1 What is antitrust/competition law? What is its purpose?

2 Concerned with: Concerned with: Fears of concentrations of economic power in the hands of a few Fears of concentrations of economic power in the hands of a few harmful effects of some forms of business cooperation harmful effects of some forms of business cooperation misuse of “monopoly” power misuse of “monopoly” power Simultaneous rise of regulatory agencies and antitrust law Simultaneous rise of regulatory agencies and antitrust law National laws: 1800s through early 1900s National laws: 1800s through early 1900s EU laws: 1980s EU laws: 1980s

3 History of Antitrust How did Standard Oil acquire market power? John D. Rockefeller believed that monopoly was beneficial because it protected members of an industry from “destructive competition.” What does that “destructive competition” mean? Destructive to whom?

4 Market divisions Price fixing & bid rigging Predatory pricing Boycotts Tying arrangements Mergers Misuse of monopoly power

5 Overview of Antitrust/Competition Laws Antitrust/Competition laws place faith in the market. EC Art. 81: EC Art. 81: prohibits agreements “ which have as their object or effect the prevention, restriction or distortion of competition within the common market” US Sherman Act: outlaws "every contract, combination..., or conspiracy, in restraint of trade"

6 Economic definition of monopoly Economic definition of monopolyvs. Legal definition of monopoly Legal definition of monopoly KEY: market power

7 Market Power “BAD” ACT Collusion Market share Monopoly power in another market Etc. Power to increase prices above “competitive” price Is the power to increase the market price sustainable? Ease of entry to market

8 Who decides what is “reasonable” or “unreasonable”?

9 EU: European Comm’n Competition Directorate  ECJ US: FTC/Justice Dept  US courts Private suits Defining “harm” – “per se” vs. “rule of reason” violations

10 Who decides what is “reasonable” or “unreasonable”? Structural approach Chicago School IO approach

11 Horizontal Agreements

12 Horizontal Agreements 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 EC Article 81 and §1 of the Sherman Act. When competitors agree on the prices at which they will buy or sell, their price-fixing is a per se violation of EC Article 81 and §1 of the Sherman Act. Pharmacists Airline ticket prices / retail gasoline prices Sports club owners World steel market and the EU Beer distributors and credit terms Trade shows Bid-rigging – public contracts Bid-rigging – public contracts

13 Horizontal Market Divisions Any effort by a group of competitors to divide its market is a violation of EC Article 81 and the Sherman Act Section 1. Any effort by a group of competitors to divide its market is a violation of EC Article 81 and the Sherman Act Section 1. Customer divisions: Customer divisions: By class (religion) By class (religion) Geographically (side of town) Geographically (side of town) Supply divisions: Supply divisions: We won’t sell X in competition with you, if you don’t sell Y in competition with us. We won’t sell X in competition with you, if you don’t sell Y in competition with us. E.g., two hardware stores in a small town agree that one will not stock plumbing equipment while the other will not stock electrical equipment E.g., two hardware stores in a small town agree that one will not stock plumbing equipment while the other will not stock electrical equipment OPEC production quotas OPEC production quotas

14 Horizontal Market Divisions What about joint ventures between competitors? What about joint ventures between competitors? What about professional codes of conduct: don’t these restrict competition? What about professional codes of conduct: don’t these restrict competition? What about franchising operations? Aren’t these geographic market divisions? What about franchising operations? Aren’t these geographic market divisions?

15 Illegal Horizontal Agreements (cont’d) Refusals to Deal / Boycotts Refusals to Deal / Boycotts Concerted refusals to deal vs. individual refusals Concerted refusals to deal vs. individual refusals A refusal to deal violates the law if it harms competition. A refusal to deal violates the law if it harms competition. South Improvement Scheme U.S. v. Hilton Hotels

16 Illegal Competition: Tying Arrangements Selling a product on the condition that the buyer also purchases a different (or tied) product. Selling a product on the condition that the buyer also purchases a different (or tied) product. To determine if it is illegal, ask: To determine if it is illegal, ask: Are the two products clearly separate? Are the two products clearly separate? Is the seller requiring the buyer to purchase the two products together? 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? 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? Is the seller shutting out a significant part of the market for the tied product?

17 Illegal Competition: Predatory Pricing Predatory pricing occurs when a company lowers its prices below cost to drive competitors out of business. Predatory pricing occurs when a company lowers its prices below cost to drive competitors out of business. The Walmart problem

18 Illegal Competition: Predatory Pricing To prove predatory pricing, show: To prove predatory pricing, show: The defendant is selling its products below cost. The defendant is selling its products below cost. The defendant intends that the plaintiff goes out of business, The defendant intends that the plaintiff goes out of business, If the plaintiff does 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. Bad intent is not enough; bad intent + fatal damage to competitor may not be enough Bad intent is not enough; bad intent + fatal damage to competitor may not be enough Why have such a test for predatory pricing?

19 Mergers and Joint Ventures Horizontal Mergers Horizontal Mergers A horizontal merger involves companies that compete in the same market. A horizontal merger involves companies that compete in the same market. FTC and European Commission halt/approve mergers, based on likely impact on competition: FTC and European Commission halt/approve mergers, based on likely impact on competition: as measure of market concentration: too much concentration creates rebuttable presumption of violation HHI as measure of market concentration: too much concentration creates rebuttable presumption of violation Herfindahl-Hirschman Index CalculatorHerfindahl-Hirschman Index Calculator = sum of the squares of the market shares of firms in industry. Threshold inquiry.

20 Mergers and Joint Ventures Horizontal Mergers Horizontal Mergers FTC and European Commission halt/approve mergers, based on likely impact on competition: FTC and European Commission halt/approve mergers, based on likely impact on competition: HHI as measure of market concentration: too much concentration creates rebuttable presumption of violation HHI as measure of market concentration: too much concentration creates rebuttable presumption of violation What is market? What is market? Product market: Product market: Geographic market Geographic market

21 Hewlett-Packard / Compaq merger Product Market? Geographic Market?

22 Hewlett-Packard / Compaq merger Product Market? Geographic Market? Laptops PCs workstations HHD Access Devices?

23 Hewlett-Packard / Compaq merger Product Market? Market shares? Access devices? Entry level servers? Geographic Market?EEA

24 Office Depot/Staples Merger Office Depot StaplesOther office supply

25 Mergers and Joint Ventures (cont’d) Vertical Mergers Key is foreclosure of opportunities for non-merging firms Key is foreclosure of opportunities for non-merging firms Time Warner – Turner Broadcasting What makes this merger worrisome for regulators? What makes this merger worrisome for regulators?