over price competition 2 This possibility is enough to rebut the inference of conspiracy 3 No improper motive 39Fquot C 5quot39 P0 4 Q with vertical restrictions balance the effects on inter and intrabrand competition in order to determine reasonableness a This balance tips in D s favor if P cannot show market power V Tampa Electric V Nashville Coal 20year requirement contract analyzed under the rule of reason 1 But no market power demonstrated 2 Always consider a Probable effect of the contract on the relevant area of effective competition i Take into account probable and immediate future effects on competition vi US Healthcare v Healthsource okay for D to offer doctors extra compensation if they agreed not to serve any other HMO l Arrangements are vertical no horizontal conspiracy among doctors 2 No showing of substantial foreclosure 3 30day duration is a de minimus constraint a Anything over one year deserves close scrutiny XVI Predatory price cutting a Predatory pricing rarely happens rarely succeeds and it is good for consumers i Claims are thus hard to win so as not to discourage it b Claims brought under Section 2 charging lower prices in order to obtain a monopoly c Elements Brooke Group i Prices complained of are below an appropriate measure of the rival s average variable costs ii D has a dangerous probability of recouping its investment in belowcost prices XVII Mergers a Clayton Act See 7 p 970 i Look at the efficiencies but be industryspecific 1 Sometimes large corporations are more efficient 2 Innovative efficiency joenobody bought out by big business 3 Production efficiency resulting from pooling resources ii Motives for mergers l Monopoly motives 2 Speculative motives a Value of a company s stock depends on investor expectations regarding future profits 3 Normal business motives a E g small company acquired when no one in family wants to take it over b FTC Horizontal Merger Guidelines the analytical process that the FTC will employ in determining whether to challenge a horizontal merger Underlying premise mergers should not be permitted to create or enhance market power or to facilitate its exercise i Define the relevant markets 1 Product 2 Geographic a region in which a hypothetical monopolist would profitably impose at least a small but intransitory increase in price SNIP usually 5 3 Are there substitutes for price quality or services a Be aware of the Cellophane fallacy DuPont i The correct test for whether two products are reasonable substitutes for one another is whether they are both sold at a competitive price 4 A merger is unlikely to create or enhance market power or to facilitate its exercise unless it significantly increases concentration and results in a concentrated market a Thus the first step is to define the markets in which firms could effectively exercise market power if they were to coordinate their actions b The relevant market is described by a product or group of products and a geographic area ii Identify the rms that participate in the relevant markets 1 Once defined the relevant market must be measured in terms of its participants and concentration 2 Firms are said to participate in the relevant market if they currently produce or sell in the relevant market iii Calculate market shares based on the total sales or capacity currently devoted to the relevant market iv Determine market concentration based on firms already in the market and their respective shares 1 Market concentration is a function of the number of firms in a market and their respective market shares v Look at potential new entrants into the market 1 Are there barriers to entry 2 We want entry that is l timely 2 likely and 3 sufficient a Timely usually within two years from initial planning to significant market impact b Likely profitable at premerger prices and such prices could be secured by the entrant c Not necessarily sufficient if an entrant can only take over 1 of the market this is probably unlikely to discipline the other firms vi Look at the efficiencies 1 And consider which ones are more valuable than others c US v Philadelphia National Bank i The statutory test is whether the effect of the merger may be to substantially lessen competition in any line of commerce in any section of the country 1 Section of the country is limited to within the areas of competitive overlap will the effect of the merger on competition be direct and immediate 2 Then ask will the merger substantially lessen competition a Market concentration is the most important factor b If concentration is high enjoin the merger unless P can show that the feared anticompetitive effects will not materialize ii D has burden of production to show this last point after P makes out prima facie case by showing high concentration XVIII Clayton and FTC Acts What constitutes a violation of Section 5 of the FTC Act 1 Conduct that violates the letter of one of the antitrust statutes CA Dental Section 1 of the Sherman Act 2 Conduct that threatens an incipient violation of one of the antitrust laws not yet a fullblown violation but heading in that direction must be nipped in the bud Conduct that violates the spirit or policy of one of the antitrust laws Conduct that violates recognized standards of fair business behavior Conduct that violates competition policy as framed by the FTC Conduct constituting an unfair act or practice V3939gtquot Clayton Act Section 4 p 5 of appx
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