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

 
Antitrust
Edlin
Spring 2015
 
 
1.      Introduction
       I.      Purposes of federal antitrust laws:
·         Primarily concerned with controlling private economic power through competition.
·         Competition is considered desirable:
°         Efficiency in resource allocation (keep costs and prices lower)
°         Consumer choice – give producers greater opportunities to succeed and to offer consumers broader choice
°         Avoidance of concentrated political power
°         Encourage fairness in economic behavior among competitors and equitable distribution of wealth
* Professor (and Chicago Law School) define pro-competitiveness based on the increase of consumer surplus. However, there is a competing idea where competition means duking out by two companies – competition is then a process rather than the size of consumer surplus.
1.1.      Sources of Antitrust law 
Statutes
·     Sherman Act §1
Every contract, combination, or conspiracy in restraint of trade in interstate commerce
•         Prohibit only unreasonable restraints
·     Sherman Act §2
Monopolizing, attempts to monopolize and combinations or conspiracies to monopolize any part of interstate commerce.
·     Clayton Act §3
Sales on the condition that the buyer not deal with competitors of the seller (“tie-in” sales, exclusive dealing arrangements) where the effect may be to substantially lessen competition or tend to create a monopoly in any line of commerce.
•         Sale of goods only (not intangibles, services, real estate)
·     Clayton Act §7
Acquisitions or mergers where the effect may be substantially to lessen competition, or tend to create a monopoly in any line of commerce in any section of the country.
·     FTC Act §5
Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce.
1.2.      Economics for Antitrust
·         Perfect competition:  requires a large no. of sellers and each seller must take the market price as given and the supply is controlled by the supplier. If he raises the price above the market price however, he will not be able to sell his goods.
o   Key characteristics:
§  Sufficient # of sellers & buyers
§  No barriers to the entry of new firms into the market
§  A uniform product offered by all sellers
§  All buyers and sellers have perfect knowledge of market conditions
·         Demand – Less elastic demand if fewer substitutes exist
·         Supply – Whenever MC < Price, more production is better. Cartels ·         A well-functioning cartel acts like a monopoly °         Joint interest is to restrict output/raise price to maximize joint profit °         Cheaters may lower price to gain advantage ·         Concerns for monopoly or cartels: 1.      Higher price than the competitive price à Lost consumer surplus 2.      Deadweight loss (social loss) 3.      Rent-seeking expenditures -- spend producer surplus to protect monopoly (e.g. in advertising or marketing) 4.      Costs rise/can rise as companies get lazy and don’t face competition (sloth + inattention) 5.      Less innovation °         Once a firm has a monopoly it may rest on its laurels and may spend money in wasteful ways erecting barriers to entry and hindering innovation. °         Note, temporary monopoly profits are an incentive to innovate (e.g. patents)   2.      Collaboration among Competitors 2.1.      Horizontal Restraint of Competition among Competitors (Sherman Act § 1) ·         Sherman Act §1. ·         2 elements: (1) agreements and (2) unreasonable restraint of trade  ·         Horizontal (i.e. among providers of substitutes) or Vertical (i.e. between buyer & seller) restraints a.       §1 è only concerted action. §2 è both concerted AND independent. o   This distinction is important because PER SE & ROR are AVAILABLE only under §1. If P can’t prove conspiracy è go for §2 charge. 2.1.1.     Development of the ROR (horizontal restraints) i.        Element #1: Agreements between at least TWO parties a.       “Function,” NOT form matters—e.g., trade groups, associations, JV (Topco, NCAA, BMI, Northwest Wholesale Stationers), FOGA American Needle v. NFL: NFL was an unincorporated assoc. of teams, each team was independently organized, i.e., no common ownership. Teams collectively agreed to license their logos via joint sales agency (è PER SE price fixing). Held: Not a single entity, hence § 1 violation. b.      NO agreement for purposes of § 1 1)      Where one co controls another (complete unity of interests and objectives (Copperweld)): ·         one firm having majority shares; ·         parent-wholly owned subsidiary; o   Note: doesn’t apply to partially-owned subs ·         less than maj shares but indicate of actual control) 2)      Between subsidiaries of a common parent 3)      Between co’s officers and employees 4)      Between unincorporated internal divisions of the same firm c.       D: “One Entity,” hence, NO § 1 violation IF: the relationship does NOT deprive the market of any independent sources of economic power because (i) unified management (decision-making centers) and (ii) common (economic) interests. d.      P: NOT a single entity for § 1’s purposes IF (American Needle): entities (i) independently make decisions, (ii) have independent interests; and (iii) able to compete independently in the market. e.       Inferring Agreement (American Tobacco)—SEE: ·         Often only circumstantial evidence exists and agreement must be inferred ·         Requires: circumstantial evidence + plus factor ·         Examples: parallel price; terms of sale by firms in an oligopolistic mkt structure ·         Requirements: (i) unity of purpose or (ii) common design/understanding o   “words” NOT required (no need for formalities of K or exchange of consideration) o   In Interstate, Court stressed the knowledge of the distributors and the motive for concerted action, namely that each D would benefit by the action only if all the other Ds participated, the substantial unanimity of the distributors in reaching virtually identical arrangements and the failure of the distributors to testify concerning the presence or absence of an agreement. o   Enough that knowing that concerted action was contemplated and invited, the distributors gave their adherence to the scheme and participated in it. ·         SJ standard: Circumstantial evidence “tends to exclude” possibility of independent behavior (Matsushita) o   E.g., pattern of exchanges (Container Copr., where D asked another D about the price charged in a particular sale) ·         PLUS FACTOR: BUT mere parallel behavior is insufficient circumstantial evidence to prove conspiracy; needs “plus factor” (Theatre Enterprises; Interstate Circuit) to show parallel behavior appears to be more consistent with conspiracy than unilateral action— o   Rationale: the more competitive the market, the more precisely similar should be sellers’ prices 1)      Communication among Ds (meetings, letters) (letters in Interstate Circuit) 2)      Economic motive for concerted action (Interstate Circuit) 3)      Improbable coincidence a.       Improbably identical price for chance to explain (American Tobacco); b.      Radical departure from prior practice; c.       Simultaneous actions 4)      D’s acting against self-interest a.       Raising price when costs fell (American Tobacco) b.      Decreasing sales against economic self-interest 5)      Abnormally high profits 6)      Facilitating practices like info exchange/pre-announcement of price increases o   Minus factor: independent business judgment (Theatre Enterprises) Interstate Circuit v. U.S.—“unlawful agmt among fil distributors.” Owner of movie theatres (D1) simultaneously announced to 8 film distributors (D2) that it would not deal with any distributor unless they agreed not to distribute prime films to “second-run” theaters. Held: NO evidence of explicit price fixing, but each distributor (D) (i) knew other distributors also received the proposition and (ii) almost unanimously accepted the terms, explained by (iii) economic “motive” for concerted action (ONLY profitable to agree if all agree). American Tobacco v. U.S.—“unlawful agmt among tobacco cos when behavior improbably identical.” Parallel pricing behavior of the 3 leading tobacco cos (Ds) which together produced about 90% of all cigarettes. Held: NO evidence of explicit price fixing, but behavior too improbably identical for there to have been no conspiracy (prices among Ds practically identical for 25 years and they had raised prices in lock-step fashion, sometimes on the same day, even during the Depression, when their own costs were falling). Ds couldn’t even offer economic justification

en: anticompetitive tendencies clear but restraint may be justifiable.
v.      Naked v. Ancillary restraints
a.       Naked restraint = naked of any purpose or competition; no other consideration on either side other than the mutual restraint of the parties and a payment not to compete (Addyston Pipe & Steel Co.)
b.      Ancillary vs. naked distinction still largely works today for the extremes.
o   Naked restraints à generally illegal.
o   Merely ancillary restraints à generally legal.
o   The middle requires ROR.
 
Standard Oil Co. – Held: K offended Sherman Act only if K restrained trade “unduly,” i.e., resulting in one of the three results: higher prices, reduced output, reduced quality
Chicago Board of Trade – flashes out the ROR std, balancing of pro-competitiveness
•         Here, the call rule was procompetitive in purpose and effect and hence reasonable. The scope was such that it only operated during certain times of day, affecting only small % of the grain market. The rule helped create public market for grain and made pricing more transparent + decreased the market power of dominant sellers + ensured that prices were set by open competitive bidding.
 
Arguments to make as a D
Args that won't work
1.   Promote competition by countervailing power: Necessary to offset the superior bargaining power of the collaborator’s single customer (monopsonist) or a single supplier (monopolist) – e.g. unions/ to offset the bargaining power of the collaborators’ customers or suppliers. Or help solve or cure pre-existing problems such as monopoly (Chicago Board of Trade)
2.   Promote convenience of the members for trade (Chicago Board of Trade)
3.   No intent to suppress competition (intent is not an element of a violation but an signals facts regarding the impact on competition)
4.   Restraint was imposed to narrow product line/short duration and limited extent
5.   Process by which the price was fixed was competitive (Chicago Board of Trade)
6.   Induced more members, more agents, more sales, and hence, more efficient transactions
7.   General market prices & qty are unaffected. Standard Oil Co.
8.   Made available more/better price information (price transparency)
1.      To prevent cutthroat, unfair or ruinous competition. Nature of the industry (high fixed costs, low MC) means that it is hard to cover fixed costs with unfettered competition. Hence, rate agreements should be permissible to allow such service/production
2.      Reasonable prices or price stabilization reduces uncertainty. Helps eliminate or at least smooth out price fluctuations; makes future planning easier.
•      But such reduction is artificial and undesirable. If the competitive prices call for a lower price, maintaining the stable price forgoes profitable and desirable sales. Hence, the stability leads to loss of consumer surplus and welfare, outweighing any stabilizing benefit.
2.1.2.     Per se Offenses
i.        “Naked restraints” whose anticompetitive economic impact immediately obvious.
ii.      Conclusively presumed to be unreasonable and illegal without elaborate inquiry (Northern Pacific).
•         P need only plead that the challenged conduct actually happened because anticompetitive effects are presumed from the nature of the agreement;
•         As noted in footnote 59 in Socony, NO need to prove: market power or harmful effects, intent, any overt act toward carrying out the conspiracy
•         Pro-competitive justifications cannot save per se illegal restraint