ANTITRUST OUTLINE
Professor Jonathan Klick
Fall 2014
I. ANTITRUST GOALS AND A PRIMER ON MICROECONOMICS
A. Sherman Act
· § 1- concerns about collusion, coordinated actions between firms
o 2 important requirements:
§ Contract or agreement
§ That restrain trade or commerce
· § 2- concerns about monopolies- single firm trying to exclude others
o Being a monopoly isn’t illegal, but monopolizing is.
o Ex. Not illegal to just be the only one in a market.
· Despite eliminating other rules, 1 rule stands: PRICE FIXING IS ILLEGAL
B. Collusion Generally
· To violate the Sherman Act, a merger or acquisition would have to actually decrease competition. (Brunswick)
· Structure of the Litigation: (JTC Petroleum Co. v. Piasa Motor Fuels)
(1) Courts ask: Is this anticompetitive story possible?
§ If no, the case is kicked out
(2) Is this story plausible?
· Collusion is difficult even in a perfect market. It is hard to maintain (it resulted in arguments between players and fears of cheating), so may not be worth regulating. (Andreas)
o Because collusion is difficult to achieve, some are not concerned – from the Chicago School of economic
· What makes a collusion easy/ more likely to succeed
o Relatively few players
§ Pure transactions costs (they are lower)
§ Monitoring issue)
o Inelastic
§ Elasticity of demand = E = (% change in Q) / (% change in P)
· How much does output change when price changes
§ E > 1 – substitutes are available and market is ELASTIC
§ EWith an elastic demand, cant raise price, even if a monopolist. So collusion wont produce greater benefits in an elastic market
o Homogenous products
§ Important for monitoring concerns
§ Helps spot cheaters; allows you to only look at price and quantity
o Trade association to cover tracks
o A pool of auditors to choose from (a sign of collusion)
§ à This is all circumstantial and insufficient for prosecution absent an agreement
· Rules/ Raised Arguments:
o Antitrust is not about social good, so don’t use it as a defense! (Brown University)
o Antitrust laws apply to anyone in trade, even if non-for profit. (Brown University)
o It is about consumer welfare! Making things better for consumers by enhancing consumer choice is good. Not usually accepted, but accepted in the university context in Brown University.
o Competition laws are for the support of competition not competitors. (Brunswick v. Pueblo Bowl-O-Mat)
II. HORIZONTAL MERGERS
Reasons to merge:
· Gain market power and extract consumer surplus (base motivation)
· Reduce transaction costs (Coase)
· Engage in more markets (more R+D).
· Quality returns to scale
· Economics of scope (synergies) – ex. Decrease unit cost, so generating efficiencies
o Merger Guidelines say: measure loss of consumer surplus, and compare to the benefits that are actually passed on to consumers.
o Merger violates § 7 IF AND ONLY IF loss of consumer surplus is greater than part of efficiencies passed on to consumers!!
· Tax reasons
Theories of Competitive Harm: 3 Ways to Obtain Market Power
1. Coordinated Competitive Effects – easier to collude because of the merger
a. Especially pertinent when merger would eliminate a “maverick who has been a significant competitive constraint on pricing
b. Looks to decreasing number because costlier to maintain cartel with greater number of firms
2. Unilateral Competitive Effects- the post-merger entity will be able to profitably raise market prices
a. Easiest example: 2 firms to 1 (monopoly)
b. Problem with just decreasing the number of firms:
i. We don’t know how close the firms are in terms of level of competition
ii. Cannot assume the firms are the same
This is especially problematic when the firms are especially close substitutes.
3. Exclusionary Anticompetitive Effects – impair rivals’ access to key inputs or distribution channels
Upward and Downward Pricing Pressure
· Upward Pricing Pressure= from the elimination of a competitor
· Downward Pricing Pressure= created by efficiencies, entries by competitor
· Compare the two and see which effect dominates.
A. Statutory Framework
· MERGERS are generally viewed under the Clayton Act. (Though can also be viewed under Sherman Act- both §§ 1 and 2)
· Like the Sherman Act, the Clayton Act may be enforced by states and private parties, as well as by the federal antitrust enforcement agencies
· Section 7
o You must define a market
o Objects to mergers, where “the effect of such acquisition may be substantially to lessen competition, or tend towards monopoly.”
o Under Brown Shoe- about “trends towards concentration” – smaller number of firms. Same with Pabst and Vons.
o Structural Presumption Emerges through PNB
§ If undue percentage created by market, problem. In PNB, it was 35%. Burden then shifts to the defendant. Defendant can rarely overcome this burden. So D really cares if court accepts PNB presumption that controlling an undue percentage chare significantly increases the concentration of firms.
· STRUCTURE OF A CLAYTON ACT CASE:
(1) Plaintiff shows that the transaction will “substantially lessen competition.”
o This can be done through showing that the transaction will lead to an undue concentration in the market for a particular product in a particular geographic area. (Baker Hughes)
o MUST FIRST DEFINE WHAT THE MARKET IS: (PNB)
§ COMPARE DIFFERENT MARKET DEFINITIONS.
§ There is now regulatory FTC guidelines to figuring out the product and geographic markets. (Hospital Corporation of America) Use the data (cross-price elasticity)
§ Market definition isn’t a mechanical exercise. It involves conceptual thought as to how the market would be different or how consumers would be treated differently after a merger occurs. (General Dynamics Corp.)
· Look to more than market concentration (General Dynamics Corp.)
· Turn to substitutability and INTERNAL DOCUMENTS (Staples)
§ When defining the market, while we still need to go through methodological moves (CPE), there is no clear threshold beneath which the court says you stop and can define core customers. (Whole Foods)
§ The cou
ransaction costs- hurts consumers) (PNB)- fails
§ Chief complain is brought by a competitor (BEST DEFENSE). Competitor is not likely to complain where there is actually a restriction in competition because their business is likely to benefit.
§ Regulatory background of hospitals in the area (Hospital Corp.)
(3) If D succeeds, P has the burden of producing additional evidence of anticompetitive effects. The burden of persuasion then remains with the P.
· ANALYSIS EMPHASIZES PROBABILITIES, not certainties or possibilities.
B. Horizontal Merger Guidelines
Under the new guidelines, DOJ and FTC tend to sue only when a merger reduces the number of companies in the market to fewer than 4. (Staples; Heinz)
III. horizontal Restraints
Section 1 of the Sherman Act
ASK:
1. Is there an agreement?
2. Does it restrain trade?
A. PER SE CASES
Summary of Traditional Horizontal Per Se Rules
Price Fixing
Division of Markets
Concerted Refusals to Deal
Foundation Case:
· Socony-Vacuum
Foundation Case:
· Topco
Foundation Case:
· Klor’s
Current Status:
· Maricopa
With Qualifications Under:
· BMI
· NCAA
Current Status:
· BRG
Current Status:
· Collusive: SCTLA
· Exclusionary: Northwest Wholesale
· 2 categories:
(1) PER SE VIOLATIONS – you do this particular thing and it is illegal.
§ Employment agreements are not per se violations
§ Those that will almost certainly come out as violation when you do the analysis
§ E.g. price-fixing
(2) Not per se, but potentially a violationà RULE OF REASON
§ We don’t want to live with a 50% error rate, so we suck up the administrative costs to do the analysis
· Price-fixing – no formalistic definition. Courts find price-fixing where an activity is collusively interfering with the natural market dynamics in the price setting.
· UNCLEAR DEFINITION
· When defining price fixing, we are not concerned with the types of agreements, like the one in BMI (agreement to license music), that create a new product
· Price fixing receives per se treatment. (Socony-Vaccuum Oil; Maricopa)
· Defenses/Justifications:
o Never set a price (Palmer; Socony-Vaccuum). Court rejects because it is still interfering with pricing in the market
o Reduces transaction costs. (Maricopa; Broadcast)
o Arrangement needed to stabilize prices (Socony-Vaccuum). Court will always reject because there is no such thing as a “just price.”
