FALL 2014 – Antitrust with Edlin
1. A Primer on the Antitrust Laws
a. Prohibitions of the antitrust laws.
i. The Sherman Act (1980)
1. The Sherman Act's prohibitions are contained in the first two sections. They are short and should be re-read several times throughout the course. Section 1 makes it a felony to enter a “contract, combination . . . or conspiracy in restraint of trade.” Section 2 makes felonies of monopolization, and of attempts, combinations or conspiracies to monopolize. Since restraints of trade are a broader category than monopolization, combinations and conspiracies are generally prosecuted under Section 1. Unilateral behavior cannot be prosecuted under Section 1.
a. Rules are clear, standards are ambiguous.
b. Sherman Act seems more like a standard.
2. Violators of §§1 and 2 are felons.
a. Imprisonment up to ten years
b. Fines up to $100,000,000
c. Extra credit: find criminal violation of §2 alone.
ii. The Clayton Act (1914)
1. Unlike the Sherman Act, the Clayton Act sets out specific prohibitions. As amended by the Robinson-Patman Act, Section 2 (price discrimination) bans anticompetitive price discrimination that is not justified by cost differences or an effort to meet a competitor's equally low price. Section 3 (exclusive dealing, tying) prohibits leases and sales of commodities made on the condition that the buyer or lessee “not use or deal in the goods… of a competitor, where the effect… may be to substantially lessen competition.” Section 7 (mergers) prohibits mergers the effect of which “may be substantially to lessen competition;” the original Section 7 covered only stock transactions, but after the Cellar-Kefauver Act of 1950, this section now also covers asset purchases. Section 8 prohibits interlocking directorates among large competitors.
a. Tying – example: you can buy my printer only if you promise to buy all the printer cartridges from me as well.
iii. The Federal Trade Commission Act (1914)
1. Although the FTC Act is not part of “the antitrust laws,” as defined in Clayton §1, broadly speaking it is an integral part of U.S. antitrust, or competition, law. Section 5 of the FTC Act bans “unfair methods of competition” and “unfair or deceptive acts or practices.” The FTC has quasi-legislative authority to determine the meaning of these prohibitions. These prohibitions encompass all violations of the “antitrust laws,” but despite dicta in several cases indicating that the ambit of section 5's prohibition of unfair methods of competition could extend considerably farther, it has never been clear what else section 5 covers; the second circuit declined the opportunity to include wholly unilateral restraints on competition in du Pont v. FTC 729 F. 2d 128 (1984). Section 5's prohibition of “deceptive acts or practices” extends to many behaviors that are not addressed by the Sherman and Clayton Acts.
a. Anything that violates §1 or §2 of the Sherman Act violates §5 of the FTC Act.
i. No one is quite sure how §5 goes beyond the Sherman Act.
i. Violations of the Sherman and Clayton Acts are subject to both private and public enforcement. Under Clayton §4, private parties and state attorneys general can sue for treble damages plus the cost of the suit, including reasonable attorneys fees; private parties can also seek injunctive relief under §16 of the Clayton Act to prevent violations or further violations of the Sherman or Clayton Acts. The Antitrust Division of the Justice Department can bring criminal suits under the Sherman Act and can sue in equity under both the Sherman and Clayton Acts (see Sherman Act §4, Clayton Act §15) . Criminal suits can seek fines or imprisonment and civil suits can seek fines or injunctions.
ii. The FTC has exclusive authority to enforce the FTC Act. Clayton Act §11 also gives the FTC the power to enforce sections 2,3,7, and 8 of the Clayton Act with cease and desist orders, except for particular industries where enforcement is given to their specific regulator. (The Secretary Of Transportation enforces these sections with respect to air carriers subject to the federal aviation act of 1958; the Board of Governors of the Federal Reserve System enforces with respect to banks, banking associations, and trust companies; and the Interstate Commerce Commission, now defunct, used to enforce with respect to common carriers.) The Justice Department has the right to intervene and appear in proceedings subject to Clayton Act §11. (As mentioned above, Clayton Act §15 also gives the Justice Department the right to attack violations of the Clayton Act in the federal courts.)
c. Interstate and Foreign Commerce
i. The prohibitions of the Sherman Act cover trade “among the several states, or with foreign nations”. As the commerce power of the federal government expanded, so too did the scope of the Sherman Act — it now covers all trade affecting interstate commerce. However the “in commerce” language of the Clayton Act has been read more narrowly by the Supreme Court. For example, retail price discrimination is not usually covered by the Clayton Act, because once goods hit the retail shelves, they are no longer “in commerce.” On the other hand, Clayton Act §7 has been amended to include “any activity affecting commerce,” and the FTC Act has likewise been amended to embrace matters “in or affecting commerce.” Hence, as Areeda, Kaplow, and Edlin point out, the FTC “is no longer confined to in commerce jurisdiction even when it applies the substantive standards developed under the Clayton and Robinson-Patman Acts using Section 5 of the FTC Act.” (see ¶167, Antitrust Analysis, seventh edition, Areeda, Kaplow, and Edlin.)
i. Section 6 of the Clayton Act exempts labor unions and agricultural organizations from the Sherman and Clayton Acts. Certain ocean shipping organizations have exemptions. Other exemptions, such as insurance, exist as well.
e. Special Procedures
i. The Hart-Scott-Rodino Antitrust Improvements Act of 1976 governs merger review under Clayton §7. Before any large merger, the parties must notify the FTC and the Justice Department of their intent to merge, provide information about the proposed merger, and wait a statutorily prescribed period. During this period, the antitrust enforcement authorities decide whether the merger poses a competitive threat. This period affords the enforcement authorities broad opportunities for discovery and the chance to seek a temporary restraining order blocking the merger until the issue is resolved by negotiated settlement, permanent injunction or otherwise. Several things should be noted. First, firms cannot take control of the acquired assets or stock until after the statutory waiting period. Second, although people sometimes speak loosely of the Justice Department or FTC approving a merger, technically, they have no such power; their decision is whether to challenge mergers. Third, enforcement authorities are free to challenge a merger after the statutory period, but such delays waste the broad discovery and expedited hearings granted by HSR.
f. Statutes of Limitation
i. Section 4 of the Clayton Act limits private parties to bring causes of action within four years of their injury.
2. Chapter 1 – The Setting for Antitrust Analysis
a. Two Spectrums
ternatives that largely abandon reliance on market forces.
c. Perfect and Imperfect Competition Compared
i. Consumer Surplus: total value of all units to buyer minus total amount paid.
1. What you would have paid minus what you did pay.
2. ½ * base * height = consumer surplus
ii. Total Value: consumer surplus plus what you paid.
iii. Elasticity: “Used to describe consumers’ responsiveness to price changes. When small percentage changes in price produce great percentage changes in volume, demand is said to be very elastic. When large percentage changes in price produce little change in volume, demand is said to be very inelastic. The demand curve facing the imperfectly competitive firm is not completely elastic; price increases do not eliminate all sales.” AKE 10-11.
iv. A monopolist will increase output as long as the marginal revenue exceeds marginal cost. Where marginal revenue equals marginal cost that is the optimal production level for a monopolist that maximizes profits.
1. Competitive firm produces until MC = price; if MC < P it is better to produce more a. Note will not produce at all if Average avoidable cost is > price.
i. Firm will either exit the market in this scenario or not produce.
2. Monopolists restrict output.
a. Qm < Qc v. Variables: 1. Q: quantity produced and sold. 2. TC: total cost. 3. AC: average cost = TC/Q. 4. MC: marginal cost (change in TC resulting from an increase of 1 unit in Q). a. Cost of producing an extra unit. 5. P: price = TR/Q = average revenue. 6. TR: total revenue = P x Q. 7. MR: marginal revenue (change in TR resulting from an increase of 1 unit in Q). 8. Π: profit = total revenue less total cost = TR – TC. 9. Average Avoidable Cost: (avoidable cost)/quantity vi. “Perfect competition assumes that no one competitor’s actions have a perceptible impact on the market price. The perfect competitor’s output is so small relative to total demand that its output variations cannot affect market price; its marginal revenue from additional output, therefore, will simply equal market price.” AKE 12. 1. The perfect competitor increases profits by increasing output until the marginal cost of producing the last unit equals the market price at which it can sell all its output. This is because marginal revenue is the market price for a perfect competitor. a. The perfect competitor is an anonymous producer. 2. A monopolist’s marginal revenue is always less than price. 3. The monopolist’s demand curve is the competitive industry’s demand curve. 4. The monopolist’s marginal cost curve is the competitive industry’s supply curve.