© 2010 Pearson Education, Inc., publishing as Prentice-Hall 1 ANTITRUST LAW AND UNFAIR TRADE PRACTICES © 2010 Pearson Education, Inc., publishing as Prentice-Hall CHAPTER 46

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 2 Antitrust Laws Laws enacted to limit anticompetitive behavior in almost all industries, businesses, and professions in the United States.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 3 Federal Antitrust Laws Sherman Act of 1890 Clayton Act of 1914 Federal Trade Commission Act of 1914 Robinson-Patman Act

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 4 Antitrust Enforcement Statutes are broadly drafted to: –reflect the government’s enforcement policy –allow the government to respond to economic, business, and technological changes Each administration adopts an enforcement policy for antitrust laws. Antitrust laws enforced more stringently at some times than at others.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 5 Government Antitrust Actions –Brought by Antitrust Division of Department of Justice, or by Bureau of Competition of the Federal Trade Commission. –Government may seek criminal penalties under Sherman Act. –Government may seek civil damages. Treble damages, other civil remedies.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 6 Private Civil Actions –Brought by any person who has suffered antitrust injury Must have dealt directly with violator. E.g., consumer who paid higher prices. –Treble damages, plus costs and attorneys’ fees. –Plaintiff has 4 years to bring action. Tolled during suit by government.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 7 Effect of Government Judgment Prima facie evidence of liability in private civil action. Defendants often enter a nolo contendere plea or enter into a consent decree –Defendant does not admit guilt but is subject to penalty.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 8 Restraints of Trade Section 1 of Sherman Act prohibits contracts, combinations, and conspiracies in restraint of trade. To violate Section 1, the restraint must be found to be unreasonable under either of two tests: –Rule of reason –Per se rule Requires the concerted action of two or more parties.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 9 Determining Lawfulness of a Restraint Rule of Reason Only unreasonable restraints of trade violate Section 1 of the Sherman Act. Per se Rule Only inherently anticompetitive restraints of trade violate Section 1 of Sherman Act.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 10 Horizontal Restraint of Trade Two or more competitors at the same level of distribution enter into a contract, combination, or conspiracy to restrain trade. –Most fall under the per se rule; some examined under the rule of reason.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 11 Horizontal Restraint of Trade (continued) Competitor No. 1 Competitor No. 2 Agreement to restrain trade

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 12 Horizontal Restraint of Trade (continued) Price-Fixing – Competitors in the same line of business agree to set the price of the goods they sell. A per se violation. Division of Markets – Competitors agree that each will serve only a designated portion of the market. A per se violation. Group Boycott – Two or more competitors at one level of distribution agree not to deal with others at another level of distribution.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 13 Group Boycott by Sellers SellerCompetitor No. 1 SellerCompetitor No. 2 Agreement not to deal with a customer BoycottedCustomer

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 14 Group Boycott by Purchasers PurchaserCompetitor No. 1 PurchaserCompetitor No. 2 Agreement not to deal with a supplier Boycotted Supplier Supplier

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 15 Other Horizontal Agreements E.g., trade association activities and rules, exchange of non-price information, participation in joint ventures. Reasonable restraints are lawful. Examined under rule of reason.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 16 Vertical Restraint of Trade Two or more parties on different levels of distribution enter into a contract, combination, or conspiracy to restrain trade. Court applies both per se rule and rule of reason.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 17 Vertical Restraint of Trade (continued) Supplier Customer Agreement to restrain trade

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 18 Vertical Restraint of Trade (continued) Resale Price Maintenance (vertical price-fixing) – a party at one level of distribution enters into an agreement with a party at another level to adhere to a price schedule that either sets or stabilizes prices. –A per se violation of Section 1. –Setting maximum resale prices examined under rule of reason.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 19 Vertical Restraint of Trade (continued) Nonprice Vertical Restraints – E.g., assigning exclusive territories or limiting number of dealers in a territory. – Unlawful under Section 1 if anticompetitive effects outweigh procompetitive effects.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 20 Defenses to Section 1 of the Sherman Act Unilateral Refusal to Deal –A unilateral choice by one party not to deal with another party. –No violation because there is no concerted action.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 21 Defenses to Section 1 of the Sherman Act (continued) Conscious Parallelism –Two or more firms act the same but do so individually. –No violation because there has been no concerted action. Noerr Doctrine –Two or more parties may petition the government to enact laws or to take other action.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 22 Monopolization Section 2 of Sherman Act prohibits act of monopolization as well as attempts or conspiracies to monopolize. Elements to prove a violation: –Defendant possesses monopoly power, and –Defendant engaged in willful act of monopolization to acquire of maintain that power.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 23 Defining the Relevant Market Relevant product or service market - includes substitute products or services that are reasonably interchangeable with the defendant’s products or services. Relevant geographical market - area in which the defendant and its competitors sell the product or service.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 24 Monopoly Power The power to control prices or exclude competition. Measured by the market share the defendant possesses in the relevant market. –Rule of thumb: >70% is monopoly power. <20% is not monopoly power.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 25 Willful Act of Monopolizing Possession of monopoly power without such an act does not violate Section 2. Act that violates any other antitrust law is an act of monopolizing. E.g., illegal restraints of trade, predatory pricing. When coupled with monopoly power, otherwise legal acts may also constitute acts of monopolizing.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 26 Defenses to Monopolization Innocent acquisition –Monopoly that is acquired by superior skill, foresight, or industry. Natural monopoly –Monopoly that is thrust upon the defendant. E.g., small market that can only support one competitor.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 27 Mergers Unlawful under Clayton Act to acquire the stock or assets of another “where … the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.” Certain firms must notify DOJ and FTC of proposed merger to allow investigation.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 28 Mergers (continued) Elements to prove a violation: –Line of commerce – the product or service market that will be affected by the merger. Functional interchangeability test. –Section of the country – geographical market that will be affected by the merger. –Probability of a substantial lessening of competition.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 29 Types of Mergers Horizontal Mergers Vertical Mergers Market Extension Mergers Conglomerate Mergers

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 30 Horizontal Mergers A merger between two or more companies that compete in the same business and geographical market. –E.g., a merger between General Motors and Chrysler.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 31 Vertical Mergers A merger that integrates the operations of a supplier and a customer. –Backward vertical merger E.g., if publisher acquires a paper mill. –Forward vertical merger E.g., if publisher acquires a bookstore chain.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 32 Market Extension Mergers A merger between two companies in similar fields whose sales do not overlap. –E.g., a merger between a soft drink company and an orange juice producer.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 33 Conglomerate Mergers A merger that does not fit into any other category. A merger between firms in totally unrelated businesses. –E.g., an oil company acquires a department store.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 34 Defenses to Section 7 Actions The Failing Company Doctrine The Small Company Doctrine

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 35 Tying Arrangements Seller refuses to sell one product to a customer unless the customer agrees to purchase a second product. Section 3 of the Clayton Act prohibits tying arrangements involving goods, services, intangible property, and real property. –Lawful if there is some justifiable reason for tying.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 36 Price Discrimination Offering favorable terms to preferred customers without just cause is violation of Section 2 of Clayton Act (Robinson- Patman). Unlawful “to discriminate in price between different purchases of commodities of like grade and quality.”

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 37 Direct Price Discrimination Elements to prove violation: Defendant sold commodities of like grade and quality, to two or more purchasers at different prices at approximately the same time, and plaintiff suffered injury because of the price discrimination.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 38 Indirect Price Discrimination Sellers may devise sophisticated ways to provide discriminatory prices to favored customers. Still a violation of Robinson-Patman. –E.g., favorable credit terms, freight charge reductions.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 39 Defenses to Price Discrimination Cost Justification Changing Conditions Meeting the Competition

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 40 Cost Justification Seller’s price discrimination is not unlawful if price differential is due to differences in cost of manufacture, sale, or delivery. –E.g., bulk shipping rates that vary depending upon amount transported.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 41 Changing Conditions Price differentials that are a result of changing market conditions are not illegal. –E.g., reducing prices that reflect the deterioration of perishable goods.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 42 Meeting the Competition A seller may lawfully engage in price discrimination to meet a competitor’s price. –Seller must meet but not beat competitor’s price. –E.g., Rockport shoes meeting price of Great Lakes Shoe Co. in Michigan and Wisconsin only.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 43 Exemptions From Antitrust Laws Statutory Exemptions – Exemptions expressly provided in statutes. –E.g., labor unions, agricultural cooperatives. Implied Exemptions – Exemptions implied by federal courts. –E.g., professional baseball, airlines. State Action Exemptions – Business activities that are mandated by state law are exempt from federal antitrust laws. –E.g., public utility rates.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 44 Federal Trade Commission Act Section 5 of the FTC Act prohibits unfair methods of competition. –Broader than other antitrust laws. –Covers conduct that violates any provision of the Sherman Act or the Clayton Act, violates the spirit of those acts, fills the gap in those acts, and offends public policy.

© 2010 Pearson Education, Inc., publishing as Prentice-Hall 45 State Antitrust Laws Most states have enacted antitrust statutes. Usually patterned after the federal antitrust statutes. State antitrust laws used to attack anti- competitive activity that occurs in intrastate commerce.