Antitrust Outline PDF

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I. INTRODUCTION Glossary: Naked Restraint: This rules is a shortcut to an evaluation which ultimately determines whether market price is raised above the competitive level. It is not likely to generate efficiencies and therefore requires no market analysis, although is not necessarily per se illegal. Usually requires Quick Look. Pricing Concepts: See Hand Out #2 (with my notes and answers added). The basic concept is that generally (1) MONOPOLY means highest prices (2) PURE COMPETITION (many equal producers) has lowest prices (3) CARTELS have the same prices as monopolies but profit is divided among the producers (4) MIXED COMPETITION (several producers but unequal) means prices will be higher than Pure Competition but lower than Monopoly. Happiness can be quantified in terms of dollars. There is more happiness under Pure Competition than Monopoly (See Hand Out #2). Reasons For Anti Trust There is more happiness under Pure Competition than Monopoly, so the law should generally favor pure competition. HOWEVER, monopolies in of themselves, are NOT illegal. Rather, predatory practices designed to MONOPOLIZE are illegal. In legal parlance, MONOPOLIZATION (a short hand term for the use of predatory practices to attain complete dominance of the market) is illegal. Mergers and monopolies are not always bad because without guaranteed prices or huge economies of scale, some industries would never form. For instance, utilities need a guarantee to make some profit, but then they're prices are also regulated by the government. History Anti-Trust original arose from agrarians who felt they were discriminated against by railroads which wanted to ship heavier products so they could charge more money (steel and oil were heavier than produce). Further, since railways could always ship industrial products instead of farm products they raised their prices to ship agrarian goods as well, besides using their cars to ship industrial products during harvest time. This resulted in the Granger Laws (1870s) regulating rail freight rates.

As the industrial age matured, companies centralized and good old boy standards gave way to ruthless robber baron competition with vicious underhanded methods of competing. Further, company boards were absorbed by trusts, which split legal ownership from control; i.e. the corporate boards of different sugar companies all located in NYS could all be reached by NYS law, but if their company stock was swapped with a Sugar Trust company stock, that Trust, located say in New Jersey or Nebraska could control all the individual company decisions without being subject to NYS law. In 1887 the Interstate Commerce Commission (ICC) was formed to regulate railroad rates and regulate interstate trade (this commission may have been abolished in the 1990s). In 1890, Congress passed the Sherman Anti-Trust Act to prevent trusts from forming anti-competitive agreements across state lines. Economic Theories (Prior To 1885) Laissez-Faire: Less government regulation is best. (1885) American Economic Association: Richard T. Ely and others believed the government should play an active role. (1890) John Bates Clark: Like Alfred Marshall, the great English neo-classical economist, believe that centralization leads to better technology and that better technology leads to more progress. Trusts, will helpful to centralization efforts also impeded competition and thus the free flow of good ideas which means technologies and progress are lost. Therefore, there should be an ideal model against which all other market mechanisms are judged: the Free Market. Why? Because the good company tries to sell few products at high prices, but the great company will prefer to sell huge amounts of products at low prices. But great firms cannot take hold if there are artificial market mechanisms opposed to them, set up by muscular centralized trusts. (1970s) Chicago School: (Judge Posner) Relies primarily on static micro-analysis, i.e. market action is governed by the rational economic motives focused on short-term cost minimization. Efficiency should be overriding concern aka ALLOCATIVE EFFICIENCY (allocation refers to scarce resources). Price restraints are bad, but vertical arrangements, market concentration and mergers should be presumptively ok. Least amount of government enforcement is the best. Chicago School Detractors: (1) Kenneth Arrow: Attacks Chicago School saying that irrationality is a big part of decisions; (2) Game Theory: There are plenty of reasons why economic decisions might not be rational, like lack of adequate information (3) Substantive Theory (Herbert A. Simon): Limited information limits rational choice. Strategic Behavior (Professors Krattenmaker and Salop): Firms seek to maximize their profits not be reducing their own costs which is competitive nor by excluding rivals

altogether from a market, which is anti-competitive, but by increasing costs to competing firms while incurring no or less cost to themselves. These strategies range from concerted efforts of allies to enlisting government support to create costly regulatory structures. Predatory pricing is another method. (1980s) Contestable Markets: Ease of entry into new markets without special costs to entrant that do not have to be borne by incumbent. Only firms that think they can undercut incumbent will enter the field. This theory has been adopted somewhat in the Merger Guidelines. (1980s) Network Externalities: Industries characterized by new technology. The value of the fax machine to the fax machine manufacturer is greater as more people own fax machines. In Economies of Scale (supply side) its the size of the capital investment that makes it worthwhile. In Network Externalities (demand side) it's the increased use of the product that makes it valuable. The concern for anti-trust is that the first technology to get foothold may not be the best and may foreclose better technologies (Windows over MAC). Again, the Merger Guidelines talk about this.

Enforcement 1890-1902: Lackluster enforcement in the beginning (with the Court's refusal to permit enforcement against trusts that didn't cross state lines, or sugar manufacturers that did cross state lines because sugar manufacturing wasn't sugar trading. Anti-Trust got underway with US v. Trans-Missouri Freight (1897) and US v. Joint Traffic Association (1898) where the government sued successfully an interstate association that set REASONABLE rates for freight, without even referencing whether the parties had the intent to restrain trade. And of course, the government won against Addyston Pipe & Steel (1898) which tried to fix prices and divide markets. 1903-1915: This period began with the first USC case ordering dissolution o merged corporations as a remedy under the Sherman Act (northern railroads, in the Northern Securities Co. v. US (1904)). The USDOJ Anti-Trust Division established in 1903. "Big Stick" Teddy policy carried on by Taft and Wilson. The US defeated Standard Trust and American Tobacco Company, a result of which was also the RULE OF REASON. Prohibition of TYING agreements. Enactment of the Clayton Act, forbidding certain mergers (which also gave rise to the Congressional practice of specifically exempting certain activities from anti-trust purview). Federal Trade Commission Act (FTCA) established the Federal Trade Commission (FTC). 1916-1935: Some major losses, like against US Steel and Chicago Board of Trade. However, FTC stopped several practices such as misbranding of goods, joint-venture associations, and basing points. At the beginning of the Depression, anti-trust enforcement ground to a halt to stimulate economy. 1936-1973: With the National Industry Recover Act (NIRA) declared unconstitutional,

economic theory switched to encouraging competition among firms to make them competitive. Therefore, anti-trust enforcement picked up. Economist theories begin to deviate from looking at the market as a perfect pure competitive model to one that is imperfect, exploring issues like brand names, oligopolies, monopolies. In the 1940s the economic model of Industrial Organizations stated that the more concentrated the industry the more likely there will be collusion. Harvard Professor Joseph Schumpeter said it was less market muscle and more technological superiority that drove competition. 1974-Date: In the 1970s there was a lack of literature that suggests even concentrated industries were competing effectively. Rise of Chicago School. It is now difficult to formulate clear anti-trust polices because (1) there are many gaps in economic theory (2) there may be conflicts among economies as to the competitive effects of particular practices (3) proper economic analysis requires long and short term analysis which is rarely practical. Also, "allocative efficiency" is difficult to define; is it: (1) best allocation requiring no other allocation (2) X-efficiency producing the most goods at the least cost (3) a long-run technological efficiency poor in the short run but rich later. Most commentators agree that practice that (1) materially impede progress (2) breach accepted norms of commercial rivalry without benefits and (3) impact a significant sector of the economy.

II. HORIZONTAL RESTRAINTS Quick Summary

PRICE FIXING Socony BMI NCAA Maricopa

BOYCOTTS Klor's/FOGA NW IFP SCTLA

TREATMENT Per Se Maybe RR; Not always Per Se Quick Look Back to Per Se Rule; Courts a bit unclear

What to Do: (1) ask if alleged violation is a type of conduct that the court has previously declared Per Se illegal; if Yes, then stop analysis right there; if no ask whether the likely purpose or effect of an agreement is to raise prices (Palmer v. BRG) (2) if NOT per se, but naked restraint or price or output, then apply Quick Look (3) if neither, but still restrains trade, apply Rule of Reason. Analyses: Per Se: No justification possible at all; Defendant loses. IS MARKET POWER NECESSARY? I don't think so, but try and check this out before exams. Quick Look: This is a half-way house, between Per Se and Rule of Reason: (1) Is it naked price or output restriction? If no, then can plaintiff show market power? If no, then defendant wins (1a) if plaintiff can show market power it is unclear what happens (2) if was naked price and output restriction originally, US v. NCAA said in dictum defendant would have "heavy burden" in showing pro-competitive justification, but 3rd circuit says that heavy burden was only because NCAA was so clearly anti-competitive (2a) if defendant cannot show pro-competitive benefits he loses (2b) if defendant can show procompetitive benefits, then the courts use a full Rule of Reason analysis. Rule of Reason: Weigh all pro and anti-competitive aspects, BUT NOT PUBLIC POLICY or SAFETY! Factors that may be considered are (1) structure of industry (2) facts peculiar to that firm's operation in that industry, including market power and position (3) the history and duration of the restraint and reasons for its adoption (Chicago Board of Trade, Professional Engineers). Per Se Violations: Rationale: Agreements to fix, raise, depress, stabilize, peg prices or output, EVEN IF REASONABLE or for non-economic public policy reasons, are per se illegal because they threaten the central nervous system of the economy. An UNLAWFUL PURPOSE OR ANTI-COMPETITIVE EFFECT is usually enough to find a Per Se violation. HOWEVER, if violation makes market more competitive it might justify Rule of Reason

analysis (Chicago Board of Trade & Appalachian Coal). 1.

Price and Output Fixing: (1) pure pricing fixing and purchase programs (Potteries/Socony) (2) maximum (Maricopa) (buyer) (3) minimum (Goldfarb) (4) list prices (manufacturers issuing list prices are ok, but dealers cannot agree to use them among themselves) (5) production limits (6) purchase limits/standards (Macaroni) (7) elimination of competitive bidding (Professional Engineers) (8) elimination of short-term credit (Catlono "Beer Case") (9) internal bids (Addyston) (10) blanket licenses (BMI, Zenith) (11) limitation of output (NCAA) (12) Financial Aid (Brown) (13) Professional Associations (Goldfarb/Professional Association, California Dental Association, ABA).

2.

Division of Markets: Create monopolies in territorial areas, WHETHER DIRECT OR INDIRECT (US v. Sealy was indirect case) even though some district courts are sympathetic to elimination of free riders. The types of prohibited divisions are: (1) territories (Addyston, Palmer v. BRG, Topco) (2) customers (3) products (Rothery: Product is Atlas Name). New Product: BMI, BRG, TOPCO all claimed they offered a new product that couldn't exist without restrictive agreement.

3.

Boycotts: 2 or more firms cannot agree to deal only on certain terms, coerce suppliers, customers or buyers. Procedure: Early cases saw Per Se treatment (Klor's), although other cases saw Rule of Reason (NW Wholesale Stationers) treatment, and Quick Look (Indiana Federation of Dentists (X-rays)) but recently Per Se reaffirmed (Superior Court Lawyers). HOWEVER, courts may be reluctant to find a boycott, for the reason it would be treated as Per Se Illegal. Types of Boycotts: (1) Against Retail Buyers (FSC, Klor's) (2) Through Industry Self-Regulation (Fashion Originators Guild) (Style Pirates) (3) In Heavily Regulated Industry (Silver v. NYSE) (5) Political (SCTLA) (6) Upstream (IFD xrays) Cooperative Cases: (JPL's own designation): US v. Terminal, AP News v. US, Silver v. NYSE, and NW Whole Stationers all dealt with self-regulation and got a more leeway in the way of Rule of Reason analysis. Expulsion from cooperatives not Per SE Illegal unless (1) cooperative has market power or (2) exclusive access.

Joint Ventures Joint Ventures: Undertaking by 2 or more businesses for limited purpose; something short of a merger. Joint Ventures for illegal purposes are illegal per se. Others may be upheld, liek for research projects or new products. Nature of industry is important.

II. HORIZONTAL RESTRAINTS Introduction: Horizontal Restraints are AGREEMENTS THAT RESTRAIN TRADE BETWEEN COMPETITORS. The 3 worst types of restraint that are Per Se Illegal are (1) price fixing (2) market allocations (3) boycotts aka concerted refusals to deal. Per Se Questions: Under the Per Se Approach, courts limit their inquiry into such factors as the subjective intent of the parties, relevant markets, and market power. Rule of Reason: The major question is whether or not on balance the arrangement was anticompetitive or pro-competitive; NOT whether the agreement had other public benefits such as safety. ALMOST ALWAYS, agreements made for primary purpose of safety of the public should go through Congress. For example, in National Society of Engineers v. US (1978), the defendants argued that their anti-competitive agreement was made to ensure public safety by allegedly removing engineers from the pressure of competitive bidding. The Court said only inquiry was whether the agreement promoted competition.

A.

Per Se Rule v. Rule of Reason What Type of Agreements Are Illegal? Originally, it was unclear if the Sherman Act (1) condemned ALL AGREEMENTS that RESTRAINED trade OR (2) only agreements that UNREASONABLY restrained trade. Before 1911, US Supreme Court Says ALL Agreements in Restraint of Trade: There were 2 pivotal cases where the US Supreme Court ruled that ALL agreements in restraint of trade were illegal: (1) US v. Trans-Missouri Freight Association (1897) and (2) US v. Joint Traffic Association (1898) (No information on either case available). US v. Addyston Pipe & Steel Co (6th Circuit, AFFIRMED, 1898) Bucks Draconian Interpretation: Product: Cast Iron Pipe Substance: Price Fixing, Market Division Procedure: Pre-Creation of Rule of Reason About the same time as the US Supreme Court's draconian interpretation of the Sherman Act that all agreements to restrain trade were illegal regardless of their reasonableness, Justice Taft of the 6th Circuit Court in US v. Addyston Pipe & Steel Co (1898), adopted an approach of examining the reasonability of the restraint of the agreement. Facts: Six cast-iron pipe manufacturers controlling 30% of the nation's market, formed an association to eliminate price competition among its members by collectively responding to requested price quotes by buyers. For instance, prior to the formation of the association, municipalities would request price quotes from

several of these manufacturers and receive different quotes, and would buy from the lower quote. Now that municipality would receive either all the same price, or the association would determine which bidding manufacture would "win" the bid. The Scheme had 3 parts: (1) Reserved Cities: Manufacturers nearest to the buying city has the right to submit the lowest bid by paying a fee to the association, which meant that other manufacturers agreed to submit HIGHER bids so that they would not be selected. Of course, given the high cost of shipping heavy iron pipes on trains which charge by the weight of the freight, it is unlikely that competing manufacturers could match the price of the nearest competitor anyway. One wonders why this was a component of the association agreement, since it penalizes manufacturers nearest to the largest cities with the greatest need of cast iron pipes and rewards manufacturers furthest from cities or from cities with a large demand. (2) Free Territory: Association members could submit whatever bids they wanted to without paying any fee to the association in this area, comprising about 12 states in the northeast. This area was dominated by nine competitor firms NOT in the association, all of which together had MORE manufacturing muscle than the entire association. Therefore, the association had no power to enforce any agreement against these competitors, and thus could not guarantee prices for their members. (3) Pay Territory: This area comprised the rest of the nation. Price was determined by the association and the right to bid was auctioned off with the proceeds going to the "losers" of the bid. This resembles a cartel system. Interestingly, firms within the association would try and "cheat" each other. How? Take an example. Assume, the Association fixed the "selling price" at $26 per pipe to an outside City buyer, and the cost of each pipe was $20. In theory an internal auction would go as high as $5.99, which meant that the "winning" firm would get paid $26 per cast iron pipe, $20 of which would cover the cost of manufacturing it, $5.99 which would go to the association, and $0.01 which would be pure profit. The bidding wouldn't be any lower, because if a firm wanted to bid $5 (which would mean an entire $1 per pipe profit instead of $0.01), it knows another firm would bid $5.50 or even the full $5.99. However, there would be enormous internal cheating as well. How? The other five firms might purposely submit lower bids to lose the action. Why? Sure they would lose the $0.01 profit, but they would be paid a fee $5.99 divided by 5 firms, for doing absolutely nothing. They wouldn't

even have to go through the trouble of manufacturing and shipping pipes. They could sit idly by and suck in the money. INTERNAL CHEATING IS ALWAYS A PROBLEM. The government sued the members of the association saying they violated the Sherman Act. Taft, rather than dismiss claims of reasonable restraint out of hand, adopted a view based on the common law of contracts. Common Law of Contracts: Contract Common Law did not prohibit all restraints on trade but only unreasonable ones. For instance, if A contracts to sell his business to B, B has a right to establish reasonable restrictions on A not to compete too close to B, or not to compete with B for a certain number of years. The reasonableness of the restrictions depends on the main purpose of the contract. Taft's Ruling: As in the Common Law of Contracts, the main purpose of the contract suggests the measure of protection needed. Therefore, where there was no legitimate main purpose, the agreement to restrain was invalid. Interpreted more simply, where the MAIN purpose of the agreement is ONLY to raise price, the agreement is illegal, even if there are ...