school Antitrust Outline

I.

The Trust Problem and Origins of Antitrust Law A. Overview 1. TENSIONS IN ANTITRUST (Competition v. Cooperation) a. Competition i. Values of competition What happens when companies compete? 1. Prices are lower (cartels like OPEC are the opposite) 2. Choices (terms, product competition) 3. Efficiency lower costs better quality 4. Innovation (make better products) 5. Allocative efficiency GDP (competition pushes this. Produce what people want the most) ii. Pricing 1. Planning does not work free competition ensures that there is enough of products that are in demand a. High price acts as a signal to show that product is in demand b. Higher prices should signal we need more 2. Gains from trade a. Both parties are better off iii. Is every form of competition good? 1. Not always (illegal blow up factory) 2. Microsoft (advantage b/c better product, but not fair competition) b. Cooperation i. Why not have a law that requires total competition? 1. Leads to productive efficiencies when companys cooperate (banks, trade assn) c. What sort of balance will we allow? This is the purpose of antitrust law 2. ENFORCEMENT a. Who can bring cases? i. D of J (Antitrust Div) ii. FTC iii. Private Ps iv. State attorneys general b. All end up in federal courts b/c it is the only one that can give an affirmative answer c. Very much judge made law 3. PERFECT COMPETITION a. Overview i. PC is a model used by economists that is assumed to be the ideal. Arthur thinks that this is a profound mistake. ii. Assumptions in the model 1. Allocative efficiency all resources in an economy are at their highest usage 2. Many small buyers and sellers a. Everything is SO decentralized, that no 1 purchase or sale has any effect on the market. Too small to have an impact. 3. Standardized products (widget) a. All products are perfect substitutes for the other 4. Standard productive assets (jack of all trades) a. All workers are the same not specialized b. Exit/Entry i. Reality it is not that easy to move from one field or skill to another (cant just decide to be a doctor or a different kind of farmer) ii. Exit can be very expensive (losses if you have a large plant, etc). Can be hard to get the money out c. Central firms v. peripheral firms i. Central huge economies of scale. Makes entry/exit much more difficult ii. Peripheral ex: restaurant, shoe store. Small start-up and exit costs. Labor intensive 5. Perfect info a. Know what you are really willing to sell/buy for 6. No externalities a. Everyone gets paid for everything that they do. No freeriding. No pollution. 7. No lying, cheating, stealing iii. Weaknesses in the model 1. It is a very artificial world

25

Is any deviation from PC a bad thing? Arthur believes that some are not bad. a. Many times, progress comes at the expensive of some parts of PC i. Ex: Going to school no standard productive assets. May not want everyone and everything to be exactly the same. b. Innovation i. Innovation is completely left out of the PC model ii. Short run gains to allocative efficiency must therefore be weighed against antitrust regulations long run costs to entrepreneurial innovation. 1. If too much regulation, it keeps people away who want to be the next Bill Gates B. Types of Trusts/Combinations 1. BRANDEISS VIEW a. Small business is good i. Worried about large companies having too much power and developing a nation of employees 1. Inequality (Rockefellers) b. Thought bigger was automatically more inefficient i. This was not true, b/c most of these companies were MORE efficient than competitors 1. Trusts are combinations. Some amount of combination is good. May become more effective when they work together and may be able to specialize more (lawyers) 2. BRANDEIS 4 TYPES OF COMBINATIONS a. Tight i. Type 1: Zero integration 1. Ex: Divvying up the work in an area or pure price fixing. Nothing that is more efficient, just agreeing not to compete ii. Type 2: Some integration 1. Ex: All agree to sell through the same distributor to make sure all sell for the same price b. Loose i. Type 3: Trust 1. Ex: Trustee runs business and owners get share of profits. Companies give over legal control/title of their companies to group of trustees. ii. Type 4: Firm (vertical integration) 3. 2 MAIN KINDS OF COMBINATIONS a. Loose cartels i. What is it? 1. May consist of price fixing, dividing up areas so that each can have a monopoly in that area 2. Still make your own decisions and run your own business 3. No integration/ cooperative production (not like law partnership) a. Ex: Agree not to compete. Nothing to make the companies more efficient ii. Why are they formed? 1. Greed (OPEC) 2. Distress (overcapacity & loss minimizing) a. In PC, these companies should go out of business i. Ex: Industrial revolution. It was no good to produce a lot if you cant sell it. Led to organizational efficiency (advertising, marketing) and productive efficiency (technological, organizational) iii. This type of cartel did not work very well. Problems: 1. Cheaters one may secretly sell for a lower price a. May be hard to catch. Also, K may be against public policy and will be unenforceable. 2. To solve this they began to use some horizontal integration a. Ex: Centralized selling agency to prevent cheating. b. Begin to act a bit like a firm to produce jointly. i. Partial integration (milk marketing) iv. Benefits 1. To producers a. Can minimize losses or make more profit b. Can all weather the storm keep them alive during tough periods 2. To consumers a. Choices are retained b. Since it keeps companies from going bankrupt, it protects investors c. Unions/workers keep their jobs v. Costs 1. Consumers Increased prices (fixed) 2. Inefficient use of resources Loss in allocative efficiency

2.

25

Companies that need to go out of business dont. Not enough demand to cover the costs. Suggests that there is overinvestment 3. No productive efficiency (not doing anything together) b. Tight firms, mergers, monopolies i. What is it? 1. Originally consisted mostly of mergers of the entire industry (merger to a monopoly) this does not happen anymore a. Ex: cigarettes ii. Why are they formed? 1. Development Rockefeller did not like the loose cartels b/c of the cheating. Created a trust to take the owners out of the equation. Assets all put into the trust. Trustees could control the whole business (cut out cheating) a. Higher level of integration (horizontal integration) 2. Pros Rockefeller reduced the process of refining crude oil. Led to many productive efficiencies which outweighed the loss in allocative efficiency. a. Tight firms were very productively efficient; in fact resulted in lower prices in this era b. I.e., everyone was better off, except firms who werent as effective and thus couldnt compete with the large firms iii. Benefits 1. All of the same benefits as loose combinations 2. Can lead to productive efficiency (American Tobacco Co reduced production costs). More output for the same cost a. Lower cost to produce the same thing OR b. Better product/service iv. So... why doesnt everyone just get a trust? 1. People see Rockefeller making money and other companies try to copy these trusts. Not all succeed. What was the difference? a. Oil had a large amount of supply and market growth b. Central v. peripheral businesses i. If there were large start up costs, trust was more likely to succeed ii. This is why American Can doesnt work (not hard to get into cans) C. Origins of Antitrust Law 1. CONSTITUTIONAL SHERMAN ACT a. The Sherman Act said that a contract, combination, or conspiracy in restraint of trade was unlawful and was a crime. Could be prosecuted both civilly and criminally. i. Individuals could bring private actions and receive treble damages + fees b. Interpreting the Act i. Was supposed to codify the common law ii. Statute had very vague phrases. Eventually, Supreme Court said that the Act was like the Constitution broad. 1. Much is left up to the judges the statute is not clear cut. Easy to manipulate. c. Precedent i. Over time, the doctrine has varied. Things that were legal were made illegal, etc. ii. In this area, the law is uncertain b/c the judges change their mind about the tradeoffs and policy iii. Colgate and Appalachian Cole examples: Many antitrust precedents have been explicitly or implicitly overruled 1. Courts often pull out old precedents even if they havent been followed for a while 2. There is usually a risk on how things will turn out 2. CHOICES THAT CONGRESS MADE IN THE SHERMAN ACT a. Loose combinations i. Good: allocative and productive efficiency ii. Bad: Traditional cartel (little or no productive integration) b. Tight combinations i. Industrialization is not bad per se 1. Good: in aid of production i.e., non-monopoly mergers 2. Bad: creates market power (power to control price/output level) monopolistic mergers (Standard Oil) a. Legal per se UNLESS they were monopolistic i. OK to be a large corporation or combination, but just dont monopolize ii. Size alone is not bad iii. If combination does not lead to monopoly, we dont care c. What about firms that fall between loose and tight combinations (partial integration)?? This is the hard case of what to do under Sherman Act (e.g., joint sales agreement) NFL D. Early Cases 1. Trans-Missouri Freight Assn (1897) a. Point of this case: Early interpretation of the Act was difficult and court was too broad at first (barred even beneficial combinations)

a.

25

b.

2.

3.

Facts: Ds were a group of RR companies that established uniform rates to eliminate a price war during harsh times. Argued that the prices were reasonable i. 1: condemns every contract, combination... or conspiracy in restraint of trade. c. Holding (Peckham): Here, the court went with literal lang and the RR loses i. Makes a bright line rule: EVERY contract that restrains trade is illegal, regardless of intent or reasonableness 1. But then he hedges his bets and adds a section that says that collateral (ancillary) restraints are still ok Addyston Pipe & Steel (1899) 6th circuit a. Point of this case: Established the ancillary restraint doctrine (as long as reasonable) i. NOTE: this is Arthurs favorite rule in all of antitrust he thinks it can explain all of the law b. Facts: 6 companies that manufacture cast iron pipes and fix prices (cartel). Allocated territory and jointly fixed prices. Purpose was to create an artificial barrier by establishing prices low enough to discourage new entrants, but higher than the natural price i. Ds argument: Dont deny that this is a K in restraint of trade. Argue that they are not a monopoly b/c they did not have market control (just 30%) and are reasonable. c. Holding: not lawful b/c not ancillary reasonableness doesnt matter if naked restraint d. Established ancillary restraints doctrine i. All direct (naked) restraints are ipso facto unlawful, even when outcome is reasonable ii. Ancillary restraints that were unreasonable were unlawful 1. EVEN IF ancillary, if the real purpose is for a monopoly it is illegal a. Merges the ancillary restraint rule with the monopoly rule iii. Ancillary restraints that are reasonable are lawful e. Taft i. He is a lower court judge and is trying to help out the Supreme Court 1. Believes that the 1890 Congress did not want the reasonableness test. It is too hard to have a clear standard here. ii. Primarily argues for the Ancillary/Naked restraint doctrine 1. Goes through arguments, but says that most common law cases made the decision b/w naked and ancillary agreements also Standard Oil (US 1911) a. Importance of this case: Court modifies the Addyston Pipe ancillary restraint doctrine. The Supreme Court compromises and says that statute is only against unreasonable restraints of trade with monopoly power. b. Facts: 37 oil companies managed by a single holding company. c. SC does not adopt ALL of Tafts approach, but mostly just the 3rd step i. Afterwards, courts show that cartels always lose. Monopolistic mergers are illegal

***What really happened, is that there is no authoritative opinion by the Supreme Court that tells us which one to use. 3 options below...

E. 3 Ways to Analyze the Rule of Reason 1. ANCILLARY RESTRAINT RULE a. Requirements i. Covenant must be ancillary to the main purpose of the contract, AND ii. Necessary to protect the covenantee b. Main points i. Bright line rule: Agreement not to compete that is ONLY aimed at keeping market forces from operating is illegal per se. (i.e., c.
restraint cant be for purpose of killing competition) Combination w/o integration is per se invalid. How do you tell what is ancillary? i. One test: Would the transaction still take place without this agreement? 1. If yes, then it is ancillary 2. If no, it is central, and thus illegal per se ii. Examples 1. To facilitate: a. Sales (business/asset) gains from trade i. Ex: Cov. not to compete after sale of business (keep goodwill) b. Joint production (like partners) i. Ex: After partner leaves, etc... 2. Must be reasonably related to a goal look at why do you need this? a. Ex: Wants to buy Sams Bakery to get profits. To make the deal make sense, he has to make sure that Sam does not compete near him. This is OK. Addyston Pipe definitive authority re: acceptance of ancillary restraint doctrine in US i. Suggested that partial or ancillary restraints were lawful if they were reasonably necessary to serve legitimate ends of business arrangement (e.g., employment contract or contract to sell business) ii. But balancing approach only applied to ancillary restraints if restraint were determined to be of a general nature, it was illegal per se (no rule of reason analysis)

1.

d.

25

iii. Taft: argues that most restraints held up in the past were in conformity with this rule 1. Believes that reasonableness test is too subjective. Need a standard e.
Summary i. Arthur believes that this is structured and universal ii. If didnt facilitate the sale of goods/assets or produce productive efficiencies (cost reductions, quality improvements), then you would have to analyze it further. PURPOSE/EFFECT MONOPOLY a. If the purpose or result is to control the market not ok. Otherwise, we dont care (if only 2% of the market) i. Ex: courts weighing mergers (are the companies too big to be allowed to merge?) ii. This is more of an economic analysis and is less structured than #1 iii. Limited to looking only at effects on market, not the whole thing like #3 1. Cts spent less time inquiring into business reasons for the restraints in question, and looked more to purpose and natural effects of the restriction itself b. Originally, like a factual economic analysis w/o a particular structure. Used to determine purpose/effect of producing a monopoly. Good for easy cases, but can get tricky i. In modern days, this has morphed into a balancing of pro-competitive v. anticompetitive aspects OPEN-ENDED REASONABLENESS a. American minority/English rule let people do what they want to do i. This approach still sneaks in some cases b. Look at purpose i. Any good intention = reasonable. General reasoning anything you can think of that is reasonable 1. Reasonable price (not being greedy, just doing enough to keep control) 2. Lack of market control, etc 3. Helping a distress industry, allowing people to go home on Sunday c. Adds to #2 ANY good purpose. In #2 only look at whether trying to be more productive or take over the market nothing else matters. In #3, other things matter. Could be trying to preserve payrolls, reduce cutthroat competition, etc.

2.

3.

II. Horizontal Restraints

A. Overview

1. 2.

Primary concern of antitrust law: preserve and encourage competition among firms in same industry a. Thus, place limits on collaboration among competing firms (i.e., horizontal restraints) Basic elements of 1 claim a. To establish liability under 1 of Sherman Act, P must prove i. (1) Agreement or concerted action (unilateral action is not prohibited) ii. (2) That unreasonably restrains trade, and iii. (3) That has an effect on interstate commerce b. To show that a particular restraint of trade is unreasonable, cts generally apply one of two tests: [a] the per se rule or [b] the rule of reason (see approach below) APPROACH TO PROVING EXISTENCE OF HORIZONTAL AGREEMENT

Is there an actual written agreement? YES YES YES YES NO NO NO NO There is no agreement. There is no agreement. Determine whether the agreement unreasonably restrains trade. Are there any plus factors (e.g., communication among parties, acts in contravention of indiv-idual economic interests, radical departure of past practices, etc.)? Is there conscious parallelism (i.e., party knows of actions of its competitors and decides to do the same)? Is there direct evidence of an agreement (e.g., witnesses, tape, etc.)?

25

Horizontal Restraint Analysis Identify the type of restraint Price fixing, market, boycott Then identify the rule for that type of restraint Per se or ROR?

Horizontal Per Se Rules PF 1 generation 2nd generation

st

Mkt Div Topco Polk Bros?

Boycott FOGA, Kloys, AP NW Wholesale, Dentists

Socony BMI, NCAA

B. Price restraints 1. FIRST GENERATION/FOUNDATION CASES a. Overview i. The foundation cases are important b/c they show the two major ways in which 1 cases came to be decided, up until more recently: 1. Rule of reason (more of a standard): lots of factors considered; balancing of pros and cons; discretion of the cts in individual
cases a. Main cases that followed this approach: Chicago Bd of Trade; Appalachian Coals b. Wide open standard c. All three common law rules of reason are possible alternatives i. I.e., naked/ancillary restraints doctrine; purpose & effect; catchall tests 2. Per se analysis (more of a rule): excludes/screens out certain conduct; much less discretion given to the cts in deciding each individual case a. Main cases that followed this approach: Socony; Trenton Potteries b. Big issue tends to be evidence of an agreement c. Direct evidence is easiest; indirect evidence raises interesting questions Chicago Board of Trade (1918) Brandeis i. Importance of this case: Court adopts a broad rule of reason test to determine whether it promotes or suppresses competition, look at nature of restraint, facts of the business, etc (p. 128) 1. Because the Gov. failed to allege either an output restriction or an effect on prices, the Court refused to characterize the Ds conduct as price fixing (p. 120) a. Thus, used ROR instead of per se rule. ii. Facts: Fixes the call rule of grain sales after closing time (price at the end of the day sticks). Like the stock market. 1. Held that it is not a cartel and not price fixing. Call session actually facilitates competition by increasing information, regulating hours, etc. a. Compare to OPEC i. In OPEC, there is NO integration ii. Here, they are more like partners. And the market is still competitive iii. Ancillary restraint? 1. Purpose is jt. production. A partial integration. a. But is call rule REALLY ancillary? Is it necessary to make the call session work? iv. Problems with this case 1. Brandeis says that you should look at everything (seems to put all 3 theories together). He doesnt give an organized way to analyze it. 2. Suggests that in every case you must consider a broad range of facts, effects, history, etc. There is no standard to decide. US v. Trenton Potteries (1927) i. Importance of this case: Rejects defense that fixed prices can be reasonable. Implies that by definition a price-fixing agreement is per se unlawful. However the courts use of if effective couches its reasoning and suggests that per se treatment applies only when price fixing is effective (p. 119, 129-130) ii. Facts: Cartel that fixed price for bathroom pottery. Controlled 82% of the market and not many substitutes. Odds that they were effective were high. 1. Holding: price fixing and illegal iii. Rationale (Stone): 1. Look at the purpose of the statute.

b.

c.

25

d.

e.

Purpose was to protect from evils of monopoly and price control by maintenance of competition. i. Wants a standard to enforce the statute and reasonable price is not enough. Competitive price is the reasonable price. b. Statute was meant to keep the price system working. If there is market power, they are able to set the price and this is against the statute. c. No way that the gov. can control this if they continue to look at everything. Makes cases too complicated. iv. Ways to limit this case even though it seems to say cartel price restraints are per se illegal 1. Must have market power 2. Must have uniform price schedule Appalachian Coal (1933) i. Importance of this case: Case seems to suggest that the Act should be interpreted like the Constitution and the courts can do anything that is reasonable (more like common law and not like a statute) 1. The specifics of the case disappeared, but the Constitutional idea is still around 2. Partial integration allowed as long as viewed as reasonable under the Act ii. Facts: During the Depression. Cutthroat price cutting. Coal people get 1 sales agency that sets the price and sells all of the coal. The restraint is not a just joint selling agency to advertise, etc, but they are also getting rid of direct option to buy (unlike Ticketmaster). Ends all competition among coal companies. 1. Holding: Upheld. Arrangement is allowed. 2. This is in the time of the Great Depression this plays a role a. Justified b/c of the deplorable economic condition in the industry iii. The opinion uses a bit of all 3 versions of the rule of reason 1. Ancillary 2. Purpose/effect was not monopoly a. Less than 80% control b. But didnt want to bother unless they had over 70% seems to be evidence that they wanted control 3. Reasonableness cutthroat, etc a. Used a broad weighing analysis that included economic conditions iv. Implications for today 1. Agreements designed to facilitate the operation of the market and efficiency w/in markets are increasingly being viewed under a ROR standard. (Well see this later in BMI, etc) a. A bit of integration of integration is good and ok 2. NOTE: this is one of the cases that, though not officially overturned, is no longer followed. Socony-Vacuum (1940) THE 1st GENERATION PER SE RULE i. Importance of this case: Finally establishes a per se rule of price fixing. Rejects Trentons implication that per se rule is only applicable when price fix is effective (p. 119). Just tampering with the price system is enough. 1. Also applies to maximum price fixing 2. From now on, a price cartel cannot be covered by good intentions reasoning (3) if it is a naked price restraint ii. Facts: Too much output in the oil industry. Arrangement where each oil company has an independent refinery that they will purchase from to keep the spot market price stable. Clearly trying to hold prices up. (Illegal) iii. Compared to other cases 1. Compared with Appalachian a. Arthur thinks that the facts in this case are very similar to Appalachian both are trying to deal with overcapacity. b. Why does the court find differently? i. Different times? ii. Language about the possibility that they may have an effect on prices. Douglas doesnt want to hear about destructive competition 2. Emphasis on Trenton Pottery a. Picks up on Trentons focus on supply/demand and purpose of statute i. Need to look at the standards of the statute which are only about the competitive effects. Not interested in going beyond that. ii. W/o supply and demand, there is no way to know what the reasonable price is iv. What does Socony do? 1. Finally establishes a per se rule on price restraints a. Arguably, Trenton had already done this, but now there was no uncertainty/backsliding b. Only issue is did they do it? If so, no defenses i. It is per se illegal, to get together and do a cartel ii. What if 2 guys w/ only 2% of the market get together? The Court has said that this is illegal. Remember, price fixing also includes output control. (FN 59) 2. Gives broad definition of price restraint a. ANY combination which tampers with price structure is illegal dont have to have control of the market. Fixed includes range, etc.

a.

25

2.

Case suggests that price is really important. Price fixing is an actual or potential threat to the central nervous system of the economy. Messing with this leads to problems with allocative efficiency. 3. Market power is not necessary a. FN 59: The Court made clear that market power is NOT a precondition to finding a per se violation b. Dont even have to have an effect a conspiracy/agreement is enough. 4. Socony is the law today, but Appalachian and Chicago were never overruled. v. Practice Pointers 1. Trade association and sit around complaining. Court does not require a strong agreement tacit is enough. Advice: if client is in a meeting where they start talking about the prices charged GET OUT and make sure that everyone remembers that you got out. vi. 2 issues that need to be resolved after Socony 1. Problems with the scope of the price fixing rule 2. What about price fixing that is not a cartel? (like partial integration) a. Small town grocers get together to buy joint ad in paper w/ specials. Is this illegal per se? This remains open. b. What about ancillary restraints? If it really aims toward productive efficiencies...see Professional Engineers f. Catalano (1980) i. Importance: First and only time they used per se since Socony. However, it is after BMI, etc where it looked like the court was moving to ROR ii. Facts: Beer distributors used to extend credit agree not to do that anymore. iii. Argument: 1. Pro-competitive effects a. People know what the price is b. Easier for new people to come in 2. Court does not buy this. You are just messing with the price a. A horizontal agreement among competitors to eliminate credit was the equivalent of a discount and thus an inseparable part of the price per se illegal i. No excuse that the price was reasonable iv. Why Arthur thinks this case is right 1. Were probably fixing the prices too and were using credit to undercut each other 2. It is a naked restraint of trade 2nd GENERATION CASES CHARACTERIZATION a. Professional Engineers (1978) RETURN TO ROR i. Importance of this case: Retreat from per se analysis. SC says that ROR in price-affecting cases is focused on the examination of whether the conduct promotes or suppresses competition (public interest should not factor in). This is a structured ROR that is narrower that BOT. Analysis is limited to competition (no room for non-economic factors such as social or political benefits). Still retreats from Socony by not making it per se illegal. (p. 136-138) 1. One of first instances of quick-look rule of reason analysis => i.e., ostensibly applied rule of reason analysis, but still invalidated the agreement in question b/c of lack of procompetitive or efficiency-related justifications ii. Facts: Canon of ethics prohibiting bidding by its members. Dont discuss prices until after picked. Ds argument is good intentions says it is for public safety. iii. Stevens analysis 1. Makes it hard for consumer to shop for a priceessentially this is price fixing. a. However, this isnt a per se case b. Wants to make a point that even if its not under a per se rule, that doesnt automatically mean that good intentions can save it. You dont get to have anything goes just b/c youre in the rule of reason. 2. Here, Ds lose not b/c they are per se illegal, but by looking at the rule of reason. a. Before this case, analysis under rule of reason generally meant victory for D not anymore! D will still have to show some justifications; it is not anything goes iv. Single standard 1. The case basically takes Pottery and applies them to all cases. An attempt to get to a single standard. It becomes much more structured, even if it is still the rule of reason 2. Could have just said this is like Socony a per se case, but they dont. a. Under Socony, the fact that this affects prices should be the end of it 3. Court suggests that even the ROR should be more limited and more rule like a. Still rule of reason but much narrower than that used in Chicago Board of Trade b. Instead of having it where per se and ROR were so separated, there should not be such a hard line b. BMI (1979) THE BEGINNING OF CHARACTERIZATION i. Importance of this case: Evolves into a 2nd generation of the rule characterization. Literally price fixing does not make it a per se violation. Price fixing must be of a certain variety. Competitive harms will be weighed against economic benefits, even when the challenged conduct directly affects price competition. (p. 139) 1. Necessary to characterize doing this is the difficult question and the court has not answered it 2. BMI suggests that the price-fixing label is applied or rejected AFTER the Court makes the economic harm/benefit analysis (139)

b.

25

This is the quick look test When the per se conclusion is accepted, it now seems more like a substance law conclusion at the end of the balancing analysis that the net effect of the practice is not procompetitive. ii. Facts: Price fixing through ASCAP and BMI. Individual composers give license to these companies and then radio, etc get the rights from them. Given in blanket license so you dont have to individually negotiate (but this is still an option). Too hard to negotiate for every song. Also an enforcement agency. 1. Issue in this case: What do we do with price fixing that makes things more effective? 2. Holding: not illegal iii. Whites test: Inquiry must focus on the effect on the free-market economy whether the practice facially appears to be one that restricts competition/output or increases efficiency 1. Stressed the review standard was limited to whether conduct is designed to increase economic efficiency and render markets more, rather than less, competitive iv. Reasoning 1. BMI suggests that per se rule does not apply (rule of reason applies) if there is partial integration a. This is not a naked restraint with no purpose except stifling competition b. This is similar to a partnership partial integration (National Egg Board for advertising, marketing, but separate in other areas) 2. Efficiencies a. The efficiencies created by integration are huge b. The cost savings here are so overwhelming the rights would be worthless w/o something like this (need a middleman) 3. New product/Nature of the market a. The blanket license is like a new product b. There is no restraint here, it is just the nature of the market (have more than 1 BMI, ASCAP) 4. Direct negotiations a. Also, direct negotiations are still allowed and they are non-exclusive licenses (not sole licensee). i. Compared to a cartel: a cartel would only let you buy directly from them. Must sell through this group and no other 1. Comparing to Ticketmaster can still buy tickets directly ii. Would be a different case if musicians had to agree only to license to them v. 2 ways to characterize 1. Ancillary restraint v. naked a. Arthur thinks this case looks like an ancillary restraint (ancillary to economic integration) b. What if you have a price restraint (looks per se illegal) but it is also ancillary? Is this per se forbidden? There is no clear answer 2. Quick look test a. Before applying the per se rule, the court looks to see whether any procompetive effects... vi. Readings of BMI: 1. Broad: ANY pro-competitive defense will save you from the per se rule 2. Narrow: Must be a new product. Too dangerous to let this go any further vii. Effects of this case 1. The per se rules begin to become less hard edged and mechanical become more standard. At the same time the ROR becomes more limited. There is a convergence of the 2. a. Stevens in NCAA: there is no clear line b/w ROR and per se b. The court does not seem to be able to make up its mind 2. Arthur was excited about this ruling when it first came out b/c it looked like the court was going to stop being so overly broad with the per se rule a. Previously, the court assumed that there was no redeeming value in price fixing. Thought that this rule had no costs b. Chicago school (2nd generation): What about partial integration (real estate brokers listing service, Got Milk, NYSE, NBA)? The law shouldnt mess with this... 3. What do you do with Socony? a. Looks like it is price fixing but there is a conflict about the per se rule i. The rule seems to be too much here b/c there is redeeming value 4. Problem comes from the Maricopa case

a. b.

BMI established a turning point in price-fixing cases: not all arrangements among competitors that have an impact on price are per se violations of the Sherman Act or even unreasonable restraints NEW RULE OF REASON ANALYSIS: (1) Whether challenged conduct is reasonably necessary to achieve the cost-reducing efficiencies; (2) Whether the restraint that follows is actually necessary to the integration; (3) Whether the efficiency achieved by integration outweighs the adverse effect of the restraint. Thus, initial summary analysis under the per se rule is on the decline, although the Ct sometime vacillates on where the line should be drawn in classifying price fixing

25

Ct now values economic efficiency as a means of defining competition Competitive harms will be weighed against economic benefits, even when the challenged conduct directly affects price competition Inquiry is whether economic efficiency is achieved without sacrificing output

c.

3.

Arizona v. Maricopa (1982) i. Importance of this case: The only reason that this case is a big deal is b/c it came after BMI and applies a per se rule. ii. Facts: maximum fees for heath services agreed upon by doctors by reimbursement of heath services provided to policy holders of certain insurance plans 1. Holding: setting a maximum price is just as anticompetitive as setting a minimum price (still price fixing and interrupts the signals of the marketplace) 2. Pro-competitive justifications a. It appears that this doesnt count either under the per se rule b. This is a very strong version of the per se rule iii. Why isnt this like BMI? 1. Powells dissent a. This looks like BMI. Arthur thinks that he is right 2. Other factors a. Integration i. Looking at the product. Why isnt this just considered an integration of doctors (like BMI)? Court held that this was a violation of statute ii. ASCAP was a partial integration, same as Foundation. Used as a method of organizing a particular kind of insurance. b. Option to buy directly i. Doctors really arent bound to the Foundation either. Can still go directly. There is no real restraint. It is equally open as BMI... c. New product i. BMI created a new product with the blanket license ii. Arthur thinks that they are really just trying to make an exception to the rule b/c w/o this, there would be no product d. Necessary i. The result seems to turn on whether the agreement among the doctors was necessary to achieve the desired efficiencies or whether less restrictive means were available. (133) 1. Note: b/c it directly fixed the price, could not be ancillary (naked restraint) ii. In BMI, unlike Maricopa, the participation of the individual composers was essential to the plan (p. 139) 1. It wasnt necessary for the doctors to do it, like BMI 3. The justices say that there is a distinction b/w these cases, but Arthur does not believe that there is. This case does not differ at all from BMI. d. NCAA (1984) Justice Stevens i. Importance: Court applies a ROR analysis even though there was price-fixing agreement and an output restriction. The ROR was again accepted, this time on the belief that in certain markets horizontal restraints on competition are essential if the product is to be available at all. (p. 140) ii. Facts: Joint venture among college sports teams that restricted # of games that could be broadcast and set price. 1. Court agrees that the contracts restrict output and fixed the price. However, they reject the per se approach b/c this was a market that required cooperation or interdependence (or else no product). The Court examined whether, under the BMI analysis, there were offsetting procompetitive features that could take this case out of the naked restraint category. (p. 140) 2. Holding: the scheme was not illegal per se, but illegal under ROR a. NCAA lacked procompetitive justifications (defense of keeping attendance, etc was not enough) iii. Compared to Maricopa and BMI 1. This looks per se illegal under Maricopa a. Stevens: In Maricopa, he says that the per se rule is broad. Then in NCAA, he says that the rule should not be so broad. 2. NCAA looks the most like a cartel. If you want to play, they must be in charge. It is not market driven. It spreads the business so that everyone gets a share (very much like a cartel) a. Unlike BMI, the individual colleges are not allowed to negotiate directly with radio stations must go through NCAA. 3. Arthur thinks that this case has more restraints than any of the others, yet it is not per se illegal. a. Court uses a broad sword to use rule of reason b/c of the area (sports) iv. 2 ways to read this case. ROR applies to : 1. Any network industry (where parties have to cooperate to make things work) 2. Ancillary to creating a new product (a new type of football). Having 1 college is not enough. All have to participate to keep grades up, etc SUMMARY OF THESE MODERN CASES a. Overview i. The court decisions here are very muddled and filled with false distinctions

25

1. Lower courts have a lot of room. There are a lot of phony distinctions ii. All 3 of these cases are similar. Each has a middleman that puts together a substantial mass so that this will work. Compiling it is
something of value.

iii. Looks like ROR makes the following OK 1. New Product (BMI) 2. Cooperation/network industry (NCAA) b.
What should you do as an attorney? i. Depends on what your objective is 1. Want ROR (defendant) a. Argue that NCAA is the most recent case and should be followed (consistent with BMI) just ignore Maricopa b. You could also argue for new product or network industry 2. Want per se rule (plaintiff) a. Socony has never been overruled and was followed in Maricopa RULE TODAY REGARDING PRICE RESTRAINTS a. Determining what constitutes price-fixing i. Any agreement among competitors fixing minimum prices ii. Agreement among competitors fixing maximum prices 1. I.e., presence of max price tends to stabilize prices and distort resource allocation iii. Agreement among competitors on how much they will sell or produce, even though there is no specific agreed-upon price iv. Agreement among buyers on price they will offer v. Agreement prohibiting competitive bidding vi. Elimination of short-term credit

4.

Horizontal Price Fixing Analysis use info from BMI, Maricopa, NCAA above Originally, per se rule applied to all price fixing agreements. Later, the court began accepting affirmative defenses and instead applied the RoR. When applying the per se rule, ask if the price fixing agreement stems from a naked restraint, making the situation facially appear to be a cartel. If ancillary, or if there is partial integration, apply RoR. (BMI) Court will also consider whether there is some procompetitive purpose to the restraint. If so, use RoR. Looks at productivity and efficiency Consider Ancillary Restraints Consider Exceptions: NCAA, Maricopa Direct agreements that fix prices and reduce output are illegal UNLESS Cooperation/interdependence/integration is required to produce procompetitive efficiencies that offset the restraint AND Less restrictive means are not possible (according to Maricopa, so maybe)

C. Joint Ventures 1. What is a joint venture? a. Joint venture is the formation of a single entity by two or more independent firms for the purpose of engaging in research, production, or
marketing activities Joint conduct may be of the type that either firm is capable of carrying out individually or, b/c of its nature, could not be undertaken if the firms acted separately Why have a joint venture? a. Firms engage in joint ventures for numerous reasons some lawful, some unlawful b. Possible benefits of joint venture: increased productivity and competition c. BUT costs associated with joint ventures include potential for price fixing, output restrictions, market divisions, and increased monopoly power Rule of Reason a. Because joint ventures have the potential of producing benefits as well as costs, cts generally analyze them under the rule of reason i. I.e., cts attempt to weigh the economic efficiencies against the actual costs of the venture b. The more pure research-oriented the venture is, the more likely it is lawful c. As the venture moves toward production and marketing, the more serious antitrust concerns are implicated Analysis of joint ventures a. (1) Cts begin analysis with inquiry into nature of joint venture (i.e., research, production, or marketing) and whether actual creation was lawful (esp. in purpose) b. (2) Also consider joint venturers and competitive relationship (or lack thereof) of the members of the joint venture i. Direct competitors who join together in joint venture have greater potential for anticompetitive conduct than other relationships c. (3) Finally, cts analyze the restraints imposed on the joint venturers in scope and duration, and determine whether they are reasonably necessary to achieve the benefits of the venture or whether they are overbroad i. Venture that is broad in scope and lengthy in time is more problematic. NOTE: if the collateral restrictions include price agreements, output limitations, market divisions, customer allocations or refusals to deal, they will be declared per se illegal

b. 2.

3.

4.

5.

25

BUT if restraints are merely ancillary to otherwise lawful agreement and limited in scope duration so they are reasonably necessary to achieve goals of project, they will be held lawful. D. Market Division 1. OVERVIEW a. Types of Market Divisions i. Territorial 1. 2 parties take what could be a single market and split it into segments. If effective, each person becomes a sole seller in their segment (essentially a monopoly). a. Ex: (Addyston Pipe, Topco, Palmer) b. Topco (each has its own regional territory and would be the only one that could sell Topco there) ii. Customer 1. Topco/wholesalers: These are usually vertical restraints iii. Products 1. Polk Bros built store together 2. Microsoft: alleged that they went to Netscape and said we wont make a browser if you dont make a operation system b. Why do it? i. This is actually a clean and simple way to get a monopoly 1. Cartels can be combinations of price fixing and market divisions ii. Market divisions are more stable than price fixing b/w optimum prices change iii. With price fixing, you can still compete on things other than price (service/product), but if you have a good market division you cant compete on anything. This is the most complete restriction c. Vertical v. horizontal i. Horizontal: among competitors. These are viewed with more suspicion than vertical ii. Vertical: b/w buyer and seller (ex: arrangement b/w GM and dealer that GM will sell to police, but not to customers) 1. Coke has territorial limits on their bottlers. Vertical b/c the manufacturer is laying down the restriction. 2. To determine whether vertical/horizontal look at who is imposing the restriction 2. CASES a. Sealy (notes p. 365) i. Holding: the Sealy guys were per se illegal. However, when Topco comes up they do not apply a per se rule from Sealy. What is the difference? 1. Sealy had both price fixing and market division for their mattresses. This could be a distinction. Also, in Sealy, the price fixing was enough to make it per se illegal in the 60s. b. Topco (US 1972) i. Importance: The high water mark of the per se rule. Court says that horizontal geographic market divisions (even without price fixing) are illegal. (p. 173). However, the court also discusses market power, which indicates that there may be some ROR analysis still left. ii. Facts: Independent grocery stores that create a house brand to compete with large grocery stores. Topco is a cooperative association/joint venture of the grocery stores horizontal. Different than GM and its dealers, etc. 1. 3 restrictions: a. Can only sell Topco in the allotted area (territorial). However, can still compete in all other ways in that area. b. New members in that area have to be voted on (but probably wont happen) i. Effects: customers can only get Topco brand from 1 place in that area. Dont want to lose exclusivity in your territory c. Restriction on wholesalers (customer restriction) i. Can only sell to retail customers in your territory. Cannot be a middleman would get the brand out to too many other stores 2. Partial integration a. Hypo: If they joined together and just formed 1 store chain, then they would be a firm and this is OK. But this is not what they have done here. Here, they are only partially integrated b. This is the best of both worlds. Better than a firm b/c they keep control. Topco is not a cartel. 3. Holding: this is per se illegal iii. What Arthur thinks is frustrating with this opinion 1. Ancillary Restraint a. Arthur believes that this is a prime example of an ancillary restraint and that this is a terrible opinion. In 1979, the court says in BMI (and later in NCAA) that not every horizontal restraint is illegal per se. The rule loses its strictness. i. It might be argued that later cases in price-fixing area undermine the rationale in this case (e.g., NCAA, BMI) i.e., they apply the rule of reason ii. If you were consistent with BMI and other cases, this would be ok. There is integration, small % of the market. Eyeballing it it is not a cartel 2. Reasonableness a. Court says that reasonableness (that they only have 16% of the market and actually improves competition) is not enough to make it ok

a.

25

Court doesnt care about positive aspects and is very stubborn about wanting a uniform approach. Wants a per se rule so that there is predictability. ii. Says that the courts are not capable of dealing with difficult economic problems (were not smart enough). Cover it by making it all illegal 3. Harsh Language a. Compared to Northern Pacificcourt uses harsh language, but never applies it again c. Polk (1985) 7th circuit i. Facts: 2 stores build stores together and agree not to compete on certain products 1. Uses quick look to decide if illegal per se. Recognizes free rider defense as a legitimate objective of a system of distribution. (p. 177) ii. Holding: This is OK 1. Ancillary restraint/ partial integration a. This is an ancillary restraint that results in productivity and output. b. Like Topco, this is limited to particular goods not all goods. The fact that it is limited to the cooperative activity is a sign that it is not a cartel, but a type of partnership (partial integration) 2. Quick look test a. On its face, it does not look like a cartel. One way to tell this is by looking at market share (plus the fact that the restrictions are limited to only part of the market or brand) 3. WHAT DO YOU DO WITH THESE CASES? a. What is the law today? Mkt Division Horizontal Per Se Rule 1st generation Topco: Nothing matters except whether there is a market division Didnt care if there were efficiencies (opposite of the N. Pacific case that classifies per se as arrangement as one with negative effects) Rationale A rule is a rule Judges are not good at economics Its worth it to have an overbroad rule, so that there is consistency (the costs are minor) 2nd generation (if it exists) 1st generation rule is too overbroad and too harsh Rationale: Judges are sophisticated enough to engage in economic analysis (characterize) The costs of the overbreadth of the rule are too high Court characterizes the mkt division Look to see if ancillary Quick look i. We dont know for sure. The last word was Topco (decided under the old regime). Not sure how the new court would horizontal restraints today. In every other area, they have cut back on the per se rule, so perhaps they would do that in this area too.

i.

b.

c.

Is there really a 2nd generation rule at all? i. Polk is not the equivalent of the other per se rule cases b/c it is not Supreme Court 1. In Polk, the judge (Easterbrook) can be bold in his statements b/c it will cannot be appealed to the SC 2. We dont know whether the SC would agree with this case, or knock it down ii. Last case is Palmer v. Bar Review of GA (p. 377) (1990) 1. This case has an element of partial integration 2. SC holds that horizontal market division is unlawful per se. a. Does this mean that Polk was wrong? Is Topco still good law? i. Argument that it is not 1. Been decayed by other decisions. The court has not said that it is wrong, but newer cases have totally different approaches a. This is the point you would make if you were arguing that Polk was right b. Maybe Easterbrook is just anticipating the court 2. What do you do with the Palmer case? a. Distinguish it. The facts are different. Here, Barbri had control of the market (combined had 100% of market, Topco only had 16%). It is essentially a monopolistic merger b/w 2 large companies. You stay out of mine and Ill stay out of your and well split the profits. i. Taft (in Addyston Pipe) would say that this merger was so big that the restraint becomes the purpose. What would be an innocent restriction for a small company, is unlawful for a large one b. Arthur doesnt think that SC really got to this issue i. The case was decided per curiam w/o argument, briefs, or anything

25

ii. This is a poor opinion. This is not an attractive case for the court to try to cut back on the per se rule. ii. Argument that it is 1. The court clearly has not overruled it. a. It is not the role of the lower courts to overrule it 2. Would argue that Palmer is the most recent case and it reaffirms Topco (in 1990). Even after all of the other cases, in 1990 the
court reaffirms that per se rule in Topco What do you do with a client in this area? i. This area is not so clear. Probably would be hesitant to let your client have an arrangement like Topco 1. Must advise your client that this is risky. Your opponent could say that it is per se illegal if they follow Topco. 2. All you can really do is tell them Its your business decision on how much risk you want to take. ii. Arthur thinks that one day the SC will adopt the Polk approach. However, until that decision is written, the lower courts can do whatever they want to do in this area until your circuit decides its opinion 1. Lower court judges prefer the Polk approach. E. Boycotts/ Concerted Refusal to Deal 1. OVERVIEW a. In general, an individual is free to choose those with whom he wishes to deal, except when such a refusal amounts to monopolization or attempt to monopolize (discussion below) b. BUT when a group of competitors agrees not to deal with a person or firm outside the group, deal only on certain terms, or coerce suppliers/customers not to deal with the boycotted competitor, there is a combination in restraint of trade in violation of 1. c. Great deal of confusion surrounds the proper treatment of group boycotts under 1 i.e., whether to apply per se rule of illegality, or to analyze them under rule of reason i. Cts generally analyze the objectives and effects of the agreement and the market power of the firms engaged in the concerted conduct before drawing a conclusion whether agreement is reasonable or per se illegal. 2. DEVELOPMENT OF 1st GENERATION PER SE ANALYSIS: Collective agreements aimed at competitors a. Paramount (1930) i. Importance: implies that good intentions and moderate means do not matter ii. Facts: Distributors would license their pictures to exhibitors. Each studio negotiated with the theatres. Studios wanted a faster way to deal with disputes arbitration. FTC worked with them to get an arbitration clause that was fair. If someone marks through the clause, they all agree that NONE of them will work with them (boycott). 1. 2 main parties: a. Distributors (studios like RKO) 60% b. Exhibitors (theaters like AMC) iii. Holding: illegal 1. Even if you have a good purpose and moderate means, it does not give you the authority to do this a. Cant take away business peoples right to negotiate the terms b. This is unusual and unnatural 2. This is like price fixing/cartel, but instead of fixing prices they are fixing the terms a. Make an analogy: what if they had said we wont deal with you unless you take 5%. b. Individually, they do not have enough power to make people follow this restriction b. FDGA (1941) Fashion i. Facts: People are making knock-offs of FDGAs designs. Designers get together and say that they will not deal with stores who work with the copiers. The textile suppliers also agree to cut them off. This makes the store have to boycott the pirates. 1. Difference in this case: a. Every other case has been a collusion want everyone in the market together to effect an outside party b. Here, someone in the same level is the target and is being left out. Used to exclude ii. FDGAs rationale 1. Good purpose. These people are copying us. 2. We are being reasonable and efficient. 3. There is due process (can appeal to the board to show not an infringement) iii. Holding: Agreement is NOT allowed 1. Opinion reads a lot like the per se price fixing opinion. Doesnt matter if you dont have control, reasonable, etc. None of these things matter 2. Doesnt specifically say that it is illegal per se, but it hints at it 3. Is it really true that power doesnt matter? Here, the numbers are very large and there is power. Perhaps, this is something that concerns the court. Maybe the real rule is that those with power in the industry are not allowed to do this. c. Klors (1959) i. Importance: Knocks out market power and actual market effects as defenses ii. Facts: K alleges in his complaint that the Broadway chain of department stores was using its power to get GE, etc not to sell to K or only sell on unfavorable terms. Argues that he has been cut off. 1. Ds argument: There is no effect on the customers. People can still get these goods from many other places. No public injury/effect

d.

25

iii. Holding: A concerted refusal to deal by competitors was per se unlawful. 1. This is inherently anti-competitive and illegal 2. Clear that there is power if these manufacturers actually did agree 3. The effect does not matter (although usually power and effect are linked) 4. The case does not talk about good purpose (but Paramont and FDGA do)
AP (1945) i. Importance: suggested that pro-competitive justifications were not okay ii. Facts: Clear that they are not a cartel. Agreed that members can only sell their stories to other members (more than 1200 newspapers). Developed b/c there are huge economies of scale. 1. This is not a naked restraint b/c there is a huge amount of integration. 2. Ds defenses a. Not necessary to have AP (essential facilities doctrine) i. NY Mirror was not AP and was very successful b. There could be more than 1 association. Nothing here to stop that 3. Holding: illegal a. Sidenote: most of this case was decided on summary judgment iii. Compared to Topco 1. Restrictions are very similar to those in Topco. They essentially have territories 2. Both are meant to give exclusivity and a competitive advantage a. Competitive advantages are not always bad, but can be more difficult to protect when people are working together to get it iv. Courts reasoning 1. Unlawful on its face and no less unlawful just b/c they have not yet achieved a monopoly. a. Courts seems to imply that smaller group (a couple of newspapers) could agree to share news and that would be reasonable. Market power might make a different case... 2. Case suggests that pro-competitive justifications were not a defense a. Ways to get around this: Maybe its just b/c the group was too big here (like a news trust) v. Lawyers do not know what to do about this case 1. Should you just let everyone be members? Thats the result of this case and it ran the competitors out of business 2. AP has language of other 1st generation cases a. Justice Black seems to say that this is as bad as FOTA, etc, but he never tells you why 1st generation per se rule None of these affirmative defenses matter Good intentions Moderate means Mkt power (ability to cause effects) Actual market effects Pro-competitive justifications Cases that knocked these out FOGA and Paramount implied that good intentions/moderate means do not matter Private parties cannot come in to regulate the market (compared to law) Klors Knocks out market power and actual market effects (the SC later says that these 2 are so intertwined that if you have 1, you dont have to prove the other) AP pro-competitive justifications This is a tougher one to knock out as a defense b. Hard to tell what the rule i

d.

3.

2nd GENERATION CASES THAT MOVE TO RULE OF REASON a. NWWS (1985) i. Importance: Must characterize boycotts first to see if illegal per se. The court rejected, except for a narrow category of cases, the per se categorization for concerted refusals to deal. (p. 164) 1. This is the 3rd case that the court would quote to say that we can no longer use the per se rule of Topco 2. Gives 3 semi-requirements before per se rule applied ii. Facts: Cooperative buying agency comprising of various retailers. Kicked 1 out for not telling about change in board, but P says it was b/c they were wholesalers. 1. This does not look like a cartel and are not normally bad things. This should make a difference. Instead, like Topco, etc. it has legitimate purposes. 2. Restraint: they were kicked out b/c they violated a rule. This is allowed. a. Being a member is not essential to succeed in the business iii. Return to categorization and ROR 1. Just like BMI, Brennan says if its a per se rule, there has to be a refusal to deal with pernicious effect

25

b.

BMI quote: Per se rule depends on whether practice facially appears to restrict competition or instead increased efficiency Bottom line: You have to categorize. Otherwise, the rule is too broad. i. Look on the face to see if harm and no countervailing efficiency ii. Brennan is trying to fix the bad law here 2. Holding: Apply rule of reason, not per se rule a. Not all concerted refusals to deal are predominantly anticompetitive b. When P challenges expulsion from a joint buying cooperative, some showing must be made that the cooperative possesses market power or unique access to a business element necessary for effective competition iv. Synthesis of old cases where court applied the per se rule against boycotts 1. 3 main points/ requirements a. Generally: Cut off competitors access to supply, facility, market needed to compete i. Cites AP, Klors, Silver v. Stock Exchange, Radiant Burners ii. Goal is exclusion b. Frequently: Ds with dominant position (dominant market power) i. Citing Silver, AP, FOGA c. Generally: No procompetitive justification i. Citing NOTHING, but could have cited Klors, FOGA 2. If P can establish all 3 of these things, it looks like they will win a. Suggests that you need more than a facial look 3. Problems with the new rule a. Fudge words: generally and frequently not every case has done this. b. Will future cases require all 3? i. Brennan seems to want that, but is stuck with precedent. Allows for future cases where there are not all 3. But still sticks to No. Pacific standard (pernicious effect) v. More guidance from later cases 1. Discon adds that horizontal boycott rule requires a horizontal boycott (not vertical) 2. Superior Trial Lawyers/Dentist: Boycott is not exclusionary (aimed at a competitor) instead it is to coerce the customers a. Dentist Did not apply per se rule b/c it was not aimed at a competitor Indiana Federation of Dentists (1986) i. Importance: if a boycott does not exclude competitors and is aimed only at customers, it is not illegal per se. ii. Facts: Conspiracy among dentists to refuse to submit x rays to dental insurers 1. This is not within the per se boycott rule, but was illegal under ROR iii. Reasoning 1. Not aimed at a competitor a. This is the express reason of the court b. Suggests that this is a necessary element to get the per se rule 2. No efficiency reason should leave it up to consumers a. Cites Professional Engineer. Defenses are restricted to competitive effects, not just if generally good. 3. The per se rule is not applied here, but the rule of reason is still a short analysis here b/c it is a naked restraint (doesnt do them much more good) iv. Lawyers Assn (1990) p. 413 1. Facts: Trial lawyers boycott to get more money. Horizontal arrangement among lawyers to withhold legal services and increase hourly wage represented a naked restraint on price and output. a. This is also a cartel-like boycott. Not allowed. 2. Does this case change the Indiana Dentist analysis? a. Arthur thinks that this is not really a boycott case just price fixing/cartel b. Occams razor get rid of superfluous reasons c. This is not a clean case of boycotts, so it really doesnt give us much help in this area

a. b.

Must be a group of competitors (must be horizontal) Discon: Arthur thinks that this case should not have even gone to the SC Company chose to buy from a different supplier even though they had a higher price (no rational business reason) Arthur says that this does not equal to a boycott of the other suppliers though. This is not an antitrust problem no restraint 3 elements in NW Stationers not clear if you really need all 3 though... 3 elements Aimed at competitor (exclusionary), depriving it of something needed to compete effectively Cut off competitors access to supply, facility, market needed to compete

25

Boycotter has dominant position (dominant market power) No procompetitive/efficiency justification

4.

2 ways to read NW Stationers (Brennan) Read it rule-like If all 3 of NW Stationers elements = illegal per se It is the core case Looser standard: Dont get so caught up in the elements. The earlier cases that were brought up meet this test. Should really be looking at anti-competitive effects/ redeeming values Make this less rule like. Compared to International Shoe This is a confusing area and there is no set rule in this area. WHAT DOES A P HAVE TO SHOW TO GET THE PER SE RULE? a. Other points The future: What will the court require? i. Thus in a concerted refusal to deal context, the FACTS of a given case will likely dictate whether the court applies a per se or ROR approach to the alleged restraint. As Brandeis noted in Chicago BOT, the true test of legality is whether the restraint imposed is such as merely regulates and perhaps promotes competition or whether it is such as may suppress or even destroy competition. If similar to NW Stationers and shows promotion of competition OK. If not competitive, more likely to be seen as naked and per se illegal. (p. 167-168) 1. What do you do with this as an attorney? You have to mess with this its a bit up in the air ii. Instead of exclusionary boycott, what if we have collusive boycott (even naked restraint)?? 1. I.e., not exclusionary b/c not trying to knock competitor out of business; functionally operates like a cartel (e.g., Paramount wont deal unless theatre signs agreement for arbitration) 2. IFD case suggests NO not illegal per se a. Dentists arrangement has dominant position, and no efficiency justification, but is not exclusionary Ct says per se rule does not apply (examines restriction under rule of reason) b. THUS, suggests either all 3 are needed, or at least #1 is needed! 3. BUT there is also the suggestion that such agreements will not be illegal per se UNLESS the boycott is to affect price fixing (Superior Ct Trial Lawyers).

F. The Modern ROR in Horizontal Restraints 1. ROR IS A BALANCING TEST (from NCAA, Prof E, IFD) a. Anticompetitive effects (actual or potential/predictable) Ps burden of proof
First 2 constitute Quick look i. Inherently anticompetitive on its face (suggested by PE, NCAA, and IFD) OR ii. Actual effects (NCAA, IFD) OR iii. Market power + restraint => suggests potential/predicted effects VS. b. Procompetitive (productive efficiency) justifications Ds burden of proof / affirmative defenses i. Productive efficiency/lower cost if proved, D wins as matter of law OR ii. Productive efficiency/better product if proved, D wins as matter of law c. HOWEVER: Professional Engineers suggested that even under rule of reason, didnt mean anything goes 2. FULL BLOWN v. QUICK LOOK a. Cts began making a distinction b/w full blown rule of reason vs. quick look b. Full blown extensive market analysis i. Includes definition of market, assessment of market power, and actual effects ii. Involves role of expert witnesses, testimony of those in the field (requires evidence) c. Truncated/quick look i. No need to do full market analysis IF there are actual effects, or restraints are inherently anticompetitive on their face. ii. Deals less with actual market analysis and testimony based mostly on papers 1. Think: the kind of thing you can decide on summary judgment iii. Almost like per se rules if the case is close enough that you werent quite sure it was per se illegal, ct might not have to go into full blown analysis 1. If the restraint has effects on its face, you can avoid full blown analysis and go to truncated analysis 3. California Dentists (1999) p. 272 a. Importance: i. This is the last case from the SC about the rule of reason. Focuses on the fact that this is a professional organization. Requires more than a truncated analysis (sliding scale). b. Facts: Dentists join together to restrict deceptive advertising. Also covered price advertising, etc unless extensive disclaimers. i. Holding: Not illegal per se (just by looking at it). Remanded for fuller analysis? c. Procedure:

25

P showed Actual Effect: Restricts consumers ability to price shop Inherently Anticompetitive on its face ii. Shifts to D to show justification 1. Try to argue that making the choice for consumers (regulation) results in more efficiency (more allocative efficiency)This case is very similar to Prof Eng and IFD d. Majority v. dissent (importance of professional assoc) i. Majority thinks that this kind of restraint does not necessarily have anticompetitive effects when it comes to a professional association 1. Price wont be AS important when we talk about prof services, as opposed to actual goods e. What kind of analysis to use? i. No bright line 1. Ct suggested there is no bright line test for the depth of analysis that must be taken i.e., it must be done on case-by-case basis, depending on the industry ii. Ct says truncated analysis is appropriate when an observer with even a rudimentary understanding of economics could conclude that the arrangements in question would have anticompetitive effect on customer and markets 1. Need more than that here, but not sure how much f. Levels of uncertainty created by this decision i. What type of look is required? 1. Requires something more than a truncated analysis BUT Arthur says: we dont know what it does require!! 2. Ct seems to indicate that the dichotomy of truncated OR full-blown analysis is not as much of a rule as it is more of a standard a. Not really one or the other more of a sliding scale b. Its hard to know how much evidence will be enough => encourages lawyers to be safe and throw in as much evidence as they can! ii. Limited just to professional industries? iii. Welfare efficiency 1. Argument like in Prof Eng that this restraint is better for social welfare was previously rejected b/c not an efficiency argument a. Now, it is being used as an efficiency argument Modern Rule of Reason Analysis Use p. 7 analysis first Plaintiffs Prima Facie Case P must show ACTUAL or likelihood of anti-competitive effects 3 options Inherently anticompetitive on its face (Prof. E) OR NCAA, IFD: If it looks like it facially restricts output b/c of its command, then it must have a justification. Actual Anticompetitive effects (lower output, higher prices, unresponsive market) OR NCAA, IFD: actually reduced the amount of sports on TV/ dentists Proof of market power + restraint No clear amount. Have to look at whether its feasible to go to another market Shows predicted anticompetitive market effects Ways to judge Full blown analysis OR Truncated/full blown analysis if (First 2 options above) Conduct is inherently anticompetitive or suspect on its face OR Note: this is usually a clear price restraint or market division (things that used to be under per se rule) P shows actual anticompetitive effects Defendants Affirmative Defenses Rebut - Claim that allegations arent true (didnt do it) Affirmative Defenses Show that alleged restraint is reasonably tailored to achieve: Productive Efficiencies Cutting Costs Improving Products Choosing for other people is not ok (Prof Eng) Beneficial Private Regulations Social or public interest removing bad competition (Depends on Prof Eng) Curing a market failure OR Improving allocative efficiencies (CDA) Plaintiffs rebuttal:

i.

1. 2.

25

Rebut Factual bases of Defendants affirmative defenses Assert that even if Defendants affirmative defenses are true, there are less restrictive (yet equally effective?) alternatives. 2. Whether social welfare kinds of arguments will be accepted is iffy => Arthur says probably not outside of professional industries

III. Vertical Restraints A. Overview 1. Vertical restraints = agreements b/w firms at different levels in the production or distribution chain a. Also subject to scrutiny under antitrust laws b. BUT vertical agreements are less likely to be inherently anticompetitive cts are more tolerant of these kinds of agreements i. Sometimes hard to determine if vertical or horizontal though ii. Court is mostly concerned with preserving interbrand competition intrabrand is ancillary. 2. Price or non-price OVERRULED BY LEEGIN a. Distinction b/w price and non-price restraints is crucial i. Vertical agreement setting minimum price per se violation of 1 ii. Vertical agreement setting maximum price or non-price restraint rule of reason analysis 3. Since vertical agreements are evaluated under 1 of Sherman Act, threshold issue is whether agreement exists. 4. 2 main terms for intrabrand restraints a. Incentive: gives incentive to move the product i. Give the dealer the freedom to make his own judgment on how to do this ii. Guaranteed mark-ups: If high, they will push your product b. Partial vertical integration B. Intrabrand Restraints: Resale Price Maintenance/Setting Minimum Vertical Prices 1. Dr. Miles (1911) OVERRULED BY LEEGIN a. Importance: Originates that RPM is per se prohibited. b. Facts: Manufacturer sets minimum prices for its vendees. Can only sell at 1 price and can only sell to those who have agreements
inside the system. Miles is controlling the product, even though they are not employees. The retail druggists have to sign agreements that they will only resell it to customers at printed price. They wont sell to Park and the agreements keep anyone else from selling to them either. Holding: violates the Sherman Act i. Clear that it is a restraint of trade. Retailers are not free to sell to 3rd parties at any price... 3 defenses offered by Miles i. Intellectual property: gives us a right to do this, even if it normally would not be ok. TM and trade secret ii. Colgate doctrine: Our property. The greater right (not to sell at all) includes the lesser right (to sell with restrictions) 1. Court says not necessarily. This is not your typical restraint on alienation. 2. Colgate (1919): Court says that a company is allowed to chose its customers and could announce beforehand that they did not sell to discounters see section C for more info a. Allows RPM if it can be achieved through unilateral conduct i. Can be hard to determine when unilateral though iii. Reasonable restraint: Ancillary restraint 1. Court disagrees. Looks narrowly at the definition of ancillary restraint. This is not sale of goodwill, etc. There is no legitimate purpose here. a. Addyston Pipe (6th cir. and not binding) Taft just gave those as examples the field could grow and more could be included as ancillary 2. Arthur believes that ancillary doctrine also includes working together/integration (not just sales) a. Miles could have argued this. They are acting as if they are part of the same company (and this would be ok if they were the same company). Miles could argue that they are essentially the same things as a company b/c of the K (partial integration). Does the form of the transaction make the difference? b. If they were Miles actual drug stores, he could legally control them 3. Court compares this to a cartel

a. b.

25

If the retailers all got together to set a price, it is a cartel. Court sees no difference b/w this situation and this case. No better than a horizontal agreement c. Hughes dissent i. Miles is making their dealers rich at their own loss by controlling the retail price. Why would they do this? It builds in an incentive for them to move the product. It is already branded and advertised with a large mark-up. 1. Ad budget: What does it have to do with the minimum price? 2. Will give better placement to the product that has the highest mark-up 3. Rationale: the resale price maintenance will encourage extra promotion for it ii. Free rider problem 1. If you are the one who has been doing the marketing and the sales go to someone else it lowers the incentive to push the goods. 2. Unilateral refusal to deal as a means to enforce vertical RPM: the Colgate doctrine a. U.S. v. Colgate & Co. (1919) i. Another method of controlling resale prices is for manufacturer to announce a suggested resale price and to refuse to deal with retailers who do not adhere to those prices. 1. Why does this circumvent antitrust liability?? To find 1 violation, there must be evidence pricing arrangement was product of contract, combination, or conspiracy. ii. Issue: whether the dictates of Dr. Miles extended to seller who announced desired resale prices and refused to deal with those who did not adhere to those prices 1. Ct said: per se rule did NOT apply b/c, under the Sherman Act, sellers were free to deal with whomever they wished and were similarly free to announce in advance what circumstances they would refuse to deal. iii. THUS: Colgate doctrine allows RPM if it can be achieved through unilateral conduct 1. Problem then becomes determining when events have gone far enough to permit the reasonable inference that the conduct is no longer unilateral b. U.S. v. Parke Davis & Co. (1960) i. Like other cases to come after Colgate, suggested that doctrine was only available as a defense when a firm had literally done no more than indicate its wishes and refused to deal with those who did not go along ii. This case: similar to Colgate scheme, except one step further spy network to root out retailers who cheated and charged lower prices; if retailers promised never to do it again, Parke Davis gave them another chance iii. Ct found this to be tacit agreement crossed the line of protection afforded by Colgate 1. I.e., Parke Davis went beyond Colgate by using the threat of refusal to deal as the vehicle to gain the wholesalers participation in the program to maintain resale prices. 2. Ct concluded that unlawful combination under 1 is not just one that arises from actual agreement such combination is also organized if producer secures adherence to his suggested prices by means which go beyond his mere declination to sell to customer who will not observe his announced policy. 3. Khan: Court holds that vertical MAXIMUM price fixing is decided under ROR, not per se a. Chops away at Dr. Miles more C. Intrabrand Restraints: Nonprice Restraints 1. Continental TV v. GTE Sylvania (1977) a. Importance: Vertical non-price restraints are never illegal per se, but are all rule of reason i. First case to cut back on the per se rule. 1. I.e. first clear signal that economic analysis was to be the Cts guiding methodology in antitrust matters. 2. However, only interested in economic effects (not other social benefit arguments as a way to condemn the restraints) a. Social cannot be used as a defense or as a way to attack these restraints b. Facts: Could only sell Sylvania TVs from approved location (to shield Sylvania from other dealers and encourage dealers to compete aggressively and promote Sylvania). GTE moved another competitor into Continentals area. c. Evolution of the rationale i. Dr. Miles 1. If retail price restriction (RPM) is illegal under Dr. Miles, shouldnt this be? a. Location clauses effectively eliminate all competition...(like bottlers) isnt this worse? So why is it allowed? b. Although its reasoning seemed to undermine Dr. Miles, Ct made clear that per se rule against vertical minimum RPM was undisturbed c. If were going to say that Dr. Miles is right, then anything more restrictive SHOULD be illegal, but other things are not as bad and should be allowed d. Holding: rule of reason applies to vertical non-price restrictions e. Reasoning i. The distinction in Schwinn b/w selling and consigning was too formalistic 1. Judges are finding distinctions to go around Schwinn anyway ii. Look to Northern Pacific no showing of pernicious effect on competition or lack any redeeming value 1. This is an essentially economic test, but there are also social benefits (the court is not concerned with these to condemn restraints) f. What about market power?

a.

25

One of the plausible interpretations is that vertical restraints are lawful when the firm imposing them has little market power and that, when market power is higher, the interbrand and intrabrand effects are to be addressed. 1. I.e., there is little utility in addressing the offsetting competitive effects if the firm is unlikely to have the power to have any ultimate anticompetitive impact ii. NOTE: to date, there is no settled approach to how critical a detailed market analysis is to the determination of validity of vertical non-price restraints. g. New Rule i. If vertical and non-price restriction it is the rule of reason. 1. Per se rule has been eliminated for non-price 2. If you are a plaintiffs lawyers, you would get around this by trying to say that it is horizontal OR that it is unreasonable ii. Only price is still per se illegal iii. Telling the difference is the hard part when the impact is the same D. Intrabrand Restraints: Internal Distinctions 1. DEALER TERMINATION/REFUSAL TO DEAL a. Overview i. Vertical restraint issues are typically litigated after a dealer has been terminated, allegedly for noncompliance with the restraint 1. Terminated dealer generally asserts that the termination was caused by its failure to adhere to vertical restraints imposed by the mfr or supplier ii. Typical dealer termination case raises the same characterization issues as other types of restraints 1. I.e., whether the requisite agreement can be established, whether the agreement is horizontal or vertical, and whether the agreement was for price or non-price purpose. b. Colgate Defense (1919) i. Importance: As long as unilateral, you are allowed to pick/terminate your customers (219). OK to announce beforehand and then refuse to deal with those who dont want that price. ii. Facts: Colgate named desired retail prices, etc, but did not require them. Court holds that there is no agreement (1- K, combo, conspiracy) iii. Used as a defense in termination/refusal to deal cases 1. The defense is available as long as the refusal to deal is unilateral and not in furtherance of conduct from which an agreement could be inferred or motivated by monopolistic purpose a. Can be hard to determine unilateral conduct 2. No pressure: When decision to terminate is imposed by supplier through an inducement or pressure from other dealers or franchisees, however, it will be closely scrutinized in order to determine whether the termination was in fact unilateral. iv. 2 ways to read the case 1. Narrow: Tacit agreement does not equal an agreement a. You can announce in advance who the customers are and then do it. i. Allowed: Can say I dont deal with price cutters and then say Youre not a price cutter are you? 2. Broad like indictment a. As long as not written, you can do whatever you want. Can do things in addition to announcing who you will deal with (listen to complaints, bickering with the prices). Can choose your customers. This was before Parke Davis v. Putting Colgate and Sylvania together... 1. Read together, Colgate and Sylvania appear to require that a terminated dealer must show: a. (1) That there was a qualifying agreement and b. (2) That this was a price, rather than a non-price, agreement. 2. NOTE: if plaintiff fails to show (1), the termination is legal. If the plaintiff fails to show (2), the termination will be analyzed under the rule of reason, and D will probably win. c. Parke, Davis (1960) i. Importance: The court seems to suggest that the broad reading of Colgate is not okay (cant do anything as long as its not in writing anymore). Only follows the last paragraph. ii. Facts: Had a spy network so people would inform on their competitors. Cutting off people who dont stick to the price. Parke would not allow bootlegging d. Monsanto (1984) i. Importance: Revived Colgate. Complaints from other dealers are not enough to prove that termination was not the product of independent action allowable under the Colgate doctrine. 1. Must have direct or circumstantial evidence of a conscious commitment to a common scheme 2. Seems to allow discussion b/w manufacturers and dealers, even about price, as long as there is no agreement on price. (222) ii. Why did they lose? 1. Lost b/c they cut off one of their companies that they had been receiving complaints about. Lost b/c they met with the people that they cut off (looks like a conspiracy). Dont let your salesmen talk about this iii. What evidence is required? Enough to show not unilateral 1. More than complaints required a. Powell, however, says that we shouldnt assume that just b/c they are receiving complaints, that does not make it bad. It is just staying in touch with the marketplace.

i.

25

2.

Complaints and a termination are not enough. But, the moment that you tell the dealer why you have gone too far Direct or circumstantial evidence... a. Thus, this case holds that evidence must tend to exclude the possibility that the manufacturer and non-terminated distributors were acting independently b. What kind of evidence is required to meet this standard? i. Direct or circumstantial evidence of a conscious commitment to a common scheme to achieve an unlawful objective ii. I.e., the manufacturer sought the distributors acquiescence or agreement, and the distributor communicated such acquiescence or agreement e. Business Electronics v. Sharp Electronics (1988) i. Importance: Narrows per se rule. Agreement to terminate someone b/c of price cutting is not illegal pre se unless it includes some agreement on actual price or price levels. (p. 224). Treats vertical price fixing more narrowly than horizontal (must be much more specific). 1. Presumption in favor of RoR standard. Departure only if there is a demonstrable economic effect rather than formalistic distinctions. 2. Arthur believes that they have done everything EXCEPT get rid of the Dr. Miles rule. ii. Facts: H complains that BE is underselling them. H tells Sharpe if you dont stop selling to them, then we wont carry your product. Wanted to get rid of free rider. Clear that there is an agreement to cut off BE b/w H and S. This kills intrabrand price competition is this price fixing? 1. If same rationale as Socony, it would be yes, but that is not the case here iii. Holding: This is not price fixing iv. For vertical price fixing, must name specific price or price level 1. They are treating the vertical price-fixing rule more narrowly than horizontal. The agreement must name a specific price or price level. a. This amends the Dr. Miles rule even more (still not overturned) 2. Not enough that the agreement has the purpose or effect of eliminating price competition a. ANY restriction is going to have an effect on price. Non-price restrictions can have a price effect. b. As long as not explicit, then not per se. Court wont assume that there is no redeeming value. i. It is hard to really determine whether it is price or not it is essentially arbitrary but it makes a HUGE difference in the outcome of the case. v. Important facts: 1. Not forced to adhere to price a. Even though there was a suggested manf retail price, the favored dealer didnt always adhere to it and wasnt required to. b. Looks like there is a difference b/w those who cut a bit and those who cut a lot c. The court says that there wasnt any agreed price 2. This is an agreement, but is a NON-price agreement a. Facts: There are clearly complaints to S from the preferred dealer. However, S did not simply terminate BE, but they gave the other company an assurance that they would cut off BE. i. Adding this case to Monsanto: It becomes safe to do more b. In the old days (Monsanto), BE would have won. This case makes a big difference. f. SUMMARY i. What is allowed? 1. Narrow form of Colgate is allowed Can say Will not fill orders from tire dealers who sell below ___ or use it as a loss leader. (unilateral) 2. After Monsanto, before they can get into real trouble, they must do more than listen to complaints (problem if you talk to the people that you are cutting off) a. What about soliciting complaints? Like Parke Davis says that this is a combination. Monsanto seems to say that if you dont recruit them, but just receive the unsolicited complaints this is just natural and allowed. STILL cant come back and say Ill do something about that. b. These are all fine lines to draw 3. Safest if you dont suggest a specific resale price a. If you dont suggest one, better off if you dont make your favored dealer adhere to it b. This is all form over substance. This is still a murky area. 4. Advice not to get sued: Dont suggest a retail price and dont terminate any dealers. ii. These cases and their interpretations greatly narrow the per se rule against prohibiting minimum vertical price fixing thus, decreases even further the possibility that a terminated dealer could mount a successful action against the manufacturer WHAT ABOUT DUAL DISTRIBUTION? a. What is dual distribution? i. Dual distribution: Manf sells some of its products to retailers who can sell to any one, but the manf also sells to restricted customers. No Q that the manf is the one putting the restraints. 1. Ex: like car manf wears 2 hats by selling to dealers and police

b.

2.

25

a. Why isnt this horizontal? Court hasnt given a clear answer. Doesnt look like a cartel b/c its limited to brand ii. Horizontal or vertical? 1. Makes a big difference a. Horizontal: per se condemned b. Vertical: ROR b.
Approaches from lower courts to determine i. (1) Source of the restraint rule 1. Attempts to determine whether restraint was initiated by competitors on the same level of the distribution chain or whether it was initiated primarily by mfr for purpose of achieving efficient distribution system a. Ex: GM dealers: dealers had location clauses but started selling to discounters out of area (Sams Club). i. 1966 Court held that this was a dealer cartel b/c they were the ones that wanted the restriction (horizontal) b/c it didnt help the manf ii. (2) Focus on actual competitive impact rather than whether vertical or horizontal aspects of the system predominate. 1. Weighs intrabrand restriction against potential for enhancing interbrand competition, regardless of horizontal features

Approach for Intrabrand Restrictions

3.

4.

5.

Is there an agreement on the restraint? a. If no not illegal b. If there is an agreement, go to step 2 c. What about a tacit agreement? In a cartel situation, Ct has said that tacit agreement counts as enough evidence to get to the jury (people in a boardroom) i. 2 theories: there is a tacit agreement that has the effects of an explicit agreement ii. Will let the jury infer from small amounts of evidence that there is an agreement, even if the evidence of an explicit agreement is only circumstantial 1. Is it this easy with vertical? Not necessarily a. Depends on Colgate/Parke Davis distinction d. After BE, there must be an agreement on price levels Horizontal or vertical agreement? a. Sylvania: Horizontal are illegal per se (see rules on price fixing, boycott, etc) b. Vertical goes to the next step c. Tricky situations Dual distribution Vertical Rule of Reason Applies (Leegin) Regardless of Price or Non-Price (D prob wins) i. Prima Facie Case (Monsanto/Sharp/Leegin) 1. Defendant holds market power (i.e. high % of market, if there are many brands, then intrabrand competition will not matter so much usually, i.e. the price stay consistent due to interbrand competitors), AND 2. Anticompetitive Effects other than higher price (output will likely be down, but this is difficult to show) a. Leegin says consider number and percentage of market of manufacturers using VPR. Also, consider whether the manufacturer or dealer instigated the VPR. There may be a retailer Cartel, or a dominant retailer, or a manufacturer with substantial market power using it for anticompetitive effects. (hard to show dominant dealer) ii. Defenses courts will likely accept them, appear not to care about intrabrand comp as much 1. Refute plaintiffs prima facie case 2. Affirmative Defenses a. Promotes more effective product distribution i. Cheaper ii. More Efficient b. No substantially less restrictive alternatives

E. Interbrand Restraints: Exclusive Dealings 1. OVERVIEW a. What are exclusive dealings? i. Suppliers buyer is precluded by contract, either directly or indirectly, from purchasing from suppliers competitors. ii. These are essentially restraints on the customer 1. The competitive process and consumer welfare are arguably compromised b/c outlets for the suppliers competitors are b.
denied and the consumer is limited in his range of choices. 2 kinds of interbrand restraints i. Exclusive dealing. 1. Comes up in 2 scenarios

25

2.

Requirements contract: Customer agrees to purchase all of its requirements from the supplier Classic exclusive contract: Says you wont buy anyone elses products. Doesnt limit it to just requirements (although its essentially the same thing) ii. Tying (bundling/packaging) c. 2 situations where this occurs i. Involve middle man/retailer: Standard Station: SoCal filling station retail customer 1. Standard is ultimately trying to reach the end consumer and the filling station is just a means to an end. ii. Involves end user: Tampa Elec/ Nashville Coal (p. 501) 1. Usually a requirements contract. Buyer wants an assured supply at a set price. In return, the seller wants a guarantee that they will buy it all. d. Clayton and Sherman Acts i. Exclusive dealerships are governed by both Clayton Act 3 and Sherman Act 1 ii. 3 Clayton Act standard of analysis conduct is unlawful if its effect may be to substantially lessen competition or tend to create monopoly in any line of commerce 1. Burden of proof is easier for P to meet under 1 of Sherman Act 2. Burden of proof: not mere possibility but probability competition will be lessened iii. Limitations of the Clayton Act 1. Puts restrictions on requirements contracts but not output contracts 2. Does not apply to K for services, but only arrangements (sales/leases) of goods a. Sherman Act covers vertical arrangements for both goods and services. e. Economic concerns and replies regarding exclusive dealings i. Concerns 1. Primary economic concern raised by exclusive dealing: foreclosure of manufacturers b/c unable to find outlets for their products a. Related concern: entry into the industry will become more difficult b/c, to be able to enter, the firm will have to be vertically integrated ii. Responses to concerns re: anticompetitive effects 1. Exclusive dealing is not uniformly anticompetitive; anticompetitive and procompetitive effects should be weighed a. If retailer is obligated to purchase only one brand of merchandise, it will be inclined to promote that brand, thus enhancing interbrand competition b. Use of exclusive dealing may help prevent type of free riding i.e., free riding by retailer on promotional efforts of manufacturer from whom it purchases 2. Some might argue there are no anticompetitive effects in the first place a. I.e., if manufacturer has no market power, he will have to offer retailer something in return for agreement not to purchase from others likely outcome is that manufacturer will supply the product at a lower price by absorbing promotional expenses b. Thus, even if manufacturer has market power, there is still no cause for concern i. Key is that market power possessed by manufacturer that enables it to charge a supra-competitive price is limited. c. This approach might suggest that exclusive dealing agreements should be per se lawful EXCLUSIVE DEALINGS CASES a. Standard Stations (1949) i. Importance: Rejects per se characterizations for exclusive dealing (give ROR). Clayton act should be easier to satisfy than Sherman although not per se, stricter ROR that focuses on the % ii. Facts: Had to agree to buy all of their products from Chevron. Also a guarantee that they would sell them all that they need. Both sides get an advantage. iii. Sherman v. Clayton Act 1. Sherman a. Court doesnt see this as a naked restraint, so it is not per se illegal. Under Sherman, this would be done under the RoR (and the D would win). 2. Clayton Act: a. Violation if the effect is to substantially lessen competition or tend to create a monopoly. b. New ROR test i. Issue: whether a showing that a substantial portion of the market was affected 1. This is more restrictive than the traditional RoR ii. Suggests that if your % is high enough, then efficiency will not be a defense 1. Standards % was 23%, but the top 6 had 65%. b. Tampa Electric (1961) i. Importance: for exclusive dealing, ct must make qualitative analysis in addition to defining geographic and product market 1. Created a sort of rule of reason analysis for exclusive dealing agreements 2. Essentially puts Standard in mothballs.

a. b.

25

ii. Facts: generating plant that contracted with respondents to furnish the expected coal requirements for the units (total
requirements for fuel)

1. Holding: Not illegal no substantial share affected iii. 3 part test of 3 of the Clayton Act 1. Line of commerce = product market 2. Area of effective competition= geographic market 3. Competition foreclosed is it substantial? a. What is a substantial share? Here, the .7% is not enough. It looks like it is a per se rule once a certain percentage is
hit and defenses will not work.

iv. Would Standard Oil have a better chance today after TE? Would they have more of a rule of reason analysis? 1. Could probably use efficiency excuses now 2. Important things that the court will look at (STEPS) a. Defining the market i. In TE, they said that just looking a Florida was too small. Could argue that the territory should be larger. (Look
to where the purchaser could potentially turn to for supplies). Area of effective competition is too narrow. Anti-competitive effects i. % left 1. The theory is that others cannot get to the consumer b/c all of the stations are tied up. However, in TE 84% of the stores are free (not covered by these K). 2. Courts require high percentages (15-30% and markets that are hard to get into. ii. Duration of the K 1. Also depends on the duration of the K. Less foreclosure if they are short. FE had fairly short term (20 years) 2. The court says TE is okay b/c of the efficiencies/utilities of the 20 year K. There were business reasons for the term. When you read it this way, it looks like the rule of reason. iii. Barriers to Entry 1. Can build your own gas station (fairly low barriers to entry) or offer franchises iv. Role of the end user 1. If the restriction is straight to the end user this is tough 2. If middleman, you can always get another one and still get to the end user c. Summary: P has to put across the effects, D has to put forth the reasons. The court will balance. This is the way that most courts have read this case sent Standard Oil to the mothballs. Suggests that the Standard Station case is gone a. However, the Court could come back and say that this case was simply distinguished i. Percentage was too small, the seller is the one who brought this, utilities are different... ii. Most of the lower courts follow TE, but Standard is still there. The words of TE suggest a very different methodology

b.

3.

25

Exclusive Dealing Analysis Clayton Act 3 standard of analysis conduct is unlawful if its effect may be to substantially lessen competition or tend to create monopoly in any line of commerce Note: requires qualitative analyses to see whether conduct falls within this standard More Restrictive than traditional RoR suggests that if market power is high enough, efficiency will not be sufficient defense to illegality Prima Facie Case

A. Define the Relevant Market 1. Geographic Market area of effective competition 2. Product Market line of commerce B. Show Anticompetitive Effects in Relative Markets 1. Market Share foreclosed/controlled due to exclusive dealing contracts i. No Clear magic percentage 1. Standard Stations 6.7%+ other big guys did this too. SS owned 23% in West, other big oil
combined for 42% Jeff. Parish (OConnor Conncurring) 30% not enough Lower Courts 40-50% necessary, e.g. Microsoft. Also consider whether the dealing with end users or middlemen. With end user- the competition is actually foreclosed (at least temporarily). If middlemen, is there another middleman below him? ii. Consider duration of the barrier to entry/expansion in relative market iii. Consider other means to market for competitors C. Qualitative Analysis consider actual and probable effects

2. 3.

Defenses

A. Refute Prima Facie Case 1. Short Term of Contracts 2. Alternative Means of Distribution for Competitors i. Self Distribution ii. Find Other middle men 3. Lack of Actual Effects i. Show evidence of vigorous interbrand competition and easy entry to market B. Affirmative Defenses 1. Benefits to Consumers i. Assured Supply ii. Fixed/Consistent Price 2. Distributional Efficiency i. Dealer Loyalty quid pro quo for exclusive dealerships ii. End free riding by other brands

25

F. Interbrand Restraints: Tying 1. OVERVIEW a. Tying arrangement (a.k.a. tie-in sale): contractual arrangement that conditions sale or lease of one product on the purchase or lease of b.
another product from the same seller i. Desired product tying product // Second, required product tied product The original idea was that tying was a way to leverage a monopoly from the 1st market to a 2nd market i. Kodak: Had monopoly in film and prepaid processing. Gov sued b/c they were tying the products. Kodak had to agree not to do it anymore. 1. In one sense, you can do this if you have products that are used with one another to get a literal monopoly. Traditionally, tie-ins were condemned b/c i. Forced purchase of the second product allegedly denied competitors of the seller access to the tied product market ii. Tying contract forced buyer to relinquish free choice over purchasing decision Why is the seller better off with tying? What sort of profits did he get? i. It is not self evident. Kodak will charge what the market can bear for the film b/c they have a monopoly. Can only charge competitive price for the developing. It will be treated as a price increase and people will buy less. Cant charge high for both...

c. d.

1st generation elements to apply the per se tying rule (VERY STRICT) 2 products tied Consumer coerced in some way (some courts) Economic power over tying product Appears that if the product is able to be tied at all, this automatically means that there is market power (or else people wouldnt get it) Not insubstantial $ amount of commerce in tied product Dont have to prove an effect in the market, just have to show that it is not de minimis. Small amounts could satisfy this element Business justifications? This was not a defense. Believes that this is just a pre-text (use specifications/regulations instead) Argument is that there is not legitimate reason for the tying (only exists b/c of coercion) 2. 1ST GENERATION

a.

International Salt (p. 515) i. Importance: Court announced that it was unreasonable per se to exclude competitors from a potential market (essentially illegal per se) ii. Facts: Company that made salt machine. Patented and if you wanted to use their machine, you had to agree to use their salt.

25

3.

SC said that this was illegal and that tying K had no purpose except to restrain competition. a. Under Clayton Act, illegal if there was not an insubstantial effect on the market i. The thought behind this original per se rule is that no one would WANT to do something like this unless it was anti-competitive b. Times-Picayne i. Created requirement of market power in the tying good market ii. Interpreted Salt as having different requirements for Sherman and Clayton 1. Clayton: Tying is illegal if the tying firm had either 1) monopolistic position in the tying good market OR 2) restrained a substantial volume of commerce in the tied product market (255). 2. Sherman requires both c. Northern Pacific (1958) i. Importance: This is the high water mark of the 1st generation per se rule. If you have a tying arrangement, it is per se illegal. The effect on commerce was not high in this case (500K of salt) 1. Not reasonable in and of themselves ii. Facts: RR tied to land. iii. Northern Pacific test for per se rule 1. Pernicious effect on competition and lack of redeeming value. The court classifies tying arrangements as this (a naked restraint) Justice Black: this thing can only do bad and it cant do good. Always bad. iv. First generation tying rule 1. Under Northern Pacific and other cases of this time, if it meets the test from NP (naked restraint and no benefit from it) it is illegal. If you really believe that tying arrangements are bad, then they must automatically have economic power. a. There is language in NP that suggests that if the buyer is accepting it, then this means that they have power 2. This was a very tight per se rule 2ND GENERATION a. Changes in policy b/c the cases werent making sense i. Weaknesses in the leverage theory 1. The leverage theory doesnt explain things. It does not lead to a monopoly that will lead to monopoly money. a. In Int Salt and NP both had provisions that said they will have a competitive price, etc (only if all things are equal). This is not a huge money-making scheme 2. There was a real question over whether tying really was a device just to monopolize a. Chicago school says, if you already have a monopoly on film, why do you care about processing? Can make just as much $ by raising the price on the monopoly product. ii. Business justifications 1. Appears that there may be business justifications for putting these products together a. Quality control: other ways (specifications) may not be as effective or cheap Salt iii. Hard to determine when something is 1 or 2 products 1. Almost everything is a combination (software, car/parts, even a table) 2. When are there 2 tied products? a. Usually the products have been available separately, as opposed to things that are routinely put together (service & restaurant) b. There are lots of things at the margin. Not so much a contract, but just that they refuse to sell (cant just try to buy a left shoe) 3. In most cases where the court finds tying, we know 2 things a. It is usually clear that the people are not monopolists (salt manf) b. Balance the efficiencies v. the costs i. Dont want to live in a world where everything has to be put together by the consumer ii. Packages exist b/c transactions are expensive there must be efficiencies in doing this 4. What should the policy be? a. When someone refuses to sell the product alone (left shoe), it implies that there is a non-monopoly reason for it b. B/c it is so easy to say that 2 products are tied, the courts have made part 2 harder (economic power over tying product) b. Fortner (1977) i. Importance: injected traditional market power analysis into tying analysis 1. Must have market power (gatekeeper). If so, then per se ii. Issue was whether evidence supported the finding that U.S. Steel had power in credit market iii. Ct did step-by-step analysis of factors that led the trial to conclude U.S. Steel did have power 1. (1) U.S. Steel was one of nations largest corps 2. (2) Significant number of customers had entered the agreement 3. (3) Above-market prices for tied product iv. Ct found none of these factors necessarily indicated market power

1.

25

v. c.

Although per se rule survived this case, was far from that envisioned in Intl Salt 30 yrs earlier Jefferson Parish (1984) i. Importance: created modern per se rule for tying ii. Where Ct stands on issue of what constitutes sufficient power in the tying market is unclear 1. Language seems to indicate that the 30% market share did not constitute sufficient power in the tying market a. If this is what the Ct meant, it was announcing a standard that would be inconsistent with that applied in virtually every prior case in which it had found that D did have requisite level of power b. On the other hand, Ct cited earlier cases with approval, suggesting they could be reconciled with this result.

Tie In Analysis Per Se Rule according to USSC, there are no affirmative defenses here. But some lower courts are not following the USSC. If this is not met, use ROR 1. Two products tied, and a. Are they separate products or really just one product. The test is whether there are two separate demands? Are they traditionally sold separately? b. There is proof of Coercion to buy both. If efficient, not coerced. 2. Economic power over tying product (this is the hard part), and a. Classic market power analysis (key) (prob greater than 30-40%) b. Uniquely good product that others cannot offer (competitive advantage) c. Patent or Copyright (probably not, not necessarily reason for economic monopoly) d. Many buyers accept tie in (maybe) 3. Not insubstantial monetary amount tied in, meaning a. Not de minimis (Jefferson-req by USSC) 4. Some lower courts are requiring a showing of anticompetitive effects 5. Some lower courts also allow affirmative defense of pro-competitive effects, like quality control and efficiency explanations. In Jefferson, the USSC appears not to allow business justifications, however. Some bring them in by requiring proof of coerced tie in.

25

If Per Se not met, use: Modern Rule of Reason 1. Prima Facie Case a. Inherently suspect (quick look), or b. Defendants have substantial market power in relevant market (tied market) and restraint, or c. Actual anticompetitive effects in relevant market 2. Defenses a. Rebut Ps case b. Affirmative defenses i. Improve product quality ii. Lower Costs iii. More effective operation of markets Technological Ties classical ties are contractual. But what about ties that are inseparable? 1. Subject to 1 at all? a. Where is the contract restraining trade? b. DC Cir. Microsoft cases, but IP licenses provide the contract. 2. DC Cir.s test a. Are 2 products tied? No, according to 1st Microsoft opinion (p. 570), if: i. Consumer could not combine ii. Combination is plausibly better than if separate b. If tied, Rule of Reason, according to 2nd Microsoft opinion (DC Cir.)

25

IV. Monopolization A. Background 1. 2 prohibits monopolization, attempt to monopolize, and conspiracy to monopolize. a. Statute made it a violation to monopolize i. Just having a monopoly was not necessarily illegal (requires some conduct) b. Statute deals with the problem of combinations (usually restraint of trade common law doctrines) i. Most cases were brought under both. 1 was the driving force in the early cases c. 2 became useful tool to go after companies that gained monopoly power by methods other than merger (e.g., superior product
and/or unfair methods of competition) Two critical questions in early examinations of 2 a. Does the Act condemn mere possession of monopoly power (i.e., is monopoly per se illegal)? b. If there is a separate conduct requirement of the monopolization offense, what types of behavior are prohibited? i. Specifically, do the prohibitions extend only to behavior that would violate 1 if engaged in by more than one actor, or does it prohibit a broader range of conduct? ii. Corollary: are otherwise lawful acts prohibited if done by firm with monopoly power? 3. Different answers to these questions create a continuum of possible interpretations a. At one end lies the possibility that merely being monopolist is sufficient to implicate 2 b. At the other extreme is the requirement that the firm possess monopoly power and engage in practices that would otherwise violate 1. c. NOTE: today, cts have opted for a point somewhere between these two extremes B. Evolution of the Standard 1. CLASSIC CASES a. SO Tob (1911) and US Steel (1920) i. Common threads in SO Tob and Steel 1. Tend to have mergers that have some element of threat 2. When bought out, signed an agreement in restraint of trade (wont enter into business around there) 3. Charged high price in order to make up for the costs of bringing them all together a. Effects: people try to get into the market to make these profits as well. b. How do you deal with outsiders? i. These companies had reputation for continuing to practice predatory practices to keep out newcomers 1. Local price cutting 2. Get exclusive contracts for supply ii. Courts holdings and reasoning 1. Not just a restraint of trade, but also had the above issues (price wars, etc) 2. Evidenced that they were put together to maintain a monopoly 3. They are bad trusts. iii. Effects of these cases 1. Companies try to be good trusts (US Steel) 2. Make competitors friends. a. US Steel uses its position to keep the price high, but keep market share low enough b. Standard Oil (1911) i. First monopolization case. Implies that 2 and 1 can overlap. c. US Steel (1920) i. Importance: In US Steel, the court agrees that mere size is not enough for a monopoly. Implies that you need both power AND conduct.

2.

REQUIREMENTS FOR MODERN OFFENSE OF MONOPOLIZATION

Closest thing to definitive statement of monopolization offense comes from U.S. v. Grinnell (1966) The offense of monopoly under 2 of the Sherman Act as two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident
C. Monopoly Power in the Relevant Market 1. MARKET POWER GENERALLY

25

a.

2.

Part 1 monopoly power in the relevant market requires two things i. Definition of the relevant market (both product market and geographic market) ii. Assessment of defendants power in that market 1. Look to market share, but also other factors, such as entry barriers, profits, pricing behavior, etc. b. What is market power? i. Monopoly is the power to control prices or exclude competition ii. Market power is a matter of degree 1. Price searcher v. price taker 2. Market power is the ability to search for the price (can raise the price and still sell some product) a. Every differentiated product has SOME degree of market power c. Market power = competitive advantage i. 2 kinds of competitive advantage 1. Cost advantage a. If your cost is lower than fringe firms, you can continue to have a higher profit and market share even with a lower price b. However, if the monopolists sell below their competitors costs, thats when others get upset i. Arthur says this is merely a company that is more efficient. They can use this to gain market power, but this is NOT prohibited by 2 c. What ultimately forms a geographic market are the costs that others have (tariffs, freight) cost advantage 2. Preference advantage a. What if the products are different? Like cola b. Means that all companies may have the same costs to make the product (to make the cola), but RC Cola must sell for less in order to compete (less profit) d. The easiest way for the court to determine market power was the % of market share i. However, market share is not a perfect expression of market power ii. Cts often express this imperfection in the relationship by saying that a very high market share creates an inference of market power can be rebutted if D can show that it is not able to control output or price in the market iii. Which market share is right? This is the source of litigation 1. If youre just looking for a number, the definition of the market makes a huge difference. You should make a more sophisticated argument e. Remember that market power does not only apply to monopolization. i. Defining the market is an issue in all of anti-trust [mergers under 7 of Clayton, under full blown rule of reason (NCAA), tying] 1. Use the same test in all areas (product/geographic) ii. The SC is fuzzy about how much power is enough f. Assessing power in relevant market i. In 2 (monopoly) it has to be a lot ii. In tying substantial market power does not have to be as high as a monopoly 1. They dont say how much less though a. 40% wasnt enough in Times, but you dont need 70% like monopoly DEFINING THE RELEVANT GEOGRAPHIC/PRODUCT MARKET a. Geographic Market i. Tampa Electric/Alcoa 1. Main Point: creates standard for defining relevant geographic market 2. Ct looked to whether people inside the geographic market would have cost advantage over people outside the geographic market 3. Where can the buyer turn to for supplies? (Alcoa, Tampa Elec) a. In Alcoa, Norway was at a disadvantage b/c they had the cost of freight. In Tampa, the seller had no advantage over the others (all coming from the same place) b. DuPont (1956) cellophane i. Importance: creates standard to evaluate relevant product market from demand side ii. Product market consists of products that have reasonable interchangeability of use 1. Groups of products that are substitutes for one another iii. Ct looks to three elements to determine whether goods are in same product market: 1. (a) Physical characteristics; 2. (b) End uses; 3. (c) Cross-elasticity of prices (fact-based inquiry) iv. Issue: Is the market cellophane or flexible packaging material? 1. Which reality is closest to the truth? Holding: Flexible packaging material. c. IBM v. Telex (1975) i. Importance: creates standard to evaluate relevant product market from supply side

25

ii. Market was defined as all peripheral accessories that could be used with all machines (as opposed to those that could be used
with IBMs) Importance of barriers to entry/quick adjustments a. Looking from the sellers side: If the only difference is the interface, at what cost and how quickly can competitors adjust it to get into the IBM market? Wouldnt you stop making RCA compatible ones and IBM? b. Turns out that the interface only cost $1. This does not give IBM a great advantage b/c it is so small 3. ASSESSING DS POWER IN THE RELEVANT MARKET a. Look at market share i. If market share is less than 50%, you would rebut it with the market share # ii. If over 70%, would rebut by saying its easy to get in, etc iii. In the middle cases, these other issues are the tie-breakers b. Look at other factors if b/w 50-70% i. Ease /difficulty of entry 1. To be a real monopolist, entry must be difficult 2. Depends on sunk costs a. What happens if you fail? Is there an exit barrier? i. Ex: If trying to compete with Alcoa, cant immediate turn an aluminum plant into something else. Different than a restaurant business where you dont have much tied up into it ii. If its easy to exit, then its usually easy to enter ii. Profits 1. In DuPont, the judge says If cellophane is so interchangeable, then why are they making such huge profits? a. Other things being equal, high profits over a long period of time is usually indicative that the company has a high degree of market power b. Looks bad for Dupont, but the court didnt focus on this iii. Target/Monopoly pricing 1. If there is price searching, this is evidence of some degree of market power 2. DuPont: had documents where they were looking like a monopoly. Wanted to raise the price. If they are able to charge a higher price, this could show that there are few substitutes iv. Ds perception 1. What does the D see as its competition? a. DuPont really thought that its competition was clear packing materials v. Conclusion 1. These other factors have become increasingly important 2. The broader the market is defined, the less the market share D. The Monopoly Conduct Problem

1.

1.

RULE UNDER ALCOA (2nd circuit 1945) a. Importance: Alcoa made the conduct very little to monopolize. Passive beneficiary of a monopoly was the only thing that was ok. i. Came up with the idea of exclusionary conduct that was not predatory 1. Could still be guilty even without exclusive contracts, etc ii. This case suggests that if you have a monopoly, it is per se illegal unless you give it away b. What did Alcoa do wrong? Holding illegal i. Expanded capacity: 1. Kept competition out. It would be able to supply the increased demand. Kept redoubling its capacity b/f others entered the field. Took over each new area. 2. Is it really bad that you stimulate new demand for aluminum and then make sure that you can satisfy it? a. Supposedly, monopolies reduce the output. These seems like the opposite i. US Steel: expanded, but let others in ii. Alcoa: expanded capacity. Aluminum is a smaller market at the time. No proof that they did this as part of a scheme to keep people out of business... ii. Were more than mediocre 1. Arthur doesnt think that they excluded by doing anything besides doing better than the others a. Looks like you would have to give your client the advice to be mediocre and give away your market share (like US Steel) 2. Is this good policy? a. Is it SO important that they baby others who want to be in the business? Or should new have to make it by being better? c. What would be okay under Hands analysis? i. Natural monopolyOK

25

2.

3.

Usually expensive to duplicate. Usually a shrinking market that does not have enough demand to need a lot of competitors (newspapers now) ii. Superior efficiency NO 1. Arthur doesnt think that Hand really thinks that this is ok. The language brings it up, but in actuality Hand doesnt respect the fact that this is how Alcoa got its power. 2. Hand only wants to allow those that have monopoly thrust upon them like an accident this doesnt include superior efficiency 3. Problems with this view a. Good product at better price inherently excludes the competitor i. It is impossible to do this passively b. Hand believes that its obvious that Alcoa knows that if they dont expand their production, others will come in i. However, Arthur says that they are expanding only by doing good things that other good companies can match d. Policy i. Regardless of the price, it is better to have small businesses even if they are less efficient ii. Monopolies are not good, even if they are not predatory e. Conclusion i. Alcoa seems to suggest that very little conduct will suffice to make it illegal if you have market power (Arthur thinks it doesnt really require any conduct) 1. Can only get out if a natural monopoly ii. Best defense not a monopolist at all. Make friends with your competitors iii. Supreme Court later said that they liked this case MODERN RULE OF CONDUCT a. United Shoe (1953) i. Importance: D can escape liability if it bears the burden of proving that it got its monopoly solely from superior skill, superior products, natural advantages, etc 1. THIS IS THE MODERN RULE 2. Its an affirmative defense D has to justify it once it hurts competitors 3. So... it gets away from the thrust upon language, but keeps a high standard SOLELY (suggests that any taint/not necessary will make it illegal) ii. What does Wyzanski do with Hands view? Gives D an out 1. Hands argument: wasnt good enough to get a monopoly just because you have a better product. Focuses on thrust upon. Any kind of active competition to retain the share was not okay. Almost have an affirmative duty to make sure that your monopoly doesnt last a. Hand focuses on the conscious choice Ex: you picked a 10 year lease term for a reason 2. Wyzanski: D can escape liability if it bears the burden of proving that it got its monopoly solely from superior skill, superior products, natural advantages, etc iii. Holding: company formed barriers to entry with its conduct iv. What are they guilty of? 1. Product of mergers but gov had already lost this part in a previous case a. The origin of the company is innocent here b/c its already been tried 2. Superiority of products and services a. People love them. Looks like its been progressive, hard working, etc b. This is okay, BUT their control does not rest on just this... 3. Leasing, etc a. 10 year term, cant use someone elses, return charges, cant separate service from machine charges v. We are told that all of these things are not economically inevitable 1. Unnecessarily exclude and restrict a. Almost like, you could do this in a non-restrictive way b. Is this business as usual or willful maintenance? vi. Where does this leave the law? 1. Suggests that if there is ANY sort of taint, then you are guilty a. Judges uses the word solely over and over again. (market power not solely from superiority...) 2. If smaller? a. Admits that much of what they did was what any legitimate company would do (if they had a smaller share, no one would think twice about it) 3. Incentive to make the market as little as possible a. Influenced DuPont case: had to make the market as low as possible. B/c if you WERE a monopolist, you were in big trouble CONTINUUM FOR CONDUCT a. Most likely, this is an area of the law where, with only guidelines and no hard-and-fast rules, the court will just know it when it sees it

1.

25

b.

On the merits v. predatory i. Main problem in each case is drawing a distinction b/w conduct that is competition on the merits (which only accidentally incidentally excludes competitors) and conduct that seems aimed primarily at excluding competitors by preventing their entry or hastening their exit ii. NOTE: Arthur says a standard articulated based on illegality from predation would lead to more consistent results 1. I.e., family resemblance if no business would this conduct other than to get monopoly power/no element of ordinary business practice) it is illegal, BUT if you have a price that others do all the time, it is ok.

_______________________________________________________________________________________ Predatory practice = honestly industrial superior Passive/ Nakedly exclusionary but not economically inevitable skills accident/natural monopoly Selling below cost ~~~ BAD~~~ ~~~DISPUTED~~~ license ~~~GOOD~~~~

c.

4.

Views i. Clearly bad 1. Naked: no purpose other than exclusion a. Not something that you would normally do to function in a business b. Doesnt have to be part of a contract i. Ex: blowing up another plant c. Selling below cost is in between this and the next step i. Chicago school would simply divide it into 2 parts (exclusionary or efficient) ii. If youre more efficient, you are entitled to the business ii. Clearly good 1. Passive/accident a. All agree that this is OK (AJC in Atlanta b/c no one else can support it) b. If you have a license from the gov (cable company) 2. United Shoe: They can all agree on superior skills and further to the right a. Except for Hand iii. Not sure 1. The most questionable area are the ones where the actions are honestly industrial but not economically inevitable a. Only doing what most competitors would do b. Want to keep incentives for people (dont want them to have to turn over new ideas immediately) 2. Chicago school would say that this in-between area doesnt exist a. Chic this is efficient behavior b. Harvard this is inefficient DUTY TO DEAL/COOPERATE a. Overview i. Duty to deal: there is no consistent rule dealing with this ii. Worried about monopolies, but also want to maintain incentives 1. 2 views a. Grinnell (ADT): (1964 the magic boilerplate) In addition to the possession of monopoly power in that relevant market, the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident. i. This rule actually ends up being very useless ii. Arthur thinks that there should be a family resemblance/ something that ties them all together, but this doesnt exist with this view b. Classic rule: If you have a practice that is predatory (that no business would do other than to get monopoly power no element of ordinary business practice) it is illegal. If you have a practice that others do all of the time, it is OK i. Arthur believes that this standard would lead to more consistency ii. Ex: decline to enter into unreasonable deals, etc 2. When we get to predatory pricing, the court seems to go back to the classic rule. However, with monopoly duty to deal, the court seems to ignore this rule and makes them do some things that do not make business sense b. Berkey Photo v. Kodak (1980) 2nd circuit i. Importance: dont really say no general duty to disclose, but dont find one here

25

ii. Facts: New Kodak film could only be used with their new camera. 1. Bs argument: They got an advantage b/c they have a monopoly in film iii. Issue: Whether Kodak had monopolized by not disclosing to competing camera manufacturers the upcoming introduction of the
new film Must a firm share its resources? (287) iv. Holding: ok no duty to predisclose 1. Dont expect people to disclose right away (keep incentives) a. The period of exclusiveness was ok v. So long as we allow a firm to compete in several fields, we must expect it to seek the competitive advantages of its broad based activitymore efficient production, greater ability to develop complementary products, reduced transaction costs and so forth. These are gains that accrue to any integrated firm, regardless of market share, and they cannot by themselves by considered uses of monopoly power. (288). 1. This represents most courts views now vi. It is honestly industrial, but perhaps not economically inevitable 1. COULD have told others, etc California Computer v. IBM (9th Cir. 1979) i. Importance: Monopolists should not be required to predisclose innovations to make it easier on their competitors i.e., monopolists may do what other companies do. 1. No duty to be passive and help others survive ii. Facts: IBM had drives integrated into the central unit. iii. Business justifications 1. However, in this case they DID have a better product and business justifications. 2. If they did not have this stuff, then it appears that maybe the rule wouldnt be so clear. If simply no duty, then this should have been solved on summary judgment iv. Looks like this could be dicta Aspen (US 1985) (p. 290 in Supp.) i. Importance: As a general rule, monopolists do not have the duty to cooperate with competitors; but if a companys reason for refusal to deal is not motivated by efficiency concerns and consumer good will, will be illegal monopolistic conduct. 1. Under Aspen, it seems clear that as a firm gains market power its freedom to refuse to deal with another firm is qualified by the need for a valid business justification. (lure of additional profit doesnt seem to be enough). 2. Arthur is concerned that the Court will not let the company act like a normal business 3. Aspen can be read as imposing a positive duty on a monopolist to cooperate with competitors as a means of preventing their exclusion when it does not harm its own ability to offer a superior product in the market. (292). ii. Facts: Joint advertising. Start w/ 3 individual companies (mountains) that come up with 1 product (joint ticket) to distribute (like a new product in BMI), but also sold direct. Divvied up the profits by use. Then Ski Co. buys Buttermilk mountain then develops Snowmass mountain (now has 3 mountains out of the 4). Takes it away. iii. No general duty to deal but then requires business justifications 1. General rule: Even a firm with monopoly power has no general duty to cooperate with competitors (IBM language) a. Arthur thinks this case is schizophrenic The language looks like it would go one way, but then they dont follow it 2. Duty unless valid business reasonInstructions in Aspen (p. 691) a. What qualifies as a legitimate business reason? i. The court never tells you. Arthur finds this to be very fuzzy ii. Not profitable or not liking the person doesnt seem to be enough iii. Why is the court acting like they have a duty to provide a benefit to its competitor? Shouldnt you be entitled to the business if you have a better product (like the 3 part ticket?) iv. Lure of additional profit is NOT sufficient iv. Holding: upholds jury decision that Aspen did not have a business justification for excluding the P 1. Supports an inference that Ski Co was not motivated by efficiency concerns and that it was willing to sacrifice short run benefits and consumer good will in exchange for a perceived long-run impact on its smaller rival. v. Discontinued relationship as a factor 1. Element of predation is more likely to be established when firm discontinues a relationship it had found profitable and which made market more competitive 2. Conversely, if the firm has never cooperated, it is more likely to be able to defend its decision to prefer the status quo. iii. Concerns with this case 1. Modern rule makes it look like monopolists dont have enough of a right to carry on like a normal business (to make more money) 2. Important thing in these cases INCENTIVES a. $: If they make more by being together than apart, then they will do it i. Market failure human problems (cant agree on the terms). Each thinks that they deserve more. 3. Just mad at each other. . . and dont want to work together anymore (doesnt seem to be ok) a. Similarity to Pennsylvania line of cases you have a right to decide who you want to sell your stuff (like car dealership)

1.

c.

d.

25

e.

f.

The Colgate doctrine: right to pick your customers However, Ski Co wont let Highlands sell Ski Co 3 part ticket either i. Maybe this makes a difference... ii. Part of the motive not to let them sell, is b/c they made you mad Verizon (US 2004) i. Importance: The case is filled with policy. Filled with reasons not to require a duty to cooperate with competitors but doesnt overturn Aspen. ii. Policy: Firms may acquire monopoly power by establishing infrastructure that renders them uniquely suited to serve their customers. Compelling such firms to share the source of their advantage is in some tension with the underlying purpose of antitrust law, since it may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities. 1. Indicates that regulatory scheme (Telecommunications Act of 1996) may allow refusal to deal to escape antitrust liability 2. I.e., distancing itself from rule articulated in Aspen lower cts are narrowing the rule iii. Compared to Aspen 1. The tone of this case is very different than Aspen. Says it much stronger than Stevens (no general duty to deal) 2. Seems to call Aspen an exception to the general rule that you can tell your competitor to go to hell 3. Court doesnt want compelled cooperation a. Compelled cooperation usually doesnt work well with anti-trust. Very difficult to monitor this i. Would require courts to determine price, quantity, etc b. Does this fall within the Aspen duty? i. Arthur doesnt think that he really says this. Instead, he just distinguishes the cases in a common law way (facts, etc) 1. This was never voluntary for the phone company and were forced to create something new (didnt ordinarily sell this to anyone) 2. In Aspen, Ski Co wouldnt sell Highlands the same thing that they sell to the public for the same product So, what is the law? i. The Aspen duty is still out there, but most of the lower courts continue to distinguish the case 1. Verizon does not overturn Aspen, but treats it like an exception a. The SC begins to narrow the duty. ii. Depends on new/old 1. In Aspen, they used to make this/do this and then they stopped a. Makes you have to tell your client, if you get into this collaborative effort, then you cant get out b. Arthur thinks that when situations change, then you should be able to get out of it c. On the other hand, lower courts seem to say that if there is a new deal and you dont do it, then its okay 2. Difference b/w Aspen and Verizon a. New or old i. Aspen had done it before ii. Verizon had to create new product/service iii. In the future... 1. Arthur thinks that courts will continue to distinguish Aspen for policy reasons (this is what Verizon did) a. Monopoly conduct: Although Grinnell gives you a rule, the courts tend to come up with their own rules when they are faced with a situation (and the rules do not always go together) 2. This is far away from Hands view in Alcoa that no legitimate business reason matters

i.

b.

25

Modern Rule for Monopolization I. Defendant Has Market Power A. Define Relevant Market 1. Product in determining the market, they look at physical characteristics, uses, and price elasticity according to Du Pont Cellophane i. Demand Side (Du Pont cellophane case p. 629) ii. Supply (IBM Telex Case) 2. Geographic is there a locational area where one company enjoys a pronounced advantage over competitors? i. Demand (ALCOA) ii. Supply (Grinell Case) B. Assess Defendants power within Relevant Market 1. Market Shares i. Broadway Delivery (2nd Cir.) presumptions: 1. >70% - presumptive monopoly 2. 50-70% - maybe monopoly 3. <50% - presumption against monopoly ii. Most courts: <30-40% - no monopoly 2. Qualitative Factors i. Barriers to Entry? ii. Competitive Advantage? iii. Target Pricing by Defendant wide discretion (DuPont dissent) iv. High profits in relevant market (DuPont dissent) v. Narrow/broad market definition

I. Defendant Obtained/Maintained Monopoly by Unreasonably Exclusionary Conduct A. Examples of such Unreasonably Exclusionary Conduct Include: 1. Classic 1 Violations a. Monopolistic Merger b. Naked Exclusionary Restraints providing a Cost Advantage c. Tying d. Exclusive Dealing/Refusal to Deal Aspen/Trinko(Verizon) 2. Classic Clear Predation practices used to gain monopoly power, not normal business practices. If others do it all the time, OK 3. Honestly Industrial but not economically inevitable (Alcoa maintenance of excess capacity / United Shoe long term leasing) II. Defenses A. Rebut Ps Prima Facie Case 1. Redefine Relevant Market broader market decreases market power % B. Affirmative Defense 1. Show that D became monopolist solely by accident/incident, natural advantages, superior skill, superior products, NOT unreasonable 2. 3.
conduct Show Refusal to Deal a result of legitimate business purposes/maybe there is no general duty to cooperate with competitors (IBM/Aspen) Some courts accept business justifications analysis, though Alcoa did not

25

E. Attempted Monopoly 1. OVERVIEW a. Offense of attempt to monopolize is explicit in 2 of Sherman Act condemns every person who shall monopolize or attempt to
monopolize i. Cts have expressed concern about using the attempt offense too expansively the Sherman Act is not a broad statute designed to cover all unfair business practices b. Principled use of statute requires cts to distinguish questionable business practices that pose a great danger of giving sellers monopoly power form those that do not Swift (1905) a. Importance: Holmes adopts 3 elements for attempt to monopolize b. Language of the opinion seems to indicate that dangerous probability of success is not an element, but merely a function (derivative) of intent i. Prob of success is later required in Spectrum c. NOTE: in majority of instances, intent will be inferred from conduct, thereby reducing the analysis to the other two elements: conduct, and dangerous probability of success

2.

3 elements of attempt Monopolizing conduct same as in completed offense unreasonably exclusionary conduct a. Although courts do not always agree on what this conduct is, the standard will be applied the same way here 3. Specific intent to ___ (monopolize by bad conduct? Unclear exactly what) a. Infer from ambiguously predatory conduct i. Ex: If you blow up a plant, it is clear that they are trying to get all the business (dont need more for intent). Conduct that speaks for itself and has no business justification ii. Intent must be more than just competing vigorously to get all the business (must be bad) b. Actual evidence (hot docs, recordings, strong circumstantial evidence, obvious predation) 4. Dangerous probability of success (i.e. of getting a monopoly) an independent element a. Market share is high i. Define market (as usual) ii. Subs share (no clear number, but usually > 30-40%) b. Mkt structure i. Barriers to new entry 1. If anyone with a pick-up truck can come in, probably wont succeed (peripheral business) ii. Center firm 3. INTENT/CONDUCT a. What do you have to show? i. Does it have to be intent to take over the ENTIRE market? 1. Problems with this:

2.

25

4.

Is this credible? Businessmen are full of it it is easy for people to talk larger than they actually intend (hot air) If they are sincere, what do you make of that? i. The idea that you passively get all of the business b/c your better is NOT true. You must make decisions along with way (increase capacity, etc). You always have a choice ii. How far along must it be? 1. Generally more than just an intent to get all of the business 2. Usually, intent to get all by BAD conduct b. Spectrum Sport (US 1993) i. Facts: shoe inserts ii. Importance: Conduct alone is not enough to get attempt. Must have a dangerous probability of success (304). 1. Holmes in Swift seems to say that if you have intent (2), then you can infer (3) probability of success a. If the conduct is bad enough, you can infer that they wouldnt have done this if they didnt think they were likely to succeed 2. This Court requires more than an inference of success iii. Per se rule of conduct under 2? 1. Court has not adopted this a. Policy: White says that the court has made such a mess with what constitutes monopoly conduct, that we dont want to make people guilty based on this alone i. Dont want to chill aggressive competition ii. MAKE SURE INCENTIVES ARE RIGHT ($ and not just trying to eliminate competitors through unfair means) PREDATORY PRICING a. Overview i. Predatory pricing = offense of driving rivals out of business by selling products at less than their cost, with the expectation of charging a monopoly price in the future when the rivals have either left the market or have been cajoled into raising their own prices. 1. Very risky a. Foregone profit is investment that must be justified by the income it produces in the future i. May have increased demand from the lower price as well ii. Increased costs b/c of high capacity iii. Another issue: whether, once firm has eliminated competitors, it can raise price sufficiently and deter entry by old and new competitors long enough to justify the losses incurred during the period of predatory behavior. 2. For purposes of attempted monopoly offense, predatory pricing constitutes conduct element a. Since intent may be inferred from action, it may also be indicative of intent b. Still leaves the question of dangerous probability of success 3. Despite all the discussion surrounding predatory pricing and an outpouring of cases, it has rarely been the basis of a successful 2 claim. ii. Exercise with caution results in low prices 1. On the one hand, low prices are important goal of antitrust laws a. I.e., any test designed to make selling at low price illegal must take caution, or antitrust laws will end up subverting the very ends they were intended to achieve 2. On the other hand, few people have doubt that there are times when sellers attempt to create a monopoly by temporarily charging unreasonably low prices. iii. Local price cutting leverage theory. 1. Standard Oil: There was no way that they were making $ in the short run. No one else could drop that low. a. How did they survive? They would finance those losses in the places that had competition from the $ they had from places where they already had the monopoly iv. Critiques 1. Chicago critique a. Predatory pricing is irrational b. You would be better off to merge into a monopoly than to engage in predatory pricing. It would be irrational and Standard actually merged 2. Other commentators (Harvard) a. Predatory pricing is not ALWAYS irrational and some companies may do it b. Comparing the pros v. cons i. Better to let someone get away with it, than the other way around (at least there are still lower prices). Want to err on the side of allowing it (want to encourage aggressive price competition). Try to come up with a standard.... b. Costs

a. b.

25

i.

c.

d.

Various measures of cost Average variable cost (AVC): costs that vary by output Average total cost (ATC): AVC + average fixed cost Marginal cost (MC): incremental cost of producing another unit a. Chicago School i. Should produce up to the price where MC=MR (as long as you are still recovering the price) ii. If someone is selling below MC, then they are just losing $ (wont make it up by selling more just digging a hole). 1. There is no rational justification for doing this must be for predatory means b. Problem: no one knows what MC actually is! Usually use AVC as good proxy. 4. Perfect competition is when price = MC Framework for analysis i. Brooke Group Ltd v. Brown & Williamson Tobacco Co. (1993) 1. Ct was reluctant to accept predatory pricing as a legitimate theory for antitrust violation 2. Once it did accept legitimacy of the theory, it laid out analytical framework that was especially burdensome on the P a. P is required to show that defendant i. (1) Charged prices below an appropriate measure of its costs AND ii. (2) Had dangerous probability of recouping its investment in below-cost prices 3. Since this case, lower cts have stressed the issue of whether the firm allegedly engaged in predatory pricing can reasonably expect to recoup its losses 4. Although Brooke Group provided a framework for the analysis of predatory pricing, it expressly declined to identify what it would regard as the relevant measure of cost in a predatory pricing case a. Several different approaches have been proposed as finding the appropriate measure of cost Determining predatory price i. Areeda-Turner test (Harvard 1975) 1. For this to be a rational business strategy you must be able to recoup the losses down the road a. The amount that you will make in the long run from a monopoly will cover the losses 2. Problems (recoupment). These problems were stressed by the Chicago School a. Time value of money: must make enough to make up for the loss in interest b. If you drive everyone else out of business, you must increase your output (new plants, etc) i. When the price is low it will lead to a bigger market (so the amount you are selling at a loss will be high) c. Once you have a monopoly and raise the price, the demand will drop i. Now you have too much capacity and not putting out as much product ii. Other peoples plants are still there. People will get back into the market as soon as the prices go up again 3. Wanted a rigid rule for defining cost a. Prices below MC/AVC are predatory i. Exception: Prices below short run MC are not predatory if they are equal to or exceed ATC 1. Unless at or above full cost, a price below reasonably anticipated short-run marginal cost is predatory, and the monopolist may not defend on the grounds that his price was promotional or merely met an equally low price of a competitor 4. Hard to determine MC a. AVC is not exactly like the MC, but they are very similar. Use AVC as substitute b. Needs to be a number that you can actually find. The costs of mistakes are high and people will be afraid to cut prices i. As long as you are above AVC, you are OK 5. Problems with this argument: a. Oliver Williamson: At certain levels of output, AVC and MC are very different i. Could be above AVC, but below MC 1. Occurs at the areas of high output (paying overtime) can be predatory practice b. Strategic behavior: post-strategic behavior i. People play games (try to send a signal to others) ii. Barry Wright v. Grinnell (1st Cir. 1983) Briar 1. Holding a. Ct noted extreme difficulty of determining when a firm pricing above AVC was acting to discipline competitors as opposed to simply lowering price to increase short run profits b. Weighed possibility that a policy of sometimes permitting prices above AVC to be treated as predatory would chill highly desirable procompetitive price-cutting. c. Concluded prices above average and incremental costs are not prohibited under Sherman Act d. Acknowledged it might be rational to engage in predatory pricing, when company knows: i. (1) It can cut prices deeply enough to outlast and to drive away all competitors, and ii. (2) It can then raise prices high enough to recoup lost profits before new competitors again enter the market 2. Rejects 9th circuits approach

1. 2. 3.

25

It is conceivable that there is strategic behavior (making judgments about whether they can exclude their competition) that are above costs, but still enough to drive other out of business then go right back to high price i. Ex: new entrant may be less efficient at small outputs, but might become more efficient after a while (learning curve) 1. This should not be socially acceptable behavior b. Decides to use costs + other element i. Exception to the rule that legal if above total costs: 1. If you can come in with some other evidence (memo w/ strategic plan that says if someone new comes in who will have costs at the beginning vulnerable, we will lower our prices to keep them out, and then go back to normal) it can be illegal 2. P must show by a preponderance of the evidence that the price cut would not have happened except that they were trying to keep someone out 3. If above ATC then P must show by clear and convincing evidence c. Trying to come up with rules that are more precise i. Using the burdens to minimize the chance of false positives ii. There are situations where above total cost price cutting may not be procompetitive d. Court decides NOT to follow 9th circuit approach i. Why? 1. If price cut above ATC it is moving price in right direction 2. Too vague: We still cannot be precise enough to do this. The dangers are too high want to keep prices low 3. Where does this case leave us? a. Most circuits use the AVC test (9th cir. still uses presumptions) iii. Brook v. Brown Tobacco case comes 10 years later (US 1993) 1. Importance: adjusted the focus of predatory pricing analysis by emphasizing the question of whether the firm will be able to recoup its losses (321) a. Really reluctant to have false positives (would rather err on the other side) b. Established prima facie case that the P has to show 2 prereqs 1. P must prove that prices are below an appropriate level of measure of its rivals costs a. If above ATC, but below rivals cost, then suggests that this is just tough for the rival b. Policy problem: Suggests that as a general rule, if above ATC we DONT CARE if its below MC or if someone is strategically giving up profits. OK if they are only exploiting a true cost advantage i. As long as youre more efficient, the court seems to be ok with this (still profitable for you, even if its not for them) c. This doesnt really seem to fit with the SC previous cases (like Aspen) i. Not requiring a legitimate business reason ii. This is a change in the philosophy 2. Dangerous probability of recoupment a. Dont care as much about effect on the competitors as we do about consumers b. Even an act of pure malice against other competitor requires more c. Very pro-defendant

a.

iv. American Airlines (10th circuit) 1. Importance: shows how difficulty in finding a measure of the cost hurts the Ps case a. Notice how hard it is to come up with an incremental cost 2. Other problem: How do you allocate cost? a. Some things could be both fixed and variable (ticket taker) v. Lepages v. 3M (3rd Cir. 2003) 1. Facts: 3M makes Scotch tape and has monopoly. LePage comes up with private label brand. 3M has bundle discount (has 2. 3. 4.
a lot of products). However, discount depended on targets for the tape. Ls argument: Im just as efficient and just as good. Just at a disadvantage b/c not large and dont have as many products. a. What justification is there for this? Why have to meet a target? Looks like it is just aimed at the hard of the rival Case is really messy. Arthur seems to think that its a bad opinion Some courts seem to say, If youre doing all of these things and still below cost, then OK. a. Others are more strict if youre just aiming at someone w/o a business justification, then not worried about false positives b. This area is still up in the air

25

Approach for predatory pricing Prices are set below appropriate measure of cost AND Court has not said what measure is most appropriate. At least over ATC is ok. (some use AVC) Dangerous probability of recoupment D will be able to drive out all rivals and drive up prices Future profit must be more than lost during predation Makes it hard to win these cases (hard to prove)

V. Mergers
OVERVIEW

To expand business, reduce costs, or increase market power, firms often seek to merge with or acquire other firms Generally, mergers occur either through a stock or asset purchase of one firm by another

Mergers may present threats to competition, depending on the type of merger and the size and strength of the companies involved.

I.e., the entire structure of an industry can be altered by a merger Arthurs example: giants in the land of pigmies if there are two giants surrounded by pigmies, at least there is still fierce competition between the two giants; if the two giants merge, it is just one even bigger giant in a land of pigmies, which cannot compete with the giant. This is bad for competition.

Horizontal mergers

Horizontal mergers involve firms selling the same or similar products in the same geographical market i.e., firms compete directly By merging, firms eliminate competition between themselves

Because of the direct impact on competition within a given market, horizontal mergers get the most intense scrutiny

Obviously horizontal mergers are illegal under 1 of Sherman Act (combination in restraint of trade) Problem: illegalized mostly tight combinations i.e., huge combinations of all competitors in an industry; these will never be tried anymore b/c everyone knows theyre illegal BUT they did not cover smaller mergers antitrust law needed a statute that would deal with this problem! Also, oligopoly was seen as a real problem, but 1 did not cover it. competition monopolistic competition (differentiated products) oligopoly monopoly

Structure Conduct Performance paradigm I.e., look at the structure of the market, and will tell you everything else you need to know about the validity/invalidity of the merger Cts must balance beneficial effects of horizontal mergers against threats to competition created by merger must determine how much of an effect merger will have on competition in defined market To do this, cts must examine the market size and power of the firms involved and attempt to predict the consequences of the merger

Antitrust concern: whether the resulting merged firm will result in market power sufficient to enable the combined enterprise to act like a monopolist or to facilitate collusion among the remaining competitors Standard: whether the merger has reasonable probability of lessening competition (Clayton Act 7)

Economic analysis of horizontal mergers Horizontal mergers realign competitive relationships within markets; firms that once competed with each other unite and compete as a single entity Realignment can have substantial economic impact in the market E.g., it would have been illegal for the two firms to agree on pricing before merger; as merged firm, coordinated pricing is expected under unified mgt market power of the resulting firm will increase, which would create threat of monopolistic or oligopolistic pricing, either through sheer size, market control, or collusion between combined firm and other firms in the market. I.e., antitrust concern is that as firms market power grows, prices will increase above competitive levels. Economic benefits may result from horizontal mergers that increase efficiency

25

Mergers permit the movement of assets from lower to higher-valued uses through increased efficiencies and redeployment of assets Mergers serve as means to replace/discipline ineffective and entrenched corporate mgt Mergers can produce efficiencies through joint operating agreements, economies of scale, financial economies, and economies of scope Mergers can provide resource and service access for both the acquiring and the acquired firm. Restraints on competition, if they exist, are similar to those created by agreements in cartels Underlying theories against liberal merger policy argue that mergers (1) Force management to operate only on short-term goals and protect against hostile takeovers, thereby diverting management attention away from long-term goals such as technological change; (2) Damage management and personnel morale; (3) Misallocate financial resources of lending institutions, crowding out more productive investments; (4) Increase concentration and market power; and (5) Permit leveraging to finance the acquisition which increases the debt-equity ration to unacceptable levels Reviewing ct will attempt to balance the costs of a merger against its benefits and determine whether there is a reasonable probability of the merger creating a substantial lessening of competition

Non-horizontal mergers

Non-horizontal mergers do not present the same overt threat to competition Involve firms that do not compete directly with each other because overall number of competitors in a given market remains the same, direct/overt threat of monopolistic or oligopolistic collusion does not exist as it does in horizontal mergers. BUT can restrain competition in other ways: might create barriers to entry, facilitate collusion, make it possible to evade regulation, etc. In determining the legality of proposed mergers, cts attempt to balance the harms and benefits of the merger and determine whether there may be a procompetitive effect or a lessening of competition

Vertical mergers one firm purchases either a customer or supplier, resulting in the acquiring firm expanding into a new market By merging w/ customer or supplier, firm integrates into different stages of production

On its face, this type of merger leaves competitive levels unchanged in each market Ways vertical integration affects competition: each firm is assured a source of supply and demand for its production Thus, integration may create advantages over non-integrated firms (i.e., economies of scale, distribution efficiencies, and reduced transaction costs) to remain competitive, other firms may have to integrate as well. When a vertical integration is challenged, cts will usually focus on four factors

(1) Whether competitors of the supplier or buyer will be foreclosed from the market (2) Whether there is a trend towards vertical integration in the market (3) Whether there is an intent to foreclose competition; (4) Whether barriers to entry are erected that foreclose equal access to markets

Conglomerate mergers merging firms have no prior relationship Pure conglomerate mergers have no overt effect upon competition or market shares they merely change the ownership of firms in different markets I.e., some mergers occurred b/c of idea of people buying other companies for mere reason that they are better managers and could run those companies better I.e., become conglomerate of totally unrelated businesses This used to be thought of as a good idea not anymore; you will rarely see them anymore Two theories of prosecution to challenge these types of merger: reciprocity and entrenchment

Product and geographic extensions would be considered horizontal mergers, depending on how you define the market

Geographic extension: acquisition of another company to allow acquiring company to expand into new geographic area (e.g., Falstaff beer co. bought Naroganset beer co. so that it could get some business in New England, where it had no presence before) Product extension: acquisition of company to allow acquiring company to expand into new product line (e.g., P&G bought Clorox b/c bleach was the one product it didnt already produce)

25

Clayton Act

As originally enacted in 1914, Clayton Act only applied to stock purchases (not asset purchases) and only to horizontal mergers (not vertical or conglomerate) Amended in 1950 to reach horizontal and vertical/conglomerate mergers, and asset purchases

As amended, made three changes

(1) Fixed grammar fixed split infinitive (2) Closed loophole now applies to all mergers (3) Extended coverage to all kinds of mergers (not only horizontal, but also vertical and conglomerates)

SUPREME COURT DECISIONS

Originally, the USSC held that all mergers between competitors restrained competition and constituted a per se violation of 1 under the Sherman Act. By 1948, the per se rule had been extinguished

In that year, it became clear that the USSC would only invalidate mergers under the Sherman Act if they verged upon monopoly

Mergers began to be prosecuted predominantly under Clayton Act 7, esp. after 1950 amendments After the amendments, Ct began to respond to Congressional fears that larger, merging companies would destroy smaller companies Brown Show Co. v. U.S. (1962) MAIN POINT: established a broad, multifaceted rule of reason under Clayton Act 7

Ct listed some important factors in judging validity of merger in de-concentrated market under the amended 7 (1) Market share data (2) Concentration percentages/trends (3) Industry trends (4) Entry barrier evidence For this Ct, merged market share was an important factor to be considered in determining the probable effects of the market (Arthur says: it dictated the opinion) Thus, although the Ct expounds several factors to consider, the decision came down to the fact that the merged firm would constitute 5% of the market. Ct noted that Congress had plugged loopholes in Clayton Act i.e., 7 now reached mergers involving acquisition of assets, as well as stock acquisitions Also reached vertical and conglomerate mergers, if their effects would tend to lessen competition in any line of commerce in any section of the country. Ct noted that 7 gave cts authority to stop, in their incipiency, any trends toward a lessening of competition i.e., cts no longer had to find that a substantial lessening of competition would occur as a direct result of the merger; tendency to do so in the future was sufficient. Related was the fact that amended 7 allowed cts to stop mergers based on reasonable probabilities of anticompetitive effects, rather than certainties. Ct recognized that even under 7, some mergers are still legal and even commendable

Acceptable types of mergers: Merger of small companies with purpose to compete with larger corporations dominating the market Mergers involving a failing company that would otherwise be unable to have a viable competitive effect on the market I.e., Congress intended to protect competition, not competitors, and desired to restrain mergers only to the extent that such combinations may tend to lessen competition In invalidating the merger, Ct gave effect to the congressional desire to promote competition by protecting small, locally owned businesses, even if it would result in higher prices

25

Under the rule of reason announced in this case, P need not show monopoly power resulting from the merger or that there is an actual lessening of competition Result in this case indicates anti-merger tone and fear of industry concentration

Ct believed 7 was designed to further de-concentration and the dispersion of economic power, and stressed the desirability of protecting small firms from larger firms, even if they were more efficient. I.e., Ct did not even discuss efficiencies/barriers to entry efficiencies did not matter because the statute was designed to protect small businesses. Bork this was the worst decision in antitrust history

U.S. v. Philadelphia National Bank (1963) MAIN POINT: Ct seemed to move further toward establishing per se illegality for horizontal mergers, at least for mergers in concentrated markets. RULE: 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 substantially that it must be enjoined in the absence of evidence clearly showing that the merger is not likely to have such anticompetitive effects. I.e., introduces opportunity for D to make a rebuttal to Ps prima facie case that tends to show that the merger does NOT tend to have anticompetitive effects. In invalidating the bank merger, Ct reasoned that procompetitive effects in one market did not justify anticompetitive effects in another I.e., beneficial economic consequences could not save mergers with anticompetitive tendencies This case: with this large market share, in an already concentrated market, the Ct presumed an inherently anticompetitive tendency that the banks were unable to rebut.

In contrast to Brown Shoes analysis for mergers in de-concentrated markets, this case set the standard for mergers in concentrated markets Standard: presumption of illegality exists for horizontal mergers in concentrated markets when, as a result of the merger: (1) The resulting firm controls undue market share and Ct did not define undue market share, but the 30% challenged in the case served as benchmark for invoking presumptive illegality Ct noted that even a merger resulting in less than 30% market share might raise inference of illegality. (2) Market concentration significantly increases BUT presumption is rebuttable if defense introduces evidence that the merger is not anticompetitive available defenses were not clear, but Ct rejected such defenses as Enhanced efficiencies, ease of market entry, economies of scale, increased competition in other markets, etc. NOTE: failing company defense was approved as absolute defense.

U.S. v. Vons Grocery Co. (1966) Ct invalidated merger between third and sixth largest grocery companies in LA, even though their combined sales only accounted fro 7.5% of the total sales in the city Ct again noted the applicable product market showed signs if increasing concentration I.e., grocery business was being concentrated into the hands of fewer and fewer owners and the small companies were being absorbed by the larger firms through mergers Ct felt this increased concentration (i.e., decrease in number of single-store retailers) was sufficient to prevent the merger After this case, it seemed that the Ct would invalidate any merger between high ranking market share competitors whenever the relevant industry showed signs of concentration or where an aggressive competitor was acquired. This seemed to further Congress intent, but reasoning is faulty for several reasons: Prohibiting all mergers tends to result in harm to both consumers and small business owners Consumer may also be hurt by refusal to allow acquisitions by competitors Ct seemed to confuse concentration trends with a trend toward decrease in number of single-store retailers U.S. v. General Dynamics Corp (1974) MAIN POINT: signaled a major shift in 7 interpretation; first time govt loses merger case

Ct cautioned that statistics re: market share and concentration, though significant, were not conclusive indicators or anticompetitive effects This indicated that Ct would return to more functional approach, where P would have to show some actual anticompetitive effects from the merger, rather than relying solely upon statistical evidence of market shares and increasing concentration in the market. I.e., held that evidence of market share and concentration trends could be rebutted by evidence that D was really an unpromising or weak competitor this case rebutted the prima facie case with evidence that D lacked competitive strength or vitality

25

As a result of this case, the factors or market share data and concentration trends seem to be the primary index for measuring market power, and if left unrebutted, can be the basis of a 7 violation BUT industry structural evidence must be an accurate measure of competitive ability when it is not, nonstructural factors must be considered.

Question was: why did the govt lose this case?? Three possible readings

(1) Dissent claimed this was just mistaken application of failing company doctrine I.e., you must be absolutely sure there is no chance the will make it out of reorganization; and you must be sure there is no other alternative purchaser Look to reasonable alternative, even if not as lucrative Problem w/ this interpretation of the case Ct says this is not what it is doing! (2) Current sales arent always the best measure of retail sales in natural resources merger measure should have been capacity/reserves, rather than actual sales Again, this is not what the ct says! (3) What the Ct actually says (and this is what the lower cts do now) language in Phila Bank has come back, and the D can rebut Ps case I.e., other cases had suggested there was no place for rebuttal (put Phila Bank out of logic), but now the role of rebuttal comes back. Suggests more rule reason-type approach (at least more qualitative approach)

Synthesis of USSCs approach in horizontal mergers Brown Shoe, Vons Grocery, and Philadelphia National Bank show the likelihood of the Ct invalidating mergers in markets where P makes a statistical showing of increased concentration and significant increase in market power resulting from the merger BUT General Dynamics indicates that the importance of market share can be rebutted by showing either that: (1) The procompetitive effects outweigh anticompetitive consequences or (2) No anticompetitive effects exist b/c other factors indicate D does not lack competitive vigor Further distinction: Philadelphia Bank establishes only a prima facie test for merger in concentrated market, while Brown Shoe chartered broader-based economic evaluation for mergers in de-concentrated markets Even if presumption of illegality exists, General Dynamics teaches that it may be rebutted by nonstructural evidence of future market power or lack of it Under either standard, Ct will weigh harms and benefits of the merger if rebuttal evidence is presented

NOTE: following General Dynamics, lower cts have signaled that Philadelphia Banks presumptive test has been weakened, if not undercut entirely Market concentration has become one of many factors to assess it is not dispositive

In particular, barriers to entry have become increasingly important in merger analysis Criticisms of the new functional approach
(a) There are often problems with obtaining the necessary underlying data in a form that is of sufficient quality (b) Assuming that the data are available and reliable, discussions with agencies often turn into battle of applicable economic assumptions, econometric analysis, and computer simulation models (c) Methodology may be less predictable than traditional market definition analysis (d) This new analysis may be time-consuming and expensive, esp. when the merging parties attempt to challenge the govts analysis or attempt to use these approaches to dissuade agencies from challenging a merger.

Horizontal Merger Analysis Under Sherman 1 (in restraint of trade) and Clayton 7 (substantially lessen competition, or tend to create a monopoly)

I.

Define All Relevant Markets look at every possible market a merger can affect (Continental Can) A. Product B. Geographic C. Submarkets?

25

1. Localities 2. Product Lines D. Note: Merger is illegal if tends to substantially lessen competition in any of these markets II. Plaintiff/Prosecutions Prima Facie Case assessment of may substantially lessen competition. Define for EACH relevant market - Merger
would produce a firm controlling an undue percentage share of the relevant market, and would result in a significant increase in the concentration of firms in that market. (Philadelphia Natl Bank). A. Consider individual market shares of each merging firm look at the numbers B. The Concentration level post merger how concentrated is the entire market? What percentage of the market do the top few firms (probably 4, sometimes 2) share? How big is the firm resulting from the merger? 1. Suggested prima facie violation changes in post-merger concentration range from 7%-33%, depending on the scholar. C. Also consider: 1. The trend towards market concentration 2. Maverick Companies D. If this part of the analysis indicates that merger may substantially lessen competition, the burden shifts to D to rebut III. Defendants Rebuttals (D is probably allowed to; somewhat unclear but lower courts allow it) A. Claim Ps number overstate anticompetitive effects because are wrong or nature of the business. i.e. prior market shares are not accurate predictor of future market shares b/c we will not be a viable competitor in the future, OR B. Procompetitive benefits outweigh anticompetitive effects 1. Actual competition in the market (Vons Grocery dissent) i. Changing market shares ii. Changes in rank iii. Price Wars 2. Weak merger partner (Gen. Dynamics, Intl Harvester) 3. Dubious Market Definition 4. Declining Concentration in the Market (Vons Grocery dissent) 5. Easy Entry to Market/Lack of Barriers (very important) 6. Guidelines 2.11-2.12 Hard to Collude and become oligopoly i. Homogenous Products ii. Few sales, large buyers C. Affirmative Defenses 1. Failing Company 2. Efficiency (maybe). The court will expect efficiencies create extend to both the consumer and stockholders.

25

DEPARTMENT OF JUSTICE MERGER GUIDELINES (1968)

State Depts merger enforcement standards and interpretations BUT are not binding on the cts Not even entitled to Chevron deference (i.e., FTC treated just like another district ct; USSC is the final adjudicator, with Guidelines merely stating agency policy) I.e., guidelines say this is not a restatement of the law; just their approach in cases Youll find, though, that even though cts are not obliged to follow guidelines, most of them do mostly b/c judges dont tend to know a lot about antitrust Underlying theme: mergers should not be condemned unless they facilitate collusion, or increase/enhance market power to proportions of monopoly or oligopoly i.e., maintaining prices above competitive levels Thus, focus on structure of the market and certain conduct occurring within markets

Include exhaustive definitions of relevant markets and market power Analyze market power in terms of relevant product and geographic markets or service offered by each of the merging firms For each of these products, requires DoJ to define the market in which firms could effectively exercise market power through collusion i.e., market in which a hypothetical firm could impost a small but significant nontransitory increase in price above current or future competitive levels generally 5% Analysis of market power requires evaluation of both demand and supply elasticity

I.e., hypothetical firm cannot effectively exercise market power if a price increase would cause (1) Consumers to switch to other products; or (2) Consumers to switch to the same product manufactured by other firms in other areas; or (3) Producers of other products to shift and produce products in the relevant market, either by modifying the use of present facility or constructing new one.

FTC/DoJ 1992 GUIDELINES

Govern horizontal mergers vertical/conglomerate mergers still analyzed under 1984 Guidelines Policy mergers are motivated by the prospect of financial gains; Guidelines are concerned with market power gain Unifying theme of the guidelines is that mergers should not be permitted to create or enhance market power or to facilitate its exercise What kind of market power are they talking about? Main thing theyre concerned about is interdependence in oligopoly Where earlier Guidelines were only concerned with collusion, this one shifts focus to more of Harvard School of economics i.e., market power/concentration is bad Product market Agency will determine the relevant product market by estimating the group of products that would be controlled by a monopolist in order to maximize profits by imposing a small but significant and nontransitory price increase If an increase in price for all of a products group would cause consumers to shift to substitutes, then the increase would not be profitable and the product market is too narrowly defined Agency will then add next best substitute to the prevalent product market and continue this process until there is no sufficiently attractive substitute to which consumers could shift at that point, the product market would be defined.

25

In making product market determination, agency will use prevailing prices of possible substitutes unless future prices may be predicted based on expected changes in costs or demand or expected changes in regulation that will directly affect price Agency will also assume that buyers and sellers will immediately become aware of price changes in all products involved. Agency will consider both direct and circumstantial evidence of the likely effects of price increases in determining whether product substitutability exists, agency will consider several factors (1) Evidence that buyers have shifted or have considered shifting purchases between products in response to relative changes in price or other competitive variables; (2) Evidence that sellers base business decisions on prospect of buyer substitution b/w products in response to relative changes in price on other competitive variables; (3) Influence of downstream competition faced by buyers in their output markets; (4) Timing and costs of switching products. In its determination of product market, agency will include

(a) All production of firms currently producing relevant product, (b) All firms capable of producing relevant product and that could shift easily and economically to production of the product within 1 year in response to price increase, (c) Production of vertically integrated firms that now consume all their production, if the firms would begin to sell the product in response to a price increase.

NOTE: agencys definition of relevant product market can make or break a merger (see FTC v. Staples)

Although 1992 Guidelines appear to reject concept of submarkets (not mentioned), both FTC and Staples ct continue to rely on the concept

Geographical market Agency will determine relative geographical market where firms to the merger produce or sell Will identify the geographic area in which the hypothetical producer of all output could maximize profits by a small but nontransitory price increase If buyers could respond to a price increase by receiving supply from producers outside the immediate area, the geographic market is too narrow and the agency will include the outside locations until it identifies the area in which a hypothetical monopolist could maximize profits by increasing price. Agency will consider all relevant direct and circumstantial evidence in determining geographic substitutability, with particular attention to the following factors (1) Evidence that buyers have shifted or have considered shifting to relative changes in price or other competitive variables; (2) Evidence that sellers base business decisions on the prospect of buyer substitution between geographic locations in response to relative changes in price or other competitive variables; (3) Influence of downstream competition faced by buyers in their output markets; (4) Timing and costs of switching suppliers If price discrimination is possible after the merger, the agency will narrow its relevant geographic market definition.

Calculating market shares horizontal mergers Dept will include total sales and capacity of all plants determined to be within the relevant product market and geographical market Will include only sales likely to be made, or capacity likely to be used, in response to a price increase sales or capacity already committed elsewhere that are not available to respond to price increase will not be included Each firms share of market will be computed by determining portion of the market it controls Dept will first focus on concentration of the market and any increase in concentration caused by the merger the greater concentration within market, the more likely collusion exists Similarly, the greater percentage of the market controlled by a firm, the more likely that an output restriction will be profitable In determining the concentration that exists and that which will result form the merger, Dept uses the HHI index calculated by squaring percentage market share of each firm in the market and summing the squares. Puts premium on having a few companies with really high shares (anything over 1800 is considered very concentrated) Why give extra credit to dominant firms? Price leadership tends to be in industry where there were huge companies, who typically had cost advantages Look for increase in concentration compare HHI pre-merger and post-merger Looks at difference between a2 +b2 and (a+b)2

25

I.e., difference between a2 +b2 and a2 + 2ab + b2 => difference between pre- and post-merger concentration is based on 2ab!!

Divides market concentration into three categories: (1) Un-concentrated (HHI below 1,000) Dept will not challenge mergers that result in this level of concentration, b/c market is so dispersed that coordination and collusion are unlikely (2) Moderately concentrated (HHI between 1,000 and 1,800) Dept will probably not challenge mergers that result in this level of concentration if the increase due to the merger is less than 100 points if it results in increase of more than 100 points, will challenge merger unless certain factors indicate that merger is not likely to substantially lessen competition, such as Financial conditions of firms in the relevant market; Relative ease of entry into the market Effect of potential competitors Dept might also allow some mergers it might otherwise challenge if the parties to the merger establish, by clear and convincing evidence, that the merger is reasonably necessary to achieve available efficiencies. This defense will be rejected if comparable savings could be achieved by the parties through other means. (3) Highly concentrated (HHI above 1,800) Dept will likely challenge mergers that result in this level, if they will increase the HHI by more than 50, unless the above factors indicate the merger is not likely to substantially lessen competition. I.e., will not challenge mergers that produce increase of less than 50, even in such concentrated markets.

Potential adverse competitive effects

Market share and concentration data provide only the starting point for analyzing the competitive impact of a merger agencies will take in account many other factors which affect competition I.e., start off with concentration index numbers, then move on to these factors Under new guidelines, Dept and FTC will scrutinize whether a lessening of competition through either coordinated action or unilateral effects exists: Coordinated interaction: threat that the merger will introduce collusion between newly merged entity and its rivals Includes both explicit price fixing and tacit oligopoly power Unilateral effects: logic as price of Brand A rises, some customers will shift from Brand A to Brand B. Prior to the merger, these customers would be lost to the firm owning Brand A. After the merger, this same firm owns Brand B and thus does not lose the customers. As a result, price increase is more profitable to the merged entity.

Efficiencies

Different from previous Guidelines, these emphasize the role of efficiencies I.e., primary benefit of mergers to the economy is their efficiency-enhancing potential, which can increase competitiveness of firms and result in lower prices to consumers. If a merger does not pose a serious threat to competition, it is unlikely to be challenged If substantial threat is present, however, appropriate agency will exercise discretion to assess whether net efficiencies outweigh the competitive risks Even when efficiencies exist, mergers can still have anticompetitive effects which make them illegal efficiencies are most likely to make a difference in merger analysis when the likely adverse competitive effects, absent efficiencies, are not great. Efficiencies do not matter when merger will lead to a monopoly or otherwise restrain trade. Agency will only consider merger-specific efficiencies i.e., those efficiencies unlikely to be accomplished in the absence of either the proposed merger or another means having comparable anticompetitive effects When giving alternatives to the merger, govt may not present theoretical alternatives must present those which are practical in the business situation faced by the merging firms. Merging firms must substantiate their claims of efficiency vague, speculative, or otherwise unverifiable claims will not be considered by the govt. Most importantly, in deciding whether to challenge a merger, govt will consider whether the efficiencies are of such character and magnitude that the merger is unlikely to have anticompetitive effects in any relevant market. Does not simply compare the relative magnitudes of the efficiency and potential harm associated with the merger will consider whether cognizable efficiencies likely would be sufficient to reverse the mergers potential harm to customers in the relevant market.

25

Certain efficiencies are more likely to be substantial in the relevant market than others, such as those allowing firms to lower the MC of production, BUT efficiencies dealing with procurement, management, or capital cost are less likely to be considered substantial NOTE: Role of efficiencies in the lower cts is up in the air; USSC hasnt looked at the issue in a long time lower cts will look at it, but not so sure Entry analysis

All issues of Guidelines have been influenced by the concept of barriers to entry Two possible definitions of entry barriers (1) Bain barrier to entry represents any factor that permits incumbent firms to price above MC, or charge supra-competitive prices, without encouraging new entry This is the theory that is incorporated into the 1992 Guidelines. (2) Stigler barrier to entry is a cost of producing which must be borne by firms which seek to enter an industry but is not borne by firms already in the industry Under the new guidelines, a merger is not likely to create or enhance market power or to facilitate its exercise if entry into the market is so easy that market participants, after the merger, either collectively or unilaterally, could not profitably maintain a price increase above pre-merger levels To determine whether entry into market is easy, agency will evaluate the likelihood of entry in response to small but nontransitory increase in price I.e., if entry is easy, following a merger, remaining firms are less likely to exercise market power and therefore price at supra-competitive levels b/c ease of market entry deters price increase.

To assess whether entry into a market is easy, Guidelines specify that analyses of timeliness, likelihood, and sufficiency of entry are required: Timeliness: entry is timely only if, following a merger, committed entry can be achieved within two years from initial planning to significant market impact on price Although entry may occur at some point in the future, two year standard is adopted. Primarily, Guidelines posit that entry beyond this two year limitation will be insufficient to eliminate the potential for supra-competitive pricing. Likelihood: entry into market is likely only if a new entrant would be profitable at pre-merger prices Relevant price criteria is pre-merger b/c following a merger, a firm with enhanced market power could conceivably temporarily reduce price to discourage new entry, or if entry were to occur, to make it considerably more difficult for the new firm to get market share Thus, if a potential firm is able to acquire market share and profits within the two-year period, entry is likely. Sufficiency of entry: entry into a market is sufficient only if a potential competitor would be able to successfully offer a product or service within the two year limitation For entry to be considered sufficient, a potential entrant must possess the market knowledge and financial ability to introduce a new product or service that will have a significant impact on price or deter supra-competitive pricing by a merged firm.

NOTE: FTC v. Staples is example of lower ct paying close attention to entry barriers

25