ANTITRUST MILLER FALL 2015
I. Introduction and Overview
A. The Law and Economics of Antitrust
1. 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.
3. 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.
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.
The 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.
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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 any gains will be cancelled immediately when rival sellers retaliate with similar price cuts. As a consequence, oligopoly sellers focus on coordination and anticipation. This leads to cartelization. The problem here, however, is that cartels are unstable, and each member has the incentive to “chisel” profits away from the other members of the cartel.
4. Overview of Antitrust Statutes: The common law’s inability to reach certain anticompetitive behavior and rising concern over abuses by corporate giants in the late nineteenth century spawned legislation curbing the power of the railroads and “trusts.”
a. The Sherman Act: The Sherman Act, enacted in 1890, is the principal antitrust statute. Plaintiffs prevailing under the Sherman Act are entitled to treble damages, costs, and attorney’s fees.
i. Section One: Section one of the Sherman act make unlawful (and criminal) “every contract, combination or conspiracy in restraint of trade” in interstate or foreign commerce. Anything traditionally considered a contract qualifies, but even less traditional notions may be enough. Supreme Court decisions have limited
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 defendant in this case never challenged the definition of the relevant product market, a major tactical error.) Once market power has been demonstrated, the plaintiff must show an anticompetitive effect, either in the intrabrand or interbrand markets. That anticompetitive effect must be balanced against any alleged positive effects on interbrand competition stemming from the restraints. The ultimate question is, what effect does the restraint have on consumers?
b. Copperweld Corp. v. Independence Tube Corp. (1984): The Court overruled the intra-enterprise conspiracy doctrine and held that a parent and its wholly owned subsidiary could not be “conspiring entities” for the purpose of satisfying § 1’s plurality requirement. Antitrust is about economics,; it is not about formalities.
3. Conspiracy to Restrain Trade: A primary concern of the antitrust laws has been to preserve and encourage competition among firms in the same industry. The antitrust laws place limits on collaboration among competing firms, so called horizontal restraints. When a group of competitors agree not to deal with a firm outside the group, there is a combination in restraint of trade.
a. Rothery Storage & Van Co. v. Atlas Van Lines (D.C. Cir. 1986): This is a horizontal boycott which, under Supreme Court precedent, are per se illegal. Judge Bork, however, notes that most lower courts do not follow the rule that any per se horizontal restraint is per se illegal. Atlas, a national moving company with interstate authority, operated its business though various agent contracts, in which it delegated its authority to transport goods interstate to smaller companies that would do the actual work. When the moving industry was deregulated in 1979, the agents had authority to move interstate, and thus operated as both as an agent and a competitor of Atlas. This created a free riding problem for Atlas: “A free ride occurs when one party to an arrangement reaps benefits for which another party pays, though that transfer of wealth is not part of the agreement between them.” Basically, the agents were using Atlas equipment, uniforms, and services on non-Atlas interstate shipments, thus consuming Atlas goods and exposing Atlas to the potential for liability. To address the problem, Atlas announced that it would cancel the contract of any agent that continued to handle interstate carriage on its own account as well as for Atlas.
