CHAPTER 38 Antitrust

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

In the Beginning… Sherman Act, passed in 1890, prohibits all agreements “in restraint of trade” and bans “monopolization.” Adherent of the “Chicago School” argue that the goal of antitrust enforcement should be efficiency; they ask, “Has competition been harmed?” instead of, “Has a competitor been harmed?”

Overview of Antitrust Laws The Clayton Act prohibits anticompetitive mergers, tying arrangements, and exclusive dealing agreements. The Robinson-Patman Act bans price discrimination that reduces competition. Violations of antitrust laws are divided into per se violations and “rule of reason” violations. Anyone injured by an antitrust violation has the right to sue for damages.

Violations Violations of antitrust laws are divided into two categories: Per se violations are automatically illegal, no matter what effect they have on competition. Rule of Reason violations are illegal only to the extent that they have an anticompetitive effect.

Competitive 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. Some cooperative strategies which may be illegal, include: Horizontal agreements Vertical agreements Mergers and joint ventures

Illegal Horizontal Agreements 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.

Illegal Vertical Agreements 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.

Mergers The Clayton Act prohibits mergers that are anticompetitive. Horizontal Mergers A horizontal merger involves companies that compete in the same market. Vertical Mergers A vertical merger involves companies at different stages of the production process.

Joint Ventures A joint venture is a partnership for a limited purpose—the companies do not combine permanently, they simply work together on a specific project. The government will usually permit a joint venture, even between competitors with significant market power.

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.

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 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.

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?

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.

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.

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 only illegal if it has an adverse effect on competition.

“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.”