ANTITRUST OUTLINE

I. INTRODUCTION AND OVERVIEW

A. THE LAW AND ECONOMICS OF ANTITRUST

1. Introduction: Antitrust promotes competition out of the belief that competition
presses producers to satisfy consumer wants at the lowest price while using the
fewest resources. Producer rivalry lets consumers bid for goods and services,
thus matching their desires with society’s opportunity costs.
2. Some Basic Explanations and Behavioral Assumptions: Antitrust tries to assure
that the gap between the ideal of competition and the reality of some forms of
private rule does not grow dangerously wide.
a. The Demand Schedule: When economists refer to “demand,” they are
identifying a demand schedule—a statement of the different quantities of
a good or service that a consumer would buy at each of several different
price levels. Because the amount of an item that a person will purchase
cannot be determined without also considering its price, demand cannot
be identified as a set, specific quantity. Rather, the demand for a product
consists of a range of alternative quantities. The basic rule is that the
value a consumer will attach to successive units of a commodity
diminishes as her total consumption of that commodity increases. In
other words, the quantity demanded varies inversely with price; the
demand curve is negatively or downwardly sloped.
b. Profit-Maximizing Behavior by Firms: In making production decisions,
the firm will adhere to the principle of substitution—that for a given set
of technical possibilities, efficient (profit-maximizing) production will
substitute cheaper factors for more expensive ones. Efficient production
generally means that a firm will seek the lowest possible costs for a
particular rate of output. A profit-maximizing firm will increase
production when the additional revenue exceeds the additional costs.
That is, the firm will expand its output as long as the marginal, or last,
unit add more to revenues than it does to costs—namely, as long as the
marginal revenue exceeds or equals marginal cost.
P MC (marginal cost)

p E (Profit Maximization)

MR (marginal revenue)

q Q
3. Basic Economic Models: Economic theory traditionally concludes that the
structure of an industry affects its behavior and, ultimately, its performance.

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a. Perfect Competition: Perfect competition describes a market where
consumer interests are controlling. The market is efficient in the sense
that no rearrangement of production or distribution will improve the
position of any consumer or seller. Societal wealth is maximized
because resources are put to their highest valued use and output is
optimal. The following conditions are useful in predicting whether
competitive behavior is likely in a market: (1) there are many buyers and
sellers; (2) the quantity of the market’s products bought by any buyer or
sold by any seller is so small relative to the total quantity traded that
changes in these quantities leave market prices unaffected; (3) the
product is homogenous; no buyer has a reason to prefer a particular seller
and vice versa; (4) all buyers and sellers have perfect information about
market prices and the nature of the goods sold; (5) there is complete
freedom of entry into and exit out of the market.

P
MC

(Output of a Competitive Industry)

D
Q

In a perfectly competitive market, the individual firm is merely a

quantity adjuster. All firms sell at marginal cost and earn only a normal
return on investment. Each firm takes a price as set by the market; no
firm can affect the price by adjusting output by raising or lowering price.
Each firm strives to maximize profits by adjusting its output until its
marginal costs equals the prevailing market price.
b. Monopoly: A seller with monopoly power restricts her output in order to
raise her price and maximize her profits. Not only does this transfer
output and may relieve the producer of pressure to innovate or otherwise
be efficient. Monopoly markets are often described by three structural
and functional factors: (1) one seller occupies the entire market; (2) the
seller’s product is unique (i.e. there are no substitutes); (3) substantial
barriers bar entry by other firms into the industry, exit is difficult. For a
competitive seller marginal revenue is the same at all output levels; the
monopolist, on the other hand, finds marginal revenue always less than
price because her demand curve slopes downward. As a result, the
monopolist faces a choice on production and price: either sell at a higher
price (with fewer unit sales) or sell at a lower price (with greater unit
sales). In making this choice, the monopolist will maximize profits at
less than the competitive output level—namely, where marginal revenue
equals marginal cost. Thus, contrary to the competitive result, the

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 monopolist will maximize profits by restricting output and setting price
above marginal cost.

MC
P

pm
(Profit Maximizing Monopolist)

qm Q
MR

The monopolist maximizes her profit by producing an output quantity

where her marginal revenue equals marginal cost and by charging
whatever price her demand curve reveals is necessary to sell that output.
In other words. The monopolist will increase her output only as long as
her profits increase.
c. Competition and Monopoly Compared: Compared to perfect
competition, the primary effects of monopoly are reduced output, higher
prices, and a transfer of income from consumers to producers.
Deadweight loss
P MC
pm

pc (Monopolizing a Competitive Industry)

Income transfer

D
qm qc Q

MR
Monopoly pricing also leads to what is known as deadweight welfare
loss. Deadweight loss represents the loss in value to consumers who at
the competitive price would buy product, but who at the monopoly price
are deflected to “inferior” substitutes.
d. Oligopoly: Where the market contains only a few sellers, all sellers
recognize that they are largely interdependent. Therefore, each seller
accounts for its rivals’ reactions when setting output and prices. This
means that oligopolists will not drop prices to increase market share
because they expect that any gains will be cancelled immediately when
rival sellers retaliate with similar price cuts. As a consequence,

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 oligopoly sellers focus on coordination and anticipation. This leads to
cartelization. The problem here, however, is that cartels are unstable,
and each member has the incentive to “chisel” profits away from the
other members of the cartel.
4. Overview of Antitrust Statutes: The common law’s inability to reach certain
anticompetitive behavior and rising concern over abuses by corporate giants in
the late nineteenth century spawned legislation curbing the power of the
railroads and “trusts.”
a. The Sherman Act: The Sherman Act, enacted in 1890, is the principal
antitrust statute. Plaintiffs prevailing under the Sherman Act are entitled
to treble damages, costs, and attorney’s fees.
i. Section One: Section one of the Sherman act make unlawful (and
criminal) “every contract, combination or conspiracy in restraint
of trade” in interstate or foreign commerce. Anything
traditionally considered a contract qualifies, but even less
traditional notions may be enough. Supreme Court decisions
have limited this language, interpreting it to prohibit only
“unreasonable” restraints of trade.
ii. Section Two: Section two prohibits monopolizing, attempts to
monopolize, and combinations or conspiracies to monopolize any
part of interstate or foreign commerce. Section two is typically
sued to attack the activity of a single firm with monopoly power.
b. The Clayton Act. Enacted in 1914, the Clayton Act was a response to
perceived deficiencies or loopholes in the Sherman Act.
i. Section 3: Section three prohibits sales on the condition that the
buyer not deal with competitors of the seller (“tying” and
“exclusive dealing”), where the effect “may be substantially to
lessen competition or tend to create a monopoly.”
ii. Section 4: Allows private parties injured by violations of the
Sherman and Clayton Acts to sue for treble damages.
iii. Section 7: Prohibits acquisitions or mergers where the effect
“may be substantially to lessen competition, or tend to create a
monopoly.”
c. Federal Trade Commission Act: Also enacted in 1914, the Act created
the Federal Trade Commission, giving it broad powers to enforce the
antitrust laws. Section 5(a)(1) prohibits “unfair methods of competition
in or affecting commerce, and unfair or deceptive acts or practices in or
affecting commerce.”
B. OVERVIEW OF ANTITRUST IN THE COURTS
1. Monopolization: Section 2 of the Sherman Act does not specifically outlaw
monopolies as such, but rather, it forbids the act of monopolizing. Thus, the
possession of monopoly power and the willful acquisition or maintenance of that
power, will violate § 2.
a. Aspen Skiing Co. v. Aspen Highlands Skiing Corp. (1985): The Court
unanimously held that a monopolist’s refusal to continue to participate in
a joint marketing plan with its only rival could amount to
monopolization. The Court distinguished between parties with a history

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 of dealing and those with no history of dealing. Thus, the refusal by the
owner of three of four mountain slopes used for skiing in Aspens to
cooperate with the owner of the fourth slope and continue their joint ski
ticket reflected “a deliberate effort to discourage customers from doing
business with its smaller rival.” The “decision by a monopolist to make
an important change in the character of the market,” coupled with the
jury’s conclusion that the defendant lacked a reasonable business
justification, supported the conclusion that the behavior was unlawful.
i. Market Definition: The key to this case was the definition of the
relevant market—i.e., whether the defendant had enough “market
power” to make it a monopolist. The market was defined as
downhill skiing in Aspen, Colorado. Defendant would have
preferred to define the market more broadly, to include other ski
resorts in the area.
ii. Refusal To Deal: A company that has monopoly power has no
duty to cooperate with its business rivals and does not violate § 2
by refusing to deal with competitors if it has valid business
reasons for the refusal. If the rivals have history of dealing,
however, the monopolist might act unlawfully if it “changes the
character of the market” by refusing to continue dealing.
iii. Essential Facilities Case: The Court describes this as an essential
facilities case—i.e. the multi-ticket is essential to the business.
However, the Court ignores the essential facilities analysis but
focuses instead on the legitimacy of the defendant’s reasons for
refusing to agree with the plaintiff.
b. Implications: Aspen’s implication that a monopolist could violation § 2
merely by changing its distribution pattern and, indeed, that the
monopolist can be required to cooperate with its competitors in a joint
marketing arrangement is disturbing. Perhaps most important, such a
standard raises the risks associated with undertaking any form of
legitimate collaboration with a direct rival. By raising the potential costs
of abandoning such relationships, Aspen makes it less likely that
collaborative arrangement will be formed in the first place.
2 Vertical Restraints: Relationships between the various levels of production and
distribution can be described as “vertical”; on the other hand, relationships
between competitors are described as “horizontal.
a. Graphic Products Distributors, Inc. v. Itek Corp. (11th Cir. 1983): This
case involved nonprice, vertical restraints on trade. This was basically a
territorial allocation case, in which the plaintiff claimed that the
manufacturer’s use of exclusive territories was an unreasonable restraint
of trade. The court noted that the Supreme Court had prescribed a rule
of reason analysis for such claims. See Sylvania. The Court noted that
while vertical restraints may lessen intrabrand competition, it may
enhance interbrand competition. Thus, the question in this case was
what were the competitive effects of the vertical territorial allocation.
The first factor to be examined in answering that question is whether the
defendant has market power, as evidenced by market share. (The

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 defendant in this case never challenged the definition of the relevant
product market, a major tactical error.) Once market power has been
demonstrated, the plaintiff must show an anticompetitive effect, either in
the intrabrand or interbrand markets. That anticompetitive effect must
be balanced against any alleged positive effects on interbrand
competition stemming from the restraints. The ultimate question is, what
effect does the restraint have on consumers?
b. Copperweld Corp. v. Independence Tube Corp. (1984): The Court
overruled the intra-enterprise conspiracy doctrine and held that a parent
and its wholly owned subsidiary could not be “conspiring entities” for
the purpose of satisfying § 1’s plurality requirement. Antitrust is about
economics,; it is not about formalities.
3. Conspiracy to Restrain Trade: A primary concern of the antitrust laws has been
to preserve and encourage competition among firms in the same industry. The
antitrust laws place limits on collaboration among competing firms, so called
horizontal restraints. When a group of competitors agree not to deal with a firm
outside the group, there is a combination in restraint of trade.
a. Rothery Storage & Van Co. v. Atlas Van Lines (D.C. Cir. 1986): This is
a horizontal boycott which, under Supreme Court precedent, are per se
illegal. Judge Bork, however, notes that most lower courts do not follow
the rule that any per se horizontal restraint is per se illegal. Atlas, a
national moving company with interstate authority, operated its business
though various agent contracts, in which it delegated its authority to
transport goods interstate to smaller companies that would do the actual
work. When the moving industry was deregulated in 1979, the agents
had authority to move interstate, and thus operated as both as an agent
and a competitor of Atlas. This created a free riding problem for Atlas:
“A free ride occurs when one party to an arrangement reaps benefits for
which another party pays, though that transfer of wealth is not part of the
agreement between them.” Basically, the agents were using Atlas
equipment, uniforms, and services on non-Atlas interstate shipments,
thus consuming Atlas goods and exposing Atlas to the potential for
liability. To address the problem, Atlas announced that it would cancel
the contract of any agent that continued to handle interstate carriage on
its own account as well as for Atlas.
i. Rejection of Per Se Analysis: Judge Bork concluded that “the
challenged restraint is ancillary to the economic integration of
Atlas and its agents so that the rule of per se illegality does not
apply. Neither are the other tests of the rule of reason offended
since Atlas’ market share is far too small for the restraint to
threaten competition or to have been intended to do so.”
ii. Relevant Market: Bork defines the relevant market by looking to
the “availability of substitutes.” “The degree to which a similar
product will be substituted for the product in question is said to
measure the cross-elasticity of demand, while the capability of
other production facilities to be converted to produce a
substitutable product is referred to as the cross-elasticity of

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 supply. The higher these cross elasticities, the more likely it is
that similar products or the capacity of production facilities now
used for other purposes are to counted in the relevant market.”
iii. Economic Reality: Bork’s analysis focuses not on the formalities
of prior precedent, but on the economic realities of Atlas’
cancellation of the contracts. “If it is clear that Atlas and its
agents by eliminating competition among themselves are not
attempting to restrict industry output, then their agreement must
be designed to make the conduct of their business more
effective.” Based on the fact that Atlas was seeking to eliminate
free riding, “the Atlas agreements thus produce none of the evils
of monopoly but enhance consumer welfare by creating
efficiency.
iv. Ancillary Restrictions: Bork notes that every combination
“restrains” trade or reduce competition; but every combination
between competitors cannot be per se illegal under the Sherman
Act. Quoting Justice (then Judge) Taft in United States v.
Addyston Pipe & Steel Co. (1898), Bork states that “’restrictions
in the articles of partnership upon the business activity of the
members, with a view of securing their entire effort in the
common enterprise, were, of course, only ancillary to the main
end of the union, and were to be encouraged.’ To be ancillary,
and hence exempt from the per se rule, an agreement eliminating
competition must be subordinate and collateral to a separate,
legitimate transaction.”
b. BMI, NCAA, and Pacific Stationary: Bork relies on these seminal
Supreme Court cases of horizontal restrictions to support his decision
that only restraints that so tend to restrict competition that no
procomptetative justification can be discerned are subject to the per se
rule.
4. Injury to Competition Through Mergers: It is difficult to overstate the
importance of antimerger policies to the American antitrust system. This
concern is most acute where the participants are direct rivals, for courts often
presume that such arrangements are more prone to restrict output and increase
prices. The economic analysis indicates that antirust law has a legitimate
concern with preservation of market structure that is conducive to effective
competition.
a. United States v. Waste Management, Inc. (2nd Cir. 1984): This was a
merger challenged under § 7 of the Clayton Act. The case illustrates that
market share might not be as dispositive as it seems. A large market
share resulting from a merger is prima facie evidence of illegality; easy
of entry, however, may rebut the presumption of illegality because it
demonstrates that the firm will be unable to raise prices over the
competitive level without new firms entering the market. (Judge Winters
suggests that potential entrants to the market might be considered in
determining market power; but that analysis can just as easily be done by
looking at the rebuttal case.) The court concluded that “entry into the

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 relevant product and geographic market by new firms or by existing
firms [outside the geographic market] is so easy that any anti-
competitive impact of the merger would be eliminated more quickly by
such competition than by litigation.”
b. United States v. Syufy Enterprise (9th Cir. 1990): The court followed the
logic in Waste Management, and refused to invalidate the merger of the
only two firms in the market—i.e., a “merger to monopoly.”
5. Balancing Types of Error In Antitrust: Because courts don’t always make the
right decision, they should be aware of what type of “error” might be possible as
the result of an erroneous decision: one possible error is finding illegal
economically benign actions that perhaps ought positively to be encouraged; the
second possible error is finding no illegality for practices that are in fact
economically malign and ought to be deterred. These types of error are often
referred to as Type I (a “false positive,” analogous to mistakenly punishing the
innocent) and Type II (a “false positive,” exemplified by mistakenly failing to
punish the guilty).
a. Entry: As the Waste Management decision illustrated, when barriers to
entry are low, antitrust errors tend to be self-correcting. As quantities are
reduced and prices rise, new entrants emerge to redress any difficulty.
The costs of Type II error thus are reduced.
b. The Costs of Type I Error: Type I error is not the subject of any
significant self-canceling mechanism. When a court imposes liability on
conduct that actually is beneficial, there is no market corrective for the
judicial mistake; society loses the benefits of the commercial practice
that has been wrongly deterred. Only reversal of the case can undo the
mistake.
6. Special Requirements for Private Recovery: Most antitrust suits are brought by
private plaintiffs. In the 1970s, the Supreme Court established two concepts that
serve as a barrier to private antitrust suits—antitrust standing, and antitrust
injury.
a. Mid-Michigan Radiology Assocs. v. Central Michigan Community
Hosp. (E.D. Mich. 1995): The court defines antitrust injury as an injury
resulting from a violation of “the type of interests protected by the
antitrust laws.” In other words, was the injury to competition itself, or
merely to a competitor: antitrust injury flows from a reduction in
competition, not from competition itself. Antitrust standing asks
whether the injury to the plaintiff was caused by the antitrust injury; in
other words, is the plaintiff an efficient enforcer of the antitrust laws. To
determine standing, it is necessary to examine the physical and economic
nexus between the alleged violation and the harm to the plaintiff. The
plaintiff in this case did not show antitrust injury, and lacked standing.
Its complaint was that the defendant cancelled its contract, not that the
replacement contract was anticompetitive.
b. Indirect Purchasers: Note that in Illinois Brick, the Supreme Court held
that indirect purchasers of a price-fixed product do not have standing to
bring an antitrust suit; only direct purchasers have the requisite proximity
of injury.

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II. CONSPIRACIES IN RESTRAINT OF TRADE

A. THE MECHANICS OF PRICE-FIXING ARRANGEMENTS

1. How Price Fixing Works: The International Uranium Cartel: When the uranium
market declined in the 1950s and 1960s, the U.S. government shut out foreign
producers from the U.S. market. By the 1970s, the industry was “overbuilt,”
with prices barely covering the variable operating costs. Foreign producers
responded by creating a cartel to divide up the rest of the world’s market. The
cartel set prices, allocated sales by nation group and by producer within each
group, and provided a rigged bidding system in which one “leader” quoted the
fixed price, while other companies quoted higher prices in order to create the
appearance of competition. The producers set a permanent Secretariat whose
function was to administer the cartel’s activities, and an Operating Committee
which met regularly to set the prices for individual bids.
2. Normative Pros and Cons of Cartels: Per se bans on price fixing assume that
price agreements have no redeeming social value under any circumstances.
Economists recognize situations in which cartels can be beneficial.
a. Ruinous Competition: In industries with high fixed costs but low
marginal costs, price wars can keep competitors from being able to
maintain their facilities in the long run. It is possible to imagine a
situation under which collusion is necessary for achieving competitive
outcomes. However, antitrust has yet to condone price fixing to solve
the fixed-cost, “ruinous competition” problem.
b. Self-Help Remedies in Contract: Sometimes, collective action is an
effective, extra-judicial way of helping firms enforce their contracts.
This often takes the form of information exchanges. In at least one case,
the Supreme Court refused to enjoin an information exchange because
“the gathering and dissemination of information which will enable
sellers to prevent the perpetration of fraud upon them . . . cannot be held
to be an unlawful restraint of trade.” Cement Manufacturers Protective
Ass’n v. United States.
c. Lower Prices Through Collusion: In certain situations, fierce competition
may destroy profitability in the market. In that situation, sellers may
agree to fix prices at a “reasonable” level, i.e. one that gave them a
competitive but not a supra-competitive profit. Economically, however,
this type of an agreement is unlikely because new firms will enter and
drive prices down, or existing firms will lower prices as the profit risks
decline.
d. Property Rights and Establishment of Efficient Prices: Defendants often
claim that price fixing is necessary to establish the “right” price, arguing
in effect that the market did not price at efficient level without collusion.
Ruinous competition is a subset of this argument.
e. Enforcement of Rules Against Price Fixing: The nirvana fallacy states
that just because something undesirable is going on does not mean that
passing a law against it will obviate the problem. Having no law may
engender Type II errors; but having a law may create Type I errors. In
the end, the issue is an empirical one: does the law find and punish the

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 anticompetitive behavior, while leaving the unobjectionable behavior
alone?
B. CLASSIC EARLY CASES
1. United States v. Trans-Missouri Freight Ass’n (1897): This was an association
of railroad carriers that set freight rates for all participants. They conceded that
their agreement curbed each firm’s commercial freedom, but that, as regulated
industries, they were exempt from the Sherman Act, and that in any case the
rates they fixed were reasonable. The Court held that compliance with another
statute (e.g. regulatory restrictions) does not exempt a firm from the antitrust
laws; and furthermore, the “reasonableness” of prices fixed pursuant to a
contract was irrelevant under the Act—Congress intended for the Court to create
a new federal common law of antitrust.
a. Two Principles: This cases thus established two things: first, that price
fixing was per se illegal under § 1 of the Sherman Act; and second, that
the solution to ruinous competition was not price fixing agreements.
“Competition itself brings the charges down to what may be reasonable,
while, in the case of an agreement to keep prices up, competition is
allowed no play.”
b. United States v. Joint Traffic Ass’n (1898): The Court backed off the
strict language in Trans-Missouri, and held that if the price agreement
was “collateral” to the main price agreement it is not a violation of
antitrust law.
2. United States v. Addyston Pipe & Steel Co. (6th Cir. 1898): Six cast iron pipe
producers conceded that they had agreed to divide the southern and western
markets into regional monopolies and had fixed prices for each territory. The
defendants argued that the agreement was designed to eliminate ruinous
competition, and that the fixed prices were reasonable. Judge Taft held that the
agreements deprived the public of the benefits of competition. Seeking to build
an airtight per se ban against price-fixing agreements, Taft read the prevailing
common law as voiding all price-fixing agreements unless they were ancillary to
some legitimate cause. “If the sole object of both parties in making the contract
as expressed therein is merely to restrain competition, and enhance or maintain
prices, it would seem that there was nothing to justify or excuse the restraint . . .
and therefore would be void.” Thus, “naked” restraints in which the “sole
object” is to eliminate competition are per se illegal; ancillary price-fixing
agreements may be legal if they are reasonable.
3. United States v. Trenton Potteries Co. (1927): The makers of 82 percent of
toilets and other bathroom fixtures belonged to an association that had fixed the
prices of sanitary pottery and had limited sales to “legitimate jobbers.” The
Court again rejected the “reasonableness” of prices as a defense to price fixing
agreements under § 1: “the reasonable price fixed today may through economic
and business changes become the unreasonable price tomorrow. . . . Whether
prices actually agreed upon were reasonable is immaterial . . . .” Read literally,
this analysis holds that proof of the mere existence of a price-fixing agreement
establishes defendant’s illegal purpose, and the prosecution need not show that
the prices fixed are unreasonable. On the other hand, the defendants’ control of
82 percent of the market evidenced significant market power.

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 4. Appalachian Coals, Inc. v. United States (1933): To cope with plunging prices,
137 coal companies, which accounted for roughly 12 percent of all bituminous
coal production east of the Mississippi, formed a new company to act as the
exclusive selling agent for member firms. The agency was instructed to get the
“best prices obtainable” and if all output could not be sold, to allocate orders
fairly among member firms. In effect, it served as a sales cartel, but with far
from complete control over the coal market. The Court refused to reject the
agreement, and held that because the agreement did not fix prices it was not per
se illegal: “Realities must dominate the judgment. The mere fact that the parties
to an agreement eliminate competition between themselves is not enough to
condemn it.” The Court accepted that the collaboration was for legitimate ends.
C. DOCTRINAL FOUNDATIONS OF § 1
1. Per Se Violations: Certain agreements almost always result in substantial
restraint of trade, without redeeming procompetitive benefits. A case-by-case
inquiry into reasonableness is therefore unwarranted. Consequently, certain
types of business agreements among competitors are unreasonable as a matter of
law—i.e., illegal per se.
a. United States v. Socony-Vacuum Oil Co. [“Madison Oil”] (1940): The
facts strongly resembled those of Appalachian Coals. The oil refining
industry was depressed, and independent producers faced panic market
conditions. Independent refiners lacked storage facilities and had been
dumping gasoline at give-away prices. In response, a group of major
refining companies agreed to buy surplus (“distress”) gasoline from the
independents, disposing of it in a more orderly manner so as not to
depress prices. The arrangement assigned a major firm to each
independent as a “dancing partner,” and the major firm bought its
partner’s surplus gasoline.
i. Holding: Relying on Trenton Potteries, the Court held that
“uniform price-fixing by those controlling in any substantial
manner a trade or business in interstate commerce is prohibited
by the Sherman Law, despite the reasonableness of the particular
prices agreed upon.” This resolved the conflict between
Appalachian Coals and Trenton Potteries. The Court believed
that the defendants, by manipulating the relatively thin spot
market, kept gasoline prices above the level that competition
would otherwise have yielded. Even this type of “price
stabilization” is per se illegal under § 1. With some exceptions,
Socony-Vacuum remains a foundation for analysis of horizontal
price-fixing cartels today.
ii. Rationale: Although the defendants had not explicitly agreed on
the price at which they would sell their gasoline, the Court found
that the arrangement’s purpose was to curtail competition and
raise prices. “Any combination which tampers with price
structures is engaged in an unlawful activity. Even though the
members of the price-fixing group were in no position to control
the market, to the extent that they raised, lowered, or stabilized
prices they would be directly interfering with the free play of

11
 market forces.” “Under the Sherman Act a combination formed
for the purpose and with the effect of raising, depressing, fixing,
pegging, or stabilizing the price of a commodity in interstate
commerce is illegal per se.”
b. Fashion Originators’ Guild of America v. FTC (1941): Women’s
garment manufacturers who claimed to be creators of original dress
designs sought to curb “style piracy” by which other manufacturers
copied their designs and sold these copies at much lower prices. To stop
the practice the Guild’s member agreed to refuse to sell to retailers who
also sold garments copied from a Guild member. The members were
trying to prevent an allegedly illegal or tortious act; however, the Guild
was taking the law into its own hand and, in the process, excluding rivals
from the market.
i. Holding: The Court held that because the combination “narrows
the outlets to which garment and textile manufacturers can sell
and the sources from which retailers can buy; subjects all retailers
and manufacturers who decline to comply to an organized
boycott; takes away the freedom of action of members by
requiring each to reveal to the Guild the intimate details of their
individual affairs and has both as its necessary tendency and as
its purpose and effect the direct suppression of competition from
the sale of unregistered textiles and copied designs,” the
combination violated § 1.
ii. Effect: FOGA has been read as applying a per se test to group
boycotts. The Court invoked the notion that the antitrust laws
were designed to protect “small dealers and worthy men.” The
holding in this case is, however, in tension with the holding in
Cement Manufacturers.
c. United States v. Topco Associates, Inc. (1972): A group of small- and
medium-sized grocery chains with 6 percent of the market created a joint
subsidiary to market private label products through their stores in
competition with larger supermarket chains. The members of the joint
venture allocated exclusive territories in which to sell the new label, and
refused to allow new members whose location would overlap with the
territory of an existing member. This is a horizontal combination
because the members of the joint venture were competitors; but it was
argued that the combination removed the incentive for these stores to
compete.
i. Holding: The Court held that market allocations are per se illegal
whether or not ancillary to price-fixing or other market-rigging
arrangements. “The Court has reiterated time and time against
the horizontal territorial limitations are naked restraints of trade
with no purpose except stifling of competition.”
ii. Rationale: In reaching this result and applying a per se rule, the
Court specifically rejected the fact that the defendants lacked
market power, that the arrangement did not reduce competition
among them or in the market, and that the restriction were

12
 necessary for the joint venture to succeed. The Court said these
arguments were for Congress to assess and observed that courts
are ill equipped to measure whether restraints on competition in
one area are overcome by increased competition elsewhere.
iii. Criticism: The Court’s opinion is subject to criticism for (1)
failing to evaluate the economic necessity and competitive
benefits of the arrangements, and (2) ignoring that the
participants lacked market power and therefore could not have
affected competition adversely.
2. Rule of Reason: An all-inclusive condemnation of every restraint, if applied
literally, would make § 1 unworkable since it would condemn much business
behavior that is economically and socially beneficial. Thus, certain
combinations are only condemned if they are unreasonable—in other words,
court will consider whether the restrain promotes competition more than it
suppresses competition.
a. Chicago Board of Trade v. United States (1918): The government
contended that a grain exchange rule requiring members to adhere to
their closing bid on the “call” (which in effect confined price
competition to the time the exchange was open) was illegal because it
fixed prices during part of the business day. The Court rejected the
claim of per se illegality, and stated that “the true test of legality is
whether the restraint imposed is such as merely regulates and perhaps
thereby promotes competition or whether it is such as may suppress or
even destroy competition.”
i. Relevant Factors: To measure and evaluate a challenged
restraint’s impact on competition, courts should consider “the
facts peculiar to the business to which the restrain is applied; its
condition before and after the restraint was imposed; the nature of
the restraint and its effect, actual or probable. The history of the
restraint, the evil believed to exist, the reason for adopting the
particular remedy, the purpose or end sought to be attained, are
all relevant facts. This is not because a good intention will save
an otherwise objectionable regulation or the reverse; but because
knowledge of intent may help the court to interpret facts and to
predict consequences.”
ii. Problems: The problems with the approach created in Chicago
Board of Trade was that the decision offered little guidance about
how the factors should be considered in certain cases. This
difficulty in administration led courts to expand the category of
conduct denominated illegal per se.
b. Nat’l Soc’y of Professional Engineers v. United States (1978): The
Society had a rule against competitive bidding because it was thought
that “bidding on engineering services is inherently imprecise, would lead
to deceptively low bids, and would thereby tempt individual engineers to
do inferior work with consequent risk to public safety and health.” The
Court held that the rule of reason applied, in part because the industry
was a “learned profession,” and under prior decisions the Court treated

13
 restraints in such industries under the rule of reason. Nevertheless, the
Court found the ban on competitive bidding to be an unreasonable
restraint under the rule of reason. The Court said that the agreement
suppressed and destroyed competition, and had an indirect (and perhaps
intentional) effect on prices.
i. Two Categories: The Court stated that there are “two
complementary categories of antitrust analysis. In the first
category are agreements whose nature and necessary effect are so
plainly anticompetitive that no elaborate study of the industry is
need to establish their illegality—they are illegal per se. in the
second category are agreements whose competitive effect can
only be evaluated by analyzing the facts peculiar to the business,
the history of the restrain, and the reasons why it was imposed.”
ii. Holding: The Court held that the Society’s “ban on competitive
bidding prevents all customers from making price comparisons in
the initial selection of an engineer, and imposes the Society’s
views of the costs and benefits of competition on the entire
market.” The holding in this case demonstrates that rule of
reason analysis only looks to the effects that the challenged
activity has on competition.
c. California Soc’y of Dentists v. FTC (1999): The FTC went after
California dentists who enacted a rule against members advertising
discounted prices and making quality claims. The FTC saw this as a
type of price fixing. The Court evaluated the restraint under the rule of
reason because dentists are professionals. The dentists argued that the
restriction was enacted because consumers are ignorant and unable to
adequately evaluate prospective services. The Court agreed with the
dentists’ justification as an adequate reason to restrict competition.
D. DOCTRINAL REFORMULATIONS
1. Loosening of Per Se Rules: The Professional Engineers decision demonstrated
that the Court might be willing to narrow the scope of per se illegality, while
more readily finding agreements not covered by the per se rule illegal under the
rule of reason.
a. Price Fixing: In two of the seminal modern antitrust opinions, the Court
applied rule of reason analysis to what were essentially price fixing
cases, recognizing that even price-fixing agreements may serve
necessary and beneficial purposes.
i. Broadcast Music, Inc. v. Columbia Broadcasting Sys. (1979)
(BMI): This case involved non-profit organizations which
enforced the copyright rights of composers whose music was
being publicly performed. BMI and ASCAP granted blanket
licenses to radio stations, etc., and paid out royalties to the artists
based on the number of times their songs were played—
essentially, they were license clearing houses for their members.
The blanket license was non-exclusive; thus, consumers could
still buy individual licenses direct from the copyright owners.
CBS approached BMI and ASCAP and asked for a license on a

14
 per use basis. When they refused, CBS sued for violation of the
Sherman Act, including a claim of price fixing. On its face the
blanket license seemed to transgress Socony-Vacuum’s sweeping
ban on all contracts having the purpose or effect of “raising,
depressing, fixing, pegging, or stabilizing prices.”
(a). Holding: The sole question before the Court was whether
the blanket license was per se illegal. The Court held that
the blanket license was not a “naked restraint on trade
with no purpose except stifling competition, but rather
accompanies the integration of sales, monitoring, and
enforcement against unauthorized copyright use.” “Not
all arrangements among actual or potential competitors
that have an impact on price are per se violations of the
Sherman Act or even unreasonable restraints.”
(b). Property Rights: The Court found it important that the
arrangement was helping artists enforce their copyrights,
which they would have been unable to do otherwise.
“The extraordinary number of users, the ease with which
a performance may be broadcast, the sheer volume of
copyrighted compositions, the impracticality of
negotiating individual licenses for each composition, all
combine to create unique market conditions for
performance rights.” This basically revived Addyston
Pipe, and the notion that price fixing is justified if it is
ancillary to a more noble purpose.
ii. NCAA v. University of Oklahoma (1984): The Court applied rule
of reason analysis to another price fixing agreement; this time,
however, finding a violation of § 1. The agreement was among
members of the NCAA to restrict how often each team’s football
games could be televised. The Court applied rule of reason
analysis because the “horizontal restraints on competition are
essential if the product [league sports] is to be available at all.”
“BMI squarely hold that a joint selling arrangement may be so
efficient that it will increase sellers’ aggregate output and thus be
procompetitive. . . . Thus, despite the fact that this case involves
restraints on the ability of member institutions to compete in
terms of price and output, a fair evaluation of their competitive
character requires consideration of the NCAA’s justifications for
the restraints.” The Court noted that, because the agreement was
a restriction on both price and output, it was a “naked restraint”
on competition, and required some competitive justification”—in
other words, was the exclusive, joint marketing arrangement
necessary for college football to exist? The answer to that
question was “no”; the agreement had none of the redeeming
qualities of BMI.

15
 b. Concerted Refusals to Deal: Over the past decade, some Supreme Court
decisions have retreated from an unqualified rule of per se illegality for
concerted horizontal refusals to deal. C.f. FOGA.
i. Northwest Wholesale Stationers v. Pacific Stationary (1985): A
seller of office supplies was expelled from a purchasing
cooperative after it expanded its operations from retailing to
include wholesale activities. The reason for the expulsion was
disputed, and the district court granted the defendant summary
judgment under the rule of reason because there was no evidence
of anticompetitive effect. Justice Brennan noted that the
cooperative raised efficiency by realizing scale economies in both
buying and warehousing supplies, enabling smaller retailers to
reduce prices and compete more efficiently. Thus, “the act of
expulsion from a wholesale cooperative does not necessarily
imply anticompetitive animus and thereby raise a probability of
anticompetitive effect.” “Unless the cooperative possesses
market power or exclusive access to an element essential to
effective competition, the conclusion that expulsion is virtually
always likely to have anticompetitive effect is not warranted.
Absent such a showing with respect to a cooperative buying
arrangement, courts should apply a rule of reason analysis.” This
decision was a genuine improvement over the Court’s earlier
boycott decisions and their suggestion that § 1 forbade all
concerted horizontal refusals to deal.
ii. FTC v. Indiana Federation of Dentists (1986): The members of
the dental federation refused to submit dental x-rays to patients’
insurers that requested the patient x-rays to evaluation the
necessity of the treatment. The Court used a rule of reason
approach, explaining that “the per se approach has generally been
limited to cases in which firms with market power boycott
suppliers or customers in order to discourage them from doing
business with a competitor—a situation obviously not present
here.” Nevertheless, the Court found that the activity violated §
1: the rule of reason does not require and exhaustive factual
inquiry: the reason for doing market analysis is to determine
market power; however, if there is already proof of an
anticompetitive effect, then market analysis is unnecessary and
the boycott is illegal under the rule of reason. Because the
refusal to deal “impaired the ability of the market to advance
social welfare by ensuring the provision of desired goods and
services to consumers at a price approximating the marginal cost
of providing them,” the Court invalidated the boycott.
2. Reaffirmations of Per Se Rules: Despite the holding in BMI, which some lower
courts interpreted as prescribing a rule of reason analysis in all antitrust cases,
the Court continued to apply per se illegality to certain restraints on price.
a. Arizona v. Maricopa County Medical Soc’y (1982): Physicians had an
agreement to set maximum fees they would charge for their services.

16
 Seventy percent of the medical practitioners in the County established a
plan whereby they agreed not to charge patients more than a specified
fee for identified services. The doctors argued that this agreement
reduced prices to consumers by lowering information search costs, that
the participating insurance companies were acting in the consumers’
interests, and that the medical profession met higher standards and
should not be subject to the usual antitrust per se rule. Nevertheless the
Court held that the fee-schedule was per se illegal under § 1. The Court
invoked Socony-Vacuum to support its conclusion that “the
anticompetitive potential in all price fixing agreements justifies their
facial invalidation even if procompetitive justifications are offered for
some. Those claims of enhanced competition are so unlikely to prove
significant in any particular case that we adhere to the rule of law that is
justified in its general application.” This approach is questionable; the
program had genuine potential to lower consumer costs, and the use of a
per se approach prevented consideration of the plan’s effect on prices or
output.
b. FTC v. Superior Court Trial Lawyer’s Ass’n (1990): The Court reversed
its move towards rule of reason treatment of boycotts when in held
applied per se illegality to an agreement by attorneys not to represent
indigent criminal defendants until the government increased the fees for
such work. The Court ignored evidence regarding market power, and the
fact that the boycott was designed to effect political change (an
exception to the antitrust laws under the “Noerr-Pennington Doctrine”
(Justice Brennan would have found the boycott legal on this ground)),
and viewed the activity as a naked restrain on price and output.
i. Price Fixing: The Court emphasized that this case involved not
only a boycott, but price-fixing. This may have contributed to
the decision to apply per se liability.
ii. Modern Approach to Boycotts: In light of SCTLA, the Court’s
modern boycott decisions suggest the following standards: (1) an
agreement by direct rivals to withhold their services until the
price for such services is raised is a naked restraint on output and
is condemned summarily (SCTLA); (2) concerted refusals to deal
that pose remotely plausible efficiency rationales are evaluated
with a truncated rule of reason that begins with a preliminary
assessment of the conduct’s purposes and effects (Indiana
Dentists); and (3) suits challenging membership policies of
efficiency-enhancing collaborations require a fuller
reasonableness inquiry, including a determination of the
defendant’s market power (Northwest Stationers).
c. Palmer v. BRG of Georgia, Inc. (1990): This is another territorial
allocation case in which the two main suppliers of bar review courses
(and hence were in direct competition) entered into an agreement under
which BRG was given an exclusive license to market HBJ’s bar review
materials in Georgian and use HBJ’s trade name. HBJ also agreed not to
compete with BRG in Georgia. In a short per curium opinion, the Court

17
 cited Socony-Vacuum and Topco as establishing that market division
agreements involving actual or putative competitors are illegal per se.
The revenue-sharing formula, plus the immediate price increase,
indicated that the agreement was “formed for the purpose and with the
effect of raising” the bar view course’s prices in violation of the Sherman
Act. Agreements between competitors to allocate territories to minimize
competition are illegal, regardless of whether the parties split a market
within which they both do business or merely reserve once market for
one and another for the other.
d. Horizontal Restraints and the “Quick Look”: BMI, NCAA, and
Northwest Stationers demonstrate a new approach to cases involving
horizontal restraints—horizontal contracts traditionally considered as per
se illegal may now be evaluated under the rule of reason. On the basis of
pleadings, affidavits and other “short form” filings, a court will quickly
consider whether the contract(s) at issue might not be among those
“which because of the pernicious effect on competition and lack of any
redeeming virtue should be conclusively presumed to be unreasonable
and therefore illegal without elaborate inquiry as to the precise harm they
have caused or the business excuse for their use. If the practice could
conceivably have some redeeming social (procompetitive) value, it
should be litigated under the rule of reason. Otherwise, on the basis of
this preliminary review then the matter should be disposed of under the
per se rule.
3. Lower Court (Re?)Interpretations: How did lower court interpret the shift in
analysis begun in BMI and NCAA? Polk Bros. v. Forest City Enterprises (7th
Cir. 1985), involved an agreement by two retailers to restrict the products that
each could sell in stores that would be located within a new building which the
firms had cooperated to construct. Acknowledging that most contracts
allocating products and markets were unlawful per se, Judge Easterbrook
nonetheless held that the rule of reason should apply. “Antitrust law is designed
to ensure an appropriate blend of cooperation and competition, not to require all
economic actors to compete full tilt at every moment. When cooperation
contributes to productivity through integration fo efforts, the rule of reason is the
norm. NCAA.” Easterbrook saw the allocations at issue in this case as ancillary
to the joint venture—“A restraint is ancillary when it may contribute to the
success of a cooperative venture that promises greater productivity and output.”
(See Addyston Pipe.) “Only when a quick look reveals that ‘the practice facially
appears to be one that would always or almost always tend to restrict
competition and decrease output’ should a court cut off further inquiry.”
Because the main purpose of the agreement was to avoid free riding, and market
power was too small to prevent customers from going elsewhere, the agreement
was not unreasonable and hence not a violation of § 1.
E. APPLICABILITY OF THE SHERMAN ACT
1. Commercial vs. Non-Commercial Activities: The question here is whether the
Sherman Act applies to non-profit entities.
a. United States v. Brown University (3rd Cir. 1993): The issue here was
whether an agreement between the ivy league schools to offer the same

18
 financial aid package to all commonly admitted students offended § 1 of
the Sherman Act. The district court applied a quick-look style rule of
reason analysis because the Universities were non-profit entities; but
concluded that the agreement was plainly anticompetitive because it
eliminate price competition for students. First, the court of appeals
examined whether the Sherman Act applied to the Universities at all.
Non-profit organizations are, the court found, subject to the Act ass long
as the activity involves or implicates trade or commerce—i.e., the
exchange of money for services. The court agreed that the rule of reason
was the appropriate analysis, and that the agreement was anticompetitive
on its face. But the court said the district court erred when it failed to
consider the proffered procompetitive justifications for the agreement.
The court expressed serious doubts as to whether the justifications did in
fact apply to the agreement, and whether the restraints imposed by the
agreements had were necessary to achieve its purported goals.
Nevertheless, the court remanded for a full rule of reason analysis.
b. DELTA Rescue v. Humane Soc’y of the U.S., Inc. (9th Cir. 1995): The
question here was whether the charities were involved in “trade or
commerce,” and hence were subject to the antitrust laws. The court held
that trade or commerce involves contractual type relationships, as
opposed to donative relationships, which implicate property-type rights.
“The solicitation of contributions by a nonprofit organization is not trade
or commerce, and the Sherman Act has no application to such activity.”
2. Other Applicability Issues: Most exemptions to the antitrust law require
affirmative law passed by Congress.
a. Labor Unions: Because labor unions function by a contract, whereby
their members ban individual negotiations with an employer in favor of
negotiation by the union, they were treated as unreasonable restraints of
trade at common law. Section 6 of the Clayton Act provides labor
unions with a statutory exemption from the antitrust law.
b. Insurance: Federal law not specific to insurance shall not be construed to
invalidate, impair, or supercede any state regulation of the insurance
industry, as long as the activity regulated by the state is part of the
business of insurance and no issue of boycott, coercion, or intimidation
arises. Because antitrust does not specifically relate to insurance, it is
inapplicable to insurance companies.
c. Professional Sports: Obviously, sports leagues must restrict output and
hence competition in order to function. Baseball has long enjoyed a
judicially-created immunity from antitrust.
F. PROVING THE EXISTENCE OF CONSPIRACIES
1. The Limits of Circumstantial Evidence: Outcomes in § 1 litigation often depend
on whether the plaintiff has supported its conspiracy claim with enough
evidence to warrant a trial and to have its case submitted to the jury. The § 1
plaintiff bears the burden of proving an agreement. This requires a showing that
the existence of an agreement is more likely than not; conclusory allegations of
concerted action are prone to summary dismissal. In other words, circumstantial

19
evidence of an agreement is sufficient to support such a finding, but the
evidence must tend to exclude the possibility of unilateral action.
a. Matsushita Elec. Industr. Co. v. Zenith Radio Corp. (1986): This was a §
1 conspiracy claim by two American electronics firms that a group of
Japanese television producers had conspired to charge predatorily low
prices for goods sold in the U.S., using monopoly profits from the
Japanese market to subsidize the below cost pricing in the U.S. The
district court granted summary judgment for the defendants on the
ground that the plaintiffs had failed to put forward any evidence of an
conspiracy or collusion. The court of appeals reversed, but the Supreme
Court reinstated the judgment of the district court. To survive the
motion for summary judgment, the plaintiff must show that there is a
genuine issue of fact as to whether a conspiracy existed that caused
plaintiffs to suffer a cognizable injury.
i. Antitrust Injury: First, the Court says that plaintiff did not suffer
any “antitrust injury”—the conspiracy to raise prices in the U.S.
market would actually benefit the American companies. Lower
prices, by themselves, do not create antitrust injury.
ii. Predatory Pricing: Thus, the only claim on which the plaintiff
could prevail was a showing that the low prices were intended to
eliminate competition as a predicate to later raising prices to
supracompetitive levels. The Court noted that predatory pricing
is so speculative as to be uneconomical. Furthermore, predatory
pricing as part of a combination of companies is even more
unlikely.
iii. Evidentiary Standard: To survive a motion for summary
judgment, a plaintiff seeking damages for a violation of § 1 must
present evidence “that tends to exclude the possibility that the
alleged conspirators acted independently.” Courts should not
permit factfinders to infer conspiracies when such inferences are
implausible, because the effect of such practices is often to deter
procompetitive conduct.
iv. Balancing: In order to avoid punishing procomptetitive behavior,
courts should balance that desire against the desire that illegal
conspiracies be identified and punished. When the economic
realities make clear that the activity at issue is unlikely to be
anticompetitive, a higher quantum of evidence is needed
overcome a motion for summary judgment. “If the defendants’
had no rational economic motive to conspire, and if their conduct
is consistent with other, equally plausible explanations, the
conduct does not give rise to an inference of conspiracy.”
v. Type I v. Type II Error: Because this case involved a competitor
complaining about lower prices, the Court was reluctant to
sanction the prices scheme because it was actually beneficial to
consumers.
b. Monsanto Co v. Spray-Rite Serv. Corp. (1984): The Court said “the
correct standard is that there must be evidence that tends to exclude the

20
 possibility of independent action by the parties. That, there must be
direct or circumstantial evidence that reasonably tends to prove that the
parties had a conscious commitment to a common scheme designed to
achieve an unlawful objective.”
2. The Extent of Conspiracies: Even when the existence of some illegal activity is
clearly established, the precise nature of the agreement—or agreements—and
who participated in what can become a matter of vigorous debate and critical
legal significance both as to criminal and civil liability.
a. Single-Schemes v. Multiple-Conspiracy Characterizations: Whether the
conspiracy was a single overarching agreement, or a series of agreements
involving various subsets of defendants, can have important
consequences.
i. United States v. Beachner Construction Co. (10th Cir. 1984): The
defendant was indicted for his part in a bid rigging conspiracy.
He was acquitted, but later retried for three different acts of bid
rigging. The court held that the bids in the second case were part
of a single, decades-long conspiracy. Thus, to allow a second
prosecution would violate the Double Jeopardy clause of the
Fifth Amendment. “The pertinent inquiry is whether the record
is sufficient to establish that all conspirators had a single,
common and continuing objective. . . . If so, there would be but
one conspiracy even though its purposes were advanced by
diverse parties.”
ii. Sargent v. United States (3rd Cir. 1986): “An agreement to rig
bid wherever and whenever possible is meaningless for Sherman
Act purposes unless there are in the real world of the marketplace
some “whens” and “wheres.”
b. Why The Number of Conspirators Matters in Civil Cases: Antitrust
violations are analyzed as joint torts subject to the general tort law
doctrines. Thus, the longer a defendant remains in a case involving
multiple defendants without settling, the greater his share of potential
liability. Ironically, this whipsaw effect is at its strongest when the
merits of the liability case, as measured by the probability of liability, are
at their weakest.
3. Common Purpose and Other Requirements: A conspiracy under § 1 requires
proof that the conspirators had a common purpose. Also, other generally
requirements of tort liability, such as causation, are necessary to a showing of
antitrust liability.
G. LEGALLY AND ECONOMICALLY AMBIGUOUS PRACTICES
1. Agreements to Exchange Information: Exchanges of information between
competing or related businesses often raise antitrust problems. Information
exchanges have § 1 implications in essentially two settings—where data is
disseminated through the assistance of a trade association, and where firms
obtain or provide information by contacting competitors directly. It is
important, however, to be sensitive to whether the exchange helps perfect the
market or creates efficiencies, or whether it facilitates cartelization and lessens
competition.

21
a. Classic Cases on Information Exchange: Early cases dealing with “open
competition” plans (which admittedly sought to “keep prices at
reasonably stable and normal levels”) found that such plans violated the
Sherman Act.
i. American Column & Lumber Co. v. United States (1921): A
trade association whose members produced one-third of the
nation’s hardwood lumber had adopted a plan requiring member
firms to submit price lists, detailed daily sales and shipment
reports, monthly production and stock reports, etc. The plan was
supposed to disseminate among members accurate knowledge of
production and market conditions so that each member may
gauge the market intelligently instead of guessing at it. The
Court held that the plan violated § 1 because it was used “to
suppress competition by restricting production.” “Genuine
competitors do not make . . . reports of the minutest details of
their business to their rivals, as the defendants did.”
ii. Maple Flooring Mfrs. Ass’n v. United States (1925): The trade
association disseminated information detailing members’ average
costs and summarizing all sales, prices, and stocks—but not
identifying current individual transactions; a single base point
freight rate booklet (which would facilitate uniform pricing) was
also distributed. The Court focused on the fact that the members
never discussed future price, only past transactions. The Court
basically held that competitors who meet to discuss past
transactions, current prices and shipping rates, do not violate § 1.
iii. United States v. Container Corp. of America (1969): The
defendants (18 separate firms) shipped 90 percent of the
cardboard cartons supplied in the Southeast. They established an
informal price exchange whereby suppliers gave each other, on
request, price information on their most recent sales to a
particular customer. Not surprisingly, once a firm had received
this information, it would often quote the same price to that
customer, and buyers commonly divided orders among suppliers.
The Court held that the information exchange was illegal under
Socony-Vacuum because “the exchange of price data tends
towards price uniformity.” “Stabilizing prices as well as raising
them is within the ban of § 1.” The citation to Socony-Vacuum
implied that this was a per se case; however, the Court has not
rigidly applied a per se rule to information exchanges. (Indeed,
Justice Fortas concurred in the judgment on the understanding
that the Court was not announcing a per se rule.)
iv. United States v. United States Gypsum Co. (1978): Here the
government charged that gypsum board producers had engaged in
per se illegal price-fixing by checking current and future prices
with rivals before giving price concessions to buyers. The
defendants said they had consulted with competitors to comply
with the meeting competition requirements of the Robinson-

22
 Patman Act. The Court held that the mere exchange of price
information without intent to fix prices is not criminal price-
fixing per se and must be tested under the rule of reason—simple
evidence of price raising or stabilizing could not lead to a
presumption that the defendants intended that result. the
government must show that the defendant had intent to fix prices.
An effect on price, however, may well support an inference of
knowledge that the agreement would effect prices.
b. Recent Information-Exchange Cases: Container and Gypsum severely
limited the circumstances in which competitors can share price data
directly. The applicable standard, however, is unclear; the test applied in
Container was a narrower-than-usual rule of reason test, and the Gypsum
decision spoke in the measured terms of the rule of reason, yet its
treatment of the facts left little doubt that price exchanges were
disfavored among oligopolists.
i. The Five Smiths, Inc. v. NFL Players Ass’n (D. Minn. 1992):
The League charged that agents who exchanged player salary
information were pushing up salaries, and were engaged in a
conspiracy to fix, raise, or maintain prices in violation of § 1.
The court rejected the price fixing claim because there was no
link between the information exchange—it made no economic
sense (see Matsushita). The court also applied the rule of reason
to the information exchange, rejecting the application of a per se
rule: “even assuming that some players are competitors . . . such
an exchange of information among competitors is not within any
of the categories of conduct that is so manifestly anticompetitive
as to warrant per se condemnation.” “The Supreme Court has
determined that, absent some agreement between competitors to
restrain price, the exchange of price and other market information
is generally benign conduct that facilitates efficient economic
activity.” Furthermore, the plaintiffs failed to show any antitrust
injury to competition (e.g. fewer players, fewer games, etc.).
ii. In re Petroleum Products Antitrust Litigation (9th Cir. 1988): The
plaintiff alleged that oil companies were conspiring to raise
prices. Plaintiffs claimed that defendants were exchanging
information regarding prices through press releases and other
avenues, in order to ensure an uniform price and decrease
competition. The defendants had basically no justification for
publicly announcing price changes other than to “facilitate either
interdependent or plainly collusive price coordination.” That
evidence was, therefore, sufficient to support a finding of an
agreement, whether express or tacit, to raise or stabilize prices.
On remand, it is therefore likely that the district court will apply a
per se rule for the information exchange that was clearly intended
to effect prices.
2. Oligopolistic Interaction and Facilitating Devices: Antitrust doctrine and
enforcement policy have taken several paths to frustrate efforts by oligopolists

23
to coordinate their behavior by means other than a direct exchange of
assurances.
a. Conscious Parallelism and Tacit Agreements: “Conscious parallelism”
is a process, not in itself unlawful, by which firms in a concentrated
market might in effect share monopoly power, setting their prices at a
profit-maximizing, supra-competitive level by recognizing their shared
economic interest and their interdependence with respect to output
decisions. In concentrated markets, the recognition of interdependence
can lead firms to coordinate their conduct simply by observing and
reacting to their competitors’ moves. This may generate parallel price
movements that seem like price-fixing agreements.
i. City of Tuscaloosa v. Harcros Chemicals, Inc. (N.D. Ala. 1995):
The defendants were oligopolists selling chlorine, a homogenous
product, in a largely inelastic market. The plaintiffs claimed that
the firms engaged in a price-fixing conspiracy, evidenced only by
the fact that the market structure was such that collusion was
likely. Because there was no direct evidence, plaintiffs relied on
expert testimony that a price-fixing conspiracy was possible. The
court held that this type of tacit agreement is not a violation of
the antitrust laws. (This should be contrasted with actual
agreements but of which there is only indirect evidence.) In this
case there are several factors that would make price fixing easier,
but no evidence of actual price fixing; thus, the court rejected the
expert testimony on conscious parallelism.
ii. Plus Factors: Courts typically require plaintiffs who rely on
parallel conduct to introduce additional facts, often termed “plus
factors,” to justify an inference of agreement. Some plus factors
recognized by courts include: whether defendants have a motive
to engage in a conspiracy; whether the disputed conduct would
have contradicted the defendants’ self-interest if pursued
unilaterally; proof that defendants priced uniformly where price
uniformity was improbable without an agreement; past antitrust
violations; direct communication with competitors, and
subsequent simultaneous changes in behavior; agreements to
adopt common practices, such as product standardization.
b. Facilitating Devices: Facilitating devices are commercial practices or
institutions that a group of conspirators may employ in order to make it
easier to attain or stabilize an anticompetitive arrangement of some type.
Information exchanges are a classic example of a facilitating device.
i. Using Facilitating Devices to Strengthen Anticompetitive
Agreements: These practices share, along with information
exchanges, the problem that they have legitimate procompetitive
uses in addition to having a potential as anticompetitive
facilitators.
(a). Basing Point Pricing: One way to prevent members of a
cartel from chiseling on freight charges is to set a single
freight rate for all shipping. The full selling price of the

24
 product would then be set as the product priced f.o.b. plus
the freight rate from a single location (the “basing point”).
Thus, the product would be charged as if shipped from
Pittsburgh, even if it was actually shipped from San
Francisco. In FTC v. Cement Institute (1948), the Court
upheld the FTC’s finding of illegality for concerted use of
basing-point pricing.
(b). Most Favored Nation Clauses: A MFNC is a provision in
a multi-period commercial contract whereby the seller
guarantees the buyer the right to have product delivered at
either the contract price or the lowest price charged by the
seller to any other customer during the term of the
contract. This is another method of dissuading cartel
members from chiseling.
ii. Facilitating Devices In Oligopolistic Settings: It is not
permissible in most instances for rivals to form arrangement
whose effect on price is indirect.
(a). Catalano, Inc. v. Target Sales, Inc. (1980): Defendants
had formerly given short-term trade credit to beer
purchasers. Plaintiffs alleged that the agreement between
the defendants to end this practice was a per se violation
of § 1. Because trade credit was an area in which the
defendants had formerly competed, the Court held that the
agreement to refrain from extending such credit was a
form of price fixing, and was a method to raise prices.
Thus, the agreement was anticompetitive on its face and
was illegal per se.
(b). Non-Price Restraints: Note that certain restraints, while
not explicitly on price or output, might have such a direct
effect on those factors that they might trigger per se (or at
least quick look) analysis.

III. MONOPOLIZATION

A. MONOPOLY POWER
1. Defining the Offenses: The Sherman Act does not condemn the mere possession
of monopoly power. Because § 2 prohibits conduct which “monopolizes,”
courts focus instead on the monopolist’s purpose and intent—on its positive
drive to seize or exert monopoly power. In Aspen Skiing, the Court said the
elements of the monopolization offense are (1) the possession of market power
accompanied by (2) some kind of anticompetitive (exclusionary) conduct.
a. United States v. Aluminum Co. of America (2nd Cir. 1945): The real
question in this case is to what standard is single-firm behavior held
under § 2. Judge Hand suggests that § 2 is concerned with maintaining
“small units,” or competitors, in the relevant market. A monopoly is
basically the functional equivalent of a contract, combination, or
conspiracy.

25
 i. Facts: When the government filed suit, Alcoa was the only
domestic producer of virgin ingot; thus, its only competition was
imported ingot, which gave Alcoa a 90 percent market share.
Alcoa had also entered into contracts with foreign producers in
which it secured covenants not to import into the United States,
or to do so under restrictions, which in some cases involved the
fixing of prices.
ii. Market Definition: The importance of market definition cannot
be underestimated in these cases. Judge Hand defined the market
narrowly to include only virgin ingot, excluding secondary
aluminum because Alcoa controlled the initial production of
everything that eventually ended up as secondary aluminum. He
also excluded foreign competition because shipping is expense
and thus Alcoa could control the amount imported simply by
setting its prices. Hand says that 33 percent market share would
be insufficient to establish monopoly power; 60-64 percent is
doubtful; but that 90 percent is certainly sufficient to establish
monopoly power.
iii. Holding: Hand concluded that it is sufficient to establish a
violation of § 2 by showing that a firm having monopoly power
purposefully and intentionally acquired, maintained, or exercised
that power. The narrow holding was the Alcoa had violated § 2
by using its monopoly power to exclude new entrants into the
market by buying up raw materials over what was necessary to
meet its production requirements. The reasoning used to reach
that decision, however, is more important than the holding itself.
iv. Reasoning: Hand distinguished between a firm that achieved
monopoly power by “superior skill, foresight and industry,” or a
firm that had monopoly power thrust upon it, from a firm that
achieved a monopoly through the exclusion of competitors or
other unduly coercive means. Alcoa gained its monopoly power
by price fixing and erecting barriers to entry. Hand refused to
consider the fact that Alcoa had only enjoyed 10 percent profits
because overall profits don’t fully reflect the profits in the
relevant market.
v. Significance: The holding in Alcoa established that conduct that
might otherwise be lawful can violate § 2 if the actor has
significant market power.
b. Economics: The “Dominant Firm” Model: A company can be a single
seller of a product and yet not a “monopolist” in Sherman Act terms.
Conversely, a company may be one of many sellers and have
substantially less than 100 percent market share and nonetheless satisfy
the market power requirements that define a “monopolist.” The
Dominant Firm Model suggests that a firm may have the power to
control prices even though there are many other firms competing in the
relevant market. The Model presumes that the DF has the ability to
produce product more cheaply that the “competitive fringe.” At a certain

26
 price, the fringe firms will supply the entire demand; but at a lower price,
the fringe suppliers will not meet the demand and the DF can fill the
residual demand. Thus, the DF can set the price as long as the fringe
firms meet a certain amount of the supply and demand. There is
therefore no competition with respect to this residual demand. The DF’s
position may be the result of natural factors, or perhaps anticompetitive
activities.
2. Sources of the Monopoly Power: Relevant Markets: Without market power,
actual or probable, there is little reason to be concerned with the acts of a single
firm under the antitrust laws. Thus, the definition of the relevant market is
critical to any analysis under § 2. To define the product market in which the
seller operates, one seeks to locate all substitutes available to buyers of the
seller’s product.
a. Blue Cross & Blue Shield of Wisc. v. Marshfield Clinic (7th Cir. 1995):
Plaintiffs claimed that defendants were exercising monopoly power in
the HMO “market” in the counties in which the plaintiff operated. The
key question in this case was the definition of the relevant product
market; the answer depends on to what extent the services at issue can be
substituted for—cross-elasticity of demand. Judge Posner says that
HMOs by themselves are not a relevant market because the HMO is just
a way for marketing doctors’ services. If HMOs raised prices,
consumers would substitute PPOs or other doctors’ services, and thus
HMOs compete with those entities. Thus, plaintiff only controlled 50
percent of the relevant market, “below any accepted benchmark for
inferring monopoly power from market share.” Furthermore, Posner
refused to infer monopoly power from plaintiff’s high prices and high
profit—high profit is not, in economic terms, necessarily indicative of
monopoly power, and high prices might just be a reflection of the quality
of services provided.
b. American Key Corp. v. Cole National Corp. (11th Cir. 1985): The
important issue in this case was the relevant geographic market. The
court ruled that the geographic market consists of the area from which
the sellers of the relevant product derive their customers, and the area
within which purchasers of the product can practically turn for such
products or services. “The relevant market is the “area of effective
competition” in which competitors generally are willing to compete for
the consumer potential, and not the market area of a single company.”
Thus, the defendant lacked significant market power, and plaintiff was
unable to maintain a § 2 claim.
3. Attempted Monopolization: In addition to prohibiting monopolization and
conspiracies to monopolize, § 2 proscribes attempts to monopolize. Conduct
amounts to an attempt to monopolize if there is a specific intent to monopolize
and a dangerous probability that, if unchecked, such conduct will ripen into
monopolization.
a. Abcor Corp. v. AM International, Inc. (4th Cir. 1990): Defendant
manufactured printing equipment; plaintiffs provided maintenance and
repair services for defendant’s machines in the Washington, D.C. area.

27
 The three elements of an attempted monopolization claim are: (1) the
defendant formed a specific intent to monopolize the market; (2) the
defendant engaged in anticompetitive or predatory conduct designed to
further that intent; and (3) a dangerous probability of success.
i. Intent to Monopolize: Attempted monopolization requires a
specific intent to destroy competition or build a monopoly. A
desire to increase market share or even to drive a competitor out
of business through vigorous competition on the merits is not
sufficient. The court found not intent to monopolize—a desire to
destroy a competitor though competition is not enough. Note the
risk of Type I/Type II error in this situation. McChesney says
this element is in essence just a pleading requirement—intent can
be inferred from anticompetitive conduct (see Spectrum Sports).
ii. Anticompetitive Activity: Plaintiffs must also show that the
defendant engaged in anticompetitive conduct—i.e., conduct
designed to destroy competition. It is important to distinguish
this conduct from conduct that is merely competitive. In short,
the defendant must be employing unfair means to achieve his
goal (the same activities that are condemned in cases of actual
monopolization). Here, the court found that the defendant’s
actions were not unfair or anticompetitive.
iii. Dangerous Probability of Success: A finding of dangerous
probability of success is basically a function of market
share/power. A dangerous probability of success can occur at
market share levels well below those needed to establish actual
monopolization. Any change in market share brought about by
the activity at issue may also be relevant.
iv. Antitrust Injury: As always, the plaintiff must show antitrust
injury, not just individual injury.
b. Spectrum Sports v. McQuillan (1993): The Court adopted the three part
test for an attempt to monopolize. The Court rejected, however, the
assumption that a dangerous probability of success could be inferred
from proof of predatory conduct alone. The Court held that satisfying
the dangerous probability element required an “inquiry into the relevant
product and geographic market and the defendant’s economic power
within that market.
B. EXCLUSIONARY CONDUCT
1. Exclusionary Contracts: The “bad conduct” requirement of § 2 is often very
difficult to understand. It is the means of winning the competitive wars that can
give rise to antitrust issues. For example, a violation may be found for
exclusionary conduct that unnecessarily impairs or restricts the ability of
competitors to compete. Note, however, that a defendant may be able to avoid
liability by demonstrating procompetitive reasons for its behavior (see
Microsoft).
a. United States v. United Shoe Machinery Corp. (D. Mass. 1953): It is
unquestioned that defendant has a monopoly on shoe making machinery.
The question was whether it was maintaining its monopoly through

28
 exclusionary conduct. The conduct at issue was a “lease-only” policy, in
which defendant would only lease its machines to customers. The court
found that its refusal to sell machines enhanced its monopoly position in
several ways: first, it solved the problem of a secondary market in
defendant’s machines; second, the “full-capacity” clause in the lease
directly restricted the customer’s ability to use a competitor’s equipment;
third, the price conditions made it cheaper to renew with defendant than
to acquire a competitor’s machine; fourth, it provided for free service
which deterred customers from switching to competitors. These
restrictions led to an almost absolute barrier to entry, and was thus
harmful to competition. Customers, however, were happy with the state
of the market; the restrictions of the leasing policy forced defendant to
give price breaks. The court’s remedy therefore is to end the leasing
policy (“conduct remedy”) as opposed to breaking up the company
(“structural remedy”). This case, like Alcoa, demonstrates that § 2 is
less concerned with prices and quantities, and more concerned with
maintaining competition.
b. Problem: The problem with the approach of United Shoe and Alcoa is
that it makes otherwise acceptable conduct illegal when the firm has
significant market power.
c. United States v. Microsoft Corp. (D.C. Cir. 2001): The issue in this case
was Microsoft’s practices in maintaining its monopoly, not that it
possessed monopoly power.
i. Market Definition: The court defined the relevant market as Intel-
compatible PC operating systems. The court excluded Mac OS
because consumers would not switch to Mac in response to a
substantial price increase. The court also excluded “middleware”
from the relevant market because middleware products could not
effectively replace Windows. Having defined the market, the
court found that Microsoft had a greater than 95 percent share.
ii. Anticompetitive Conduct: The bad acts that constituted the § 2
violation involved different types of transgressions. First,
Microsoft misled its competitors; second, it entered into
exclusionary contracts with OEMs, Apple, IAPs, and others
(contracts giving Windows to OEMs for free in exchange for
exclusively promoting IE; forcing competitors to market IE);
third, actively trying to inhibit the develop of Java technologies.
iii. Procompetitive Justification: Even though the court found that
Microsoft was engaging in exclusionary conduct, the court
allowed Microsoft to offer procompetitive justifications for the
conduct. Microsoft failed to do so, however.
2. Essential Facilities: This doctrine is a subset of the refusal to deal theory of
antitrust liability. However, courts are very reluctant to find liability on an
essential facilities theory under § 2.
a. Florida Fuels, Inc. v. Krueder Oil Co. (S.D. Fla. 1989): The question was
whether oil bunkers owned by defendant were an essential facility to
competing in the heavy marine fuel market in South Florida. The court

29
 described the requirements for liability under an essential facilities
theory. The doctrine is basically an exception to the general rule that
there is no duty to help one’s competitors.
i. Control of Facility by Monopolist: First, the plaintiff must prove
that the defendant who controls the facility is a monopolist; in
other words, the defendant must have monopoly power as
evidenced by the defendant’s ability to control prices or exclude
competition.
ii. Practicality of Duplicating the Facility: An essential facility need
not be indispensable; but it must be economically unfeasible to
recreate and must present a severe handicap on market entry. It
is insufficient for plaintiff to show that access to the facility is
simply more convenient, more economical, or less expensive. An
inquiry into the practicality of duplicating the facility should
consider economic, regulatory, and other concerns.
iii. Denial of Use: The monopolist controller of the facility must
deny use of the facility to competitors. The court suggest,
however, that this denial must be unreasonable.
iv. Feasibility of Sharing: The plaintiff must demonstrate that the
defendant may feasibly provide access to the facility.
v. Business Justification: Aspen Skiing has been interpreted as
adding a fifth element—whether the defendant advanced a
reasonable business justification for denying access or
conditioning access on terms that the plaintiff deems to be
excessively burdensome.
vi. History of dealing: Although not an explicit factor in the essential
facilities analysis, the court notes that in cases imposing a duty to
deal, the Supreme Court has not required an unregulated
monopolist, acting independently, to share its facility with a
competitor with which it has had no prior history of dealing.
b. Early Essential Facilities Cases: In early cases, the Supreme Court
treated essential facilities somewhat differently. In Associated Press v.
United States (1945), the Court held that an agreement to exclude
competitors from news gathered by the AP was a violation of the
Sherman Act because “trade restraints of this character, aimed at the
destruction of competition, tend to block the initiative which brings
newcomers into a field of business and to frustrate the free enterprise
system which it was the purpose of the Sherman Act to protect.” In
United States v. Terminal Railroad (1912), the Court held that the owner
of the only rail yard in St. Louis could not deny access to the rail yard to
competing railroads who were willing to pay market rates for access.
Both cases were decided under § 1.
3. Predatory Conduct: What kind of unilateral conduct, when undertaken by a firm
with monopoly power, can constitute the type of activity that violates § 2?
a. Predatory Pricing: This anticompetitive is based on a theory that a firm
with monopoly power could temporarily set prices below its own and its
competitors’ costs, wait for its rivals to go bankrupt or leave the market,

30
and then raise prices to supracompetitive levels. The graph below
demonstrates how the theory works, and why it is economical suspect.
Anticompetitive Gains (uncertain & later)
pm

pc MC
Predatory Losses (certain &
immediate)
pp D

qm qc qp
As the graph shows, it is very risky to undertake this approach to gaining
market power. Furthermore, present value of money makes it more
difficult to recoup losses later. Plus, because less quantity will be sold at
the higher monopoly price it will be harder to recoup losses.
Accordingly, like essential facilities cases, courts disfavor predatory
pricing as a theory of liability.
i. A.A. Poultry Farms v. Rose Acre Farms, Inc. (7th Cir. 1989):
Judge Easterbrook points out the primary problem with a
predatory pricing theory of § 2 liability: it punishes firms for
pricing too low; this is good for consumers, and good for
competition. Thus, Type I and Type II error become a serious
problem, and courts should be reluctant to discourage what might
be procompetitive behavior. Easterbrook identifies factors to
distinguish between aggressive competition and predatory
pricing.
(a). Prices & Costs: First, courts should determine whether the
defendant’s prices exceed its costs: if price exceeds cost,
then it reflects beneficial aggressive competition; if the
price is less than cost, then it may reflect a sacrifice in the
hope of suppressing competition. Also, “monopolists set
price by reference to their costs; competitors set price by
reference to the market. So the statement that [defendant]
does not pay attention to its own costs when setting price
reveals that the firm was acting as a competitor rather
than a monopolist.
(b). Intent: Second, look to the defendant’s intent.
Easterbrook doesn’t like relying on this factor because it
is irrelevant if the scheme fails.
(c). Possibility of Success: Third, look at the back end—if a
monopoly price later is impossible, then predatory pricing
is unlikely. Courts favor the third factor whenever
possible. Determining the possibility of future monopoly
power requires an analysis of the market structure—if the
market has many competitors, if it is easy to enter, and the

31
 defendant’s market share is low, it is unlikely that a
predatory price scheme would succeed.
ii. Brooke Group Ltd. v. Brown & Williamson Tobacco (1993): The
Court emphasized the importance of “recoupment” in predatory
pricing cases. If the defendant cannot recoup its losses from
below cost pricing, antitrust concerns are not implicated because
low prices benefit consumer welfare; and consumer welfare is the
goal of antitrust. The Court sustained the dismissal of a
predatory pricing claim because the plaintiff had failed to show
how the defendant could recoup its investment in below-cost
sales. The Court said that plaintiffs who claim predatory pricing
under § 2 or under the Robinson-Patman Act must satisfy two
requirements, which the Court called “not easy to establish.”
First, the plaintiff must “prove that the prices complained of are
below an appropriate measure of its rival’s cost. The Court did
not, however, prescribe what measure of cost (average variable
cost or average total cost) should be the threshold. The second
requirement “is a demonstration that the defendant had a
reasonable prospect, or under § 2 a dangerous probability, of
recouping its investment in below-cost prices.”
b. Theories of Predatory Behavior: The Court’s increasingly skeptical view
of predatory pricing allegations mirrors economists’ own belief that, for
the most part, the simple sort of predatory pricing alleged in most cases
makes little economic sense. Further, recoupment is impossible when
there are no barriers to entry; as soon as the predator begins to price
above cost, new entrants (or even the former rivals who had left the
market) will compete away any attempt at monopoly pricing. Some
theories, however, might allow for such predatory pricing to work. For
example, if the firm anticipated predatory pricing from the beginning, it
could heavily invest in fixed costs, thus lowering marginal cost and
deterring entry into the market. Another theory posits that a firm might
be able to raise its rivals’ costs, thus driving them out of the market and
obtaining a monopoly.
4. Price Squeezes: This may arise when there are two related markets; the
monopolist in the upstream market might raise prices at that level, and then
lower its prices in the downstream market to drive out competition at that level.
a. Town of Concord v. Boston Edison Co. (1st Cir. 1990): The narrow
question in this case was whether § 2 forbid a governmentally regulated
firm with fully regulated prices (at both levels) from asking regulators to
approve prices that could create a price squeeze? Judge Breyer answers
the question no, based on the fact that an upstream monopolist has no
economic incentive to attempt to monopolize downstream.
i. Facts: The plaintiffs were towns in Massachusetts who purchased
electricity from the defendant, which was an “investor-owned
utility” that operated at all three levels of the industry: (1)
production of electricity; (2) transmission of electricity from
generators to local distributors; and (3) distribution of electricity

32
 directly to consumers. Defendant’s rates were regulated by the
federal government. Defendant petitioned the government to
raise the rates it charged to local distributors; thus, while the rates
local distributors paid for electricity rose, the rates defendant
charged to consumers stayed the same. This created the so-called
“price squeeze.”
ii. Reasoning: Breyer begins by noting that the purpose of antitrust
is lower prices, better products, and more efficient production
methods. Furthermore, antitrust rules must be simple enough for
lawyers to explain to clients. Also, antitrust is not concerned
with prices per se, but with processes that result in certain prices.
The first problem with the price squeeze theory is that it is
basically complaining about lower prices, which is problematic
ab initio. Furthermore, and most importantly, Beryer says the
price squeeze in this case is economically counterintuitive: an
upstream monopolist has no incentive to monopolize downstream
because it can reap all the monopoly profits it needs at the first
level; in other words, a production level monopolist doesn’t care
what happens downstream. This reality is only untrue if there is
also a monopolist downstream; but that would have the effect of
forcing the upstream monopolist to lower its prices and increase
its output in the downstream market, which is good from an
antitrust point of view; and it would allow the upstream
monopolist to “squeeze” the downstream monopolist into lower
prices, also good.
iii. Holding: Breyer therefore holds that any anticompetitive risks
associated with a price squeeze are outweighed by the possible
economic benefits; and that, in any event, there is not much
economic incentive to monopolize the downstream market.
Because the risks of anticompetitive effects are even more remote
in a regulated industry (removes the potential barrier to entry),
price squeezes in a regulated industry do not violate § 2.
TWO-LEVEL MONOPOLY
Ps
MCp – Marginal cost of
production Pc Graphic Illustration Of Breyer’s Decision

MCp + MCw – Marginal cost of Pc – Pw = $1

wholesaling Pw

Dc – Consumer demand MCp + MCw

MCw = $1
MRc – Marginal revenue for
production and wholesaling MCp
SINGLE MONOPOLY
MRw – Marginal revenue for Dc
production only Dw
MRw MRc
Dw – Consumer demand

Ps – Successive monopoly price Qs Qc

33
 C. NONCOLLUSIVE, NONMONOPOLIZING, NONCOMPETITIVE CONDUCT
1. E.I. DuPont De Nemours & Co. v. FTC (“Ethyl Case”) (2nd Cir. 1984): This
case was brought under § 5 of the FTC Act, which challenged the simultaneous
adoption by the two leading firms in the ethyl industry of the following
practices: basing-point pricing, advance notice to competitors of price increases,
and use of most favored nation clauses. The FTC concluded that, although the
adoption of these practices was non-collusive, they collectively had the effect of
substantially lessening competition by facilitating price parallelism at
noncompetitive levels higher than might have otherwise existed. Thus, the
claim is basically one of tacit collusion; which, however, is a problem because
there are no “plus factors” that make it a violation of the Sherman Act. The
Second Circuit held that practices were not of the type that the antitrust laws are
concerned with; and, because the FTC failed to show the practical
anticompetitive effects of the practices, there was no harm to competition. The
court noted that may of these practices were adopted decades before the antitrust
suit was brought, and that there was evidence of substantial non-price
competition between the firms. The court also noted that § 5 cannot be violated
by non-collusive, non-predatory, and independent conduct of a non-artificial
nature. Liability under § 5 for “unfair practices” requires, at a minimum, a
showing of “oppressiveness” such as (1) evidence of anticompetitive intent or
purpose on the part of the producer charged, or (2) the absence of an
independent legitimate business reason for its conduct. McChesney say, “No
contract, no agreement, no antitrust injury, no problem.”
2. Standards of § 5 Violation: While specific standards are elusive, the FTC has
described various factors it will consider in determining whether a practice not
covered by the letter or spirit of other laws in nonetheless “unfair”: whether the
practice offends public policy; whether it is immoral, unethical, oppressive, or
unscrupulous; and whether it causes substantial injury to consumers.

IV. VERTICAL RESTRAINTS

A. INTRODUCTION
1. In General: Vertical relationships are between firms at different levels of
production or distribution. Antitrust law creates an incentive for companies to
vertically integrate without independent contracts because it will eliminate the
potential for § 1 liability. But this is not the most economical way to do
business. For firms that do contract along the vertical supply chain, in order to
extract the full potential gain they frequently condition their contractual
relationships in ways designed to regulate the conduct of the other party. Such
restraints can have both pro- and anticompetitive results.
2. The Economies of Contracting Out—Potential Gains and Problems: It is clear
that a firm producing a product can reap larger revenues if it contracts-out the
process of marketing the final product to consumers, rather than assume the
additional costs of marketing the product itself.
a. Potential Gains: The graph below demonstrates how contracting out can
increase profit. If the firm produces and markets the product itself, it
produces at Q0, and makes profit A; if it contracts with a distributor who

34
 can market the product at a lower cost, it would allow the producer to
sell additional units up to Q1; and to make additional profits B + C.
P
Marginal Cost

A Profit Effect of Agent/Distributor

Whose Marketing Yields The Same
C
Revenues at Lower Costs
B

Marginal Revenue

Q0 Q1 Q

Note that the economic effect is the same as above when the
agent/distributor doesn’t lower costs, but instead raises the price and thus
raises marginal revenue.
b. Potential Problems: Independent distributors have an incentive to free-
ride on the efforts of other distributors (sell a competing product at a
lower price, using the producers efforts at product demonstrations, etc.,
to educate the consumer), or otherwise to pursue their own interests at
the expense of the manufacturer. Vertical restrains certainly protect the
manufacturer from its distributors’ deviations from behavior maximizing
the manufacturer’s profits. But vertical restrictions also protect faithful
distributors from the free-riding of other distributors.
B. COMPETITIVE THREATS VS. COMPETITIVE OPPORTUNITIES
1. Anticompetitive Concerns: Although firms might contract with distributors to
stabilize demand or to concentrate sales and advertising efforts within a certain
territory, such restraints may merely mask efforts by manufacturers or dealers to
fix prices horizontally.
a. Dr. Miles Medical Co. v. John D. Park & Sons (1911): A manufacturer
of a patented medicine sued a wholesaler on the ground that the latter
obtained the plaintiff’s medicine at cut prices by inducing others to
breach their price agreements with plaintiff. The Court held that a
manufacturer who sells goods to a wholesaler may not restrict their
resale by constraining the buyer’s pricing decision. This is known as
“Resale Price Maintenance,” and continues (with some exceptions) to be
per se illegal under § 1. The plaintiff was basically setting a minimum
price at which its product could be resold—tantamount, in the Court’s
opinion, to price fixing. This decision was based on the somewhat
artificial notion that once the wholesaler purchases the goods, the
contract restricting price would be a restraint on alienation, illegal at
common law. In dissent, Holmes says the holding relies too much on
formal distinctions—the Court ignores the economic purpose of the
contract and its effect on consumer welfare; and, therefore, the Court
should be reluctant to apply per se liability.
b. United States v. General Electric Co. (1926): The Court maintained the
formal property-based distinction in Dr. Miles in holding that if the

35
 manufacturer’s agent/distributor never takes title to the goods (if the
manufacturer continues to bear the risks consequent to ownership), the
antitrust laws allow it to dictate the terms of sale—including retail prices.
This continued reliance on formal distinctions focused on the method of
the producer’s control and not its effect on competition or consumer
welfare, the supposed goal of antitrust.
c. Simpson v. Union Oil Co. (1964): The Court rejected the holding in GE,
and ruled that Union Oil violated the Sherman Act by fixing retail prices
for its service stations-consignees. The Court reasoned that Union Oil
was suing the vertical price restraint to “coerce” nominal agents.
d. Vertical Contracts vs. Unilateral Action: The formal distinctions of Dr.
Miles and its progeny make the definition of “agreement” very important
in vertical restraint cases. As GE implied, if the defendant is acting
unilaterally, it cannot run afoul of § 1.
i. United States v. Colgate & Co. (1919): The Court held that a
manufacturer’s advance announcement that it would not sell to
price cutters did not violate the Sherman Act. “In the absence of
any purpose to create or maintain a monopoly, the Act does not
restrict the long recognized right of trader or manufacturer
engaged in an entirely private business, freely to exercise his own
independent discretion as to parties with whom he will deal; and,
of course, he may announce in advance the circumstances under
which he will refuse to sell.” Thus, the Colgate doctrine
basically allowed manufacturers to “suggest” a retail price, and
then refuse to deal with wholesalers who did not sell at the
suggested price.
ii. United States v. Parke, Davis & Co. (1960): The defendant drug
manufacturer sought to obtain compliance with its “suggested
retail price” plan by bargaining and mediating with retailers who
refused to abide by the prices suggested by defendant. In
essence, the goal and primary effort was indistinguishable from
that of Colgate; the only difference was the Parke, Davis did not
have to terminate the dealer. Nevertheless, the Court held that
the “agreement” violated the Sherman Act.”
e. Albrecht v. Herald Co. (1968) (Note: the Court expressly overruled this
case in State Oil v. Khan): The defendant newspaper refused to sell to
the plaintiff-distributor when the latter resold the papers to customers at
more than the suggested retail price. The Court held that this maximum
price fixing arrangement was per se illegal under § 1. “Agreements to
fix maximum prices no less than those to fix minimum prices, cripple the
freedom of traders and thereby restrain their ability to sell in accordance
with their own judgment.” Justice Harlan dissented on the ground that
this formal approach ignored the economic realities of the situation.
i. Practical Effect: The practical economic effect of the Court’s
decision in Albrecht was for manufacturers to integrate
downstream. This is bad because it eliminates independent
distributors, and is economically wasteful.

36
 ii. Paschall v. Kansa City Star (8th Cir. 1984): The newspaper
vertically integrated and eliminated the downstream distribution
market. The court held this was not per se illegal, but subject to a
rule of reason analysis.
f. State Oil Co. v. Khan (1997): The Court overruled Albrecht in holding
that an agreement between a manufacturer and distributor under which
the distributor had to sell at the manufacturer’s suggested retail price or
rebate the amount of the overcharge to the manufacturer (maximum price
fixing), was subject only to rule of reason analysis. “Our analysis is
guided by our general view that the primary purpose of the antitrust laws
is to protect interbrand competition. ‘Low prices,’ we have explained,
‘benefit consumers regardless of how those prices are set, and so long as
they are above predatory levels, they do not threaten competition.’ So
informed, we find it difficult to maintain that vertically-imposed
maximum prices could harm consumer or competition to the extent
necessary to justify their per se invalidation.”
g. State of the Law: Under § 1, vertical maximum price fixing is judged
under the rule of reason (Khan); and vertical minimum price fixing is per
se illegal (Dr. Miles). The same conduct is always per se illegal if the
agreement is horizontal. This illustrates the strange treatment given to
vertical agreements.
2. Accommodating Efficiencies—Relaxed Rule for Non-Price Restraints: Once
resale price maintenance was foreclosed, firms began to look to other
contractual means for attaining similar or additional distributional advantages.
Initially, the Court ruled that even non-price vertical restraints were per se
illegal. United States v. Arnold, Schwinn & Co. (1967). Later cases, however,
demonstrated a more enlightened approach to vertical economic relationships.
a. Continental T.V. v. GTE Sylvania, Inc. (1977): Sylvania had a negligible
market share in the national television market. In an effort to increase
sales, it abandoned its old distribution methods in favor of selling to
franchised retailers. The retailers, however, were restricted to certain
geographic areas, and could only operate from approved locations. The
strategy worked, and Sylvania’s market share increased. Dissatisfied
with its sales in San Francisco, Sylvania appointed an additional dealer
to service the area. The existing San Francisco dealer objected, and
moved its store to Sacramento. This move violated the location clause in
the franchise agreement, and Sylvania terminated the franchise. The
franchisee sued, claiming the location clause was a vertical restriction
that violated § 1 of the Sherman Act.
i. Reasoning: The Court recognized that under Schwinn, the
territorial restrict at issue was per se illegal because the
franchisee actually acquired title to the t.v. sets before it sold
them to consumers—Schwinn made agency contracts subject to
the rule of reason, and resale contracts subject to the per se rule.
The Court recognized, however, that this approach was out of
line with economic realities: “Vertical restrictions promote
interbrand competition by allowing the manufacturer to achieve

37
 certain efficiencies in the distribution of his products. . . . Such
restrictions, in varying forms, are widely used in our free market
economy. There is substantial scholarly and judicial authority
supporting their economic utility. . . . Accordingly, we conclude
that the per se rule in Schwinn must be overruled. In so holding
we do not foreclose the possibility that particular applications of
vertical restrictions might justify per se prohibition. But we do
make clear that departure from the rule of reason standard must
be based upon demonstrable economic effect rather than
formalistic line drawing.”
ii. Functional Antitrust: Justice Powell’s decision demonstrates a
rejection of the formal distinctions that were embodied in Dr.
Miles and its progeny in favor of a more “functional” approach to
antitrust analysis. Thus (at least in the world of vertical
restraints), rule of reason is the norm, and per se liability is the
exception. This represents a dramatic shift in the Court’s
approach to antitrust: formal distinctions should be replaced by a
pragmatic examination of the economics of the activity and its
effect on competition.
b. St. Martin v. KFC Corp. (W.D. Ky. 1996): This case involved a “dual
distributorship” structure, in which the manufacturer has both
independent franchised distributors, and also operates as a distributor
itself. KFC has “company towns,” in which it acted as the only
distributor, and refused to allow the plaintiff to open a franchise in Las
Vegas, a company town. Plaintiffs alleged a violation of § 1in that KFC
excluded franchises from company towns, and prohibited franchisees
from acquiring other fast-food franchises other than KFC outlets. The
court said that his was a vertical, non-price restraint, and therefore
subject to the rule of reason. The “company store” clause is only a
restriction on intrabrand competition, and is therefore subject to rule of
reason analysis under Sylvania. McChesny says, however, that the
restriction on obtaining other fast-food franchises is a horizontal
restriction—it is possible for a contract to have both vertical and
horizontal components. The court also cites Copperweld for the
proposition that KFC’s actions were unilateral; this reliance, however, is
misplaced because the franchisees are not part of the same corporation,
but independent entities with only a contractual relationship with KFC.
C. APPLYING THE RULES
1. Price Agreements: Plaintiffs in the vertical world are always trying to get to the
Dr. Miles rule; to have the situation characterized as retail price maintenance.
But this approach is in tension with the ruling Sylvania and the notion of
“functional antitrust.”
a. Monsanto v. Spray-Rite Service Corp. (1984): The defendant
manufacturer terminated a price-cutting dealer after receiving complaints
from nondiscounting dealers. The dismissed dealer alleged that
defendant was engaging in retail price maintenance as evidenced by the
fact that it had been dismissed for failing to meet the fixed price. The

38
 Court held, like in Matsushita, that the evidence presented to support a
finding of an agreement must tend to exclude the possibility of unilateral
action. “Permitting an agreement to be inferred merely from the
existence of complaints, or even from the fact that termination came
about ‘in response to’ complaints, could deter or penalize perfectly
legitimate conduct.” The Court’s skeptical approach towards
circumstantial evidence of retail price maintenance agreements makes it
harder for vertical plaintiffs to prove those agreements and thus obtain
per se analysis.
b. Business Electronics v. Sharp Electronics (1988): Like Monsanto, this
case involved the termination of a price-cutting distributor. Defendant
published a list of suggested retail prices, but its dealership agreements
did not obligate the dealers to observe those prices. One dealer
complained the defendant that the plaintiff was selling the product below
the suggested prices. In essence, the plaintiff was free riding of the other
dealers efforts to educate consumers and provide technical support.
Defendant then terminated plaintiff in response to the complaints.
Justice Scalia noted that the approach to cases such as this must be
guided by premise of Sylvania: “that there is a presumption in favor of a
rule of reason standard; that departure from that standard must be
justified by demonstrable economic effect, such as the facilitation of
cartelizing, rather than formalistic distinctions; that interbrand
competition is the primary concern of the antitrust laws; and that rules in
this area should be formulated with a view towards protecting the
doctrine of Sylvania.” The Court held, therefore, that a vertical restraint
is not subject to the per se rule unless it specifically relates to prices—a
restraint that merely affects price is subject to rule of reason analysis.
(Note that this approach itself is contrary to Sylvania because it draws a
bright line between contracts specifically on price and those that simply
affect price.)
c. Sportmart, Inc. v. No Fear, Inc. (N.D. Ill. 1996): This case demonstrates
the fine line between unilateral price fixing and refusals to deal (Colgate
Doctrine), and resale price maintenance. This case looked like Monsanto
—terminating a price cutting distributor. But the plaintiff was able to
offer evidence that defendant “had agreements with other retailers to sell
their goods at higher prices.” Thus, the court held that there was a jury
question as to whether defendant was engaged in resale price
maintenance.
2. Other Restraints: The range and variety of non-price vertical restraints is nearly
infinite.
a. O.S.C. Corp. v. Apple Computer, Inc. (C.D. Cal. 1985): Defendant
sought to prohibit its distributors from selling product through mail
orders; those sales were harming Apple’s business because it was losing
money it spend on demonstrations and service (mail-order distributors
were free riding on the efforts of other distributors). The per se rule
doesn’t apply because the restraint doesn’t apply to price; and rule of
reason analysis leads to a finding of no liability because plaintiff failed to

39
 show any adverse effects to competition. The court also relies on market
power in its rule of reason analysis—without significant market power,
there can be no anticompetitive effect, and the rule of reason analysis can
end there.
b. Murrow Furniture v. Thomasville Furniture Indus. (4th Cir. 1989): This
was a non-price, territorial restriction, and thus subject to rule of reason
analysis under Sylvania. The court focuses on the fact that defendant
lacked significant interbrand market power in holding that the restraint
did not violate the antitrust laws.
3. Rule of Reason: In the area of vertical restraints, courts applying the rule of
reason usually conduct the following inquiry. First, courts will look to whether
the defendant has significant market power to warrant further inquiry; if not, the
analysis ends there. Second, if the defendant has market power, courts then look
to whether the restraint has a valid procompetitive justification. If the defendant
offers such a justification, the burden shifts back to the plaintiff to show that the
asserted rationales are outweighed by other evidence of harmful anticompetitive
effects.

V. TYING AND EXCLUSIVE DEALING

A. BACKGROUND—POLITICS OF THE CLAYTON ACT

1. Application of the Clayton Act: Tying and exclusive dealing involve contracts
allegedly in restraint of trade, which, moreover, may also be a means of
monopolization. These practices, however, are not governed by the Sherman
Act; rather, § 3 of the Clayton Act was passed specifically to addressed these
practices.
2. Language of the Act: Section three’s language doesn’t specifically mention
tying and exclusive dealing; it was, however, expressly designed to criminalize
such behavior. The Act, notably, only prohibits tying and exclusive dealing
when their effects “may be to substantially lessen competition or tend to create a
monopoly.” Thus, the statute seems to mandate a rule of reason analysis.
B. TIE-IN SALES
1. Traditional Cases: Under a tying arrangement, the seller of a product conditions
the sale of one product (the tying product) upon the buyer’s agreement to
purchase a second product (the tied product). The concern is that a monopolist
in the tying product market may use that leverage to garner sales in the tied
product market, thereby foreclosing competition in that market. Judicial
approach to these cases has focused on both on the tying arrangement itself as
well as on the defendant’s market power and the affect of the arrangement on
the market.
a. International Salt Co. v. United States (1947): Defendant, the largest
producer of salt for commercial use, tied the lease of its salt dissolving
and processing machines to the lesee’s purchase from it of all the salt
used in operating the machines. The Court used a “quasi” per se rule of
liability to hold that arrangement violated § 3. The Court focused on
defendant’s market power and on the substantial dollar volume of
business in the tied product as proving anticompetitive effect. Once

40
 these minimum threshold elements were shown, the Court held that the
violation was proven. The Court rejected the legitimate business reasons
that defendant offered to justify the arrangement—it seemed to suggest
that there were less restrictive alternatives than tying to achieve the
business goals defendant meant to attain through the tying arrangement.
b. Northern Pacific Railway Co. v. United States (1958): The Court termed
the rule laid down in International Salt as a per se rule against tying. It
also held that tying was illegal under the Sherman Act, and the same
standard of illegality applied.
c. Siegel v. Chicken Delight, Inc. (9th Cir. 1971): Defendant gave away its
franchise license (tying product) for free, but required the franchisee to
purchase cooking equipment, food items, and packaging (tied products)
from defendant. The court reasoned that there are three requirements for
a finding of liability for tying: (1) that the tying and tied products are two
distinct products; (2) that the defendant has sufficient market power in
the tying product market (i.e., “economic power”) to restrain trade in the
tied product market; and (3) that the arrangement effects a “not
insubstantial” amount of commerce. (Economic power is different than
market power.) The court said that sufficient market power can be
presumed when the tying product is patented or copyrighted; and that the
power to impose the tie-in may establish as a matter of law the existence
of market power sufficient for a violation. The court also rejected the
legitimate business justification for the arrangement.
d. Mozart Co. v. Mercedes-Benz of N. America, Inc. (9th Cir. 1987): The
court recognized that, with respect to franchise arrangements, tying may
be the most efficient and effective method of ensuring quality.
2. Recent Tying Cases: The “partial” per se test developed by the court in
International Salt and Northern Pacific Railway seemed unduly rigid in practice
(for example, the result in Chicken Delight). In more recent years, the Court has
backed off somewhat from this formal approach.
a. Jefferson Parish Hospital Dist. No. 2 v. Hyde (1984): Defendant hospital
required patients wanting operations to use the hospital’s
anesthesiologists. The hospital claimed that this bundling of services
reduced costs and improved the quality of care; an excluded
anesthesiologist complained that the tie prevented him from obtaining
privileges of practice. The Court unanimously held that this arrangement
did not violate the antitrust law; the Justices disagreed, however, on why
the tie was acceptable.
i. Majority: Justice Stevens says for the majority that “it is far too
late in the history our antitrust jurisprudence to question the
proposition that certain tying arrangements pose an unacceptable
risk of stifling competition and therefore are unreasonable per
se.” “It is clear, however, that every refusal to sell two products
separately cannot be said to restrain competition.” “The essential
characteristic of an invalid tying arrangement lies in the seller’s
exploitation of its control over the tying product to force the
buyer into the purchase of a tied product that the buyer either did

41
 not want at all, or might have preferred to purchase elsewhere on
different terms. When such ‘forcing’ is present, competition on
the merits in the market for the tied item is restrained and the
Sherman Act is violated. Accordingly, we have condemned tying
arrangements when the seller has some special ability—usually
called “market power”—to force a purchaser to do something
that he would not do in a competitive market. When forcing
occurs, our cases have found the tying arrangement unlawful.”
Justice Stevens does not apply the per se rule in this case,
however, because defendant lacked market power in the tying
product. Under the rule of reason, there is no anticompetitive
harm because “there is no evidence that the price, the quality, or
the supply or demand for either the ‘tying product’ or the ‘tied
product’ involved in this case has been adversely affected by the”
tying arrangement.
ii. Concurring Opinion: Justice O’Connor concluded that surgery
and anesthesia were not separate products for tying purposes.
More importantly, Justice O’Connor would drop the “per se”
label for the inquiry under tying cases, and refocus the inquiry on
the adverse economic effect, and the potential economic benefits,
that the tie may have. “The ultimate decision whether a tie-in is
illegal under the antitrust laws should depend upon the
demonstrated economic effects of the challenged agreement.” In
O’Connor’s opinion, tying is only illegal if: (1) the seller has
power in the tying market; (2) there is a substantial threat that the
seller will acquire power in the tied-product market; (3) there is a
coherent economic basis for treated the two products as distinct;
and (4) the economic effect of the tie is anticompetitive.
iii. Shift in Analysis: Even under the majority’s “per se” test, this
case demonstrates a shift from an analysis focused on supply-side
competition to a focus on consumer/demand-side effects.
b. Town Sound & Custom Tops, Inc. v. Chrysler Motors (3rd Cir. 1992):
This case demonstrates the confusion caused by the Jefferson Parish
decision. Plaintiff alleged that defendant was tying sales of new cars to
sales of radios to go in the new car. The court treated the per se test as
totally separate from the rule of reason analysis; but this approach
illustrates how the two tests overlap. First, the court says that for the per
se rule to apply, defendant must have significant market power in the
tying market. Plaintiffs wanted to define the market as Chrysler cars; but
this makes no sense because Chrysler cars are not so wholly distinct
from other cars that consumers don’t consider other cars as substitutes
for Chrysler cars. Thus, the relevant tying product market is Chrysler
cars and cars that are substitutes for Chrysler cars. Because defendant
lacked significant power in that market, the per se rule did not apply.
The court read Jefferson Parish to say that under the rule of reason a tie
may be illegal if it serves as an unreasonable restraint on competition in
the tied product market. The court then analyzes this issue as basically

42
 an question of antitrust injury—plaintiff must state a theory of injury to
competition that doesn’t require market power. Plaintiffs do show
injury, but not as a result of injury to competition; the injury was caused
by consumers choosing not to buy its product.
c. Eastman Kodak Co. v. Image Technical Servs., Inc. (1992): The Court
further confused the appropriate analysis for tying arrangements when it
suggested that a seller without market power in the market for the sale of
original equipment can possess market power in the aftermarket of parts
and services for that product. The tying product was replacement parts
for the copy machines; the tied product was service contracts for repairs
to the machines. The Court said there was a triable issue of fact as to
whether the service and the parts constituted different products for tying
purposes. The dissent said that lack of market power in the primary
market is inconsistent with market power in the derivative aftermarket.
d. United States v. Microsoft Corp. (2001): The court refused to apply a per
se rule to the tying claims against Microsoft. Notably, the court seems to
ignore the forcing analysis in Jefferson Parish, and goes straight into a
Sylvania-type economic analysis. The court concludes that because the
technology is so new, it is impossible to determine whether the tie has
harmed competition. The court instructed that on remand the
government would have to prove several things. First, it must show that
Microsoft’s conduct unreasonably restrained competition, which requires
an inquiry into the actual effect of the conduct on competition in the tied
market. This would in turn require a careful definition of the tied good
market and a showing of barriers to entry other than the tying
arrangement itself.
C. EXCLUSIVE DEALING
1. Traditional Approach: Another way to secure vertical integration through
contract is exclusive dealing. Instead of relying on economic power in the tying
product market to obtain sales of a second product, the manufacturer offers a
sales contract conditioned on the buyer’s agreement not to deal in the goods of a
competitor; the buyer is “tied” to a particular manufacturer. This type of
arrangement may, however, have substantial procompetitive advantages; it may
stabilize demand, prices, and reliability of supply, and can avoid the problem of
interbrand free riding. In Standard Oil Co. v. United States (“Standard
Stations”) (1949), defendant supplied gasoline to independent service stations
through requirement contracts, as did all other gasoline suppliers. Despite the
fact that the contracts in question only affected 16 percent of the market, the
Court held that the contracts violated § 3 of the Clayton Act. The Court seemed
to apply a per se rule—it said a review of the economic would be too
complicated, and reasoned that in any event § 3 only required a showing that the
activity “may” be to lessen competition. But the Court’s exhaustive
examination of the economics of these agreements suggested something more
than a simply per se rule.
2 Recent Approach: Lower courts have tended not to follow the rigid rule laid
down in the Standard Stations case. Modern cases focus on three principle
criteria in evaluating the reasonableness of exclusive dealing arrangements: (1)

43
 the extent of market foreclosure (up to 30 percent is presumably acceptable after
Jefferson Parish); (2) the duration of the exclusive arrangement (short terms and
short notice for termination are frequently presumed to be reasonable); and (3)
entry barriers (easy entry will usually lead to a finding of reasonableness).
a. Tampa Electric Co. v. Nashville Coal Co. (1961): A coal suppler argued
that its agreement to fill an electric utility’s “total requirements” for coal
should not be enforced because it violated § 3. The Court upheld the
contract because it found that it did not affect a substantial enough
amount of the coal market to raise antitrust concerns. The Court seemed
to reject the “substantial amount of commerce” analysis in Standard
Stations which looked only to the actual amount of money involved.
This decision seemed to move the analysis in exclusive dealing cases
more towards a rule of reason.
b. Roland Machinery Co. v. Dresser Indus., Inc. (7th Cir. 1985): Defendant
had a dealership agreement with plaintiff that provided for termination
by either party on 90 days notice. Plaintiff also signed an agreement
with a rival manufacturer. After discovering this second agreement,
defendant gave notice that it would exercise its right to terminate the
contract. Plaintiff’s theory was based on an implied exclusive dealing
arrangement. Judge Posner begins by observing that the law of exclusive
dealing is in disarray. First, Posner says defendant’s actions are
analogous to behavior approved under the Colgate doctrine: there was no
evidence of meeting of the minds on the exclusive dealing arrangement,
and defendant’s announcement that it will not deal with distributors
dealing in a rival’s product is a unilateral decision free from antitrust
concern. Furthermore, Posner says that “although the Supreme Court
has not decided an exclusive-dealing case in many years, it now appears
most unlikely that such agreements . . . will be judged by the strict test of
Standard Stations. They will be judged under the rule of reason, and
thus condemned only if found to restrain trade unreasonably.” Posner
says that under the rule of reason, the plaintiff must show that the
exclusive dealing arrangement is likely to keep at least one significant
competitor from the market, and the probable effect will be to raise
prices or otherwise injure competition. In other words, “foreclosure” is
no longer the gravamen of exclusive dealing—it’s really about prices and
quantities.

VI. MERGERS AND ACQUISITIONS

A. CLASSIC MERGER CASES

1. Introduction: Antitrust is only interested in horizontal mergers. Mergers
basically serve as an alternative to price fixing. Section 7 of the Clayton Act
prohibits mergers that may “tend to substantially lessen competition or tend to
create a monopoly.” The “Merger Guidelines” promulgated by the DOJ have
had a significant influence on which mergers the government will challenge, as
well as on the approach courts take in analyzing mergers.

44
2. United States v. Von’s Grocery Co. (1966): Defendant, a chain grocery store in
Los Angeles, acquired another chain grocery store; together, the two firms
accounted for 7.5 percent of the market. This was also set against a trend in the
market which saw the gradual elimination of smaller, independent stores and the
rise of chain stores. But, at the time of the merger, there were still over 3,000
single-store operations in the L.A. market. The Court holds that these facts
taken together were enough to render the merger illegal under § 7. This
amounted to basically a per se rule against mergers. The Court’s decision was
premised on the belief that § 7 was designed to protect “small dealers and
worthy men,” which accounts for the statute’s directive that anticompetitive
mergers should be halted in their “incipiency.” In dissent, Justice Stewart noted
that mergers can have significant procompetitive effects, and thus a per se rule is
inappropriate. Furthermore, the goal of antitrust is to protect competition, and
not competitors.
3. Brown Shoe Co. v. United States (1962): The Court’s first major merger
decision, and perhaps still the benchmark for mergers in unconcentrated
markets. The Court held that a functional approach should guide courts in
examining mergers; simply looking at market share was insufficient—the
context of the industry must significantly factor into the analysis. Because the
goal of merger laws was to protect markets from becoming too concentrated, the
Court said that mergers must be stopped before they occur—“curbed in their
incipiency.”
4. Untied States v. Philadelphia National Bank (1963): The Court blocked a merger
that would create the largest bank in Philadelphia. It held that mergers resulting
in a high market share were so likely to substantially lessen competition, that a
detailed analysis was unnecessary. “a merger which produces a firm controlling
an undue percentage share of the relevant market, and results in a significant
increase in the concentration of firms in that market is so inherently likely to
lessen competition that it must be enjoined in the absence of evidence showing
that the merger is not likely to have such anticompetitive effect.”
5. FTC v. Procter & Gamble Co. (1967): P&G sought to acquire Clorox, the largest
seller of household bleach; P&G did not did not itself manufacture or sell
bleach. The Court ruled that the merger violated § 7 for two reasons: first, that
the merger would give Clorox a decisive advantage in the bleach market,
allowing it to raise barriers to entry; and second, that P&G was the only
potential competitor for entry into the bleach market. The Court rejected the
argument that the merger would bring costs down (and lower prices for
consumers) for Clorox.
a. The Potential Competition Doctrine: In Procter & Gamble, the Court
stated that “it is clear that the existence of Procter at the edge of the
industry exerted considerable influence on the market. First, the market
behavior of the industry was influenced by each firm’s predictions of the
market behavior of its competitors, actual and potential”; second Procter
had no barrier to entry; third; there were few potential entrants, so
elimination of Procter as one would be significant; and fourth Procter
most likely entrant. Thus, the Court based its decision not on the fact
that the merger would diminish competition, but that competition might

45
 be increased if the merger was enjoined. In United States v. Falstaff
Brewing Co. (1973), the Court expanded the potential competition
doctrine to include firms outside the market that, although not actually
considering entry, might be perceived by firms in the market as being a
possible entrant, thereby affecting prices in the market. This theory has
not been applied, however.
b. Market Efficiencies: Merger (and antitrust) law doesn’t adequately
address the possibility of productive efficiency, and how that might
outweigh the loss to consumers. As the graph below demonstrates, it is
possible that a merger might result in certain efficiencies that will bring
costs down, thereby lowering prices, even though the firm’s profits
would increase. The Court in Procter & Gamble rejected this as a
possible defense to in merger cases because the “efficiency” might act as
a barrier to entry.

Income shift (Market Efficiencies)

P

Productive Deadweight loss

Efficiency
MC

MC’ (result of merger)

D

6. United States v. General Dynamics Corp. (1974): Relying on the imperative in

Brown Shoe that “statistics concerning market share and concentration, while of
great significance, are not conclusive indicators of anticompetitive effect,” the
Court upheld the merger of two leading coal producers. This represented a
major departure from the per se rule of Von’s and Procter & Gamble. The Court
also considered the efficiencies that would result from the merger.
B. PUBLIC AGENCY ENFORCEMENT POLICIES
1. Merger Guidelines: The DOJ Merger Guidelines state that the “unifying theme”
of federal merger enforcement is that “mergers should not be permitted to create
or enhance market power or to facilitate its exercise.” “While challenging
competitively harmful mergers, the Agency seeks to avoid unnecessary
interference with the larger universe of mergers that are either competitively
beneficial or neutral.” There are five steps for identifying mergers that might
have anticompetitive effects: (1) does the merger cause a significant increase in
concentration and produce a concentrated market?; (2) does the merger appear
likely to cause adverse competitive effects?; (3) would entry sufficient to
frustrate anticompetitive conduct be timely and likely to occur?; (4) will the
merger generate efficiencies that the parties could not achieve by other means?;
and (5) is either party likely to fail, and will its assets leave the market if the
merger does not occur? The DOJ takes the following steps to answer these
questions.

46
 a. Market Definition: To assess the merger’s impact on concentration, the
Guidelines use market power measurement methods. Thus, the first step
is to define the relevant product and geographic markets. The focus is on
cross-elasticity of demand. This is by far the most important step in the
merger analysis.
b. Market Participants: Current producers and sellers, and also firms that
participate through a supply response (uncommitted suppliers) are
considered. The possibility of entry is also important.
c. Herfindahl-Hirschman Index: Once the market is defined, and the
participants are identified, the HHI is calculated. The HHI is calculated
by summing the squares of the market shares of each firm in the market.
For example, if there are three firms in the market, with 10%, 40%, and
50% market shares respectively, the HHI would equal 102 + 402 + 502, or
4200. This indicates how concentrated the market is pre-merger.
d. Application of HHI: The question here is how will the merger affect
market concentration. The HHI is recalculated using the post-merger
market shares. If the pre-merger HHI is 1800 or above and it is
increased by more than 50, the government will challenge the merger; if,
the pre-merger HHI is between 1000 and 1800, and is increased by more
than 100, the government will challenge the merger; if the HHI is below
1000, the government will not challenge. In the above example, if the
10% and 40% firms merged, the new HHI would be 502 + 502, or 5000,
an increase of 800; thus, the merger would be challenged.
e. Efficiencies: The Guidelines also consider whether otherwise
objectionable mergers may be necessary to achieve efficiencies. The
merging parties bear the burden of proof concerning efficiencies; the
DOJ will only consider efficiencies that are merger-specific (i.e. could
not be otherwise accomplished) and cognizable.
f. Failing Firm: There is a limited defense for failing firms. The defense is
available if impending failure would cause the assets of one party to
leave the market if the merger does not occur. This is a complete
defense, and therefore (according to McChesney) should be considered
first.
2. Pre-Merger Notification: The Hart-Scott-Rodino Act requires merging firms to
notify the government of their deals. More importantly, it established a waiting
period before larger mergers could be consummated. This has converted
antitrust merger enforcement into a regime of bureaucratic regulation rather than
litigation.
C. MODERN MERGER CASES
1. Approach of Lower Courts: Although courts recognize that the Supreme Court
decisions from the 1960s permit the condemnation of mergers merely by
reference to modest concentration increases, most judges have declined to rely
on structural criteria alone. In fact, most courts refer to the Merger Guidelines
when determining whether a merger violates the antitrust laws.
2. Hospital Corp. of America v. FTC (7th Cir. 1986): Judge Posner affirmed the
decision of the FTC because it was not clearly erroneous; but it is obvious from
the opinion that Posner disagrees with the decision. Defendant owned one

47
 hospital in Chattanooga, and wanted to acquire two additional hospitals;
defendant also managed two other hospitals in Chattanooga. The acquisition
would raise defendant’s market share to 26 percent in a highly concentrated
market. Because the market was so highly concentrated, the merger would
make it easier for firms to collude; because there was little cross-elasticity of
demand, a rise in price will not significantly effect quantities sold to consumers;
and because entry was difficult, it was unlikely that the market would check any
increase in price. Thus, Posner concludes, there are facts supporting the finding
that the merger might have anticompetitive effects. The efficiencies defendant
claimed would result of the merger were not of the sort considered in merger
analysis.

VII. SPECIAL RULES OF ANTITRUST: STANDING AND ANTITRUST INJURY

A. ANTITRUST “STANDING”
1. Introduction: Several related concepts are often referred to as “antitrust
standing”: (1) purchaser rules; (2) antitrust injury; and (3) efficient enforcer.
These are distinct requirements necessary for a private plaintiff to bring suit
under the antitrust laws. They are a significant barrier to enforcement of the
antitrust laws by “private attorneys general.”
2. Illinois Brick v. Illinois (1977): The plaintiff was the state of Illinois, which
claimed it had been injured by a price fixing conspiracy among producers of
concrete blocks. The defendants sold their product to masonry contractors, who
submit their bids to general contractors, who in turn submit their bids to
customers such as the state. Thus, plaintiff was not the direct purchaser of the
product; the injury had therefore been passed down the chain of supply. The
Court held that indirect purchasers did not have standing to sue for antitrust
violations at the manufacturing level. This was based in large part on a prior
decision in which the Court had proscribed defendants from using “passing on”
as a defense against direct purchasers who passed the loss to consumers; the
Court reasoned that it would be unfair to allow passing on to be used offensively
against the manufacturer. The Court also feared that permitting indirect
purchaser to sue would create intolerable administrative difficulties as courts
sought to trace the amount and locus of harm throughout the distribution chain
and apportion damages to each claimant.
B. ANTITRUST INJURY
1. In General: In Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc. (1977), the Court
established the requirement that the private plaintiff show that its injury resulted
from the anticompetitive effects of the defendant’s conduct. The Court
emphasized that the asserted injury must flow from a reduction or injury to
competition—plaintiffs must prove injury “of the type the antitrust laws were
intended to prevent and that flows from that which makes defendants’ acts
unlawful.
2. Cargill v. Monfort of Colorado, Inc. (1986): This was a private challenge to a
proposed merger in which plaintiff sought an injunction rather than damages.
The question was whether, in this situation, plaintiff was required to
demonstrate antitrust injury. The Court held that injunctive relief also requires a

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 plaintiff to show antitrust injury. Furthermore, plaintiff only demonstrated that
the merger might harm it because defendant might engage in predatory pricing,
thereby depriving plaintiff of potential profits and possibly driving it out of
business. The Court noted that, even though the government might have
prevailed if it had brought suit, plaintiff could not prevail because it was
basically saying that the increased competition would harm its business; this is
not the type of harm the antitrust law seeks to redress, and thus plaintiff failed to
show antitrust injury.
3. Atlantic Richfield Co. v. USA Petroleum Co. (1990): The question was whether
a plaintiff must demonstrate antitrust injury when the defendant’s acts are per se
illegal under the antitrust laws. Plaintiff alleged that defendant was engaged in
vertical, maximum price fixing with its distributors (still subject to the per se
rule of Albrecht in 1990). The Court held that this did not give rise to antitrust
injury to a competitor—the rule against maximum price fixing is to redress the
harm to consumers and dealers, not competitors; indeed, competitors might
actually benefit from the pricing policy. “When a firm lowers prices but
maintains them above predatory levels, the business lost by rivals cannot be
viewed as an ‘anticompetitive’ consequence of the claimed violation. A firm
complaining about the harm it suffers from nonpredatory price competition is
really claiming that it is unable to raise prices. This is not antitrust injury;
indeed, cutting prices in order to increase business often is the very essence of
competition.” The significance of this case is that it makes it very difficult for
competitors to sue for antitrust violations of its rivals: if prices are too low, then
(as in this case) there is no antitrust injury; if prices are too high, there is no
actual injury.

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