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Santa Clara University School of Law
Compton, Charles (Chris)

AT Outline – Professor Compton – Spring 2013
AT Law protects competitions, NOT competitors
The Relevant Acts
–          Sherman Act
o   S 1 – “Everyone K, combination… or conspiracy, in restraint of trade… is declared to be illegal”
§  Only ‘unreasonable’ constraints prohibited (Standard Oil)
§  Must involve multiple parties
§  ‘K’ & ‘restraint of trade’ defined pretty broadly.
§  Civil or criminal
o   S 2- “every person who shall monopolize, or attempt to monopolize, or combine or conspire… to monopolize… shall be guilty of a felony.”
§  No K req – only 1 actor, unilateral conduct
§  monopolist must have both the power to monopolize and the intent to monopolized. 
§  Civil or criminal
§  In a relevant market
§  Willful acquisition or maintenance of that power
§  OK if power is acquired via skill, industry, or foresight
§  Key issues: defining the ‘relevant market’ & determining what conduct constitutes ‘willful acquisition or maintenance’ of power
§  Possession of monopoly power
§  The power to control prices or eliminate competition
§  Show circumstantially by dominant share, significant barriers to entry and inability of competitors to increase output in short run
§  Willful acquisition or maintenance of that power
§  Power via skill, industry or foresight is blessed
§  Conduct is “exclusionary,” “predatory,” etc.
–          Clayton Act
o   Sec 7 – no person engaged in commerce of any activity affecting comm shall acquire, directly/indirectly, the whole or any part of the stock… or any part of the assets of another person… the effect of such acquisition may be sub to lessen competition, or to tend to create a monopoly.
–          FTC Act
–          Robinson Patman Act
–          Hart Scott Rodino Act
–          State AT & Unfair Competition Laws
–          International Competition Regimes
The Economics
–          Elements of economic performance
o   Allocative efficiency
§  Degree to which enough output is produced to satisfy the demand of all consumers who value the product in excess of its cost of production
§  Looks to society’s welfare as a whole; best use of limited resources
o   Productive efficiency
§  Output is produced at minimum cost
§  Firms achieve higher levels of productive eff by building eff plants, saving costs, etc.
§  Mergers & some tying arrangements may be a way to achieve productive efficiency. 
o   Dynamic efficiency
§  Degree to which sellers reduce costs and design new and superior products to satisfy consumer preferences
§  DE is an issue in market conceptualization and analysis of market power
§  Includes innovation
§  AT law gen looks favorably upon increases in eff, but must be balanced w analysis of market power, pro-competitive benefits & anti-competitive effects
o   Efficiency v controlling economic power
§  Tension w/I AT law bw emphasis on efficiency (price competition & the tendency to view ppl as consumers) vs. democratic values (prevent dominant power for political & 1st A purposes)
§  Protecting small business & democracy was a big motivation for AT laws
§  Today, the econ conception of AT is dominant, but the Sherman Acts protects competition.
–          Exercising market power by raising prices or restricting output entails 2 types of consumer loss:
o   Monopoly overcharge – transfer of wealth from consumers to shareholders/owners
o   Deadweight Loss (of consumer surplus) (150)
§  Lower demand & production = loss of econ eff
§  It’s the loss in consumer surplus.  It is to denote the fact that the consumer loss is not gained by monopolist.  It’s not a wealth transfer, but rather represents wasted resources – that is, a loss in econ efficiency. 
§  The higher price limits demand, creating a loss of potential consumption benefits
§  Although the consumer values units of the commodity in excess of their production cost (‘consumer surplus’), the units are not produced & consumed.
o   Producers lose the incremental profits on goods not produced
o   This ‘deadweight loss’ is not gained by shareholders
o   It’s a reduction in the econ eff of the market.
–          Cross elasticity of demand
o   Whether an increase in price of product A is going to cause consumers to buy product B to the extent is that consumers decision is dependent on price changes
o   It’s a measurement of how sensitive 1 variable is to changes in some other variable.
o   Price elasticity of demand is a measure of how sensitive consumer demand is for a good when the price of that good goes up/down. 
o   If the good is very price elastic à a small increase in price will cause a large decrease in the quantity consumers will purchase.
o   Elasticity depends on the intensity of consumers’ desire for the good & on availability of substitutes. 
–          Ancillary and Ancillary Restraint
o   Ex: A simple (naked) K by rivals to set prices, allocate customers, or divide sales territories would be condemned summarily, but the adoption of a uniform pricing schedule as part of the operation of a partnership, which could provide services beyond the capability of any single individual, warranted more tolerant consideration b/c it was ‘ancillary’ to a legitimate transaction. 
o   To qualify as an ‘ancillary’ restraint, an agreement eliminating competition must be subordinate & collateral to a separate, legitimate transaction, and it must also be related to the efficiency sought to be achieved.  A determination of ancillary includes the factual inquiry whether a particular restraint was indeed reasonably necessary to permit the parties to achieve a particular efficiency.  But that factual inquiry is not the only pertinent consideration. 
–          Monopoly (155) – possession of monopoly power in relevant market, willful acq or maintenance of that power.  The existence of such power ordinarily may be inferred from the predominant share of the market.
–          Market Power
o   You’ve enough market shares to manipulate prices
o   Ability to raise prices
o   Ability to foreclose competition (i.e. barriers to entry)
o   Ability to raise power or foreclose competition in the relevant prod/geo market.    
–          Barriers to entry
–          Vertical Restraints
–          Horizontal Restraints
o   An agreement b/w competitors at the same level of the market structure to allocate territories in order to minimize competition. 
o   Ct has reiterated that “horizontal territorial limitations are naked restraints of trade w/ no purpose except stifling of competition.”  No need to weigh econ harm.    
–          Per se Rule
o   It is applied when ‘the practice facially appears to be 1 that would always or almost always tend to restrict competition & decrease output.’  (BMI case)
o   It is invoked when surrounding circumstances make the likelihood of anti-comp conduct so great as to render unjustified further examination of the challenged conduct. 
o   Per se violations under S1
§  Having ‘pernicious effect on competition’, or lacking ‘any redeeming virtue’.
§  Restraint’s ‘nature & necessary effect’ are so plainly anticompetitive that no further inquiry is needed.
·         Restraint conclusively presumed harmful to competition
·         No rebuttal permitted on reasonableness/intent.
§  Market power irrelevant.
–          Rule of Reasoning
o   The purpose of cts in applying the RoR is to evaluate the impact of challenged behavior upon competition.  (Standard Oil, Chicago Board)
Fixing Prices
–          Production restraints
–          Employee restrictions
–          Division of territories
–          Allocation of customer
Market definition; Early market definition cases
Monopolization and the Problem of Market Definition
–          The Sherman Act is a composite of 2 maj concept – restraint of trade & monopoly. 
–          Considerations of distinguishing the relevant firms from the irrelevant
o   Nature of the product & the ability/willingness of its users to substitute other products for it.
§  A product/service’s market power would be less if as a result of slight changes in price, buyers quickly were willing to switch to other products/services.
o   Spatial or geographic
o   A firm may be limited by the desire to forestall possible competition that would enter the field if its profits were to rise too high

Dissent:  Gov has defined the market as ‘insurance accredited central station protection services.”  This narrows the market too severely.  The market is deemed to be nationwide, yet the nature of the services is local (fixed locations, nonmovable equipment, and premises.)  the correct geo market herein is local & the line of comm is the entire security prod market. 
DuPont (cellophane case)(129)
–          Rule: where competitive substitutes are available, dominance over a single product does not constitute market dominance. 
–          DuPont owned 75% of the cellophane market.  Gov tried to sue them but DuPont alleged that the presence of adequate substitutes had to be considered in determining whether its control of cellophane constituted monopoly.
–          Ct: To determine whether a monopoly exists, it’s necessary to determine what constitutes the relevant market.  If other econ feasible practical alternatives exist, these prod must be considered as part of the relevant market.  If other prod of comparable price, quality and use are available, the fact that a manufacturer controls 1 line of prod will not, in and of itself, mean that a monopoly exists.  Here, b/c other alternatives were available; DuPont couldn’t use its dominance over cellophane to arbitrarily affect the price. 
–          Ct indicated that theres a considerable deg of functional interchangeability exists b/w these prod… cellophane has no qualities that are not possessed by a # of other materials. (137)
–          Must also consider cross elasticity of demand b/w prod – the responsiveness of sales of 1 prod to price changes of the other
o   If a slight decrease in the price of cellophane causes a considerable # of customers of other flexible wrappings to switch to cellophane, it would be an indication that a high cross elasticity of demand exists bw them; that the prod compete in the same market.
o   Ex: Ct found that cellophane competed w other companies.  It found that if DuPont raised the price of cellophane even slightly, it would lose sub sales to these other materials.  If prices of the other materials changed, cellophane sales would be affected.   
–          Ct concluded that cellophane’s interchangeability w/ the other similar materials sufficed to make it a part of this flexible packaging material market. 
–          If you are looking at just cellophane, dupont has monopoly
–          Dupont was able to arg that in addn to cellophane, you are looking at diff kinds of materials like wax paper.  This watered down Dupont’s market share and therefore didn’t have monopoly. 
–          Cellophane fallacy – If you are a smart monopolist,  you are going to charge as much as you can before the price is so high that you are encouraging your customers to find new substitutes or encouraging new entrance.
–          Dissent – There are not a # of products that can meet the flexibility, strength,… of cellophane.  While other alternatives exist, they wouldn’t readily be chosen by one who wanted cellophane.  Aluminum foil, waxed paper are poor 2nd choices.  Where there’s relatively low cross-elasticity of demand b/w alternatives, so that the consumer would probably pay a little more for 1 product than another, the relevant market is the single industry, cellophane.  DuPont had the power and has used it to affect price & to prevent entry.