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University of Iowa School of Law
Hovenkamp, Herbert J.

Antitrust Outline-Hovenkamp-Fall 2010

I. Economic Foundations, History and Goals

A. Overview: Policies and Goals
Antitrust law has been concerned with governmental control of business concentration and economic power. Current antitrust law suggests that courts interpret the law so as to promote the maximization of consumer welfare. Economics is one of the most important factors that has been introduced into antitrust law.

Two central themes have been recognized as the underpinnings for antitrust policy:
1. Control the economic concentration of industry, as economic power inferred the destruction of individual choice, distributive justice, and pluralism. (non-economic reasoning)
2. Promote the goal of enhancing economic efficiency. Efficiency is frequently viewed in terms of whether the challenged conduct creates a restraint or limitation on output. (economic reasoning)

The Supreme Court has gradually accepted the economic objectives of efficiency and increased consumer welfare in recent decisions. The analytical framework requires an economic inquiry that weighs competitive harms and economic benefits. The factual and economic issues are reduced to whether the challenged conduct promotes or suppresses competition in the final analysis.

The negative implications of monopolies (higher prices and restricted output) have been recognized in three main areas:
· Allocative Inefficiency- reduction of total amount of wealth in society
· Transfer of Consumer Surplus from Consumers to Monopolists- Consumers become poorer while monopolists become wealthier
· Productive Inefficiency- less total production

Congressional Goals- Antitrust laws are among the least precise statutes enacted by Congress. The central terms are inherently vague. Congress’s primary aim was with firms acquiring or possessing enough market power to raise prices artificially and restrict output. In enacting the Sherman Act, the legislative history is unconcerned with allocative inefficiency. The two main concerns were transfer of surplus and productive inefficiency. However, Congress was especially concerned with the social and political powers of trusts and monopolies.

United States v. Trans-Missouri Freight Ass’n- Dealing with a railroad cartel, the Supreme Court interpreted §1 of the Sherman Act as condemning every restraint of trade without exception. “[T]he plain and ordinary meaning of such language is not limited to that kind of contract alone which is unreasonable restraint of trade, but all contracts are included in such language.” This decision was reconsidered the next year, and the Court found this interpretation as over-inclusive.
United States v. Addyston Pipe & Steel Co.- “Where the sole object of both parties in making the contract as expressed therein is merely to restrain competition, and enhance or maintain prices, it would seem that there was nothing to justify or excuse the restraint, that it would necessarily have a tendency to monopoly, and therefore would be void.” From this opinion, the distinction between lawful and unlawful restraints on trade emerged. A two-prong approach emerged: the reasonableness was applied to ancillary restraints (secondary to the otherwise lawful main purpose of the contract), whereas direct restraints (those purposefully designed to eliminate competition) were per se illegal.

B. The Economic Problem
The economic theory of antitrust law is based on two parts of microeconomics: price theory and industrial organization. In a market economy, no central authority decides production figures. Producers and consumers make decisions only on their own self-interest. The theory is that people maximize society by maximizing their personal wealth.

Perfect competitive firm:
· One among many firms producing identical products
· No individual firm is large enough to affect prices
· No barriers to entry and exit
· Produces where Marginal Revenue equal Marginal Cost
· One firm producing the product
· No competitive entry
· Produce quantity where MR=MC; Charge Price on Demand Curve

Monopolies can have many impacts on society. Economic decisions reverberate, extra political pressure, income redistribution, wasted resources. The social cost of the monopoly includes (1) the welfare loss caused by inefficient consumer substitutions; (2) resources consumed by the monopolist in the activity of destroying competition; (3) resources foregone that the competition produced.

Judicial Emphasis on Economic Reasoning:
· The early years of antitrust law can be characterized by socio-political concern. The emphasis was on fairness and equality in business dealings.
· This moved to “structuralism”, where the premise is the structure of the industry, which determines the conduct and behavior of firms. Courts found that any conduct that had the effect of facilitating the fixing of prices within a highly concentrated industry structure was repugnant to public policy. The forced changes of industry structure are unknown, as breaking up firms may force them to behave competitively, but marginal costs become higher.
· At odds with the structuralist theory is the efficiency or Chicago school theory of industrial organization. The underlying assumption is that the interaction of supply and demand will determine a set of prices that maximize society’s economic welfare. Under this view, an economy dominated by a few large firms could indeed be socially optimal because the large firms achieve production efficiency through economies of scale and the problems of allocative efficiency are eliminated by potential entry, because each firm knows that it will face additional competition if it charges too high a price.

II. Monopoly and Attempt to Monopolize
Sherman Act § 2: Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several states, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding 100 million if a corporation, or if any other person, 1 million, or by imprisonment not exceeding ten years, or by both said punishments, in the discretion of the court.

A. Problem of Monopoly
Conduct undertaken by a firm that is already a monopolist, designed to enable it to preserve its monopoly position, is called monopolization. The offense of attempt to monopolize is concerned with conduct designed to give monopoly power to a firm that is not yet a monopolist in the market in which the conduct occurred.

Market power is the ability of a firm to obtain higher profits by reducing output and selling at a higher price. Monopoly power is simply a large amount of market power.

The Modern Formulation of the Offense: The Supreme Court in Alcoa defined the offense of monopolization as containing two elements that must be established before a defendant can be condemned of monopoliz

s by determining the defendant’s market share. In order to do this, the court must define a certain relevant market, which consists of:
· Product Market
o A relevant product market is the smallest product market for which 1) the elasticity of demand and 2) the elasticity of supply are sufficiently low that a firm with 100 percent of that market could profitably reduce output and increase price substantially above the competitive level.
o The things grouped within a product market must, to a certain degree, be substitutes for each other. To conclude that a grouping of sales constitutes a relevant market is to conclude both that the things inside the grouping do not face significant competition from the things outside the grouping and that the things inside the grouping do compete with each other.
o Cross-elasticity of supply is the rate at which competitors or potential competitors will increase their output of a product in response to the alleged monopolist’s price increase. If cross-elasticity of supply is high, a firm has no market power. In this measurement, it is important to consider 1) whether other firms will be able to enter in response to the price increase and 2) the time that entry will take. This concept is exemplified in Telex, where the court recognized that IBM plug compatible peripherals was not a relevant market, because other manufacturers of peripheral products could quickly and cheaply change their peripherals into IBM plug compatible peripherals.
o The concept of cross elasticity of demand enables the court to compare two relatively tangible products and compare the rate at which customers turn to one in response to a price increase in the other. Where cross elasticity is high between products, both should be included in the market. The chief function of the concept should be to remind us that close, technologically similar substitutes should be grouped into a relevant market.
o Cross elasticity can be misused, as shown by E.I. du Pont, called the Cellophane fallacy. A monopolist will charge a profit-maximizing price, where it tried to get as many customers as possible without losing a substantial number. Therefore, at a profit-maximizing price, the cross-elasticity will always appear high; not because it has no monopoly power, but because it is already charging a monopoly price. The fact that cross elasticity of demand cannot be measured at current market prices is a major impediment to the use. The relevant question is what would the cross elasticity of demand be if the monopolist were charging a competitive (marginal cost) price.
In Eastman Kodak, the Supreme Court stated that aftermarket power might exist even though Kodak had no power in the primary market because poorly informed customers might purchase a copier not knowing about repair