Promoting Competition

1. BUSINESS LAW TODAYEssentials 9th Ed.Roger LeRoy Miller - Institute for University Studies, Arlington, TexasGaylord A. Jentz - University of Texas at Austin, Emeritus Chapter 22 Promoting Competition

2. Learning Objectives • What is a monopoly? What is market power? How do these concepts relate to each other? • What type of activity is prohibited by Sections 1 and 2 of the Sherman Act? • What are the four major provisions of the Clayton Act and what types of activities do these provisions prohibit? • What agencies of the federal government enforce the federal antitrust laws? • What four activities are exempt from antitrust laws?

3. Introduction • 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.

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. • Jurisdictional Requirements.

5. Section 1 of the Sherman Act • Section 1 regulates what are called “horizontal” and “vertical” restraints. • Per se violations vs. the Rule of Reason. • Per se violations are blatant and substantially anticompetitive. • Rule of reason agreements do not unreasonably restrain trade.

6. Horizontal Restraints Seller Seller Seller Buyer Buyer Buyer • Horizontal restraints are agreements among Sellers (or Buyers) that restrain competition between rival firms competing in the same market.

7. 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.

8. 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.

9. Horizontal Restraints: Horizontal 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.

10. Horizontal Restraints: Trade Associations • Industry specific organizations created to provide for the exchange of information, representation of the business interests before governmental bodies, advertising campaigns, and setting of regulatory standards to govern their industry or profession. • 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.

11. Vertical Restraints Seller Buyer Buyer Buyer Vertical restraints are per se anticompetitive agreements imposed by Sellers upon Buyers (or vice versa) that may include affiliates in the entire supply chain of production.

12. Vertical Restraints • Agreements between firms at different levels of the manufacturing and distribution process. • Vertical restraints may restrain competition among firms that occupy the same level in chain. • Vertical restraints that significantly affect competition may be per se violations.

13. 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.

14. Vertical Restraints: Resale Price Maintenance Agreements • An 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. • CASE 22.1Leegin Creative Leather Products, Inc. v. PSKS, Inc. (2007). The Supreme Court held that the per se rule did not apply to “minimum resale prices.”

15. Section 2 of the Sherman Antitrust Act • Section 2 of the Sherman Antitrust Act deals with: • Monopolization. • Attempts to monopolize. • Predatory pricing. • Attempt by a firm to drive its competitor from the market by selling its product at prices substantially below the normal costs of production.

16. Monopoly Power • Monopolization in violation of the act requires two elements: • The possession of monopoly power and • The willful acquisition and maintenance of the power. • Exists when one firm has sufficient market power to control prices and exclude competition.

17. Monopoly: Relevant Market • Before court can determine whether firm has dominant market share, it must define the “relevant market” which consists of two elements: (1) relevant product market, and (2) relevant geographic market.

18. The Intent Requirement • 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. • In certain circumstances, a unilateral refusal to deal my violate antitrust laws.

19. 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 22.2Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co. (2007). Held: for Weyerhaeuser. Supreme Court held the same standards apply to both predatory pricing as well as predatory bidding.

20. The Clayton Act • The Clayton Act (Robinson-Patman Act) deals with: • Price Discrimination. • Exclusionary Practices. • Mergers. • Interlocking Directorates.

21. Section 2: Price Discrimination • Price discrimination is the charging of different prices to competing buyers for identical goods. Exceptions: • Charge of lower price was temporary and in good faith to meet another seller’s equally low price to the buyer’s competitor. • A particular buyer’s purchases saved the seller costs in producing and selling the good. • Defenses: Cost Justification, Meeting the Price of Competition, and Changing Market Conditions.

22. Section 3: Exclusionary Practices • Exclusive Dealing Contracts. • A contract under which a seller forbids a buyer to purchase products from the seller’s competitors. • Prohibited if the effect of the contract is to “substantially lessen competition or tend to create a monopoly.” • 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.

23. Section 7: Mergers • Horizontal Mergers occur between firms at the same level in the production and distribution chain. • CASE 22.3Chicago Bridge & Iron Co. v. Federal Trade Commission (2008). Using the Herfindahl-Hirschman Index, FTC correctly calculated that CB&I’s acquisition of Pitt-Des Moines violated Section 7 of the Clayton Act. • Vertical Mergers occur between firms at different levels in the production and distribution chain.

24. Section 8: Interlocking Directorates • Occurs when an individual serves on the board of directors of two or more competing companies simultaneously. • These are prohibited if the two firms meet certain size requirements.

25. Enforcement and Exemptions • Agency Actions: • U.S. Department of Justice. • The Federal Trade Commission 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.”

26. Private Actions • Private party injured under the Sherman or Clayton Act can: • Sue for damages and attorneys fees. • Plaintiff must prove: • Antitrust violation either caused or was a substantial factor in plaintiff’s injury, and the unlawful actions of Defendant affected Plaintiff’s business protected by antitrust laws. • Treble Damages.

27. Exemptions 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. • And Others.

28. U.S. Antitrust Laws in the Global Context • Section 1 of the Sherman Act provides for application of antitrust laws on any foreign conspiracy, by companies or individuals, that has a “substantial effect” on U.S. commerce. • Jurisdiction is automatic when there is a per se violation.