ANTITRUST – FALL 2010 – PROF. WHEELER
I. AGREEMENTS AMONG RIVALS
FIRST ANTITRUST QUESTION: What’s the market?
United States v. Andreas (2000)
Antitrust law not here to protect customers, here to protect competition and punish bad actors
Theme: not looking to fix, just to correct the markets going forward
“Our competitors are our friends. Our customers are the enemy.”
Actual issue is the sentencing of the two criminals
But, almost the perfect conspiracy
Facts: The investigation started with Whitacre embezzling from the company, so to take the heat off him, he told Mick Andreas who called his father, Dwayne Andreas, who called the CIA then FBI who then says they will tap Whitacre’s phone. Cartel started with 3 Korean companies (Ajinomoto, Kyowa Hakko, and Miwon), then ADM says they’ll build the world’s biggest lysine plant then wants in. They were scared that so much of their business would be taken (doubling supply reduces prices greatly). At the first meeting in June 1992, agreed to raise prices but didn’t agree as to production allocation. But, the companies each cheated. Also, Cheil wouldn’t join in yet.
Lit spark in worldwide and Stateside enforcement
No reasonable substitute for lysine – highly fungible commodity (doesn’t matter where it came from)
Purina could sue as direct purchaser of the lysine
They could pass on to hog farmers, who couldn’t in turn pass it on
Volume agreement was essential
Customer allocation different because doesn’t equate to share of profit, but you tell other cartel member to keep quoting a slightly higher price (no set prices so helps avoid price detection)
Cheating deterrent was key – if you sell more, have to share excess profits by buying from another
Rule: plaintiff must be direct purchaser
Brunswick Corporation v. Pueblo Bowl-o-Mat, Inc. (1977)
Facts: Brunswick (large bowling equipment company) bought local bowling alleys that were about to close and stopped them from going out of business, then other local centers sued, claiming damages of lost profits
For Section 7 violations, you get treble damages
Pueblo complaining that there’s not less competition
· Damages are limited to ANTITRUST INJURY = injury of the type the Antitrust Laws were intended to prevent and that flow from defendant’s unlawful acts
Injury should reflect the anticompetitive effect of either the violation or the anticompetitive acts made possible by the violation
CORE ECONOMIC CONCEPTS OF ANTITRUST ANALYSIS: Did the defendants undertake conduct that unreasonably restrained trade?
Reduced output/supra-competitive prices
Reduced quality or service (effectively a higher price)
Diminished buyer choice
Market Power (used to infer anticompetitive effects)
Define relevant market
Calculate market shares
Infer market power from high market shares
Measure demand elasticities
Actual exclusion of rivals
Output expansion/lower costs
Improved quality or service
Condition to Entry
Ability of rivals and/or new entrants to expand output in response to price increases
1. Per Se Rule v. Rule of Reason
Sherman Act § 1
“Every contract combination . . . or conspiracy, in restraint of trade . . . is illegal.”
Main statute in antitrust – the result of having such a broad statute is that antitrust law feels like a common law field.
Alternate Forms of Original Sherman Act Rules:
Two Approaches to Per Se Condemnation:
Literal per se rule (Trans-Missouri Freight; 1897): every restraint of trade is unlawful [approach no longer relevant].
The “Naked Restraint” per se rule (Addyston Pipe; 1899):
Per se if not related to legitimate main purpose
No purpose/effect other than restraint
Two Approaches to the Rule of Reason:
Unstructured Rule of Reason (Standard Oil/Chicago Board of Trade; 1911/1918): look to purpose, nature, and effect of restraint
Standard Oil effectively wrote in the phrase unreasonable into the Sherman Act – “Every unreasonablecontract combination . . . or conspiracy, in restraint of trade . . . is illegal.”
Limited and Structured Rule of Reason (Addyston Pipe): only ancillary restraints can be justified on reasonableness grounds.
Prices are reasonable – no anticompetitive effect (no market power).
Agreement justified – lowers cost.
This industry should be exempt from antitrust laws.
The agreement is not price-fixing – concerns cost (or output), not price.
No ability to raise price.
Competition will be harmful to industry/innovation.
Need money to preserve employment.
The Evolution of the Per Se Ban on Price-Fixing by Competitors
In 1911 in Standard Oil, the company got monopoly profits but also reduced production costs. The Court decided that “every” does not mean every – only unreasonable restrictions on trade were illegal.
Trenton Potteries (1927)
SC reviewed the criminal convictions under the Sherman Act of 23 producers and twenty individuals charged with fixing prices of bathroom fixtures.
No dispute that they fixed prices and no dispute that they accounted for 80% of the market.
Their defense was that the prices were reasonable.
Issue: Should the court allow the defendants to offer evidence in support of this defense?
Holding: No, the agreement to fix price is unreasonable even if the prices themselves are reasonable. Otherwise, courts would act as utility commissions – complicated inquiry into prices. Also, the aim of fixing prices eliminates one form of competition.
o Sherman Act §1 – cartel agreements that affect the market through naked restraints such as price-fixing are per se illegal à did not have to define the market!
Famous footnote 59: the law does not permit an inquiry into the reasonableness of a price-fixing agreement – intent, justification, etc. are not relevant.
Government does not have to prove market power, effect or that a conspiracy was carried out à wanted a clear, simple rule to bolster deterrent effect
The justification is that the law is protecting the “central nervous system of the economy.”
It does not matter that the mechanism was a restr
as to create a new product – beneficial to sellers and buyers
ASCAP made a market that otherwise would have not existed
o Rule of Reason analysis applies unless it is a naked restraint on trade (per se rule)
o Must focus on whether market power created the effect and if the purpose of the practice was to threaten competition
o Limits Per Se Rule to pricing agreements that are output limiting and bad for consumers
o Complainant bears burden of proof that there is an agreement to fix prices and limit output
Essentially, the Court adds another element to the per se rule:
1. agreement among rivals
2. concerning price
3. [no plausible efficiency justification]
Palmer v. BRG of Georgia (1990)
Two companies were engaged in bar prep.
BRG conducted business in Georgia while HBJ did business nationwide.
They made a deal where one of them would offer the course in Georgia, would not offer courses outside of Georgia, and they would use the same name (Bar/Bri).
The price went way up.
This scheme satisfies both requirements: agreement among rivals dividing markets.
There was no efficiency alleged by the defendants.
No reason to reconsider Topco.
Multiple courts of appeals found that BMI overruled Topco and added the 3rd element – “no plausible efficiency justification”
3. Collusive Effects and the Rule of Reason
Standard Oil (1911):
The Supreme Court read the “rule of reason” into Sherman Act § 1 (see above).
Chicago Board of Trade (1918)à True Statement of Legality: Prevailing statement of the rule of reason as well as the earliest example of its application.
The government challenged the “call rule” at the Board of Trade grain market.
The rule stated that after the close of call, members could only trade at the closing price (made at 2:00).
The government contends that this is an agreement among rivals concerning price.
Supreme Court: This is not illegal per se – more analysis is needed. The decision is basically reaffirming that unreasonable restraints are illegal.
1. “True test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition.”
2. Three Categories of Factors to Consider: Nature; Scope; Effect
Facts peculiar to the business
Conditions of business before and after the restraint was imposed
Nature of restraint