What is antitrust law?

1. What is antitrust law? • History: late 19th/early 20th century • Fears of concentrations of economic power in the hands of a few • Recall common law rules against restraints of trade (sales of business/employment contracts) • Concerned with: • harmful effects of some forms of business cooperation • misuse of “monopoly” power • Faith in the competitive market • Simultaneous rise of regulatory agencies and antitrust law: “regulated industries exception”

2. Overview of Antitrust Laws • The Sherman Act (1890) prohibits all agreements “in restraint of trade” (various forms of anti-competitive agreements) and bans “monopolization” (attempts to form a harmful monopoly) • The Clayton Act (1914) prohibits anticompetitive mergers (those that create harmful monopoly power), tying arrangements and exclusive dealing agreements. • Federal Trade Commission Act (1914) created the FTC, an independent executive branch agency to supplement judicial enforcement.

3. Overview (cont’d) • “Per se” vs. “rule of reason” violations. Former are violations even the absence of harm to consumer. • Enforcement: • U.S. Department of Justice (attorneys) bring judicial enforcement actions (civil and criminal) • Federal Trade Commission brings administrative (civil) enforcement actions • Private litigation: party injured by violation can seek “treble damages”

4. Sources of Confusion in Antitrust Law • Changing philosophies over time: • Movement away from presuming harm to consumer (per se violations) and toward requiring government/plaintiff to prove harm (increasing application of rule of reason) • Movement towards greater focus on effect on consumer in the long run • DOJ/FTC enforcement policies vary according to the preferences of the presidential administration

5. Sources of Confusion in Antitrust Law • Economic definition of monopoly vs. • Legal definition of monopoly KEY: market power

6. Sources of Confusion in Antitrust Law • Business competitors that fail to compete with one another (by cooperating illegally) violate the antitrust laws. • BUT, businesses that compete too aggressively also violate the antitrust laws • Forms of competition that are not illegal for one firm (a non-monopolist) may be illegal for another (a monopolist)

7. Competitive vs. Cooperative Strategies • Some competitive strategies which may be illegal include: • Tying arrangements • Exclusive dealing contracts • Improper monopolistic practices • Some cooperative strategies which may be illegal, include: • Horizontal arrangements • Vertical arrangements • Mergers and monopoly power

8. Cooperative Strategies, Scenario 1: In 1910, the small town of Fort William has only two pharmacists. One pharmacist is Catholic, the other Protestant. The town is segregated by religion, and the Catholic pharmacist is located on the Catholic side of town; the Protestant pharmacist on the Protestant side of town. But some Catholics shop at the Protestant pharmacist’s shop, and some Protestants at the Catholic pharmacist’s shop. The two pharmacists agree that each will refrain from advertising their products to customers on the other’s side of town. Every Sunday, the two pharmacists meet in the park and arrange to sell their products at identical prices. VIOLATION OF ANTITRUST LAWS?

9. Horizontal Divisions • Any effort by a group of competitors to divide its market is a per se violation of §1 of the Sherman Act. • Customer divisions: • By class (religion) • Geographically (side of town) • Supply divisions: • We won’t sell X in competition with you, if you don’t sell Y in competition with us. • E.g., two hardware stores in a small town agree that one will not stock plumbing equipment while the other will not stock electrical equipment • Palmer v. BRG of Georgia, Inc.

10. Illegal Horizontal Agreements (cont’d) • Price Fixing and Bid Rigging • When competitors agree on the prices at which they will buy or sell, their price-fixing is a per se violation of §1 of the Sherman Act. • Pharmacists • Major league baseball: arbitration collusion vs. salary cap • Trade shows • Fixers must be able to exert market power • Bid-rigging is also a per se violation. • Catalano Inc. v. Target Sales, Inc.

11. Illegal Horizontal Agreements (cont’d) • Refusals to Deal • Concerted refusals to deal vs. individual refusals • A refusal to deal violates the Sherman Act if it harms competition. • Fashion Originator’s Guild v. FTC

12. Vertical Agreements, Scenario 2: Acme, the world’s largest producer of anvils, has a new Wood Products division that manufactures saws, lathes, and a variety of other woodworking tools. Acme has no retail outlets of its own, but sells its products to several major retail chains, who make the retail sales. Acme has worked very hard to produce products that are price-competitive with Black and Decker and other major manufacturers. To gain market share, Acme requires buyers of its anvils to also purchase for resale Acme’s new wood products. VIOLATION OF ANTITRUST LAWS?

13. Illegal Competition: Tying Arrangements • Selling a product on the condition that the buyer also purchases a different (or tied) product. • To determine if it is illegal, ask: • Are the two products clearly separate? • Is the seller requiring the buyer to purchase the two products together? • Does the seller have significant power in the market for the tying product? • Is the seller shutting out a significant part of the market for the tied product? • Eastman Kodak v. ITS

14. Vertical Arrangements: Resale Price Maintenance • Resale price maintenance (RPM) means that the manufacturer sets minimum prices that retailers may charge, eliminating discounting of certain products. Why do this? • What about resale agreements setting maximum prices?

15. Illegal Vertical Arrangements: Exclusive Dealing • Contract in which buyer agrees not to buy from seller’s competitors • Usually between manufacturer/supplier and retailer • Illegal if the effect is “to substantially lessen competition” • Standard Oil case (1949)

16. Controlling Distributors and Retailers • Allocating Customers and Territory • A vertical allocation of customers or territory is illegal only if it adversely affects competition in the market as a whole. • E.g., licensing within a brand is OK • Key is effect on inter-brand competition • Continental v. GTE Sylvania

17. Scenario 3: Acme, the world’s largest producer of anvils, controls 65% of the American anvil market, and 25% of the world market. A British firm, UKAnvils, controls 40% of the world market, but only 10% of the American market. UKAnvils wants to increase their market share in the U.S. When UKAnvils begins to erode Acme’s American market share, the two firms begin merger negotiations, and ultimately decide that Acme will purchase UKAnvils. VIOLATION OF ANTITRUST LAWS?

18. Mergers and Joint Ventures • Horizontal Mergers • A horizontal merger involves companies that compete in the same market. • FTC halts/approves mergers, based on likely impact on competition: • HHI as measure of market concentration: too much concentration creates rebuttable presumption of violation • What is market? Product market: • Office Depot/Staples case (local markets) • Flexible wrap case case • Geographic market

19. Mergers and Joint Ventures (cont’d) • Vertical Mergers • A vertical merger involves companies at different stages of the production process. • Key is whether foreclosure of opportunities for non-merging firms

20. Illegal Competition: Predatory Pricing • Predatory pricing occurs when a company lowers its prices below cost to drive competitors out of business. • To prove predatory pricing, show: • defendant is selling its products below cost. • 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. • Bad intent is not enough; bad intent + fatal damage to competitor may not be enough

21. Monopolization • Under §2 of the Act, it is illegal to monopolize or attempt to monopolize. • To tell if a monopoly is illegal, ask: • What is the market? • Does the company control the market? • No matter what your market shares, you do not have a monopoly unless you can exclude competitors or control prices.

22. Monopolization (cont’d) • How did the monopolist acquire or maintain control? • Possessing a monopoly used to be illegal; probably not any more • using “bad acts” to acquire or maintain one is. • What kind of bad acts? Anticompetitive behavior • Other antitrust violations • Predatory pricing • Tying arrangements • Exclusive dealing/refusals to deal • KEY: did/will behavior “diminish competition”

23. Microsoft Example HISTORY: Microsoft used its dominance in the operating system (OS) market to leverage PC makers into using only Microsoft software applications. DOJ and Microsoft entered a consent agreement in which Microsoft agreed not to tie products together in this way. DOJ claimed Microsoft violated the consent agreement: you be the judge.

24. Microsoft Example DISTRICT COURT DECISION/ ISSUE #1: RELEVANT MARKET: “Microsoft possesses a dominant, persistent, and increasing share of the world- wide market for Intel-compatible PC operating systems. Every year for the last decade, Microsoft's share of the market for Intel-compatible PC operating systems has stood above ninety percent. Even if Apple's Mac OS were included in the relevant market, Microsoft's share would still stand well above eighty percent. …”

25. MICROSOFT ARGUMENT: Our monopoly cannot hurt consumers for two reasons: • Innovation in the computer industry is so fast that any monopoly is inherently unstable. If we are inefficient, we will lose our monopoly. • Our industry is characterized by “network effects” – i.e., the value of the product increases as it is more widely used. These two characteristics mean that consumers benefit (and costs of production decrease) from a monopoly, AND that the monopoly nevertheless must be efficient (keep costs down) to survive.

26. Microsoft Example DISTRICT COURT DECISION/ISSUE #1: HOW MICROSOFT DEFENDED ITS OPERATING SYSTEM (WINDOWS) MONOPOLY: • Vs. Netscape’s browser’s potential development as an “operating platform” in lieu of Windows: “As soon as Netscape released Navigator on December 15, 1994, the product began to enjoy dramatic acceptance by the public ... This alarmed Microsoft, which feared that Navigator's enthusiastic reception could embolden Netscape to develop Navigator into an alternative platform for applications development.”

27. Microsoft Example ISSUE #1 (cont’d): A.Defending Windows against Netscape (cont’d): Microsoft offered to leave the browser market for non-windows machines to Netscape (i.e., not to develop a version of Internet Explorer for those machines) and to give Netscape preferred access to information about new versions of Windows IF Netscape would refrain from developing its produce as a “platform” that could support applications.

28. Microsoft Example ISSUE #1 (cont’d): A.Defending Windows against Netscape (cont’d): When Netscape refused to cooperate with Microsoft, Gates sought to limit other companies’ use of the Netscape Browser. “Apple was installing Netscape at the default browser on its machines. … Ninety percent of Mac OS users were running a suite of office productivity applications [called] Microsoft's Mac Office.” “Microsoft threatened to cancel the product unless . . . Apple distributed and promoted Internet Explorer, as opposed to Navigator, with the Mac OS.” Apple agreed.

29. Microsoft Example ISSUE #1 (cont’d): • Defending Windows against Sun Microsystems: “The inventors of Java at Sun Microsystems intended the technology to enable applications written in the Java language to run on a variety of platforms . . . [so that] a program written in Java . . . will run on any PC system.” Wanted Java to be windows-compatible, but …

30. Microsoft Example ISSUE #1 (cont’d): • Defending Windows against Sun Microsystems (cont’d): “Microsoft designed its Java developer tools to encourage developers to write their Java applications using certain "keywords" and "compiler directives" that could only be executed properly by Microsoft's version of the . . .” “Microsoft encouraged developers to use these extensions by shipping its developer tools with the extensions enabled by default and by failing to warn developers that their use would result in applications that might not run properly with any [version of Java] other than Microsoft's . . .”

31. Microsoft Example ISSUE #2: OTHER MISUSES OF MONOPOLY POWER • Vs. Intel “Although Intel is engaged principally in the design and manufacture of microprocessors, it also develops some software.. . .” At a meeting, “Gates told [Intel CEO] Grove that he had a fundamental problem with Intel using revenues from its microprocessor business to fund the development and distribution of free platform-level software. In fact, Gates said, Intel could not count on Microsoft to support Intel's next generation of microprocessors as long as Intel was developing platform-level software that competed with Windows.”

32. Microsoft Example ISSUE #2 (cont’d): MISUSES OF MONOPOLY POWER • Vs. Intel (cont’d) “Intel's senior executives knew full well that Intel would have difficultly selling PC microprocessors if Microsoft stopped cooperating in making them compatible with Windows and if Microsoft stated to [PC manufacturers] that it did not support Intel's chips. Faced with Gates’ threat, Intel agreed to stop developing platform-level interfaces that might draw support away from interfaces exposed by Windows. . .”

33. Microsoft Example ISSUE #2 (cont’d): MISUSES OF MONOPOLY POWER B. Vs. Apple “QuickTime is Apple's software architecture for creating, editing, publishing, and playing back multimedia content. . . . QuickTime competes with Microsoft's own multimedia technologies . . .” “Microsoft tried to persuade Apple to stop producing a Windows 95 version of its multimedia playback software …” In return, Microsoft offered to cooperate with Apple in a joint multimedia product. “Microsoft's representatives made it clear that, if Apple continued to market multimedia playback software for Windows 95 that Microsoft would enter the authoring business to ensure that those writing multimedia content for Windows 95 would use Microsoft's product instead of Apple’s.”

34. Microsoft Example ISSUE #2 (cont’d): MISUSES OF MONOPOLY POWER C. Vs. IBM IBM makes PCs, operating systems (OS/2) and software. “Microsoft tried to convince IBM to move its business away from products that themselves competed directly with Windows (OS) and Office (software) . . . . When IBM refused to abate the promotion of those of its own products that competed with Windows and Office, Microsoft punished the IBM PC Company with higher prices, a late license for Windows 95, and the withholding of technical and marketing support.”