1. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1 Promoting Competition Chapter 22 BUSINESS LAW TODAY Essentials 9 th Ed. Roger LeRoy Miller - Institute for University Studies, Arlington, Texas Gaylord A. Jentz - University of Texas at Austin, Emeritus

2. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2 Learning Objectives  What is a monopoly? What is market power? How do these concepts relate to each other?  What type of activity is prohibited by Sections 1 and 2 of the Sherman Act?  What are the four major provisions of the Clayton Act and what types of activities do these provisions prohibit?  What agencies of the federal government enforce the federal antitrust laws?  What four activities are exempt from antitrust laws?

3. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3  Common law actions intended to limit restraints on trade and regulate economic competition.  Embodied almost entirely in: The Sherman Antitrust Act of 1890. The Sherman Antitrust Act of 1890. The Clayton Act of 1914. The Clayton Act of 1914. Introduction

4. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4  Section 1 and 2 contain the main provisions of the Sherman Act. Section 1: Section 1: Requires two or more persons, as a person cannot contract, combine, or conspire alone.Requires two or more persons, as a person cannot contract, combine, or conspire alone. Concerned with finding an agreement.Concerned with finding an agreement. Section 2: Section 2: Applies both to an individual person and to several people, because it refers to every person.Applies both to an individual person and to several people, because it refers to every person. Deals with the structure of monopolies in the marketplace.Deals with the structure of monopolies in the marketplace.  Jurisdictional Requirements. The Sherman Antitrust Act

5. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5  Section 1 regulates what are called “horizontal” and “vertical” restraints.  Per se violations vs. the Rule of Reason. Per se violations are blatant and substantially anticompetitive. Per se violations are blatant and substantially anticompetitive. Rule of reason agreements do not unreasonably restrain trade. Rule of reason agreements do not unreasonably restrain trade. Section 1 of the Sherman Act

6. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Horizontal restraints are agreements among Sellers (or Buyers) that restrain competition between rival firms competing in the same market. Seller Buyer Seller Buyer Horizontal Restraints

7. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7  An agreement between competing firms in the market to set an established price for the goods or services they offer.  Price fixing is a per se violation of the Act. Horizontal Restraints: Price Fixing

8. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8  Agreement between two or more sellers to refuse to deal with a particular person or firm.  Group boycotts are per se violations of the Act. Horizontal Restraints: Group Boycotts

9. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9  Occurs when competitors in the same market agree that each will have exclusive rights to operate in a particular geographic area.  Horizontal market divisions are per se violations of the Act. Horizontal Restraints: Horizontal Market Division

10. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10  Industry specific organizations created to provide for the exchange of information, representation of the business interests before governmental bodies, advertising campaigns, and setting of regulatory standards to govern their industry or profession.  Rule of reason is applied to determine if a violation of the Act has occurred.  Concentrated Industry: small firms control large percentage of market sales. Horizontal Restraints: Trade Associations

11. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Vertical restraints are per se anticompetitive agreements imposed by Sellers upon Buyers (or vice versa) that may include affiliates in the entire supply chain of production. Buyer Seller Buyer Vertical Restraints

12. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 12  Agreements between firms at different levels of the manufacturing and distribution process.  Vertical restraints may restrain competition among firms that occupy the same level in chain.  Vertical restraints that significantly affect competition may be per se violations. Vertical Restraints

13. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13  Imposed by manufacturers on the sellers of the products, to insulate dealers from direct competition with each other.  Territorial and customer restrictions are judged under the rule of reason. Vertical Restraints: Territorial or Customer Restrictions

14. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 14  An agreements between a manufacturer and a distributor or retailer in which the manufacturer specifies the retail price at which retailers must sell products furnished by the manufacturer or distributor.  This is a type of vertical restraint and is normally a per se violation.  CASE 22.1 Leegin Creative Leather Products, Inc. v. PSKS, Inc. (2007). The Supreme Court held that the per se rule did not apply to “minimum resale prices.” Vertical Restraints: Resale Price Maintenance Agreements

15. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15  Section 2 of the Sherman Antitrust Act deals with: Monopolization. Monopolization. Attempts to monopolize. Attempts to monopolize.  Predatory pricing. Attempt by a firm to drive its competitor from the market by selling its product at prices substantially below the normal costs of production. Attempt by a firm to drive its competitor from the market by selling its product at prices substantially below the normal costs of production. Section 2 of the Sherman Antitrust Act

16. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16  Monopolization in violation of the act requires two elements: The possession of monopoly power and The possession of monopoly power and The willful acquisition and maintenance of the power. The willful acquisition and maintenance of the power.  Exists when one firm has sufficient market power to control prices and exclude competition. Monopoly Power

17. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 17  Before court can determine whether firm has dominant market share, it must define the “relevant market” which consists of two elements: (1) relevant product market, and (2) relevant geographic market. Monopoly: Relevant Market

18. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 18  Anticompetitive behavior must be “willful acquisition of power.”  Anticompetitive intent to monopolize is difficult to prove.  Intent may be inferred from evidence that the firm had monopoly power and engaged in anticompetitive behavior.  In certain circumstances, a unilateral refusal to deal my violate antitrust laws. The Intent Requirement

19. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 19  Firm actions are scrutinized to determine whether they were intended to exclude competitors and garner monopoly power and had a “dangerous” probability of success.  CASE 22.2 Weyerhaeuser Co. v. Ross- Simmons Hardwood Lumber Co. (2007). Held: for Weyerhaeuser. Supreme Court held the same standards apply to both predatory pricing as well as predatory bidding. Attempts to Monopolize

20. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 20  The Clayton Act (Robinson-Patman Act) deals with: Price Discrimination. Price Discrimination. Exclusionary Practices. Exclusionary Practices. Mergers. Mergers. Interlocking Directorates. Interlocking Directorates. The Clayton Act

21. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 21  Price discrimination is the charging of different prices to competing buyers for identical goods. Exceptions: Charge of lower price was temporary and in good faith to meet another seller’s equally low price to the buyer’s competitor. Charge of lower price was temporary and in good faith to meet another seller’s equally low price to the buyer’s competitor. A particular buyer’s purchases saved the seller costs in producing and selling the good. A particular buyer’s purchases saved the seller costs in producing and selling the good.  Defenses: Cost Justification, Meeting the Price of Competition, and Changing Market Conditions. Section 2: Price Discrimination

22. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 22  Exclusive Dealing Contracts. A contract under which a seller forbids a buyer to purchase products from the seller’s competitors. A contract under which a seller forbids a buyer to purchase products from the seller’s competitors. Prohibited if the effect of the contract is to “substantially lessen competition or tend to create a monopoly.” Prohibited if the effect of the contract is to “substantially lessen competition or tend to create a monopoly.”  Tying Arrangements. The conditioning of the sale of a product on the buyer’s agreement to purchase another product produced or distributed by the same seller. The conditioning of the sale of a product on the buyer’s agreement to purchase another product produced or distributed by the same seller. Section 3: Exclusionary Practices

23. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 23  Horizontal Mergers occur between firms at the same level in the production and distribution chain.  CASE 22.3 Chicago Bridge & Iron Co. v. Federal Trade Commission (2008). Using the Herfindahl-Hirschman Index, FTC correctly calculated that CB&I’s acquisition of Pitt-Des Moines violated Section 7 of the Clayton Act.  Vertical Mergers occur between firms at different levels in the production and distribution chain. Section 7: Mergers

24. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 24  Occurs when an individual serves on the board of directors of two or more competing companies simultaneously.  These are prohibited if the two firms meet certain size requirements. Section 8: Interlocking Directorates

25. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 25  Agency Actions: U.S. Department of Justice. U.S. Department of Justice. The Federal Trade Commission enforces the FTCA. FTCA provides that: The Federal Trade Commission enforces the FTCA. FTCA provides that:Federal Trade CommissionFederal Trade Commission “Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce are hereby declared illegal.”“Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce are hereby declared illegal.” Enforcement and Exemptions

26. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 26 Private Actions  Private party injured under the Sherman or Clayton Act can: Sue for damages and attorneys fees. Sue for damages and attorneys fees. Plaintiff must prove: Plaintiff must prove: Antitrust violation either caused or was a substantial factor in plaintiff’s injury, and the unlawful actions of Defendant affected Plaintiff’s business protected by antitrust laws.Antitrust violation either caused or was a substantial factor in plaintiff’s injury, and the unlawful actions of Defendant affected Plaintiff’s business protected by antitrust laws. Treble Damages. Treble Damages.

27. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 27  Most statutory exemptions to the antitrust laws apply to the following areas:  Labor. Labor. Agricultural associations and fisheries. Agricultural associations and fisheries. Insurance. Insurance. Foreign trade. Foreign trade. Professional baseball. Professional baseball. Cooperative research and production Cooperative research and production Joint efforts y businesspersons to obtain legislative or executive action. Joint efforts y businesspersons to obtain legislative or executive action. And Others. And Others. Exemptions from Antitrust Laws

28. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 28 U.S. Antitrust Laws in the Global Context  Section 1 of the Sherman Act provides for application of antitrust laws on any foreign conspiracy, by companies or individuals, that has a “substantial effect” on U.S. commerce.  Jurisdiction is automatic when there is a per se violation.