1. Emerging Issues in Management (Mgmt 440) Antitrust (Chapter 9) Professor Charles H. Smith Fall 2011

2. Introduction to Antitrust Congress started passing laws in the late 19 th Century in response to businessmen (e.g., John D. Rockefeller) who were perceived to have so much power that it restrained competition Congress started passing laws in the late 19 th Century in response to businessmen (e.g., John D. Rockefeller) who were perceived to have so much power that it restrained competition These restraints of trade were contrary to capitalism’s fundamental premises of competition and how free market’s “invisible hand” sets prices, etc. instead of wrongful conduct of those in commerce. These restraints of trade were contrary to capitalism’s fundamental premises of competition and how free market’s “invisible hand” sets prices, etc. instead of wrongful conduct of those in commerce. We will limit our coverage of antitrust to Sections 1 and 2 of the Sherman Act. We will limit our coverage of antitrust to Sections 1 and 2 of the Sherman Act.

3. Sherman Act – Section 1 Section 1 violation involves some sort of agreement/conspiracy between 2 or more people/businesses. Section 1 violation involves some sort of agreement/conspiracy between 2 or more people/businesses. Therefore, action that is merely concurrent or otherwise coincidental is not Section 1 violation. Therefore, action that is merely concurrent or otherwise coincidental is not Section 1 violation. Section 1 violation can be “horizontal” (between competitors) or “vertical” (between seller and buyer) Section 1 violation can be “horizontal” (between competitors) or “vertical” (between seller and buyer) Four levels of typical economic model are manufacturers, wholesalers, retailers and consumers. Four levels of typical economic model are manufacturers, wholesalers, retailers and consumers. “Per se” rule (“you did it, you’re guilty”) usually applied in Section 1 cases “Per se” rule (“you did it, you’re guilty”) usually applied in Section 1 cases Only defense – did not commit the act. Only defense – did not commit the act. Vertical price-fixing cases governed by “rule of reason” – defenses are did not commit the act and defendant acted reasonably given the circumstances. Vertical price-fixing cases governed by “rule of reason” – defenses are did not commit the act and defendant acted reasonably given the circumstances.

4. Sherman Act – Section 1 cont. Examples of Section 1 violations Examples of Section 1 violations Price-fixing Price-fixing Horizontal. Horizontal. Vertical. Vertical. Market division Market division Horizontal only. Horizontal only. Group boycott Group boycott Horizontal only. Horizontal only. Tying arrangement Tying arrangement Vertical only. Vertical only.

5. Sherman Act – Section 2 Two-step analysis used to decide whether a business is a “monopoly” in violation of Section 2 Two-step analysis used to decide whether a business is a “monopoly” in violation of Section 2 1 st – structural analysis re relevant product or geographic market determines whether defendant’s market share is too high 1 st – structural analysis re relevant product or geographic market determines whether defendant’s market share is too high Usually at least 65% of relevant market). Usually at least 65% of relevant market). This determination often decides case. This determination often decides case. 2 nd – did defendant do something wrong to obtain high market share 2 nd – did defendant do something wrong to obtain high market share Often shown by Section 1 violation or some other violation of federal or state law. Often shown by Section 1 violation or some other violation of federal or state law. Hard work, creativity, luck, etc. – OK. Hard work, creativity, luck, etc. – OK. Example – “Monopoly” on page 269. Example – “Monopoly” on page 269.

6. Sherman Act – Enforcement Issues The federal government is charged with enforcing the Sherman Act The federal government is charged with enforcing the Sherman Act What factors might influence the government to file or not file a case? What factors might influence the government to file or not file a case? Clayton Act Section 4 permits private enforcement of Sherman Act violations Clayton Act Section 4 permits private enforcement of Sherman Act violations What circumstances could motivate a private business to file a lawsuit based on the Sherman Act? What circumstances could motivate a private business to file a lawsuit based on the Sherman Act?

7. Sherman Act – Case Studies “Price Fixing in the Airways” on pages 289-90 – read on your own before class and then discuss the Preparation Questions in class with small groups. “Price Fixing in the Airways” on pages 289-90 – read on your own before class and then discuss the Preparation Questions in class with small groups. “The Microsoft Antitrust Case” on pages 294- 301 – read on your own before class and then discuss the Preparation Questions in class with small groups. “The Microsoft Antitrust Case” on pages 294- 301 – read on your own before class and then discuss the Preparation Questions in class with small groups.