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Antitrust Law
University of California, Berkeley School of Law
Edlin, Aaron S.

Edlin_Antitrust Law_Fall 2014

Review:

A. Monopolization – §2 Sherman Act

1. Monopoly Power: control over price, or the power to exclude competition

a. Proof

i. Direct – show actual exercise of power over price or power to exclude

ii. Indirect – infer monopoly power by the structure of the market

1) Define the market

a. When defining the market use the SSNIP test (is a small non-transitory price increase profitable)

b. Do not use market price in the SSNIP test, use competitive price (the Cellophane Fallacy)

c. The ultimate question; is the elasticity low (is demand insensitive to price

d. Look for functional interchangeability (as the Cellophane Court termed it, cross-elasticity)

2) Determine market shares

3) Show that this party has power, or too much of the market)

iii. Ordinarily >70% market share suggests monopoly, 40-70% possible, but rare, below 40% unlikely

b. Other factors

i. Elasticity of demand

ii. Capacity constraints (can other companies increase production, are they at maximum output)

iii. Entry barriers

iv. Behavior of others (are firms likely to follow the lead of some firm in the market?)

2. Willful acquisition or maintenance of monopoly power

a. Raising prices (monopoly pricing) is NOT a bad act under §2 or the Grinnell test, the bad act is using exclusionary conduct to maintain monopoly power

i. Raising prices invites other firms to enter the market

ii. Gaining or maintaining a monopoly by accident, business acumen, or superior products is not willful, it is perfectly permissible

b. Sacrifice can be an important indicator

i. If the challenged conduct involves profit sacrifice by the accused firm that is best explained by a desire to monopolize then it could indicate willful acquisition or maintenance — if the firm would not undertake the activity but for its anticompetitive effect it suggests it is anticompetitive

ii. The exact significance of sacrifice is not clear, although it is an important indicator

c. Competition on the merits

i. Part of exclusionary conduct analysis is asking if accused is competing on the merits

ii. Is the company providing a good product at a low price and thus gaining market share, or are they doing something else (using clever contracting terms like in United Shoe, to gain advantage)

iii. Predatory pricing is a special case of competition not on the merits

a. This is a two prong analysis:

1) Pricing below an appropriate measure of cost (the Court has never defined such a measure, in American Airlines the Court used Average Variable Cost)

2) Prospect of recoupment (after competitors are driven out)

d. A central theme in the competition analysis is raising rival’s costs (if the purpose of the conduct is to raise rival’s costs, rather than improve your efficiency, then that is not competition on the merits)

3. Attempted monopolization

a. Three elements

1) Specific intent to monopolize

2) Exclusionary act

3) Dangerous probability of success

B. Horizontal Restraints – §1 Sherman Act

1. Agreement: contract, combination, or conspiracy is the language of the statute

a. Copperweld says that a company and its wholly owned subsidiary cannot conspire in violation of the Sherman Act

b. What constitutes an agreement?

i. Inferred express agreement – you need not have anything in writing, an inferred express agreement is sufficient

a. Parallel behavior is, usually, not by itself sufficient

b. Typically need plus factors (circumstances or evidence which tends to preclude the possibility of independent action)

1. Acts against self interest (would be against interest unless others follow your lead)

2. Otherwise inexplicable coincidence

3. Opportunity for agreement

ii. Agreement can also be formation of/membership in an anticompetitive institution – the agreement to form an anticompetitive association is an agreement which restrains trade the facilitating practice the agreement allows can be illegal

c. When thinking about agreement remember two things

1) Be very precise on what the agreement is

2) Why does the agreement restrain trade (i.e. Container: the agreement was to verify price quotes, the effect was to fix prices because no one would pick up market share by competing on price)

2. Unreasonable restraints of trade

a. The default rule is the rule of reason, does the agreement unreasonably restrain trade

i. Chicago Board balancing test (balance pro and anti competitive effects)

b. Some restraints are per se illegal, they are of a type which are inherently unreasonable, or so likely to have pernicious anticompetitive effects that proving anticompetitive effects is unnecessary

i. No need to prove anticompetitive effects

ii. Naked restraints are typically per se violations (price fixing, market division, bid rigging) – One firm promising to restrain itself in exchange for another firm agreeing to restrain itself

a. Procompetitive justifications won’t be heard and won’t save you — see Maricopa

c. Restraints that are merely ancillary to the main lawful purpose of the agreement and minimally restrictive are seldom per se illegal and are judged under the rule of reason

d. ASCAP/BMI shows that some procompetitive justifications are so overwhelming that the court will consider them even in the face of price fixing

e. Quick-look rule of reason

i. NCAA – sometimes the rule of reason can be administered in the “twinkling of an eye”

ii. Rules of professional associations are often given the benefit of a doubt, though they will not always win (Professional Engineers, Goldfarb)

a. They cannot just argue competition won’t work to get to the rule of reason — see Professional Engineers

iii. In Quick Look the court will generally look at a bunch of factors, but typically not market power (the restraint is in the area of the per se analysis, but the court will take a look at potential offsetting factors)

C. Horizontal Mergers

1. The real question is whether the merger will substantially lessen competition

2. Courts today generally look at the FTC/DOJ Merger guidelines

1) Define the relevant market (using the SSNIP test)

a. The relevant market is the smallest market containing the products in question

2) Determine the HHI (sum of the squares of the market shares)

a. Look at the magnitude and change in the HHI resulting from the merger to determine if the market is concentrated before and after

3) Decide if you will analyze adverse competitive effects based on the change in the HHI

a. Possibly look at coordinated or unilateral effects

4) Perform an entry analysis (are other firms likely to enter and will that offset anticompetitive effects of the merger) — is entry likely, timely, and sufficient?

5) Does the merger present efficiencies (that are verified and merger specific) to offset the anticompetitive impact

a. Generally efficiencies only matter if they are going to be passed on to consumers in the form of lower prices

6) Falling firm defense (would the firm have exited the market anyway)

3. The central question: Will prices increase significantly as a result of the merger?

I) Economics of Monopoly

A. Mercantilism

1. Under mercantilism (which prevailed into the mid-18th century) most commerce was conducted under state sanctioned monopolies in the forms of licenses

a. Even today the state is the primary source of monopolies

2. In mercantilism the state extracted substantial profits through selling monopolies and monopolists enjoyed huge monopoly profits, but there was also substantial deadweight loss in the absence of competition

3. All this changed after Adam Smith published “The Wealth of Nations”

a. He argued that monopoly impoverished nations through inefficiency (gains monopolists realized were less than the losses monopoly created) à through competition overall wealth would increase, even if monopolists lost their edge

B. Modern economic thought

1. The prevailing economic thought holds that competition produces efficiency and encourages innovation

a. In contrast, Schumpeter’s concept of creative destruction suggests that innovation can only receive sufficient resources under a monopoly, but because of innovation these monopolies may be short lives

2. Characteristics of a perfect market:

1) Low/no barriers to entry and exit (“free entry”)

a. This assumes there is no minimal efficient scale, i.e. that there are no or low sunk costs to produce the product, if large factories or other means of production are necessary to enter the market they serve as a

Court noted that unexerted monopoly power and the absence of overt anticompetitive acts to create a monopoly weighed in the company’s favor

b. Four of the seven justices also held that US Steel was not a monopoly

d. Alcoa (pg 372)

i. This case was heard by the 2nd Circuit but it’s treated like Supreme Court precedent

a. The Supreme Court didn’t hear it because too many Justices owned shares in Alcoa and thus were conflicted out

ii. The court had to resolve whether the fact of a monopoly was a violation of §2 or whether there had to be improper acts to maintain it for a violation

a. Alcoa had entered a consent decree in an earlier action which authorized its exclusive contracts with power suppliers and foreign suppliers and buyers of aluminum

b. The government argued that under Standard Oil existence of a monopoly itself is a §2 violation

c. Alcoa argued that even if they were a monopoly they did not violate the act since they had not exercised monopoly power to make high profits

1. Judge Hand noted that low profits do not inherently avoid a §2 violation

2. He also notes that high prices are not necessarily an indication of monopoly power because they will encourage others to enter the market

d. The court found that the only exclusionary conduct Alcoa engaged in was an increase in production in response to others entering the market

1. Since this increase in production was done solely to exclude others the court held it to be a violation of §2

e. American Tobacco II (pg 382) the Supreme Court endorsed much of Alcoa and made five key observations about competition and §2

1) Rivalry stimulates industrial progress, monopoly deadens competition and progress

2) Price fixing by competitors is equivalent to price fixing by a monopoly

3) Monopoly is not monopolization since it may be achieved lawfully, achieving monopoly by control or combination is a violation of §2

4) Progressive embracing of each new opportunity is exclusionary

a. This is the key holding of Alcoa, but it’s not clear if this alone is sufficient to support a finding of improper monopolization anymore

5) A violation of §2 requires power and intent but not specific intent because no monopolist monopolizes unconscious of what it is doing

3. The early cases teach two things:

1) Monopoly and monopolization are not synonymous – monopoly status does not prove monopolization

2) Exclusionary conduct is necessary to show a §2 violation

4. Remedies

a. Structural – primarily divestiture

b. Conduct – prohibit or compel certain kinds of conduct (compulsory licensing, prohibitions against certain deals or exclusionary pricing, etc.)

c. Damages – likely the only real deterrent in antitrust law since private plaintiffs can sue for treble damages

C. “One monopoly profit” and the Chicago school

1. The “one monopoly profit” theory holds that a monopolist can never use its power to extract more than a single monopoly profit

a. This refutes the concern that power in one market could translate to power in others

b. The theory argues that a monopolist in product A has two choices:

1) Raise price and restrict output of A to achieve a full monopoly profit

2) Allow price/supply to float in A to encourage adoption of A so that the monopolist can extract the remainder of the monopoly profit in complementary product B

-Either way the monopolist gets only a single monopoly profit

2. US v. Griffith (pg 383)