1. COPYRIGHT © 2011 South-Western/Cengage Learning. 1 Click your mouse anywhere on the screen to advance the text in each slide. After the starburst appears, click a blue triangle to move to the next slide or previous slide.

2. COPYRIGHT © 2011 South-Western/Cengage Learning. 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. COPYRIGHT © 2011 South-Western/Cengage Learning. 3 Overview of Antitrust Laws  Sherman Act prohibits all agreements “in restraint of trade” and bans “monopolization.”  Adherents of the “Chicago School” in the 1960’s and 1970’s argued that the goal of antitrust enforcement should be efficiency. They asked, “Has competition been harmed?” instead of, “Has a competitor been harmed?”  Recently, “Post-Chicago School” thought has focused more on the consumer, asking, “Will this action cause consumers to pay higher prices?” and, “Are the higher prices sustainable in the face of existing competition?”  The Clayton Act prohibits anticompetitive mergers, tying arrangements, and exclusive dealing agreements.  The Robinson-Patman Act bans price discrimination that reduces competition.

4. COPYRIGHT © 2011 South-Western/Cengage Learning. 4 Violations  Violations of antitrust laws are divided into two categories: Per se violations are automatically illegal, no matter what effect they have on competition. –Per se violations may be subject to both civil and criminal penalties. Rule of Reason violations are illegal only to the extent that they have an anticompetitive effect.

5. COPYRIGHT © 2011 South-Western/Cengage Learning. 5 Options for Strategies  For a competitive strategy, managers may consider two approaches: Cooperative strategies, where companies work together to their mutual advantage. Aggressive strategies, designed to create an advantage over competitors.

6. COPYRIGHT © 2011 South-Western/Cengage Learning. 6 Cooperative Strategies  Some cooperative strategies, which may be illegal, include: Horizontal agreements Vertical agreements Mergers and joint ventures

7. COPYRIGHT © 2011 South-Western/Cengage Learning. 7 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, their price-fixing is a per se violation of §1 of the Sherman Act. Bid-rigging is also a per se violation.  Refusals to Deal A refusal to deal violates the Sherman Act if it harms competition.

8. COPYRIGHT © 2011 South-Western/Cengage Learning. 8 Vertical Cooperative Strategies  Reciprocal Dealing Agreements: When a buyer refuses to purchase goods from a supplier unless the supplier also purchases items from the buyer.  Price Discrimination It is illegal to charge different prices to different purchasers if: –the items are the same, and –the price discrimination lessens competition. However, it is legal to charge a lower price to a particular buyer, if: –the costs of serving this buyer are lower, or –the seller is simply meeting competition.

9. COPYRIGHT © 2011 South-Western/Cengage Learning. 9 Mergers and Joint Ventures  The Clayton Act prohibits mergers that are anticompetitive.  Horizontal Mergers A horizontal merger involves companies that compete in the same market; illegal if it could lead to a monopoly.  Vertical Mergers A vertical merger involves companies at different stages of the production process; usually not illegal, unless it increases entry barriers.  Joint Ventures The government will usually allow joint ventures – companies joining temporarily for a specific project.

10. COPYRIGHT © 2011 South-Western/Cengage Learning. 10 Aggressive Strategies  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. How did they acquire or maintain control? –Possessing a monopoly is may not be illegal; using “bad acts” to acquire or maintain one is.

11. COPYRIGHT © 2011 South-Western/Cengage Learning. 11 Predatory Pricing  Predatory pricing occurs when a company lowers its prices below cost to drive competitors out of business.  To prove predatory pricing, show: The defendant is selling its products below cost. The defendant intends that the plaintiff go 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.

12. COPYRIGHT © 2011 South-Western/Cengage Learning. 12 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?

13. COPYRIGHT © 2011 South-Western/Cengage Learning. 13 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.  Exclusive Dealing Agreements An exclusive dealing contract is one in which a distributor or retailer agrees with a supplier not to carry the products of any other supplier. These may be illegal if they severely limit the competition.

14. COPYRIGHT © 2011 South-Western/Cengage Learning. 14 Resale Price Maintenance  Resale price maintenance (RPM) means that the manufacturer sets minimum prices that retailers may charge, eliminating discounting of certain products. Manufacturers may want to set minimum prices to build loyalty with distributors or to maintain an upscale image or to reduce competition among its distributors.

15. COPYRIGHT © 2011 South-Western/Cengage Learning. 15 Resale Price Maintenance (cont’d)  RPM is a per se violation of the law. A manufacturer may not enter into an agreement with distributors to fix prices.  Vertical Maximum Price-Fixing Vertical maximum price fixing (manufacturer setting maximum retail price) is a rule of reason violation and is only illegal if it has an adverse effect on competition.

16. COPYRIGHT © 2011 South-Western/Cengage Learning. 16 “Lawmakers are continually seeking the right balance between healthy competition and destructive aggression. In the end, antitrust laws benefit us all, as they ensure the fair and open competition necessary for a healthy economy.” “Lawmakers are continually seeking the right balance between healthy competition and destructive aggression. In the end, antitrust laws benefit us all, as they ensure the fair and open competition necessary for a healthy economy.”