1. Ch. 23-1 THE LEGAL ENVIRONMENT OF BUSINESS A Critical Thinking Approach Fourth Edition Nancy K. Kubasek Bartley A. Brennan M. Neil Browne Nancy K. Kubasek Bartley A. Brennan M. Neil Browne © 2006 Prentice Hall

2. Ch. 23-2 THE LEGAL ENVIRONMENT OF BUSINESS CHAPTER 23 Antitrust Laws

3. © 2006 Prentice Hall Ch. 23-3 THE LEGAL ENVIRONMENT OF BUSINESS Introduction to Antitrust Law Stocks transferred to trustees Trustees managed businesses jointly, on behalf of owners, to maximize profits Trusts became larger, and aggressively squeezed competitors TRUSTS Business arrangements favoring owners of several companies

4. © 2006 Prentice Hall Ch. 23-4 THE LEGAL ENVIRONMENT OF BUSINESS Public Concern – Congressional Action News accounts of trusts and their monopolistic practices alarmed the public Congress responded with the Sherman Act of 1890 The Act was the first anti- trust law in the U.S.

5. © 2006 Prentice Hall Ch. 23-5 THE LEGAL ENVIRONMENT OF BUSINESS Law and Economic Theory Chicago School Efficiency is the key consideration Harvard School Do not allow domination by one participant in the market

6. © 2006 Prentice Hall Ch. 23-6 THE LEGAL ENVIRONMENT OF BUSINESS Goals of Antitrust Laws Preserve small business Keep many sellers and buyers: more competition is better Prevent concentration of power Preserve local control Promote maximization of consumer welfare

7. © 2006 Prentice Hall Ch. 23-7 THE LEGAL ENVIRONMENT OF BUSINESS Enforcement Private enforcement: Section 4 Remedies sought: injunction; consent decree Penalties: fines and incarceration Department of Justice Sherman Act Federal Trade Commission Clayton Act

8. © 2006 Prentice Hall Ch. 23-8 THE LEGAL ENVIRONMENT OF BUSINESS Exemptions Regulated Industries Labor Unions Intrastate Activities Agricultural Activities Baseball State Action Local Government Export Activities

9. © 2006 Prentice Hall Ch. 23-9 THE LEGAL ENVIRONMENT OF BUSINESS The Sherman Act of 1890 Section 1 - Combinations and Restraints of Trade Combination, contract, or conspiracy Unreasonable restraint of trade Interstate commerce Section 1 - Combinations and Restraints of Trade Combination, contract, or conspiracy Unreasonable restraint of trade Interstate commerce

10. © 2006 Prentice Hall Ch. 23-10 THE LEGAL ENVIRONMENT OF BUSINESS Court Standard: “Rule of Reason” Restrictive covenants Location and resale restraints Exchange of information Joint research Do anticompetitive effects outweigh procompetitive effects?

11. © 2006 Prentice Hall Ch. 23-11 THE LEGAL ENVIRONMENT OF BUSINESS Per Se Se Standard Price-fixing Group boycotts Tying arrangements Dividing markets Is the practice one of the defined types?

12. © 2006 Prentice Hall Ch. 23-12 THE LEGAL ENVIRONMENT OF BUSINESS Boycotts Division of Markets Horizontal Restraints Price-Fixing

13. © 2006 Prentice Hall Ch. 23-13 THE LEGAL ENVIRONMENT OF BUSINESS Resale-price maintenance (price-fixing) Vertical Restraints Territorial and customer restrictions Tying arrangements (linking of products) Exclusive-dealings contracts (comparative substantiality)

14. © 2006 Prentice Hall Ch. 23-14 THE LEGAL ENVIRONMENT OF BUSINESS Monopolies Section 2 of the Sherman Act Prohibits monopolies or attempts to monopolize Section 2 of the Sherman Act Prohibits monopolies or attempts to monopolize Monopolies - Test Relevant product and geographic market Overwhelming power Intent Monopolies - Test Relevant product and geographic market Overwhelming power Intent

15. © 2006 Prentice Hall Ch. 23-15 THE LEGAL ENVIRONMENT OF BUSINESS Relevant Product and Geographic Market Cross-elasticity of demand; substitutability Du Pont and cellophane

16. © 2006 Prentice Hall Ch. 23-16 THE LEGAL ENVIRONMENT OF BUSINESS Overwhelming Power Market share Size of other firms Pricing structure Entry barriers Unique nature of industry

17. © 2006 Prentice Hall Ch. 23-17 THE LEGAL ENVIRONMENT OF BUSINESS Intent to Monopolize Specific conduct Exclude competitors Raise barriers to entry Passive or active

18. © 2006 Prentice Hall Ch. 23-18 THE LEGAL ENVIRONMENT OF BUSINESS Attempts to Monopolize Violations of Section 2 of Sherman Act Specific intent Stealing trade secrets Interfering with contracts Defaming competitors or their products Predatory pricing

19. © 2006 Prentice Hall Ch. 23-19 THE LEGAL ENVIRONMENT OF BUSINESS The Clayton Act of 1914 Prohibits the following actions: Price discrimination Tying arrangements Mergers and acquisitions that lessen competition Interlocking directorates

20. © 2006 Prentice Hall Ch. 23-20 THE LEGAL ENVIRONMENT OF BUSINESS Price Discrimination A price below average variable cost Sales: must be two actual sales Commodity Interstate commerce Injury to competition

21. © 2006 Prentice Hall Ch. 23-21 THE LEGAL ENVIRONMENT OF BUSINESS Defenses to Clayton Act Violations “Meeting-the-Competition” Made in good faith To meet equally low price of a competitor

22. © 2006 Prentice Hall Ch. 23-22 THE LEGAL ENVIRONMENT OF BUSINESS Mergers and Acquisitions What drives mergers? Undervalued assets DivestitureDiversification Tax credits Economies of scale

23. © 2006 Prentice Hall Ch. 23-23 THE LEGAL ENVIRONMENT OF BUSINESS Types of Mergers HORIZONTAL VERTICAL CONGLOMERATE

24. © 2006 Prentice Hall Ch. 23-24 THE LEGAL ENVIRONMENT OF BUSINESS Legality of Mergers Section 7 of Clayton Act Depends on Relevant product Geographic market Probable impact on competition Section 7 of Clayton Act Depends on Relevant product Geographic market Probable impact on competition

25. © 2006 Prentice Hall Ch. 23-25 THE LEGAL ENVIRONMENT OF BUSINESS Justice Dept. Merger Guidelines Horizontal Mergers Hertindahl-Hirschman Index (HHI) The smaller the HHI, the less concentrated the market Threshold = 1,800 postmerger score Vertical Mergers Usually not challenged

26. © 2006 Prentice Hall Ch. 23-26 THE LEGAL ENVIRONMENT OF BUSINESS Hart-Scott Robinson Act of 1976 Amended Section 7 of Clayton Act Requires premerger notification Applies to large company mergers affecting interstate commerce Report to FTC and Justice Dept. 30 days in advance Remedies: Injunction; cease and desist; divestiture Amended Section 7 of Clayton Act Requires premerger notification Applies to large company mergers affecting interstate commerce Report to FTC and Justice Dept. 30 days in advance Remedies: Injunction; cease and desist; divestiture

27. © 2006 Prentice Hall Ch. 23-27 THE LEGAL ENVIRONMENT OF BUSINESS Interlocking Directorates Section 8 Clayton Act Prohibits being director of two or more corporations More than $51 million Interstate commerce Competitors Potential competitors Exclusions: banks, trust companies, common carriers Section 8 Clayton Act Prohibits being director of two or more corporations More than $51 million Interstate commerce Competitors Potential competitors Exclusions: banks, trust companies, common carriers

28. © 2006 Prentice Hall Ch. 23-28 THE LEGAL ENVIRONMENT OF BUSINESS Other Antitrust Statutes Federal Trade Commission Act of 1914 Prohibits unfair methods of competition Prohibits unfair methods of competition Bank Merger Act of 1966 Requires agency approval of all bank mergers

29. © 2006 Prentice Hall Ch. 23-29 THE LEGAL ENVIRONMENT OF BUSINESS Global Dimensions Sherman Act, Sections 1 and 2, apply expressly to international commerce Clayton Act does not Other laws provide extraterritorial reach to U.S. antitrust laws Export Trading Act Antitrust Enforcement Assistance Act of 1994 FTC Guidelines

30. © 2006 Prentice Hall Ch. 23-30 THE LEGAL ENVIRONMENT OF BUSINESS Limits on Application of U.S. Law Overseas Dept. of Justice guidelines on “substantial and foreseeable effect” of foreign actions on U.S. commerce State regulated models that encourage price-fixing and collaboration can violate U.S. law Act of State Doctrine: U.S. courts will not judge acts of foreign governments performed within their own borders