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Antitrust
University of Iowa School of Law
Hovenkamp, Herbert J.

 
I.                    Overview of federal antitrust law
a.       Statutes
                                                               i.      Sherman Act
1.       § 1: Every contract in restraint on trade is unlawful and criminal               
a.       SC has interpreted this as only “unreasonable” restraint on trade
2.       § 2: Prohibits monopolizing
3.       Single firm monopolies charged under § 2
4.       Conspiracies to monopolize are charged under § 1
a.       Two or more legal entities
5.       The Sherman Act never defined “monopolize,” it just made it illegal
                                                             ii.      Clayton Act – Designed to create great specificity for things made unlawful under the Sherman Act
1.       § 2: Price discrimination provision
a.       Unlawful to discriminate in price between different purchasers of commodities of like grade and quality (Selling to two different buyers at two different prices)
b.      Secondary price discrimination: From a common suppler to two different buyers
                                                                                                                                       i.      Bordens selling to John’s and Wal-Mart example – secondary line price discrimination
c.       Primary price discrimination: Selective predatory pricing
                                                                                                                                       i.      Build supplier’s monopoly by charging more in a monopoly market and charging less in market where you want to build a monopoly
2.       § 3: Tying/Exclusive dealings
a.        Prohibits sales to a buyer based on the condition that the buyer not deal with competitors of the seller
b.      “I’ll sell you this for cheap if you won’t buy from my competitor at all”
c.       Technological ties: Tying of two things together, not by a contract, but by a product design
                                                                                                                                       i.      Internet Explorer always comes with a copy of Windows
                                                                                                                                     ii.      Printer cartridges and printers
d.      Legal because there is no contract
3.       § 4: Allows private parties injured by violations of the Sherman and Clayton Acts to sue for treble damages (triple) and for reasonable attorney’s fees
4.       § 5: Antitrust action brought by the government are prima facie evidence of guilt
5.       Don’t have to prove substantive violation itself
6.       § 6: Exempts labor unions and agricultural organizations from the Acts
7.       § 7: Prohibits acquisitions and mergers where the effect may be substantially to lessen competition, or tend to create a monopoly
8.       § 8: Prohibits any person from being a director of two or more competing corporations, any one of which has capital in excess of $10 million
a.       LARGELY ENFORCED
b.      Antitrust: Where did it come from?
                                                               i.      Large American corporations used trusts to conceal the nature of their business arrangements
1.       `Shareholders transfer shares from individual companies to trustees, who would manage them
2.       Trustees transferred back trust certificates to shareholders (a share of ownership)
a.       Equitable title of the company
3.       Designed to integrate a bunch of operations into one
4.       Didn’t work very well – only for a 5-6 year window was viable
c.       Economics of Antitrust
                                                               i.      Competitive Market
1.       Demand curve: Slopes downward
2.       Supply Curve : Slopes upward
3.       Where curves meet: Competitive Equilibrium
a.       Maximizes economic efficiency
b.      Cost of supply = marginal value (what customers are willing to pay)
c.       Ahead of CE is unsustainable – cost of supplying is more than what customers are willing to pay
d.      Behind CE is good – cost of supplying is less than what demand is
                                                                                                                                       i.      But will have a surplus
                                                             ii.      Competitive Firm
1.       Horizontal Demand Curve
a.       Individual price and output decisions are so small in relation to the market as a whole that they have no measurable effect on market price
b.      Will sell quantity where P=MC
2.       At very low levels of production, marginal costs are high
a.       But they quickly go down, then gradually go up as producer uses increasingly less efficient resources (like a Nike swoosh)
3.       Lerner Index:
a.       P-MC / P
                                                                                                                                       i.      0 = Competitive market
                                                                                                                                     ii.      1 = Anti-competitive, harms competitors
                                                            iii.      Monopolists
1.       Demand for monopolist is same as for entire market – there’s still a MC curve
P
Q
Total Rev
Marginal Rev
10
1
10
10
9
2
18
8
8
3
24
6
7
4
28
4
6
5
30
2
5
6
30
0
4
7
28
-2
3
8
24
-4
2
9
18
-6
2.       Monopolist will ask:
a.       What is cost of producing an additional unit when compared with the amount of additional revenue I’ll make when I do produce another unit?
3.       As a monopolist reduces its output, price goes up
a.       Not the case for non-monopolist firms
b.      Monopolists produce less than competitors
4.       Monopolists maximizes its profits where the MR = MC
5.       Overcharge: Consumers hurt
a.       Difference between what the consumer pays in the monopolistic market and the competitive market price
6.       Economic welfare:
a.       Value to all consumers, producers and 3rd parties (all participants)
7.       Consumer welfare:
a.       Value to the consumers only
8.       Who gains/loses from a monopoly?
a.       Wealth Transfer Rectangle: Profit monopoly makes from charging more than the competition price
                                                                                                                                       i.      Consumers poorer but monopoly richer
                                                                                                                                     ii.      Economists: Total wash, no welfare consequences
                                                                                                                                    iii.      Could be socially harmful or beneficial
b.      Deadweight Loss Triangle: Sales that would have been made under a competitive market (but are not made in a monopolistic market)
                                                                                                                                       i.      Double loss to consumers and monopolists – unmade sales
                                                                                                                                     ii.      Economic loss and consumer loss – no gain
II.                  Single Firm Monopoly – § 2 Sherman Act
a.       Test: Power and conduct
                                                               i.      The possession of monopoly power in a relevant market; and
                                                             ii.      The willful acquisition or maintenance of that power
1.       Look at conduct of how it was obtained and kept
2.       Socially harmless conduct: Leave alone
a.       e.g. technological improvements (Calculators and slide rulers)
                                                            iii.      Monopoly power alone is NOT illegal
                                                           iv.      Must show conduct to obtain and maintain
b.      Transaction costs: The cost of participating in a market and making an economic exchange
                                                               i.      Coase: Internal production is costly but so is use of the market
1.       Cost of contracts, cost of trusting another firm, etc.
                                                             ii.      i.e. make own engines or buy from another firm?
1.       Do everything internally until the MC of doing it internally hits the cost of doing it externally
                                                            iii.      Contracts with customer and a supplier
1.       Firms invest in ways to commit to other firms (design new machinery for producing, etc.)
c.       U.S. v. American Can Co.
                                                               i.      Facts: Gov’t accused ACC of exerting a great influence upon the entire trade in cans; dominates the market
                                                             ii.      ACC argument: It’s size was not a crime
                                                            iii.      D’s actions:
1.       Good things:
a.       Research and development
2.       Bad things:
a.       Coerced other companies to sell out
b.      Bought out competitors at high prices
c.       Non-compete clause: Sellers couldn’t engage in can-making for 15 years and within 3000 miles of Chicago
d.      Tin Co. sold tin to D at lower cost
                                                                                                                                       i.      Raising Rival’s Costs (RCC)
e.      Bought competitor plants then closed them
3.       Ambiguous things:
a.       Manufacturers of equipment agreed not to make certain machinery for anybody other than D
                                                                

s, not merely cellophane – WRONG
b.      Court missed that DuPont was already charging monopoly prices!!
4.       Hand’s numbers say 90% enough for monopoly, while 60-65% not. This case suggests 75% is enough.
5.       Cellophane fallacy:
a.       Substitutes for cellophane when cellophane is at a monopoly price may not look like good substitutes for cellophane if it was at a competitive price. 
b.      Looking for substitutes of cellophane at monopoly price has tendency to increase number of substitutes, increase relevant market, and lower tendency for liability.
6.       Court not focused on percentages, though, but looking at entry barriers and price sensitivity.
7.       Conventional measure of market power is the Lerner index which is: (P – MC)/P which = -1/elasticity of demand. In a competitive market, L = 0 while in a noncompetitive market P>MC, so the greater the difference, the more market power.
8.       Court focuses on cross-elasticity of demand between cellophane and other flexible packaging materials. 
9.       Supplier side response – court also misses this. How easy is it for suppliers to enter and make cellophane or substitute?
10.   Court eventually focuses on functional characteristics of cellophane and other flexible packaging material to conclude that they all form one market. In this broader market, DuPont found to lack market power.
11.   Since then, cross-elasticity between products has been approach courts have used to define markets
                                                           iv.      Cross-elasticity of demand
1.       If CED is high between two products, then they are in the same relevant market
a.       But this is not always true – because of the cellophane fallacy
2.       High cross-elasticity of demand at the current market price for a product is not persuasive evidence that the producer has no market power.
a.       It is evidence that the producer is charging its profit-maximizing price
3.       Cross-elasticity of demand = change in percentage of Quantity of X over change in percentage of Price of Y.
                                                             v.      Price-elasticity of supply
1.       Measure of the responsiveness of the supply of a given good to a change in the price of that good
                                                           vi.      Relevant Product Market Issues
1.       Courts began to narrowly define the product market until Telex, where the S.C. reversed the trial court’s narrow definition
                                                          vii.      Telex Corp. v. IBM Corp.
1.       Facts: IBM accused of monopolizing the market for IBM plug-compatible peripherals (making only peripherals compatible with its CPUs)
a.       Telex also made IBM plug-compatible peripherals
b.      Could buy an interface that would turn a non-IBM plug-compatible peripheral into being plug-compatible
2.       Trial court’s narrow definition of product market reversed by the court of appeals
3.       Trial court’s definition:
a.       Market only consists of peripheral computer equipment that was plug compatible with IBM units
4.       Court of appeal’s definition:
a.       Market included all peripheral equipment (whether or not plug compatible with IBM units)
5.       Rationale:
a.       All such equipment would be reasonably interchangeable with IBM units if interfaces were used, and IBM units competed with other CPUs as to which all peripheral equipment would be plug-compatible
b.      Interfaces were fairly cheap in relation, so it was not that expensive to make it compatible
                                                        viii.      Market Power – Geographic Market
1.       Market:
a.       Grouping of sales (products or services) such that both the elasticity of demand and the elasticity of supply are sufficiently low that a firm that controls that grouping of sales can impose a SSNIP (small but significant non-transitory increase in price) without losing so many sales that the price increase is unprofitable and needs to be rescinded.
2.       SSNIP: