Antitrust Laws and Strategies: A Comprehensive Overview

1. Chapter 22 Antitrust

2. Quote of the Day “Is there not a causal connection between the development of these huge, indomitable trusts and the horrible crimes now under investigation? …Is it not irony to speak of the equality of opportunity in a country cursed with bigness?” Louis D. Brandeis, Supreme Court Justice

3. In the Beginning • Sherman Act - Passed in 1890 • To prevent extreme concentrations of economic power • Chicago School • Adherents argued that the market should decide the most efficient size for each industry • Post Chicago School • Competition alone may not be enough to protect consumers

4. Overview of Antitrust Laws • Major provisions of the antitrust law: • Section 1 of the Sherman Act prohibits all agreement “in restraint of trade” • Section 2 of the Sherman Act bans “monopolization”—the wrongful acquisition of a monopoly • The Clayton Act prohibits anticompetitive mergers, tying arrangements, and exclusive dealing agreements • The Robinson-Patman Act bans price discrimination that reduces competition

5. Overview of Antitrust Laws • Violations of antitrust laws are divided into: • Per se: An automatic breach of antitrust laws • Rule of reason: An action that breaches antitrust laws only if it has an anticompetitive impact • Any conduct overseas that has an anticompetitive impact in the United States is a violation of U.S. law provided that the: • Foreign actor intended to affect the U.S. market • Foreign conduct has a direct and substantial effect on the U.S. market

6. Overview of Antitrust Laws • In developing a competitive strategy, managers consider two approaches: • Cooperative strategies that allow companies to work together to their mutual advantage • Aggressive strategies - Designed to create an advantage over competitors

7. Cooperative Strategies • Potentially illegal types: • Horizontal agreements: An agreement among competitors • Vertical agreements: An agreement among participants operating at different stages of the production process • Mergers and joint ventures

8. Horizontal Cooperative Strategies • Market division • Any effort by a group of competitors to divide its market is a per se violation of §1 of the Sherman Act • Price fixing and bid rigging • When competitors agree on the prices at which they will buy or sell products or services, their price fixing is a per se violation of §1 of the Sherman Act • Bid-rigging is a per se violation • Conscious parallelism: When competitors who do not have an explicit agreement nonetheless all make the same competitive decisions

9. Horizontal Cooperative Strategies • Refusals to deal • A refusal to deal violates the Sherman Act if it harms competition

10. Vertical Cooperative Strategies • Reciprocal dealing agreements: • A buyer refuses to purchase goods from a supplier unless the supplier also purchases items from the buyer

11. Vertical Cooperative Strategies • Price discrimination • Under the Robinson-Patman Act, it is illegal to charge different prices to different purchasers if: • The items are the same • The price discrimination lessens competition • It is legal to charge a lower price to a particular buyer if: • The costs of serving this buyer are lower • The seller is simply meeting competition

12. Mergers and Joint Ventures • The Clayton Act prohibits mergers that are anticompetitive • Horizontal mergers: Involve companies that compete in the same market • Vertical mergers: Involve companies at different stages of the production process • Joint ventures • A partnership for a limited purpose—the companies do not combine permanently, they simply work together on a specific project

13. Aggressive Strategies • Monopolization • Under §2 of the Act, it is illegal to monopolize or attempt to monopolize • To determine if a defendant has illegally monopolized, ask: • What is the market? • Product market: Consists of other items that a purchaser can buy • Geographic market: Other areas where a purchase could be made

14. Aggressive Strategies • Does the company control the market? • No matter where your market share, you do not have a monopoly unless you can exclude competitors or control prices • How did they acquire or maintain control? • Possessing a monopoly is not necessarily illegal • Using bad acts to acquire or maintain one is

15. Predatory Pricing • Occurs when a company lowers its prices below cost to drive competitors out of business • To win a predatory pricing case, the plaintiff must prove three elements: • The defendant is selling its products below cost • The defendant intends that the plaintiff goes out of business • If the plaintiff does go out of business, the defendant will be able to earn sufficient profits to recoup its prior losses

17. Tying Arrangements • Illegal under §3 of the Clayton Act and §1of the Sherman Act if: • The two products are clearly separate • The seller requires the buyer to purchase the two products together • The seller has significant power in the market for the tying product • The seller is shutting out a significant part of the market for the tied product

18. Tying Product • In a tying arrangement, the product offered for sale on the condition that another product be purchased as well Tied Product • In a tying arrangement, the product that a buyer must purchase as the condition for being allowed to buy another product

19. Controlling Distributors and Retailers • Allocating customers and territory • Vertical allocation is illegal when it adversely affects competition in the market as a whole • Exclusive dealing agreements: A contract in which a distributor or retailer agrees with a supplier not to carry the products of any other supplier • Under §1 of the Sherman Act and §3 of the Clayton Act, exclusive dealing contracts are subject to a rule of reason • Are illegal only if they have an anticompetitive effect

20. Resale Price Maintenance • The manufacturer sets minimum prices that retailers may charge • Also called vertical price fixing • Prevents retailers from discounting • Rule of reason violation

21. Vertical Maximum Price-Fixing • When a manufacturer sets maximum prices • A rule of reason violation of the Sherman Act

22. “Although managers sometimes resent the constraints imposed on them by antitrust laws, it is these laws that ensure the fair and open competition necessary for a healthy economy. In the end, the antitrust laws benefit us all.”