McGraw-Hill/Irwin©2007 by the McGraw-Hill Companies, Inc. All rights reserved. 10 Antitrust Law-Restraints of Trade

Antitrust Law-Restraints of Trade Key Points Identify the goals of antitrust law Understand horizontal restraints Price-fixing Refusal to deal Understand vertical restraints Resale price maintenance Tying arrangements Exclusive dealing and requirements contracts Price discrimination Chapter 10

Antitrust Goals 1.The preservation of competition 2.The preservation of democracy so that a few large businesses can’t corner economic, political or social power 3.The preservation of small business, that is, the preservation of the American dream 4.A tool for reshaping America to meet the needs of all of the people, rather than those of big business

Antitrust Statutes Sherman Antitrust Act (1890): Section 1 forbids restraints of trade Section 2 forbids monopolization, attempts to monopolize and conspiracies to monopolize Clayton Act (1914): Forbids price discrimination, exclusive dealing, tying arrangements, requirements contracts, mergers restraining commerce or tending to create a monopoly, and interlocking directorates Federal Trade Commission Act (FTC): Created the FTC to eliminate anticompetitive practices Section 5 declares unlawful “unfair methods of competition” and “unfair or deceptive acts or practices in or affecting commerce

Horizontal Restraints Definition: When competitors collude, conspire or agree among themselves they are engaging in horizontal restraints of trade; instead of competing to drive prices down and quality up, they may be fixing prices, restricting output and dividing territories Standard Oil (S. Ct. 1911): Only unreasonable restraints of trade are prohibited The Rule of Reason: Balance the pro- and anti-competitive effects of the situation in question Per se violations: Some antitrust violations, such as horizontal price fixing, are perceived to be so injurious to competition that their mere existence constitutes unlawful conduct

Horizontal Price-Fixing Standard: Competitors may not lawfully agree on prices Four Methods of proof: Agreement with direct evidence (e.g., writings or testimony) Agreement without direct evidence (i.e., proven by circumstantial evidence) Agreement based on a tacit understanding (e.g., the parties employ tactics that act as surrogates for direct assurances and thus “tell” each other that they are, in fact, in agreement) Agreement based on mutual observation (e.g., competitors anticipate each other’s future conduct and act accordingly without any direct collision but with results akin to those that would have resulted from a direct agreement) Contrast: Parallel conduct (i.e., independent but parallel business behavior) which is legal; business judgment had led each to independently follow parallel paths.

Examples Insurance bid rigging by insurance brokerage firm Marsh & McLennan Conspiracy to fix corn syrup prices by Archer Daniels Midland and others Global price-fixing by international vitamin manufacturers

Information Sharing Information sharing among competitors can be legal or illegal, based on whether it enhances efficiencies or restrains trade Primary analytical factors: Evidence of conscious parallelism “Plus factors,” such as motive to conspire and a high level of interfirm communication Example: Fears v. Wilhelmina Model Agency (S.D.N.Y. 2004)

Refusal to Deal (a/k/a Group Boycott) A horizontal group boycott involving a group with market power and no purpose other than restricting output or raising prices will probably be treated as a per se violation Other boycotts that have some lawful primary purpose are more likely to be subject to Rule of Reason analysis Noncommercial political boycotts (likely to be legal if impact 1 st Amendment rights) Example: U.S. v. Visa International and MasterCard International (2d Cir 2003)

Vertical Restraints Types: Resale price maintenance Tying arrangement Exclusive dealing and requirements contracts Price discrimination Analysis: Rule of Reason Example: Pricing of CDs in the ’90s

Resale Price Maintenance and Vertical Non-price Restraints Legitimate goals of resale price maintenance: By establishing a minimum prices, the product’s reputation for quality may be enhanced To prevent discount stores from undercutting regular retail outlets To prevent free riders (e.g., on national advertising campaigns) Colgate Doctrine: Sellers may lawfully engage in resale price maintenance if they do nothing more than specify prices at which their products are to be sold and unilaterally refuse to deal with anyone who does not adhere to those prices Rule of Reason analysis applies Example: Business Electronics v. Sharp Electronics (S. Ct. 1988)

Tying Arrangements Definition: Customer allowed to lease or buy a desired product (the tying product) only if she or he also leases or buys another product (the tied product) Concerns: Party who already enjoys market power over tying product is able to extend that power into tied product market Competitors in tied product market are foreclosed from equal access to that market Examples: Visa/MasterCard requiring vendors to accept their debit, as well as credit, cards Queen City Pizza v. Domino’s Pizza (3d Cir. 1997)

Tying Analysis Proof of the following conditions constitutes a per se tying violation: 1. Existence of separate products 2. Requirement that purchase of one product (tying product) is conditioned on purchase of another (tied product) 3. Market power in tying product 4. Substantial commerce in tied product is affected or, for some courts, a substantial anticompetitive effect in tied product market

Exclusive Dealing and Requirements Contracts Exclusive dealing contract: Agreement in which buyer commits itself to deal only with specific seller, thus cutting competing sellers out of share of market Requirements contract: Agreement in which seller agrees to supply all of buyer’s needs, or a buyer agrees to purchase all of seller’s output, or both Effects: May reduce or eliminate intrabrand competition May enhance interbrand competition Analysis: Rule of Reason

Price Discrimination Price discrimination (illegal): Selling substantially identical goods (not services) at reasonably contemporaneous times to different purchasers at different prices, where effect may be to substantially lessen competition or tend to create a monopoly Price discrimination (legal): Price differentials attributable to cost savings Price differentials attributable to good faith effort to meet equally low prices of competitor Price change in response to changing market Example: Intimate Bookshop v. Barnes & Noble (S.D.N.Y. 2005)

Predatory Pricing Definition: Lowering prices to drive out competition with expectation that it can recover any losses later by charging monopoly prices Proof: Prices set below average variable cost Ability to recoup in future through exercise of market power Example: American Airlines in Dallas-Fort Worth