Antitrust – Prof. Edlin – Fall 2001

ISSUES

Intro

Values of competition

Market structure

Analytics

Monopoly (Sherman §2)

Elements

Monopoly Power

Purposeful Act

Vertical Integration

Predatory Pricing

Attempt to Monopolize

Horizontal Restraints (Sherman §1)

Elements

Agreement

Unreasonable restraint of trade

Rule of Reason

Per Se

Price fixing

Agreements restricting competition

Division of Markets

Per Se

Max Price Fixing

Per Se

ROR and Quick Look

Group boycotts/concerted refusals to deal

ROR

Influencing government action

Existence of Agreements

Facilitating Practices

Horizontal Mergers (Clayton §7)

Market Definition

Anticompetitive Effects

DOJ Guidelines

Presumptive Illegality

Vertical Restrains (Sherman §1)

Elements

Agreement

Unreasonable restraint of trade

Issue: Rule of Reason vs. Per Se

Resale Price Maintenance

Min price fixing – Per Se

Max price fixing – ROR

Sole Outlets/Exclusive Dealerships

ROR

Unilateral Refusals to Deal

ROR

Tying

Per Se and exceptions

Exclusive Dealing / Requirements Contracts

ROR

Vertical Mergers (Clayton §7)

ROR

Conglomerate Mergers

Analysis

ROR

  1. P shows anticompetitive effects in relevant market
  2. D shows pro-competitive justification
  3. P shows
  4. Less restrictive means available
  5. Anticompetitive effects outweigh pro-competitive effects

Per Se

  1. P shows naked restraint
  2. D has no opportunity to justify

“Quick Look” ROR

  1. P shows naked restraint
  2. Skips market definition and proof of anticompetitive effects
  3. D shows pro-competitive justification
  4. If justifications rejected, P does not have to show anti-competitive effects
  5. P shows
  1. Less restrictive means available
  2. Anticompetitive effects outweigh pro-competitive effect

ANTITRUST

1.  Introduction

a.  Other values of competition

i.  Income distribution, Opportunity distribution, fairness, stabilization

b.  Market Structure

  1. Monopoly, Oligopoly, Perfect Competition
  2. Perfect Competition
  3. Assumptions
  4. Many buyers/sellers
  5. Perfect information about prices
  6. Homogeneous products
  7. Price takers
  8. Conclusion
  9. Price = MC (cost of producing 1 additional unit)
  10. Efficient production
  11. wealth is maximized
  12. Monopoly
  13. Can restrict output
  14. Results in higher prices
  15. Textbook Problem
  16. Inefficient production
  17. Potential Problems
  18. High prices (transfers of wealth from buyers to sellers)
  19. Political: concentrations of power and wealth
  20. Rent seeking
  21. Less innovation?

ii. Barriers to Entry

  1. Blocked Access, Scale Economies, Capital Requirements, Product Differentiation

c.  Analytics

  1. Monopoly
  2. Profit maximizing Q occurs at MR=MC
  3. Note: P>MR=MC, MR<P because AR decreases with each additional unit produced (demand curve slopes down)
  4. Producer profit/surplus = total revenue - total cost
  5. Consumer surplus = value to consumers - amount they pay
  6. Inefficiency (dead weight loss)
  7. Compared against point of efficient production (?AR=MC)
  8. Where consumer surplus + producer surplus is maximized
  9. Competition
  10. Firm demand curve is flatter than under monopoly
  11. Totally flat under perfect competition (perfectly elastic)
  12. Profit maximizing Q occurs at MR=MC
  13. Note: P=MR=MC, MR=P because AR stays same with each additional unit (demand curve is flat)
  14. Efficient production: Consumer surplus + producer surplus is maximized

2.  Monopoly

  1. Sherman Act §2: “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nationals, shall be deemed guilty of a felony…”
  2. Covers monopolization, attempts and conspiracy
  3. §2 can be violated alone or in partnership
  4. Primary Policy: Consumer welfare
  5. Terms (447-48)
  6. Performance: economic appraisal
  7. Conduct
  8. Market, market definition
  9. Market Structure
  10. Market power: capacity to act other than as would a perfectly competitive firm
  11. focus: extent that firm’s most profitable prices exceeds competitive levels

vi.  Monopoly power: power to control prices or exclude competition in the relevant market

  1. “Rule of reason” (Standard Oil, Justice White)
  2. Monopoly alone is not illegal -- monopoly does not equal monopolization
  3. A monopoly is legal if it occurs by normal, proper business methods and practices
  4. Policy: monopolies will eventually disappear if there is freedom to contract
  5. Note: many policies behind antitrust fear even legal monopolies
  6. Improper monopolization depends on the intent and purposes of the defendant
  7. Elements of Monopolization (Grinnell)
  8. Monopoly Power
  9. The possession of monopoly power in a relevant market, and
  10. Purposeful Act
  11. The willful acquisition or maintenance of that power
  12. As opposed to growth or development due to superior product, business acumen, historic accident
  13. Undecided question: burden of proof
  14. Specific intent to monopolize not required

e.  Monopoly Power (Element #1)

  1. Market Power vs. Monopoly Power
  2. Market Power: the ability to raise prices above the competitive level
  3. occurs when demand is not perfectly elastic (Imperfect vs. perfect competition)
  4. Monopoly Power: the power to control prices or exclude competition in the relevant market (Cellophane)
  5. Substantial power over price
  6. Power to exclude competitors
  7. Analysis
  8. Steps:
  9. Market definition (product, geography)
  10. Shares
  11. Monopoly power determination
  12. Merger Guidelines Approach
  13. For a Hypothetical Monopolist:
  14. Is a small, non-transitory increase in price profitable?
  15. holding substitute prices fixed
  16. Tradeoff: Are gains from remaining customers greater than losses from switching/abstaining?
  17. If so, then relevant market exists
  18. Market Definition (next page)
  19. Market Definition
  20. Product Market
  21. Substitutability -- What products are reasonably interchangeable by consumer?
  22. Cross-elasticity of demand
  23. but high cross-elasticity may show that monopolist is already extracting maximum price/profits (Cellophane Trap)
  24. current price not always best measure for analyzing substitutes since monopolies price at level where raising prices will be unprofitable (MR=MC)
  25. Firm elasticity of demand
  26. Competition with other products
  27. Barriers to Entry
  28. Functional interchangeability with other products
  29. Specialized users vs. general users
  30. Elasticity of demand is an average of various users
  31. Narrow definition sometimes used
  32. ex – replacement parts for single brand, gospel music, championship boxing matches
  33. Example: Virgin vs. Recycled Aluminum (Alcoa)
  34. Geographic Market
  35. What geographic market can purchasers practically use?
  36. Substitutability depends on location of alternatives
  37. Supply Response
  38. Expansion by immediate competitors
  39. Entry: easy entry = no monopoly power
  40. Supply substitution
  41. Shares
  42. Market Share: high share raises presumption of monopoly power, low share does not (Alcoa)
  43. In excess of 70% generally sufficient
  44. Between 40% and 70% doubtful
  45. Below 40% generally not sufficient
  46. Note: Sec 2. requires higher shares than for M&A
  47. Note: market share substitute for market power, must analyze specifics of case
  48. Herfindahl-Hirschman Index (sum of square of shares) (see also merger guidelines)

f.  Purposeful Act (Element #2: Bad Act) (next page)

g.  Purposeful Act (Element #2: Bad Act)

  1. Deliberate or purposeful acts required (Alcoa, Justice Hand)
  2. Acts that themselves violate antirust laws
  3. Ex - Restraints of trade (Sherman Act §1), or (Clayton Act §7)
  4. Otherwise legal acts done purposefully and intentionally to acquire, maintain, or exercise monopoly power
  5. Note: unexerted market power alone not enough (US Steel)
  6. Specific intent for monopoly not required (as compared with attempt below)
  7. “no monopolist monopolizes unconscious of what he is doing” (Hand, Alcoa)
  8. but intent to do bad act still required
  9. Intent also used to help interpret whether bad act is exclusionary
  10. ?prima facie presumption of improper intent can be inferred from existence of market power
  11. ?Intent to monopolize can exist even if no predatory acts or apparent benefits from monopolization (Alcoa)
  12. Policies favoring a bad act requirement
  13. Market will be self-correcting absent exclusionary actions
  14. Encourage further innovation by monopoly holders
  15. Without a bad act, what would be the remedy?
  16. What actions does antitrust seek to deter
  17. Natural sense of fairness to successful competitors

h.  Defense: Innocently acquired or natural monopolies

  1. Unless monopoly power was attained by 1) superior skill, foresight, industry, or 2) thrust upon the D because of a thin market or economies of scale (natural monopolies)
  2. Limit: resulting monopoly power cannot be then used in a ruthless, predatory or exclusionary manner

i.  Examples of anticompetitive conduct

  1. Exclusionary conduct impairing competition
  2. Refusals to deal
  3. Monopoly leveraging
  4. Predatory pricing

j.  Exclusionary conduct impairing competition on merits

  1. Examples
  2. Increasing capacity in anticipation/advance of future demand (Alcoa)
  3. Extended lease-only policies (US Shoe)
  4. More difficult to switch to competitor
  5. No second-hand market
  6. Included Service (US Shoe)
  7. Creates barrier to entry
  8. No independent service market
  9. Especially a problem where service has increasing returns
  10. Return Charges waived or reduced (US Shoe)
  11. Raises cost to consumer of using competitors’ products
  12. Full Capacity clauses (US Shoe)
  13. Decreases experience with competitors’ products
  14. Reduces utility of competitors’ products
  15. Per-unit pricing
  16. Ex - Microsoft per-processor pricing for DOS
  17. Raises cost to consumer of using competitors’ products
  18. Analysis
  19. Is activity competition on merits or illegal exclusion? Look for:
  20. legitimate efficiency reasons
  21. hindrances to other firms

k.  Vertical Integration (next page)

l.  Vertical Integration

  1. Promotes efficiency (elimination of double-markup), but usually does not give monopolist any more control over market than she already has
  2. One Monopoly Profit Theorem: entire monopoly profit can be gained from one market, no advantage to monopolist of trying to leverage into 2nd market
  3. Note: regulation may cause distortions
  4. Potential problems
  5. increased ability to price discriminate
  6. increased barriers to entry
  7. Former monopoly’s refusal to deal with new competitors/customers (Otter Tail Power)
  8. general lessening of competition
  9. Refusals to Deal / Duty to Provide Access
  10. No general requirement that a company deal with competitors or particular downstream purchasers
  11. Exception: Duty to provide access required when access is necessary to compete
  12. Rule: Monopoly cannot take acts with exclusionary effect to competitors unless valid business reasons exist
  13. A monopolist is not barred from taking advantage of its efficiencies, but may not exclude or handicap its competitors, or use its monopoly power to further any domination of the relevant market
  14. Application of balancing test (law is unclear)
  15. Valid business reasons weighed against anti-competitive effects
  16. Does conduct unnecessarily exclude?
  17. Is there a less restrictive alternative?
  18. Examples
  19. Exclusionary acts by natural monopolies
  20. Former monopoly’s refusal to deal with new competitors/customers (Otter Tail Power) (see notes on p. 1035)
  21. Essential Facilities - monopolist may be required to share facility essential to competition on a reasonable, non-discriminatory basis (Terminal Railroad, 224 U.S. 383)
  22. Canceling existing deals (Aspen Skiing - see jury instructions)
  23. Monopolist may have a duty to continue marketing jointly with competitors if:
  24. such marketing originated in a competitive market and persisted for several years, and
  25. no valid business reasons exists for not continuing co-marketing
  26. Rationale: refusal to deal can be exclusionary act
  27. omission/comission
  28. Analysis: look for sacrifice (ie foregone sales/profits) that could be repaid after competition is lessened
  29. Leveraging (next page)

  1. Leveraging
  2. Definition: Use of monopoly power in one market to gain a competitive advantage in a second
  3. Split:
  4. 9th circuit: attempt to monopolize in second market required
  5. 2nd circuit: attempt to leverage for competitive advantage is sufficient (Berkey)
  6. But competitor access must be necessary for competition in second market
  7. Analysis: Is access necessary for competition or is there only a short term competitive advantage
  8. Mere association btw activities is not illegal (Berkey)
  9. Company can enjoy benefits to integration
  10. No general duty to disclose to competitors
  11. Note: in practice, these approaches are similar

m.  Predatory Pricing (next page)

n.  Predatory Pricing

  1. Definition: pricing below average or marginal cost
  2. SC uses average variable cost (dicta)
  3. alternative: short-run marginal cost (better, but hard to determine)
  4. Policy
  5. To eliminate anti-competitive pricing w/out chilling legitimate competition on price/price cuts
  6. Issues
  7. Defensive vs. Aggressive behavior
  8. Monopoly vs. Oligopoly
  9. Elements from SC Test (Brooke Group)
  10. Below cost pricing
  11. Dangerous probability that D will recoup lost money
  12. w/out recoupment, consumer welfare is benefited
  13. protects competition, not individual competitors
  14. Below cost pricing
  15. Options -- Current price is low relative to:
  16. earlier prices
  17. competitive prices (cost)
  18. price absent predation

2.  1st Circuit (Barry White)

a.  Price > AC not predatory, always lawful

b.  Rationale

i.  Pricing above average costs is usually sustainable

ii. Pricing less than monopoly price is beneficial

3.  9th Circuit approach (overruled?)

a.  Predatory pricing can occur below or above average variable cost

i.  Price < AVC is presumptively predatory

ii. AVC < Price < ATC requires preponderance of evidence that benefit is exclusionary

iii.  Price > ATC requires clear and convincing evidence of exclusionary tendency

b.  Predation exists where justification for lowered prices is based not on effectiveness but on tendency to eliminate rivals and create a market enabling seller to recoup losses

i.  Does away with rigid adherence to cost-based formula

  1. Recoupment
  2. P must show that D had a reasonable prospect of recouping its investment in below-cost pricing (Brooke Group)
  3. Unsuccessful predation is a boon to consumers
  4. Antitrust protects competition, not competitors
  5. Baseline: competitive prices or price absent predation?
  6. Note: recoupment requirement shifts analysis away from intent to effect
  7. Difficulty in Application
  8. Costs
  9. Economic vs. accounting
  10. Accounting can over/understate economic losses/gains
  11. Opportunity cost hard to measure
  12. Foregone revenues?
  13. Marginal vs. Variable vs. Total
  14. average variable costs
  15. average avoidable costs (AVC + fixed avoidable costs)
  16. MR<MC instead of P<AVC (MC)
  17. Problems: measurement, profit maximization test (P<∆C+∆R previous units)
  18. Foregone profits?
  19. Exceptions
  20. Promotions (loss leaders)
  21. Meeting Competition
  22. Add-ons (browsers + portal revenue)
  23. Right Rule?
  24. Strict predatory pricing rule deters entry by inefficient firms
  25. Pro: Keeps inefficient firms out of market
  26. Con: Delays theoretical move from monopoly to perfect competition
  27. Alternatives

o.  Attempt to monopolize

  1. Elements
  2. specific intent to monopolize
  3. unfair, predatory or anticompetitive conduct
  4. a dangerous probability that monopolization will result if the firm’s conduct is not prohibited
  5. Specific Intent required (Intent that goes beyond the mere intent to do the act)
  6. Intent to destroy competition or build monopoly
  7. proof must be more substantial than proof of deliberateness for actual monopolizing
  8. may be proved by inference from conduct
  9. Unfair Conduct required
  10. Examples
  11. Inducing boycott of competition (Lorain Journal)
  12. Discriminatory pricing
  13. Refusal of manufacturer to sell to independent dealer
  14. Requires dominant control of relevant market
  15. No per se conduct
  16. The greater the market power, the less offensive conduct required
  17. Aggressive competition is allowed, encouraged
  18. range of permissible conduct broader than for monopolization
  19. note: actual monopolization can occur through otherwise legal business practices
  20. Dangerous Probability (of acquiring monopoly power)
  21. Policy: Protects against rules that would chill competition
  22. relevant market analysis required to determine potential for monopoly power

3.  Horizontal Restraints / Collaboration among competitors

  1. Sherman Act §1: Every contract, combination…or conspiracy, in restraint of trade or commerce…is declared to be illegal
  2. policy: to prevent collaborative monopoly and its inefficiencies regarding resource allocation, reduction in total consumer/producer benefits, waste
  3. goes beyond common law
  4. one key result in US: elimination of open cartels
  5. C/L and early antitrust law (Ancillary vs. Naked Restraints)
  6. Naked -- illegal
  7. definition: sole consideration for one restraint is another restraint
  8. Ex - railroad rate fixing
  9. Ancillary -- legal
  10. definition: 1) lawful purpose to main agreement, 2) restraint tailored and limited to serve lawful purpose
  11. Example: noncompete w/ sale of business

b.  Elements