ANTITRUST OUTLINE—LAMBERT – Fall 2012
Economics
1. When the price of an item is reduced (assuming all other factors remain the same), the demand for the product increases
2. An indispensible product is considered price-inelastic (this means that some predetermined quantity of the product will be demanded regardless of the price because there is no substitute—this is very rare) (depicted as a vertical line in a figure)
3. A product for which there is a perfect substitute is said to be perfectly elastic (if the price on the original product is elevated, then the purchasers will switch immediately to the substitute and no longer purchase the original product) (demand curve becomes a horizontal line)
a. Ex: one farmer raises the price of wheat, so the purchaser buys wheat from another farmer; exact substitute
4. Elasticity of supply: In an elastic market, when one firm raises the price on product X, 2 things will happen
a. Customers will try to switch away from X
b. Competing producers will attempt to manufacture something that resembles X, or if they already make it, they will increase their production
5. Demand curve represents the reservation price of each consumer who buys the last unit of a product that’s produced at different output levels (Lambert calls this a “willingness to pay” curve
6. Wealth : the difference between the cost of production and the price paid for the object
7. Consumer surplus: everything above the price consumer pays minus the value it is to him
8. Producer surplus: the price the object is sold for minus supply curve is producer surplus
9. Elasticity: a measure of price sensitivity of consumers and producers
a. Elasticity = % change in supply/% change in price
b. Indispensible products are price-inelastic
c. Perfectly substitutable products are very elastic
Competition
· Not necessarily about having more competitors. That actually has the potential to decrease
· There are at least 2 ways to define competition:
o First: Competition consists of setting up the rules of the game so that you have lots of competitors vying for business
§ This is in-put focused
o Second: Competition is defined in terms of the output of the market—does the market produce more stuff or less stuff? Producing more stuff is more competitive, but this may mean that there are fewer competitors in the market.—this is the contemporary antitrust uses this view
· There is a lack of competition when there is :
o Collusion
o A monopolist
The Theory of Costs
1. Average variable costs: determined by dividing total variable costs by the output level
2. Marginal cost: cost associated with producing an additional unit of output or the value of resources that must be sacrificed to get an additional unit of output
3. Economies of scale/diseconomies of scale: deals with the per unit cost of plants of increasing size (it may be cheaper per unit for a larger plant at a higher production level—subject to economies of scale; it may also be more expensive for a larger plant producing more units—subject to diseconomies of scale)—p39 figure 7
4. If 2 or more firms compete in a market dealing with economies and diseconomies of scale, then one of 2 things will inevitably happen (this is known as a natural monopoly)
a. One of the firms would eventually obtain a market share and cost advantage over the other firm and drive it out of business; or
b. The 2 firms continue to compete in the market, market output is lowered, and the price would be higher than optimal
5. Industries with small scale requirements relative to demand (such as agriculture) will be able to support a large number of firms, while industries with large requirements (such as automobile production) may have only a few firms
Perfect Competition
1. The perfectly competitive firm has the following characteristics:
a. It is only one among many firms producing identical products
b. No individual firm is large enough to affect the market price by its individual actions
c. There are no significant inhibitions on entry into and exit from the industry
2. The profit maximizing output level for a firm is the point where the price equals the marginal cost. Thus, a competitive firm attempts to maximize profits by setting output levels at the place where the firm’s marginal costs equal the obtainable price.
a. This market condition is the point of equilibrium.
b. An attempt to sell a product at a higher price than at the equilibrium point will result in a market surplus, and the producers will compete and the price will fall back to the equilibrium point
c. An attempt to sell a product at a lower price than the equilibrium point will result in a market shortage and will drive the price up to the equilibrium point
3. Hallmarks of a competitive market:
a. Lots of producers
b. The products are fungible
c. Really easy to enter the market
d. Firms are price takers/don’t have market power
Monopoly
1. Marginal Revenue: the amount a seller receives by selling an additional unit, as opposed to marginal costs, which is the additional cost that the producer incurs in making one additional unit
a. For a $1 reduction in selling price per unit, the difference in marginal revenue = (new price x new quantity) – (old price x old quantity)
2. The profit maximizing point is where the marginal revenue equal the marginal cost
3. The greatest evil of a monopoly is wasted resources according to economists. The waste can come in 2 forms
a. Failure to produce the “right” quantity of goods at a minimum price; and
b. The wasted resources the monopolist spends creating or preserving its monopoly position
4. If a monopoly profits a certain amount each year from being a monopoly, then it will be willing to spend that much to keep competitors out of the market
a. Monopoly profits may be used in useful ways, such as research and investment
b. The profits are often used for predatory pricing, false advertising, espionage or sabotage, or perhaps bribery or lobbying to keep other firms out of the market
5. Hallmarks of a monopolized market:
a. 1 producer market
b. Totally unique product/no substitute
c. Very difficult /impossible to enter the market
i. Ex: patent protected products
d. Ability to vary price by va
it.
3. The court is concerned about multiple liabilities of the D (multiple P’s could recover whatever damages they could prove and D would still be restricted from using the same rule to defend)
4. Brennan dissent: from the deterrence standpoint, it’s irrelevant to whom damages are paid, so long as there is some redress for the violation
· Midwest Paper Prods. Co. v. Continental Group (1979): indirect purchaser may sue under the pass-on theory for injunctive relief
1. Exceptions to the pass-on rule: Indirect purchaser may state a claim for relief and demonstrate the overcharges were passed on when
a. A preexisting (before cartel was formed) cost-plus K for a fixed quantity existed between the first purchaser from the price fixer and the indirect purchaser
i. The assumption is that 100% of the price increase is passed on to the indirect purchaser
b. The first purchaser is “controlled or owned” by either the price fixer or the indirect purchaser
c. Vertical price fixing conspiracy
d. Injunctive relief
i. These exceptions exist because the price tracing in these instances is not problematic; everyone gets 100% relief
Antitrust Injury
Black Letter—The “antitrust injury” doctrine requires that the P show, not merely that it was injured by an antitrust violation, but rather that it was injured by the anticompetitive consequences of the violation
Brunswick Corp. v. Pueblo Bowl-o-mat, Inc. (US 1977): Brunswick buys up all the bowling alleys that were defaulting on the loans for the equipment that Brunswick sold them.
1. Issue: whether P can collect damages because a merger made D a more efficient competitor in the market
2. HOLDING: the plaintiff’s injury is not the type the statute meant to prohibit because the same harm could have occurred if another small chain had opened up business in these areas; the fact that Brunswick has “deep pockets” is irrelevant.
3. Pueblo benefits if there is a reduction of competition in the market because that would make prices go up for it too, thus it would be benefitted. Therefore, it can’t show an injury under the antitrust “harm”. It can only show injury via the harm is sustained from a thing that the antitrust laws try to promote (more people in business, economies of scale)
4. Black Letter on Brunswick: the court held that the P could not pursue a damages action for an illegal merger if the P’s injury was that the merger made a rival a more efficient competitor than before
