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

Bilateral Behavior
 
1. §1 Sherman Act
 
 
Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.
 
Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $100,000,000 if a corporation, or, if any other person, $1,000,000, or by imprisonment not exceeding 10 years, or by both said punishments, in the discretion of the court.”
 
 
 
2. In Restraint of Trade
 
2.1. Agreements restricting competition among competitors
 
Cartel problem: companies conspire in order to raise prices to the monopoly price.
 
Possible justifications              (i) Prevent cutthroat competition:
 
Especially in industries with large fixed costs; if prices are driven down to the variable cost level: in long run business is unprofitable because no recoupment of fixed costs.
 
BUT only when excess capacity, otherwise no incentive to lower price. Hence, pressure to remediate excess capacity.
 
                                                (ii) Preserve needed capacity:
                                               
Capacity loss during recession, large costs to have everything up and running again after recession = economic waste. Hence, use cartel profits to sustain capacity.
 
BUT firms only have incentive to diminish capacity when excessive in long run.
 
                                                (iii) Reduce uncertainty:
 
                                                Stabilizing prices reduces uncertainty.
 
BUT cartel members have an incentive to raise prices, instead of merely stabilizing.
                                               
(iv) Finance desirable activities:
 
                                               
                                                (v) Countervailing power:
 
Better to fight the monopolist/monopsonist instead of legalizing the cartel.
 
à unpersuasive!
 
2.1.1. Rule of Reason
 
Trans-Missouri (1897)
 
Facts: 18 railroads had set up an association to set freight rates.
 
Defense:                – Sherman Act only prohibits unreasonable restraints (thus following common law).
                                – Cartel prices needed to recover fixed costs
                                – Rates were reasonable
 
Holding:                 – Sherman Act prohibits all restraints of trade (unless restraint is ‘collateral’)
(Peckham)             – Reasonableness of rates is too hard to determine to be a yardstick
                                – Ruinous competition defense rejected
                                – Railroads’ concerns need to be addressed by Congress, not the judiciary
 
Dissent:                  – Congress cannot be presumed to have departed from common law. Hence, the statute must be read as if it were following common law and thus only unreasonable restraints are prohibited.
 
 
Joint Traffic (1898)
 
Facts: Association of railroads to fix rates
 
Holding:                 – Certain contracts have never been understood as ‘restraints of trade’ e.g. formation of corporation.
                                – Only contracts whose direct and immediate effect is a restraint upon interstate commerce.
                                – Ruinous competition defense rejected
 
 
Addyston Pipe (1899) – Ancillary restraints
 
Facts: Producers and vendors of cast-iron pipes formed a cartel to raise prices of pipes.
 
Holding:                 – Traditionally, some types of contracts have been held to be valid under the Sherman Act. These categories are not exhaustive though.
                                – Ancillary restraints are lawful, if not main purpose of contract and if it is necessary to achieve main purpose.
 
 
Standard Oil (1911) – Rule of Reason
 
Facts:  Merger to monopoly
 
Issue: Combination in restraint of trade?
 
Holding:                 – Only unreasonable restraints are invalid under Sherman Act
 
 
 
Chicago Board of Trade (1918)
 
Facts: Board had adopted the “Call rule” which fixed the price of grain sold after closure of the Call at the price of the closing bid.

yrighted music < its members.   Issue: Per se illegal price fixing?   Holding:                 - First time that Court examines a blanket license à not per se.                                   - Consumers can still obtain individual licenses à blanket license is a new and distinct product.                                   - Individual licenses involve considerable TC                                   - “Price fixing in the literal sense, is not necessarily price fixing in the antitrust sense”.     Maricopa (1982)   Facts: Doctors were setting maximum prices for services covered by insurance.   Issue: Illegal price fixing?   Holding: Yes   Reasoning:            - Maximum price = stabilizing price       Engineers (1978)   Facts: Professional association of engineers had a canon of ethics prohibiting competitive bidding.   Issue: Unreasonable restraint of trade?   Holding: Yes   Reasoning:            - Defense of engineers: bidding process would lead to inferior work (risk to public health and safety)                                   - Defense implies that canon will have an effect on the price!                                   - Ban precludes customers from choosing inferior quality       NCAA (1984)   Facts: Limitation on output of TV rights to college football by NCAA.   Issue: Per se §1 violation?   Holding: No, but rule of reason violation.   Reasoning:            - Such horizontal restraints are necessary if the product is to be available at all à Rule of Reason                                   - “product” = college football, unpaid to preserve the integrity   - NCAA’s role to preserve competition, here: rules restrict output, hence incompatible with that role