Chapter 23 Antitrust Law and Unfair Trade Practices

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.23-2 Federal Antitrust Laws The Sherman Act The Clayton Act The Federal Trade Commission Act The Robinson-Patman Act

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.23-3 Antitrust Enforcement Government enforcement authority Department of Justice’s Antitrust Division Federal Trade Commission’s Bureau of Competition Criminal sanctions are permitted under the Sherman Act. Civil penalties and remedial actions are available.

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.23-4 Antitrust Enforcement Private civil actions Consumers who have dealt directly with alleged violators may sue for antitrust injuries. Successful plaintiffs may recover treble damages, triple the amount of actual damages.

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.23-5 Restraints of Trade: Section 1 of The Sherman Act Prohibits contracts, combinations, and conspiracies in restraint of trade. It requires the concerted action of two or more parties. To violate Section 1, the restraint must be found to be unreasonable under either of two tests: Rule of reason Per se rule

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.23-6 Rules to Determine Lawfulness of a Restraint Rule of reason A rule that holds that only unreasonable restraints of trade violate Section 1 of the Sherman Act Per se rule A rule that is applicable to those restraints of trade considered inherently anticompetitive

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.23-7 Horizontal Restraint of Trade Competitor No. 1 Competitor No. 2 Agreement to restrain trade

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.23-8 Forms of Horizontal Restraint of Trade Price fixing Agreement by competitors in the same business to set the price of goods or services Is a per se violation of Section 1 Division of markets Competitors agree to serve only a designated portion of the market Is a per se violation of Section 1

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.23-9 Forms of Horizontal Restraint of Trade Group boycotts Competitors at one level of distribution agree not to deal with others at a different level of distribution. Some group boycotts are per se illegal and others violate the rule of reason. Other horizontal agreements Some agreements such as information sharing are examined using the rule of reason.

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Group Boycott by Sellers Seller Competitor No. 1 Seller Competitor No. 2 Agreement not to deal with a customer Boycotted customer

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Group Boycott by Purchasers Purchaser Competitor No. 1 Purchaser Competitor No. 2 Agreement not to deal with a supplier Boycotted supplier

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Vertical Restraints of Trade Supplier Customer Agreement to restrain trade

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Vertical Restraints of Trade Two or more parties on different levels of distribution agree to restrain trade. Courts may apply either the per se rule or the rule of reason to determine the legality of vertical restraints.

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Forms of Vertical Restraints of Trade Retail price maintenance or vertical price- fixing A party at one level of distribution agrees with a party at another level to adhere to a price schedule that sets or stabilizes prices. Setting a minimum resale price is a per se violation of Section 1. Nonprice vertical restraints Rule of reason is applied to determine legality.

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Defenses to Section 1 of the Sherman Act Unilateral refusal to deal Does not involve concerted action with others. Conscious parallelism Two independent parties reach a decision separately. Noerr doctrine Two parties may independently petition the government to take action.

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Monopolization: Section 2 of the Sherman Act Prohibits the act of monopolizing as well as attempts and conspiracies to monopolize. To prove that a defendant violated Section 2, there must be proof that the defendant: Possesses monopoly power in the relevant market, and Engaged in a willful act of monopolization in order to acquire or maintain that power.

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Defining the Relevant Market Relevant product or service market Includes substitute products or services Relevant geographic market The area in which the defendant and its competitors sell the product

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Defenses to Monopolization Innocent acquisition Natural monopoly Market can only support one competitor, such as a small town newspaper.

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Mergers: Section 7 of the Clayton Act It is unlawful for a person or business to acquire the stock or assets of another “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”

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Elements of Section 7 Line of commerce Defining relevant product or service market Functional interchangeability test Section of the country Relevant geographical market The area that will feel the direct and immediate impact of the merger Probability of substantial lessening of competition

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Types of Mergers Horizontal merger – two or more companies compete in the same business and geographic market Vertical merger – integrates operations of supplier and customer Backward vertical Forward vertical

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Types of Mergers Market extension merger – merger of two companies in similar fields whose sales do not overlap Geographical market extension Product market extension Conglomerate merger – merger between firms in unrelated businesses

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Defenses to Section 7 Actions Failing company doctrine No other reasonable alternative No other purchaser is available Assets of the failing company would disappear if the merger was not allowed. Small company doctrine Merger may be permitted if it will allow two or more smaller companies to compete more effectively with a large company.

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Tying Arrangements A tying arrangement is a vertical restraint of trade where a seller refuses to sell one product to a customer unless the customer agrees to purchase a second product from the seller.

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Statutes Prohibiting Tying Arrangements Section 3 of the Clayton Act prohibits tying arrangements involving goods. Section 1 of the Sherman Act prohibits tying arrangements involving goods, services, intangible property, and real property.

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Price Discrimination Price discrimination is charging different prices to different customers for the same goods without any justification. Price discrimination is governed under Section 2(a) of the Robinson- Patman Act and Section 2 of the Clayton Act.

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Price Discrimination The elements of direct price discrimination under Sec. 2 (a) of the Robinson-Patman Act are: Sale to two or more purchasers Commodities of like grade and quality Injury as a result of price discrimination Indirect price discrimination includes more favorable credit terms or freight charges.

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Defenses to Price Discrimination Cost justification Changing conditions Meeting the competition

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Unfair Methods of Competition Section 5 of the Federal Trade Commission Act prohibits unfair methods of competition and unfair and deceptive acts or practices Covers conduct that violates the spirit of antitrust laws.

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall Exemptions from Antitrust Laws Statutory exemptions, including Labor unions Agricultural cooperatives Implied exemptions Baseball, but not other sports Airlines State action exemptions

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.23-31