Chapter 27: Antitrust and Monopoly

1. Chapter 27:Antitrust and Monopoly

2. Introduction • Generally, the law encourages innovation and competition among businesses to develop and sell more appealing products to consumers. • The law regulates conduct that leads to or tends to produce monopoly power or conduct that is a restraint of trade. • This chapter will deal with federal laws regulating monopolies; Chapter 28 will deal with federal laws regulating activities that restrain trade.

3. §1: Market Power • “Market power” is the power of company to control the market for its product. • The law does allow for market monopolies when a patent is issued. During the “monopoly” the patent owner is protected from competition in the market to manufacture and sell its patented product or service.

4. Goals of Antitrust Law • Market power per se is not “bad.” • What is bad or illegal is how the market power is acquired and what firms do once they have that power. • Antitrust laws regulate the market power of companies to promote competition.

5. §2: Common Law and Restraint of Trade • Socially beneficial business activity involves cooperation and competition. • The law presumes freedom of contract, except when a contract is contrary to public policy, like price fixing and restraint of trade.

6. §3: Federal Antitrust Laws • In the late 1800’s, as westward expansion continued, the common law became impotent to meet the challenges of the new industrial age. • Companies like Standard Oil (Rockefeller) became “trusts” which began to control the entire market. • Thus the Congress was involved in “anti-trust” legislation.

7. Federal Antitrust Laws [2] • Congress responded with the Interstate Commerce Act of 1887 and the Sherman Act of 1890. • The Clayton Act. • The Federal Trade Commission Act authorized to prevent and correct unfair trade practices.

8. § 4: The Sherman Antitrust Act • Section 1 and 2 contain the main provisions of the Sherman Act: • Section 1. • Requires two or more persons, as a person cannot contract, combine, or conspire alone. • Concerned with finding an agreement. • Section 2. • Applies both to an individual person and to several people, because it refers to every person. • Deals with the structure of monopolies in the marketplace.

9. Restraint of Trade • Restraint of trade is any agreement between firms that has the effect of reducing competition in the marketplace. (See Chapter 28 for more discussion.)

10. The Clayton Act • In contrast to the Sherman Acts broad proscriptions, the Clayton Act deals with very specific practices: • Price Discrimination: When sellers charge different buyers different prices for the same goods. • Exclusionary Practices: no exclusive-dealing or “tie-in” sales agreements. • Corporate Mergers: forbidden if it substantially lessens competition.

11. Federal Trade Commission Act • The FTC’ sole substantive area is “unfair methods of competition” or “deceptive acts or practices” affecting commerce. • The FTC’s act is a “catchall.”

12. §5: Enforcement of Antitrust Laws • The Sherman Act only applies to conduct that has a significant impact on interstate commerce. So courts presumably only have jurisdiction if the commerce is interstate. • Can the Sherman Act regulate a “local” activity? • Case 27.1: Summit Health v. Pinhas(1991). • The DOJ enforces the Sherman Act.

13. Private Actions • Under the Clayton Act a private party can sue for treble damages (3 times the damages she has suffered) plus attorney’s fees. • Under the Sherman Act, the Plaintiff must show: • Defendant’s antitrust violations directly or indirectly caused injury; and • Defendant’s actions affected protected interests of the Plaintiff. • Case 27.2: Amarel v. Connell (1997).

14. §6: U.S. Antitrust Laws in a Global Context • Foreign “persons” may sue U.S. companies for antitrust violations in U.S. courts, even if the violations occur outside of the U.S.. • These violations occur in the export, trade or commerce with foreign nations.

15. § 7: Exemption from Antitrust Laws • Most statutory exemptions to the antitrust laws apply to the following areas: • Labor. • Agricultural associations and fisheries. • Insurance. • Foreign trade. • Professional baseball. • Cooperative research and production. • Joint efforts y businesspersons to obtain legislative or executive action. • Other.

16. § 8: Monopolies • Section 2 of the Sherman Antitrust Act deals with: • Monopolization or attempts to monopolize; and • Predatory pricing which is an attempt by a firm to drive its competitor from the market by selling its product at prices substantially below the normal costs of production.

17. Monopolization • Monopolization in violation of the Sherman Act requires two elements: • The possession of monopoly power; and • The willful acquisition and maintenance of the power. United States v. Grinnell Corp.(1966) • The U.S. Supreme Court has defined monopolization as “the power to control prices or exclude competition.”

18. Monopoly Power • Exists when one firm has sufficient market power to control prices and exclude competition.

19. Market Power • Market power is often assessed by the use of the “Market-Share” test. • As a rule of thumb, if a firm has 70% or more of a relevant market, it is regarded as having monopoly power. • Market includes both Product and Geographical Markets. • Case 27.3: Godix Equipment v. Caterpillar, Inc. (1996).

20. Anticompetitive Behavior • Anticompetitive behavior must be “willful acquisition of power.” • Anticompetitive intent to monopolize is difficult to prove. • Intent may be inferred from evidence that the firm had monopoly power and engaged in anticompetitive behavior. • Case 27.4: Aspen Skiing Co v. Aspen Highlands Skiing Corp.(1985).

21. Predatory Pricing • Predatory Pricing is the sale of products below cost. This is problematic for government attorneys because consumers benefit from low prices, giving them greater freedom of choice. • Remember Microsoft giving away its browser? • Predatory pricing is condemned because ultimately it leads to monopoly by driving competitors out of business. • Case 27.5: C.B. Trucking v. Waste Management (1996).

22. Attempts to Monopolize • Firm actions are scrutinized to determine whether they were intended to exclude competitors and garner monopoly power and had a “dangerous” probability of success. • Case 27.6: Caldera v. Microsoft (1999).

23. Law on the Web • Protecting Competition in Cyberspace • U.S. v. Microsoft (1999-2000) at Findlaw.com. • U.S. Department of Justice Antitrust Division. • American Bar Association’s website on antitrust law. • Legal Research Exercises on the Web