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Antitrust
University of North Carolina School of Law
Chin, Andrew

Antitrust–Fall ’09

1.Objectives and Origins
A. Goals of AT policy:
i. Any society must decide how much of what to produce, how to distribute it, and how resources for production are to be allocated. There are three main ways of doing this:
a. Tradition: ie, Manorialism
b. Central Planning: ie, Communism
c. Market System: ie, the rational approach
ii. The main goals of anti policy:
a. Efficient allocation of extant resources, including prohibiting wealth transfer to monopolists
b. Fostering innovation, which is more likely if folk can compete and get rich from their innovation
c. Protecting individual firms through fairness
d. Maintaining decentralized economic power.
iii. A secondary task of AL is to minimize cost of antitrust enforcement w/o giving up too much in accuracy. This is why we classify agreements:
a. Per se class — can be approved or condemned w/ a quick look
b. Rule of Reason class – more detailed industry and market analysis required
B. Sherman Antitrust Act (ShermAT)
i. Originally, Sherman Antitrust Act was intended to have a reach equal to cts definition of commerce. Sherman thought it would be used to attack stuff that would raise the price to the consumer. It has morphed since then toward something where political choices are handled by cts, as it is truly judge-made law.
ii. Some considerations on ShermAT:
a. Northern Pac. Ry. Co. v. US, 356 US 1: SAA was designed to be a comprehensive charter of econ liberty aimed at preserving free and unfettered competition as the rule of trade.
b. Brown Shoe v. US, 370 US 294: We cannot fail to recognize congress’s desire to promote competition through the protection of locally owned businesses….We must give effect to that decision
c. US v. ALCOA, 148 F2d 416: Even if only a fair profit is extracted, all trusts are bad. Congress did not differentiate between good ad bad trusts; it forbade them all
d. Natl Soc. of Professional Engineers v. US, 435 US 679: SAA expected cts to flesh its regulations out by drawing on common law tradition
e. Berkeley Photo v. Eastman Kodak, 603 F2d 263: monopoly is inherently evil
f. Eastman Kodak v. Image Technical Services, 504 US 451: monopoly is bad, but maybe only if it is used badly. ‘Valid business reasons’ may explain away what appears to be monopolistic behavior.
g. Note that even if the restraint does not affect interstate commerce, something can violate ShermAT if the business or activity does affect interstate commerce.
iii. Text:
a. Section 1: ‘Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.’
i. This is usually used to attack the actions of multiple firms acting in concert
b. Section 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.’
i. This is usually used to attack the activities of a single firm
C. General economic concerns:
i. Elasticity of demand = (change in % of quantity demanded) divided by (% change in price). This is high when a small change in price leads to a large change in demand. It is hard for monop to exist in this type of market, as they can be undercut by a buck and lose lotsa market share.
ii. Natural monop markets:
a. Postal service type things
b. IP industries, where there is a huge cost to make the first thing, and decreasing with the number produced.
iii. Monopoly Power and Market Power: Monopoly Power implies Market Power, but not the other way around.
a. Monopoly Power is the power to control prices or exclude competition.
i. It is unilateral (possessed by only one corp in the market).
ii. It does not mean the power to set any price, as folk are always able to not buy your stuff.
iii. This can exist, even if it is not exercised.
iv. Monopsony is the buyer’s equivalent of this.)
b. Market Power is the power to force a purchaser to do something that he would not ordinarily have to do in a competitive market. When the something is raising prices, this can look like monopoly power.
i. An oligopoly is an example of this.
ii. Firms might price above the competitive level, but lower than the monopoly level; if either raises the price, the other gets business, so there is a stalemate.
iii. Another example of this is when no new firms can enter into the market (prohibitive expenses, no available license, etc), even if the extant firms have no power to exclude the newbies.
iv. Entry barriers: a cost that is faced by firms that are not currently in the market that was not and is not faced by current corps in the market. You have to point to a concrete barrier, you can’t just say that entry is hard or assume it is because no one has entered the market.
D. History of AT
i. British CL origins:
a. Letwin on English CL: early England was not unfriendly to monop, if the kings and guilds wanted them. In addition, Mercantilist economies were almost entirely monop. Types of anti-competitive behavior:
i. Forestalling: folks would bring produce for sale, but would be stopped before they could enter the marketplace (ie location, town square, etc). You then buy their goods, enter the marketplace, and sell for a profit. This assumes you have better knowledge of the market price than the forestallee. This is an example of arbitrage–taking advantage of a defect in the market, in this case, imperfect knowledge of price.
a. Arbitrage may not be looked at harshly today.
ii. Rebreeding: buying in bulk and selling in small lots
iii. Engrossing: buying crops in the field before they mature.
b. The Schoolmaster Case (1410): Folk established a school in a village were there already was one. Extant schoolmasters sued. In a split opinion, ct held there was no cause of action. The ct is not concerned if the new school drives out the old school, unless it is operating at a loss. As long as one school is able to operate, we have good stuff. There is no cause of action for economic damages suffered as a result of competition, or anti protects competition, not competitors.
c. Dyer’s Case (1415): A debt prevented a dyer from dyeing within a town where the master dyer was. This was held to be invalid. The restraint of trade is that D is not allowed to dye stuff in the village in security for a debt he incurred. The court seems offended by this restraint of trade and voided the contract sent D to prison for entering into such a contract.
d. Nowadays, we’d look at this as a reasonable non-compete clause.
e. Case of Monopolies (Darcy v. Allen) (1602): Darcy was granted the right to import and print playing cards by Liz I. No one else in the realm was allowed to do so. D, a haberdasher, who was allowed to sell diverse goods, undercut Darcy on price, and Darcy sued.
i. Ct held that the grant was an invalid monop, as it kept all folk in the kingdom from dealing in playing cards for 21 years. Dyer and Schoolmaster were cited. Darcy claimed that he got his monop from the queen; it was his property given him by the queen. Even if Liz gives you a monopoly, its no good.
ii. Note the remedy has changed; we no longer jail monists.
f. Mitchell v. Reynolds (1711): This is an early case th

and recoup their damages.
E. Principles and text of ShermAT:
i. Section 1: “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.”
a. US v. Trans-Missouri Freight Assoc (1897): D was an association of freight carriers who ked to agree to set rates and maintain them. Each member was allowed to vary from the assoc agreed rate, but only if it were necessary to respond to competition.
i. Ct held there was a PS approach: Any contract which restrains trade is included, not just unreasonable ones. Although the CL may have only banned unreasonable restraints of trade, ShermAT allowed attacking all contracts which restrained trade, and this was clearly that. The opinion suggests that all restraints of trade should be held illegal, but that is not the actual holding.
ii. Despite the words of the opinion, some policy concerns are read into ShermAT:
a. Autonomy of small dealers: a monopoly will be able to crush small folk and make them servants of the monopoly by constantly undercutting the prices. The big guys can absorb losses better than small fry. This harkens back to the harms to folk to practice the trade of their choice expressed in the Case of Monopolies.
b. Pricing subject to monopoly’s discretion, not market forces
iii. This holding was moderated in US v. Joint Traffic Assoc, 171 US 505, when the ct allowed folk to voluntarily restrain from competing as valid consideration for a contract.
iv. Hopkins v. US, 171 US 578 allowed an assoc where cattle buyers agreed not to buy from folk who were not members of their assoc and fixed the commissions on such sales. This was held to be a voluntary assoc, and did not restrain trade. The object of the agreement was to allow members to better transact their business, not ruin trade.
b. US v. Addyston Pipe and Steel Co. (1898): D were part of an association that sold pipe. They divided the country into two areas ‘free’ and ‘pay.’ In pay areas, the member corps would pay a fee to the assoc, and the corp with the largest fee would be awarded any business. The loser corps had to bid at inflated prices to ensure the winning corp would get the contract. The price that would win was pre-determined by the assoc. In free areas, more competition was allowed, and in all cases, the prices were reasonable. D claimed that it was trying to prevent ruinous competition.
i. Ct held contracts whose sole purpose is restraint of trade are per se illegal
ii. If restraint of trade is ancillary to a lawful main purpose of a contact, the analysis is modified
a. naked restraints (price-fixing) condemned automatically
b. ancillary restraints which facilitate the main purpose of contract are outside antitrust law b/c pro-competitive and market facilitating
iii. The inquiry starts with asking if the restraint is ancillary to a lawful contract.
a. If yes, it is legal.