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Antitrust
University of Connecticut School of Law
Greene, Hillary

ANTITRUST LAW OUTLINE                                                    SPRING 2008
 
–          Sherman act is the main statute in antitrust law but it’s very short for a statute & wording isn’t clear
o   Sec. 1 seems to make contracts illegal – it’s basically wrong as written
o   Sec. 2 means what it says but doesn’t define terms it uses
–          Antitrust law is common law b/c precedent defines what the law is
 
Competition v. Monopoly
–          The goal of antitrust is to foster competition – why?
o   Drives down prices b/c firms compete for sales
o   More goods are sold b/c at lower prices consumers buy more & sellers need to sell more to turn profit
o   Prevents monopoly pricing
§ Want to stop people from being excluded from market b/c prices too high but also want to protect people still in market from paying too much
o   Creates better quality, services, etc. for products
o   Allows consumers to have better info about products b/c info sharing (thru ads) occurs
o   Increases efficiency thru competitive pressure
o   Greater distribution of wealth – profit lost by monopolist is shifted to consumers
§ Antitrust populism – monopolies concentrate economic power in few hands which is bad b/c creates concentrated political power
§ This is no longer in favor
o   If good is socially valuable don’t want one to control it
o   Allows market access for small businesses
o   Encourages investment in research & development/ innovation
§ Counter-argument to this is that monopolies actually encourage innovation b/c they have more money to spend on R & D – competition doesn’t have a lot of profits – also if monopoly allowed it’s a big incentive to innovate
§ L thinks competition-innovation is more likely
o   More products/brands to choose from
–          Antitrust is more concerned w/ economic benefits of competition than w/ public interest/policy benefits like employment
–          Antitrust doesn’t set prices or regulate just make sure there is competition assumes the rest will follow
–          On supply and demand curve efficient point is where supply intersects demand – this produces qc (competitive quantity) & pc (competitive price) – don’t want to produce more than this b/c cost of producing is more than benefit to society
–          Consumer surplus (cs) is surplus get b/c they pay competitive price rather than a higher one
o   CS can be transferred to producers by hiking prices
–          Producer surplus (ps) is profit producer makes above what it costs to produce product
o   Dead weight loss is name for trans lost by monopolist that would’ve occurred in comp. market
–          In a monopoly one group of consumers loses b/c of dead weight loss (priced out of market) another b/c of transfer of cs to producers (have to pay higher price)
 
Cartels
–          In 19th C some industries had few firms so organized to act like monopolists by forming cartels – needed stabilize cartels, wanted to be corp.’s but hard to get charter – used trusts to stabilize
–          Problem w/ cartels is opportunism – cheating creates most profit for cartel members – but if everyone cheats cartel is destroyed
–          Trusts helped stabilize – trust was run by trustee or Board of trustees which set prices, sales, and production
o   Less cheating b/c people weren’t doing their own sales
o   Provided centralized control like corp. but didn’t req. auth. of state – legally binding
o   Most major industries were controlled by trusts
§ Consumers hurt b/c prices artificially high
§ Producers hurt – ex. acted as middlemen
§ Convinced Congress to make high tariffs for imported goods to protect selves from foreign comp.
–          Sentiment against trusts gathered such steam that it was a major theme in 1888 political election
–          Antitrust legislation passed in 1890 – Sherman wanted this to be his legacy – no hearings b/c he just wants bill passed thru
o   On debate no one wants to speak up for trusts even tho they are benefactors
o   Debate is mostly on constitutionality of doing this
o   Sherman created stronger Sec. 1 – judiciary committee vastly changes Sec. 1 and adds Sec. 2
o   Passed w/o much comment by either House or Pres.
o   No one seems to have known what it means – they leave it to the courts – thus the case law is the law
 
Monopolizing in Violation of Sherman Act §2
–          Sec. 2 of Sherman Act – monopolization is illegal
o   Can be brought by private individuals or gov’t
–          Main question is what does monopolize mean?
o   Not all monopolies illegal ex. utilities
ALCOA
–          Must have market power to violate §2 – Court defines what is monopoly market share
o    90% — yes
§ Small co.’s can’t compete – incentive to charge same as monopolist
§ Minimal comp. won’t price discipline
§ Firm will be able to act like monopolist, to hike price and reduce output
o   60-64% — doubtful
§ Market has enough comp. here that we don’t have to worry about monopolist dominating
o   30% — no
§ Firm won’t be able to profitably act monopolistically b/c too many competitors
–          This is always starting point for determining §2 violation
–          Market share depends on how you define product market
o   Gov’t wants PM defined narrowly to make A’s share as large as possible – argues:
§ Scrap metal excluded b/c not a substitute for some consumers – they need pure ingot
§ Foreign comp. excluded b/c tariffs and transportation costs mean foreign comps have
o   A wants PM defined broadly argues
§ Scrap included b/c can

ing factors
o   Do products & services have sufficiently distinctive uses
o   Do firms routinely monitor ea. other’s actions & adjust own prices, at least in part, on basis of other firms prices
o   Extent to which consumers consider various categories of sellers as substitutes
o   Does a sizable price disparity between different types of sellers persist over time for equivalent amounts of comparable goods
§ Under this list D’s market would be cellophane
Grinell
–          PM – central station alarm service
o   D argues wide market, include: non-automatic & automatic alarms, watchmen services & audible alarm systems
§ Court says watchmen diff. product b/c cost more – said cost didn’t matter in DuPont
o   Court says all these diff. products b/c none have same group of characteristics as central station services
–          Geographic market – nat’l
o   Consumers need service station no more than 25 m away
o   Court relies on G’s policies re: pricing, etc. to show nat’l
§ Court’s reasoning irrelevant b/c look at comp’s reactions not D’s policies
§ Fact that can charge monopoly prices in some places proves market isn’t nat’l b/c if it were comp’s would enter markets where G had monopoly & price disp.
§ Geographic markets here are localized
–          Grinnell definition of §2 violation
o   Possession of monopoly power in the relevant market & the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen or historic accident
–          Grinnell Test
o   Element 1 – Monopoly Power
§ Product market
·         Elasticity of supply & demand
§ Geographic market
·         Where consumers & producers come from
§ Monopoly power
·         Market share (look to Circuit for percentages)
·         Barriers to entry
(Relevant if present but not req’d part of test)
·         Supra-competitive profits
·         Unused capacity
·         Competition trends – businesses exiting?
·         Price discrimination – only a monopolist can
o   Element 2 – Conduct
§ Monopoly/Predatory/Exclusionary/Anti-competitive conduct
o   Element 3 – Affirmative defense
§ LBJ – legitimate business justification