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Antitrust Law
University of Dayton School of Law
Gerla, Harry S.

ANTITRUST OUTLINEI.    INTRODUCTION AND OVERVIEW    A.    THE LAW AND ECONOMICS OF ANTITRUST1.    Introduction: Antitrust promotes competition out of the belief that competition presses producers to satisfy consumer wants at the lowest price while using the fewest resources.  Producer rivalry lets consumers bid for goods and services, thus matching their desires with society’s opportunity costs.2.    Some Basic Explanations and Behavioral Assumptions: Antitrust tries to assure that the gap between the ideal of competition and the reality of some forms of private rule does not grow dangerously wide.a.    The Demand Schedule: When economists refer to “demand,” they are identifying a demand schedule—a statement of the different quantities of a good or service that a consumer would buy at each of several different price levels.  Because the amount of an item that a person will purchase cannot be determined without also considering its price, demand cannot be identified as a set, specific quantity.  Rather, the demand for a product consists of a range of alternative quantities.  The basic rule is that the value a consumer will attach to successive units of a commodity diminishes as her total consumption of that commodity increases.  In other words, the quantity demanded varies inversely with price; the demand curve is negatively or downwardly sloped.b.    Profit-Maximizing Behavior by Firms: In making production decisions, the firm will adhere to the principle of substitution—that for a given set of technical possibilities, efficient (profit-maximizing) production will substitute cheaper factors for more expensive ones.  Efficient production generally means that a firm will seek the lowest possible costs for a particular rate of output.  A profit-maximizing firm will increase production when the additional revenue exceeds the additional costs.  That is, the firm will expand its output as long as the marginal, or last, unit add more to revenues than it does to costs—namely, as long as the marginal revenue exceeds or equals marginal cost.    P    p    E    (Profit Maximization)    q    Q3.    Basic Economic Models: Economic theory traditionally concludes that the structure of an industry affects its behavior and, ultimately, its performance.a.    Perfect Competition: Perfect competition describes a market where consumer interests are controlling.  The market is efficient in the sense that no rearrangement of production or distribution will improve the position of any consumer or seller.  Societal wealth is maximized because resources are put to their highest valued use and output is optimal.  The following conditions are useful in predicting whether competitive behavior is likely in a market: (1) there are many buyers and sellers; (2) the quantity of the market’s products bought by any buyer or sold by any seller is so small relative to the total quantity traded that changes in these quantities leave market prices unaffected; (3) the product is homogenous; no buyer has a reason to prefer a particular seller and vice versa; (4) all buyers and sellers have perfect information about market prices and the nature of the goods sold; (5) there is complete freedom of entry into and exit out of the market.        P        MC                    (Output of a Competitive Industry)        D        Q    In a perfectly competitive market, the individual firm is merely a quantity adjuster.  All firms sell at marginal cost and earn only a normal return on investment.  Each firm takes a price as set by the market; no firm can affect the price by adjusting output by raising or lowering price.  Each firm strives to maximize profits by adjusting its output until its marginal costs equals the prevailing market price.b.    Monopoly: A seller with monopoly power restricts her output in order to raise her price and maximize her profits.  Not only does this transfer output and may relieve the producer of pressure to innovate or otherwise be efficient.  Monopoly markets are often described by three structural and functional factors: (1) one seller occupies the entire market; (2) the seller’s product is unique (i.e. there are no substitutes); (3) substantial barriers bar entry by other firms into the industry, exit is difficult.  For a competitive seller marginal revenue is the same at all output levels; the monopolist, on the other hand, finds marginal revenue always less than price because her demand curve slopes downward.  As a result, the monopolist faces a choice on production and price: either sell at a higher price (with fewer unit sales) or sell at a lower price (with greater unit sales).  In making this choice, the monopolist will maximize profits at less than the competitive output level—namely, where marginal revenue equals marginal cost.  Thus, contrary to the competitive result, the monopolist will maximize profits by restricting output and setting price above marginal cost.        MC        P        (Profit Maximizing Monopolist)        D        Q        MRThe monopolist maximizes her profit by producing an output  quantity where her marginal revenue equals marginal cost and by charging whatever price her demand curve reveals is necessary to sell that output.  In other words. The monopolist will increase her output only as long as her profits increase.c.    Competition and Monopoly Compared: Compared to perfect competition, the primary effects of monopoly are reduced output, higher prices, and a transfer of income from consumers to producers.        P        (Monopolizing a Competitive Industry)        D        Q        MR    Monopoly pricing also leads to what is known as deadweight welfare loss.  Deadweight loss represents the loss in value to consumers who at the competitive price would buy product, but who at the monopoly price are deflected to “inferior” substitutes.d.    Oligopoly: Where the market contains only a few sellers, all sellers recognize that they are largely interdependent.  Therefore, each seller accounts for its rivals’ reactions when setting output and prices.  This means that oligopolists will not drop prices to increase market share because they expect that

enough “market power” to make it a monopolist.  The market was defined as downhill skiing in Aspen, Colorado.  Defendant would have preferred to define the market more broadly, to include other ski resorts in the area.ii.    Refusal To Deal: A company that has monopoly power has no duty to cooperate with its business rivals and does not violate § 2 by refusing to deal with competitors if it has valid business reasons for the refusal.  If the rivals have history of dealing, however, the monopolist might act unlawfully if it “changes the character of the market” by refusing to continue dealing.iii.    Essential Facilities Case: The Court describes this as an essential facilities case—i.e. the multi-ticket is essential to the business.  However, the Court ignores the essential facilities analysis but focuses instead on the legitimacy of the defendant’s reasons for refusing to agree with the plaintiff.b.    Implications: Aspen’s implication that a monopolist could violation § 2 merely by changing its distribution pattern and, indeed, that the monopolist can be required to cooperate with its competitors in a joint marketing arrangement is disturbing.  Perhaps most important, such a standard raises the risks associated with undertaking any form of legitimate collaboration with a direct rival.  By raising the potential costs of abandoning such relationships, Aspen makes it less likely that collaborative arrangement will be formed in the first place.2    Vertical Restraints: Relationships between the various levels of production and distribution can be described as “vertical”; on the other hand, relationships between competitors are described as “horizontal.a.    Graphic Products Distributors, Inc. v. Itek Corp. (11th Cir. 1983): This case involved nonprice, vertical restraints on trade.  This was basically a territorial allocation case, in which the plaintiff claimed that the manufacturer’s use of exclusive territories was an unreasonable restraint of trade.  The court noted that the Supreme Court had prescribed a rule of reason analysis for such claims.  See Sylvania.  The Court noted that while vertical restraints may lessen intrabrand competition, it may enhance interbrand competition.  Thus, the question in this case was what were the competitive effects of the vertical territorial allocation.  The first factor to be examined in answering that question is whether the defendant has market power, as evidenced by market share.  (The