1. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Chapter 23: Antitrust Law and Promoting Competition © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

2.  Common law actions intended to limit restraints on trade and regulate economic competition.  Embodied almost entirely in: The Sherman Antitrust Act of 1890. The Clayton Act of 1914. The Sherman Antitrust Act 2

3. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Sherman Antitrust Act  Major Provisions of the Sherman Act. Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal [and a felony punishable by fine and/or prison].  3

4. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Sherman Antitrust Act  Major Provisions of the Sherman Act (cont’d). Every person who monopolizes, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony. 4

5. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Sherman Antitrust Act  Differences Between Sections 1 & 2. Section 1: requires 2 or more persons, finding an agreement to restrain trade. Section 2: requires only 1 person, and concerned with “monopoly power” in the marketplace. What is a monopoly? What is market power? 5

6. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Jurisdictional Requirements. Any activity that substantially impacts interstate commerce. Also extends to U.S. nationals working abroad who are engaged in activities that have an effect on U.S. foreign commerce. The Sherman Antitrust Act 6

7. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Section 1 regulates “horizontal” and “vertical” restraints.  Per se Violations versus the Rule of Reason. Per se violations are blatant and substantially anticompetitive. Rule of reason agreements do not unreasonably restrain trade.  Section 1 of the Sherman Act 7

8. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Per se Violations versus the Rule of Reason (cont’d). CASE 23.1 A MERICAN N EEDLE, I NC. V. N ATIONAL F OOTBALL L EAGUE (2010). CASE 23.1 A MERICAN N EEDLE, I NC. V. N ATIONAL F OOTBALL L EAGUE (2010). What was the ‘concerted activity’ between the NFL teams and NFLP? Section 1 of the Sherman Act 8

9. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Horizontal Restraints. Agreements among Sellers (or Buyers) that restrain competition between rival firms competing in the same market. Buyer Section 1 of the Sherman Act 9

10. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Horizontal Restraints. Price Fixing. An agreement between competing firms in the market to set an established price for the goods or services they offer. Price fixing is a per se violation of the Act. Section 1 of the Sherman Act 10

11. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Horizontal Restraints. Group Boycotts. Agreement between two or more sellers to refuse to deal with a particular person or firm. Group boycotts are per se violations of the Act. Section 1 of the Sherman Act 11

12. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Horizontal Restraints. Market Division. Occurs when competitors in the same market agree that each will have exclusive rights to operate in a particular geographic area. Horizontal market divisions are per se violations of the Act. Section 1 of the Sherman Act 12

13. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Horizontal Restraints. Trade Associations. Industry specific organizations. Rule of reason is applied to determine if a violation of the Act has occurred. Concentrated Industry: small firms control large percentage of market sales. Section 1 of the Sherman Act 13

14. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Vertical Restraints. Per se anticompetitive agreements imposed by Sellers upon Buyers (or vice versa) that may include affiliates in the entire supply chain of production.  Section 1 of the Sherman Act Buyer 14

15. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Vertical Restraints. Agreements between firms at different levels of the manufacturing and distribution process. May restrain competition among firms that occupy the same level in chain. Vertical restraints that significantly affect competition may be per se violations. Section 1 of the Sherman Act 15

16. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Vertical Restraints. Territorial or Customer Restrictions. Imposed by manufacturers on the sellers of the products, to insulate dealers from direct competition with each other. Territorial and customer restrictions are judged under the rule of reason. Section 1 of the Sherman Act 16

17. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Vertical Restraints. Resale Price Maintenance Agreements. Agreements between a manufacturer and a distributor or retailer in which the manufacturer specifies the retail price at which retailers must sell products furnished by the manufacturer or distributor. This is a type of vertical restraint and is normally a per se violation. Section 1 of the Sherman Act 17

18. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Section 2 of the Sherman Antitrust Act deals with: Monopolization.  Attempts to Monopolize.  Predatory Pricing: Attempt to drive a competitor from the market by selling products at prices substantially below the normal costs of production. Section 2 of the Sherman Act 18

19. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Monopolization: requires two elements: The possession of monopoly power and The willful acquisition and maintenance of the power.  Section 2 of the Sherman Act 19

20. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Monopolization (cont’d). Monopoly Power: Exists when one firm has sufficient market power to affect or control prices and output. CASE 23.2 E.I. D U P ONT DE N EMOURS AND C O. V. K OLON I NDUSTRIES, I NC. (2011). CASE 23.2 E.I. D U P ONT DE N EMOURS AND C O. V. K OLON I NDUSTRIES, I NC. (2011). What was the major factor in the court’s decision against Du Pont? Section 2 of the Sherman Act 20

21. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Monopolization (cont’d). Relevant Market: before court can determine whether firm has dominant market share, it must define the “relevant market.” Relevant Market consists of two elements: (1) relevant product market, and (2) relevant geographic market. Section 2 of the Sherman Act 21

22. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Monopolization (cont’d). Intent Requirement: Anticompetitive behavior must be “willful acquisition of power.” Intent may be inferred from evidence that the firm had monopoly power and engaged in anticompetitive behavior. Section 2 of the Sherman Act 22

23. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Monopolization (cont’d). Unilateral Refusals to Deal. Joint refusals to deal (group boycotts) are given close scrutiny. Unilateral refusals to deal violate the Sherman Act if: the firm refusing to deal has (or is likely to acquire) monopoly power, AND the refusal is likely to have an anticompetitive effect on a particular market. Section 2 of the Sherman Act 23

24. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Attempts to Monopolize: intended to exclude competitors and garner monopoly power, and had a “dangerous” probability of success. CASE 23.3 W EYERHAEUSER C O. V. R OSS - S IMMONS H ARDWOOD L UMBER C O. (2007). CASE 23.3 W EYERHAEUSER C O. V. R OSS - S IMMONS H ARDWOOD L UMBER C O. (2007). Test for predatory pricing also applies to predatory billing. Section 2 of the Sherman Act 24

25. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The Clayton Act (the Robinson- Patman Act) deals with: Price Discrimination.  Exclusionary Practices.  Mergers.  Interlocking Directorates.  The Clayton Act 25

26. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Section 2 - Price Discrimination. Occurs when a seller charges different buyers different prices for identical goods, and may violate Section 2 (Robinson-Patman Act). Customer Preferences. Time and Cost Considerations. The Clayton Act 26

27. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Section 2 – Price Discrimination (cont’d). Defenses: (1) Cost Justification, (2) Meeting the Price of Competition, (3) Changing Market Conditions. The Clayton Act 27

28. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Section 3 – Exclusionary Practices. Exclusive Dealing Contracts: seller forbids a buyer to purchase products from the seller’s competitors, that will “substantially lessen competition or tend to create a monopoly.”  The Clayton Act 28

29. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Section 3 – Exclusionary Practices. (cont’d). Tying Arrangements: the conditioning of the sale of a product on the buyer’s agreement to purchase another product produced or distributed by the same seller. The Clayton Act 29

30. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Section 7 – Mergers. Horizontal Mergers occur between firms at the same level in the production and distribution chain. Factors to Determine Legality. The Herfindahl-Hirschman Index: to determine market concentration. The Clayton Act 30

31. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Section 7 – Mergers (cont’d). Vertical Mergers occur between firms at different levels in the production and distribution chain. The Clayton Act 31

32. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Section 8—Interlocking Directorates. When an individual serves on the board of directors of two or more competing companies simultaneously.  The Clayton Act 32

33. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Section 8—Interlocking Directorates. (cont’d). Prohibited if the two firms meet certain size requirements. If either of the corporations has capital, surplus, or undivided profits aggregating more than $26,867,000 or sales of more than $2,686,700. The Clayton Act 33

34. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Federal Agencies: The Department of Justice (DOJ). The Federal Trade Commission (FTC) enforces the FTCA. FTCA provides that: “unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce are hereby declared illegal.” Enforcement and Exemptions 34

35. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Agency Actions: Only the DOJ can prosecute violations of the Sherman Act, criminal or civil. Either DOJ or FTC can enforce the Clayton Act. DOJ and FTC can petition the court for divestiture (asking company to give up one or more of its operations). Enforcement and Exemptions 35

36. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Agency Actions (cont’d). FTC has sole authority to enforce violations of Section 5 of the FTCA.  Private Actions.  Treble Damages.  Enforcement and Exemptions 36

37. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Exemptions: one of the most significant is joint efforts to obtain legislative, judicial, or executive action. Enforcement and Exemptions 37

38. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. U.S. Antitrust Laws in the Global Context  Extraterritorial Application of U.S. Antitrust Laws. Any foreign business conspiracy that has a substantial effect on U.S. commerce is within reach of the Sherman Act. U.S. jurisdiction is automatically invoked when a per se violation occurs. 38

39. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. U.S. Antitrust Laws in the Global Context  Extraterritorial Application of Foreign Antitrust Laws. U.S. firms may be subject to antitrust laws of other nations if the firm has a substantial effect. European Union Enforcement. Increased Enforcement in Asia and Latin America. 39