Antitrust Law 1

Learning Objectives: 1.The three major pieces of federal antitrust legislation 2.Monopoly power vs. monopolization 3.Horizontal vs. Vertical restraints 4.Two standards for section 1 of the Sherman Act 5.Mergers 2

Video Link Some of the material from these chapters is discussed in a presentation by Victor J. Domen, Jr., Senior Counsel, Tennessee Attorney General’s Office. You can access that video here: vic-domenhttp://avs.mtsu.edu/video/anti-trust-law- vic-domen 3

LO 1: Major Federal Antitrust Laws NameDateFocus Sherman Act1890Broadly worded pronouncements Restraints of trade Monopolization Clayton Act1914Specific actions Mergers Federal Trade Commission Act 1914Unfair trade practices 4

Sherman Act Section 1: Restraints of Trade are illegal –Prohibits concerted activity Section 2: Monopolization –Applies to both unilateral and concerted activity Violations are criminal offenses as well as civil ones 5

LO 2 Monopolization Sherman Act requires two elements – Possession of monopoly power –Willful acquisition and maintenance of power US Supreme Court has defined monopolization as “power to control prices or exclude competition” “Market-Share” test (rule of thumb) –if firm has 70% or more of relevant market, it is regarded as having monopoly power includes both Product and Geographical Markets 6

LO 2: Monopolization Monopoly power, in and of itself, does not constitute the offense of monopolization. 7

LO 2: Monopolization The possession of monopoly power in the relevant market, however, is the starting point. What is monopoly power? The power to control prices or exclude competition. What is the relevant market? Relevant product market – substitutes, reasonably interchangeable Relevant geographic market – where will purchaser go to buy product 8

LO 2: Monopolization In addition to monopoly power, the offense of monopolization requires intent, the “willful acquisition of power.” The intent is difficult to prove. This requires a purposeful act to acquire or maintain monopoly power. Predatory conduct. 9

LO 2: Monopolization Page 608: Aspen Skiing Co example The owner of 3 of 4 major ski areas discontinued the practice of offering a joint lift ticket with its smaller competitors. 10

LO 2: Monopolization The absence of a duty to transact business with another firm is, in some respects, merely the counterpart of the independent businessman's cherished right to select his customers and his associates. The high value that we have placed on the right to refuse to deal with other firms does not mean that the right is unqualified Did not persuade the jury that its conduct was justified by any normal business purpose. Evidence supports an inference that Ski Co. was not motivated by efficiency concerns and that it was willing to sacrifice short-run benefits and consumer goodwill in exchange for a perceived long-run impact on its smaller rival 11

LO 3: Restraints of Trade Every contract …in restraint of trade… is … illegal. There can be no doubt that the challenged practices of the NCAA constitute a “restraint of trade” in the sense that they limit members' freedom to negotiate and enter into their own television contracts. In that sense, however, every contract is a restraint of trade, and as we have repeatedly recognized, the Sherman Act was intended to prohibit only unreasonable restraints of trade. 12

LO 3: Restraints of Trade The agreement may be either horizontal or vertical –Horizontal is between rival firms competing in the same market –Vertical is between firms that are at two different points in the chain of production 13

Types of Restraints Horizontal Price fixing Horizontal market divisions Trade Associations Group Boycotts Vertical Market division – territorial or customer Agreements on resale price 14

LO 4: Restraints of Trade Only unreasonable restraints are prohibited Per Se: Some restraints are blatantly and substantially anticompetitive. There is no inquiry into whether these are reasonable. Rule of reason: Courts analyze the agreement to determine whether they are unreasonable. 15

LO 3,4: Restraints of Trade Thomas Blackburn, Raymond Green, Charles Sweeney, and Daniel Pfeiffer practiced law together as partners, relying on advertising to attract clients. When they came to a disagreement over the use of partnership funds, they split into separate partnerships—one formed by Blackburn and Green and the other by Sweeney and Pfeiffer. After the split, they negotiated and signed an agreement that included a term restricting, for an indefinite time, the geographical area within which each could advertise. 16

LO 3,4: Restraints of Trade Horizontal: Two partnerships, each providing professional services to the public. Division of Markets: Allocating geographic areas. Per Se: The agreement is illegal and, therefore, unenforceable. See Business Scenario

LO 5: Clayton Act - Mergers Section 7 of the Clayton Act prohibits acquisitions, including mergers, where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly. Congress used the words may be substantially to lessen competition, to indicate that its concern was with probabilities, not certainties. 18

LO 5: Clayton Act - Mergers Market concentration is the primary factor Horizontal mergers - competitors Vertical mergers – two stages of production - foreclosure Conglomerate mergers –Market extension – new geographic market –Product extension – line of products –Diversification – wholly unrelated 19