1. © 2004 West Legal Studies in Business A Division of Thomson Learning 1 Chapter 26 Antitrust and Monopoly

2. © 2004 West Legal Studies in Business A Division of Thomson Learning 2 IntroductionIntroduction Generally, the law encourages innovation and competition among businesses to develop and sell more appealing products to consumers. Generally, the law encourages innovation and competition among businesses to develop and sell more appealing products to consumers. The law regulates conduct that leads to or tends to produce monopoly power or conduct that is a restraint of trade. The law regulates conduct that leads to or tends to produce monopoly power or conduct that is a restraint of trade. This chapter will deal with federal laws regulating monopolies; Chapter 28 will deal with federal laws regulating activities that restrain trade. This chapter will deal with federal laws regulating monopolies; Chapter 28 will deal with federal laws regulating activities that restrain trade.

3. © 2004 West Legal Studies in Business A Division of Thomson Learning 3 §1: Market Power “Market power” is the power of company to control the market for its product. “Market power” is the power of company to control the market for its product. The law does allow for market monopolies when a patent is issued. During the “monopoly” the patent owner is protected from competition in the market to manufacture and sell its patented product or service. The law does allow for market monopolies when a patent is issued. During the “monopoly” the patent owner is protected from competition in the market to manufacture and sell its patented product or service.

4. © 2004 West Legal Studies in Business A Division of Thomson Learning 4 Goals of Antitrust Law Market power per se is not “bad.” Market power per se is not “bad.” What is bad or illegal is how the market power is acquired and what firms do once they have that power. What is bad or illegal is how the market power is acquired and what firms do once they have that power. Antitrust laws regulate the market power of companies to promote competition. Antitrust laws regulate the market power of companies to promote competition.

5. © 2004 West Legal Studies in Business A Division of Thomson Learning 5 §2: The Common Law and the Restraint of Trade Socially beneficial business activity involves cooperation and competition. Socially beneficial business activity involves cooperation and competition. The law presumes freedom of contract, except when a contract is contrary to public policy, like price fixing and restraint of trade. The law presumes freedom of contract, except when a contract is contrary to public policy, like price fixing and restraint of trade.

6. © 2004 West Legal Studies in Business A Division of Thomson Learning 6 §3: The Origins of Federal Antitrust Legislation In the late 1800’s, as westward expansion continued, the common law became impotent to meet the challenges of the new industrial age. In the late 1800’s, as westward expansion continued, the common law became impotent to meet the challenges of the new industrial age. Companies like Standard Oil (Rockefeller) became “trusts” which began to control the entire market. Companies like Standard Oil (Rockefeller) became “trusts” which began to control the entire market. Thus the Congress was involved in “anti-trust” legislation. Thus the Congress was involved in “anti-trust” legislation.

7. © 2004 West Legal Studies in Business A Division of Thomson Learning 7 The Federal Response Congress responded with the Interstate Commerce Act of 1887 and the Sherman Act of 1890. Congress responded with the Interstate Commerce Act of 1887 and the Sherman Act of 1890. The Clayton Act. The Clayton Act. The Federal Trade Commission Act authorized to prevent and correct unfair trade practices. The Federal Trade Commission Act authorized to prevent and correct unfair trade practices.Federal Trade Commission Federal Trade Commission

8. © 2004 West Legal Studies in Business A Division of Thomson Learning 8 § 4: Overview of the Major Federal Antitrust Laws : The Sherman Act § 4: Overview of the Major Federal Antitrust Laws : The Sherman Act Section 1 and 2 contain the main provisions of the Sherman Act: Section 1 and 2 contain the main provisions of the Sherman Act:  Section 1. »Requires two or more persons, as a person cannot contract, combine, or conspire alone. »Concerned with finding an agreement.  Section 2. »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.

9. © 2004 West Legal Studies in Business A Division of Thomson Learning 9 Restraint of Trade Restraint of Trade Restraint of trade is any agreement between firms that has the effect of reducing competition in the marketplace. Restraint of trade is any agreement between firms that has the effect of reducing competition in the marketplace.

10. © 2004 West Legal Studies in Business A Division of Thomson Learning 10 The Clayton Act In contrast to the Sherman Acts broad proscriptions, the Clayton Act deals with very specific practices: In contrast to the Sherman Acts broad proscriptions, the Clayton Act deals with very specific practices:  Price Discrimination: When sellers charge different buyers different prices for the same goods.  Exclusionary Practices: no exclusive-dealing or “tie-in” sales agreements.  Corporate Mergers: forbidden if it substantially lessens competition.

11. © 2004 West Legal Studies in Business A Division of Thomson Learning 11 Federal Trade Commission Act The FTC’ sole substantive area is “unfair methods of competition” or “deceptive acts or practices” affecting commerce. The FTC’ sole substantive area is “unfair methods of competition” or “deceptive acts or practices” affecting commerce. The FTC’s act is a “catchall.” The FTC’s act is a “catchall.”

12. © 2004 West Legal Studies in Business A Division of Thomson Learning 12 §5: Enforcement of the Antitrust Laws The Sherman Act only applies to conduct that has a significant impact on interstate commerce. So courts presumably only have jurisdiction if the commerce is interstate. The Sherman Act only applies to conduct that has a significant impact on interstate commerce. So courts presumably only have jurisdiction if the commerce is interstate. Can the Sherman Act regulate a “local” activity? Can the Sherman Act regulate a “local” activity? The DOJ enforces the Sherman Act. The DOJ enforces the Sherman Act.

13. © 2004 West Legal Studies in Business A Division of Thomson Learning 13 Private Actions Under the Clayton Act a private party can sue for treble damages (3 times the damages she has suffered) plus attorney’s fees. Under the Clayton Act a private party can sue for treble damages (3 times the damages she has suffered) plus attorney’s fees. Under the Sherman Act, the Plaintiff must show: Under the Sherman Act, the Plaintiff must show:  Defendant’s antitrust violations directly or indirectly caused injury; and  Defendant’s actions affected protected interests of the Plaintiff. Case 26.1: Paper Systems, Inc. v. Nippon Paper Industries Co. (2002). Case 26.1: Paper Systems, Inc. v. Nippon Paper Industries Co. (2002).

14. © 2004 West Legal Studies in Business A Division of Thomson Learning 14 §6: U.S. Antitrust Laws in a Global Context Foreign “persons” may sue U.S. companies for antitrust violations in U.S. courts, even if the violations occur outside of the U.S.. Foreign “persons” may sue U.S. companies for antitrust violations in U.S. courts, even if the violations occur outside of the U.S.. These violations occur in the export, trade or commerce with foreign nations. These violations occur in the export, trade or commerce with foreign nations.

15. © 2004 West Legal Studies in Business A Division of Thomson Learning 15 § 7: Exemptions Most statutory exemptions to the antitrust laws apply to the following areas: Most statutory exemptions to the antitrust laws apply to the following areas: »Labor. »Agricultural associations and fisheries. »Insurance. »Foreign trade. »Professional baseball. »Cooperative research and production. »Joint efforts y businesspersons to obtain legislative or executive action. »Other.

16. © 2004 West Legal Studies in Business A Division of Thomson Learning 16 § 8: Monopolies Section 2 of the Sherman Antitrust Act deals with: Section 2 of the Sherman Antitrust Act deals with:  Monopolization or attempts to monopolize; and  Predatory pricing which is an attempt by a firm to drive its competitor from the market by selling its product at prices substantially below the normal costs of production.

17. © 2004 West Legal Studies in Business A Division of Thomson Learning 17 MonopolizationMonopolization Monopolization in violation of the Sherman Act requires two elements: Monopolization in violation of the Sherman Act requires two elements:  The possession of monopoly power; and  The willful acquisition and maintenance of the power. United States v. Grinnell Corp. (1966) United States v. Grinnell Corp. United States v. Grinnell Corp. The U.S. Supreme Court has defined monopolization as “the power to control prices or exclude competition.” The U.S. Supreme Court has defined monopolization as “the power to control prices or exclude competition.”

18. © 2004 West Legal Studies in Business A Division of Thomson Learning 18 Monopoly Power Exists when one firm has sufficient market power to control prices and exclude competition. Exists when one firm has sufficient market power to control prices and exclude competition.

19. © 2004 West Legal Studies in Business A Division of Thomson Learning 19 Market Power Market power is often assessed by the use of the “Market-Share” test. Market power is often assessed by the use of the “Market-Share” test.  As a rule of thumb, if a firm has 70% or more of a relevant market, it is regarded as having monopoly power. Market includes both Product and Geographical Markets. Market includes both Product and Geographical Markets. Case 26.2: Godix Equipment Export Corp. v. Caterpillar, Inc. (1996). Case 26.2: Godix Equipment Export Corp. v. Caterpillar, Inc. (1996).

20. © 2004 West Legal Studies in Business A Division of Thomson Learning 20 Anticompetitive Behavior Anticompetitive behavior must be “willful acquisition of power.” Anticompetitive behavior must be “willful acquisition of power.” Anticompetitive intent to monopolize is difficult to prove. 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. Intent may be inferred from evidence that the firm had monopoly power and engaged in anticompetitive behavior. Case 26.3: United States v. Microsoft Corp. (2001). Case 26.3: United States v. Microsoft Corp. (2001).

21. © 2004 West Legal Studies in Business A Division of Thomson Learning 21 Predatory Pricing Predatory Pricing is the sale of products below cost. This is problematic for government attorneys because consumers benefit from low prices, giving them greater freedom of choice. Predatory Pricing is the sale of products below cost. This is problematic for government attorneys because consumers benefit from low prices, giving them greater freedom of choice.  Remember Microsoft giving away its browser? Predatory pricing is condemned because ultimately it leads to monopoly by driving competitors out of business. Predatory pricing is condemned because ultimately it leads to monopoly by driving competitors out of business. Case 26.4: C.B. Trucking v. Waste Management (1996). Case 26.4: C.B. Trucking v. Waste Management (1996).

22. © 2004 West Legal Studies in Business A Division of Thomson Learning 22 Attempts to Monopolize Firm actions are scrutinized to determine whether they were intended to exclude competitors and garner monopoly power and had a “dangerous” probability of success. Firm actions are scrutinized to determine whether they were intended to exclude competitors and garner monopoly power and had a “dangerous” probability of success.

23. © 2004 West Legal Studies in Business A Division of Thomson Learning 23 Law on the Web U.S. Department of Justice Antitrust Division. U.S. Department of Justice Antitrust Division. U.S. Department of Justice Antitrust Division U.S. Department of Justice Antitrust Division American Bar Association’s website on antitrust law. American Bar Association’s website on antitrust law. American Bar Association’s website on antitrust law American Bar Association’s website on antitrust law Legal Research Exercises on the Web. Legal Research Exercises on the Web. Legal Research Exercises on the Web. Legal Research Exercises on the Web.