Antitrust Law—Restraints Chapter 11 Antitrust Law—Restraints of Trade Key Points Understand horizontal restraints Price-fixing Refusal to deal Understand vertical restraints Resale price maintenance Tying arrangements Exclusive dealing and requirements contracts Price discrimination

Examples Sale of merchandise at NASCAR professional stock car races Collusion on commissions between Sotheby’s and Christie’s auction houses Global price-fixing by: International vitamin manufacturers Archer Daniels Midland and competitors in the lysine and citric acid markets McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Horizontal Restraints Definition: When competitors collude, conspire or agree among themselves they are engaging in horizontal restraints of trade. Instead of competing to drive prices down and quality up, they may be fixing prices, restricting output and dividing territories. Standard Oil (S. Ct. 1911): Only unreasonable restraints of trade are prohibited. The Rule of Reason: Balance the pro- and anti-competitive effects of the situation in question. Per se violations: Some antitrust violations such as horizontal price fixing are perceived to be so injurious to competition that their mere existence constitutes unlawful conduct. In recent years, the use of the per se doctrine has declined. McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Horizontal Price-Fixing Standard: Competitors may not lawfully agree on prices. Four methods of proof: Agreement with direct evidence (e.g., writings or testimony). Agreement without direct evidence (i.e., proven by circumstantial evidence). Agreement based on a tacit understanding (e.g., the parties employ tactics that act as surrogates for direct assurances and thus “tell” each other that they are, in fact, in agreement). Agreement based on mutual observation (e.g., competitors anticipate each other’s future conduct and act accordingly without any direct collusion but with results akin to those that would have resulted from a direct agreement). Contrast: Parallel conduct (i.e., independent but parallel business behavior) which is legal. Business judgment has led each to independently follow parallel paths. McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Information Sharing Information sharing among competitors can be legal or illegal, based on whether it enhances efficiencies or restrains trade. Example: Todd v. Exxon (2d Cir. 2001) Primary analytical factors: Structure of the industry Nature of the exchanged information McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Refusal to Deal (a/k/a Group Boycott) A horizontal group boycott involving a group with market power and no purpose other than restricting output or raising prices will probably be treated as a per se violation. Other boycotts that have some lawful primary purpose are more likely to be subject to Rule of Reason analysis. Examples: U.S. v. Visa International and MasterCard International (D.C. 2001) Klors v. Broadway Hale Stores (S. Ct. 1959) McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Vertical Restraints Types: Analysis: Rule of Reason Resale price maintenance Tying arrangement Exclusive dealing and requirements contracts Price discrimination Analysis: Rule of Reason Example: Pricing of CDs in the ’90s McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Resale Price Maintenance Legitimate goals of resale price maintenance: By establishing a minimum prices, the product’s reputation for quality may be enhanced. To prevent discount stores form undercutting regular retail outlets. To prevent free riders (e.g., on national advertising campaigns). Colgate Doctrine: Sellers may lawfully engage in resale price maintenance if they do nothing more than specify prices at which their products are to be sold and unilaterally refuse to deal with anyone who does not adhere to those prices. Rule of Reason analysis applies. McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Tying Arrangements Definition: Customer allowed to lease or buy a desired product (the tying product) only if she or he also leases or buys another product (the tied product). Concerns: A party who already enjoys market power over the tying product is able to extend that power into the tied product market. Competitors in the tied product market are foreclosed from equal access to that market. Examples: Microsoft bundling Internet Explorer with Windows operating system Visa/MasterCard requiring vendors to accept their debit, as well as credit, cards McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Tying Analysis Proof of the following conditions constitutes a per se tying violation: The existence of separate products. A requirement that the purchase of one of the products (the tying product) is conditioned on the purchase of another product (the tied product). Market power in the tying product. Substantial commerce in the tied product is affected or, for some courts, a substantial anticompetitive effect in the tied product market. McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Exclusive Dealing and Requirements Contracts Exclusive dealing contract: Agreement in which a buyer commits itself to deal only with a specific seller, thus cutting competing sellers out of that share of the market. Requirements contract: Agreement in which a seller agrees to supply all of a buyer’s needs, or a buyer agrees to purchase all of a seller’s output, or both. Effects: May reduce or eliminate intrabrand competition May enhance interbrand competition Analyzed under the Rule of Reason McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Price Discrimination Price discrimination (illegal): Selling substantially identical goods (not services) at reasonably contemporaneous times to different purchasers at different prices, where the effect may be to substantially lessen competition or tend to create a monopoly. Discounts (legal): Price differentials attributable to cost savings. Price differentials attributable to a good faith effort to meet the equally low prices of a competitor. Price change made in response to a changing market. McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Predatory Pricing Definition: Lowering prices to drive out competition with the expectation that it will recover its losses later by charging monopoly prices. Proof: Prices set below average variable cost Ability to recoup in future through exercise of market power Example: American Airlines in Dallas-Fort Worth? McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

DuPont’s Ten Don’ts of Antitrust Don’t discuss prices with competitors. Don’t divide customers, markets or territories with competitors. Don’t agree upon or attempt to control a customer’s resale price. Don’t attempt to restrict a customer’s resale activity. Don’t offer a customer prices or terms more favorable than those offered competing customers. Don’t require a customer to buy a product only from you. Don’t use one product as bait to sell another. Don’t disparage a competitor's product unless the statements are true. Don’t make sales or purchases conditional on reciprocal purchases or sales. Don’t hesitate to consult with your legal counsel. McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.