Chapter Key Points Identify the goals of antitrust laws Understand the analysis of monopolization Identify both the potential benefits and harms of mergers Understand the evaluation of horizontal and vertical mergers 10 Antitrust Law—Monopolies And Mergers

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 businesses, 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. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

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.” McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Monopoly Definition: A monopoly is a situation in which one firm holds the power to control prices and/or exclude competition in a particular market. General test for illegal monopoly:  The possession of monopoly power in the relevant market and  The willful acquisition or maintenance of that power, as distinguished from growth or development as a consequence of a superior product, business acumen or historic accident. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Monopolization Analysis  Define the relevant product market. Key concept: Cross- elasticity of demand.  Define the relevant geographic market. Again, using the concept of elasticity.  Compute the defendant’s market power. [See next slide.]  Assess the defendant’s intent. Usually identified by deliberate actions by monopolist.  Raise any available defenses. For example, monopoly was “thrust upon” entity. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Market Power Rules of thumb:  >70% market share—monopoly power exists  40%<market share<70%--analyze to determine actual market power Characteristics of effective competition:  At least five reasonably comparable competitors  An absence of single-firm dominance  Reasonably free entry into and among all segments of the market McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Attempted Monopolization Attempted monopolization is illegal under the Sherman Act. Three-part test:  Defendant has engaged in predatory or anticompetitive conduct.  Defendant has a specific intent to monopolize.  There is a dangerous probability of achieving monopoly power. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Monopoly Case Examples  Microsoft: Held to have monopolized market for computer operating systems  U.S. v. Syufy Enterprises (9 th Cir. 1990):  Ownership of movie theaters in Law Vegas  Held that Syufy did not have power to exclude competition or control prices. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Mergers Selected beneficial effects possible from merging:  Permits the replacement of inefficient management and the threat of replacement may discipline managers to be more productive.  May permit stronger competition with previously larger rivals.  May improve credit access.  May produce efficiencies and economies of scale. Possible problems from merging:  Too much power concentrated in too few hands threatening economic well- being and undermining democracy.  A particular merger may trigger a merger movement among industry competitors.  Higher market concentration may lead to higher prices for consumer and lower prices for suppliers.  Innovation may be harmed as smaller companies grow into larger, more bureaucratic structures.  Some companies may become so large that we cannot allow them to fail. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Merger Types Horizontal merger: Involves firms that are in direct competition and occupy the same product and geographic markets. Vertical merger: Involves two or more firms at different levels of the same channel of distribution, such as a manufacturer and a supplier. Conglomerate merger: Involves firms dealing in unrelated products. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Hart-Scott-Rodino Antitrust Improvements Act (HSR)  Requires reporting and documentation of proposed mergers to FTC if:  After the merger, the acquirer will control >$200 million of stocks/assets of acquiree  One of the companies has >$100 million in sales/assets and the other has at least $10 million, or  After the merger, the acquirer will hold >$50 million of stocks/assets of acquiree  After receiving information, FTC determines whether to do nothing, require some divestitures, or challenge the merger in court. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Horizontal Analysis FTC/Justice Department concerns:  Collusion among large competitors  Unilateral effects in submarkets within a larger product category Five-step analysis: 1. Market defined as the smallest product and geographic market in which a hypothetical monopolist could raise prices a “small but significant and nontransitory” amount (usually set at 5%) 2. Measurement of market concentration using HHI (post-merger >1000 and a change >50) 3. Identification of likely anticompetitive effects 4. Likelihood of future entrants to the market 5. Appraisal of efficiencies and other possible defenses McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Vertical Analysis Definition: An Alliance between a supplier and a purchaser. Primary concern: Market foreclosure—The merger may deny a source of supply to a purchaser or an outlet for sale to a seller. Other concerns:  Raising rivals’ costs  Facilitating collusion  Raising barriers to entry  Increasing access to competitively sensitive information  Encouraging discrimination in access to products and services  Reducing incentives for innovation McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Antitrust and Global Competitiveness  More than 80 nations have antitrust laws.  Some mergers may require review by dozens of nations with differing timelines, procedures and document requirements.  The U.S., the E.U., Japan and Canada have antitrust cooperation agreements.  An International Competition Network was created in 2001 to encourage worldwide competition and to achieve greater convergence in merger policies. McGraw-Hill© 2004 The McGraw-Hill Companies, Inc. All rights reserved.