· I. The Antitrust Statutes
o A. The Sherman Act
§ Section 1
· Every contract, combination, in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce along the several States or within nations, is hereby declared to be illegal. Violators shall be deemed guilty of a felony (punishable by fine and/or imprisonment).
§ 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 of commerce among the several States, or with foreign nations, shall be deemed guilty of a felony (punishable by fine and/or imprisonment)
§ Note Section 1 requires collective action. One person can not contract, combine, or conspire alone. Whereas Section 2 applies to unilateral conduct.
· Section 1 case law is usually concerned with finding an agreement, and Section 2 disputes focus on the creation or maintenance of a monopoly. Section 1 addresses improperly restrictive agreements while Section 2 examines the creation or misuse of monopoly power through wrongfully exclusionary means.
o B. The Clayton Act
§ Clayton Act of 1914 declared four practices illegal but not criminal
· Section 2-Price discrimination-selling a product at different prices to similarly situated buyers
· Section 3-exclusive dealing contracts-sales on condition that the buyer stop dealing with the seller’s competitors
· Section 7-corporate mergers-acquisitions of competing companies
· Section 8-interlocking directorates-common board members among competing companies
o C. Federal Trade Commissions Act
§ Section 5
· Provides that unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practice in or affecting commerce are hereby declared unlawful.
· Provides no criminal penalties and limits the FTC to obtaining equitable relief
· The FTC can also use Section 5 to attack conduct constituting a Sherman Act violation because courts have rules that Section 5’s ban on unfair methods includes Sherman Act offenses.
o Criminal v. Civil enforcement
§ To bring criminal it is usually widely understood that a specific form of conduct is illegal because the behavior rarely, if ever, has redeeming competitive features.
· II. Antitrust Economics
o Competition maximizes consumer welfare by increasing both allocative efficiency and productive efficiency and by promoting innovation. Antitrust relies on the free enterprise market system. Let the consumers decide.
o One will seek to buy less of an economic good as the price is raised or more as its price is lowered is an economic postulate central to understand basic price theory surrounding antitrust
o A. Basic Economic Models
§ Actual markets reside between perfect competition and monopoly and are affected by many forces
§ 1. Perfect Competition
· Perfect competition describes a market where consumer interests are controlling. Producers produce what buyers want and in competition with each other, at the lowest price.
§ 2. Monopoly
· Opposite of perfect competition. A seller with monopoly power restricts her output in order to raise her price and maximize her profits. This transfers wealth from consumers to producers and reduces output and may relive the producer of pressure to innovate or be efficient.
· Three factors of monopoly markets
o 1.One seller occupies entire market
o 2. Seller’s product is unique (no close substitutes)
o 3. Substantial barriers to entry exist
§ Most distinctive feature. Without it, other firms can enter and take sales away.
§ More potent barriers are legal constraints (regulations that prevent building etc. or patents that give exclusive rights). Other entry barriers include essential raw materials or distribution channels that make the cost of entry unlikely.
§ Most often paramount. Where entry is easy, courts have declined to infer monopoly power even from high market shares because actual or threatened entry will drive prices to competitive levels. A 100 percent market share was determined not monopoly power because of ease of entry
§ Is defined as a cost of producing which must be borne by firms which seek to enter an industry but it not borne by firms already in the industry. It is a cost newcomers must incur and incumbents did not when they entered.
o Note: these conditions by themselves do not determine whether monopoly effects will exist. Must also have monopoly effects.
§ 3. Oligopoly
· Market contains on a few sellers but all sellers recognize that they are largely interdependent.
· Markets price and output decisions are made while anticipating the reactions of one’s rivals.
· III. Monopoly Problem
o Grinnell
§ Offense of monopoly under Section 2 has two elements
· A. Possession of monopoly power in the relevant market
· B. Willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.
o A. Monopoly Power
§ Market power is the ability to raise prices above the competitive level for a sustained period of time
· First issue of monopolization analysis is to determine what degree of market power is so significant that its exercise warrants scrutiny and control.
· Defining a relevant market and evaluating the defendant’s power within that market are critical exercises in Section 2 cases.
o Three different approaches could be used to measure market power
§ Performance
§ Rivalry
§ Structure
· Most widely used. Essentially involves counting the number of firms in a market and comparing each firm’s share of market activity. It is then inferred that a firm with a major share of the market has monopoly power.
§ 1. Product Market
· To define product market one seeks to locate all substitutes available to buyers of the sellers product, then determine whether these products limit her ability to raise price.
o DuPont Cellophane
§ Changing the market from cellophane to all wrapping made market change from 75 to 20 percent. 65 percent is usually required.
§ Court says you must make an appraisal of the cross-elasticity of demand in the trade to determine we
firms relatively broad discretion to implement preferred pricing, product development, and promotional strategies. However, a wide variety of conduct are potentially challengeable under Section 2 still.
· A. Predatory Pricing
· B. Product Innovation
o Courts generally have upheld aggressive dominant firm efforts to develop new products and to market such innovations
· C. Refusals to Deal
o In Kodak the court found illegal monopolization because Kodak had refused to deal in pursuance of a purpose to monopolize. The question asked was whether the refusal stemmed from a purpose to create or maintain a monopoly. This is the “intent test”
o Aspen Skiing court said behavior is predatory if a company has been attempting to exclude rivals on some basis other than efficiency. Court said that the decision by a monopolist to make a important change in the character of the market without valid business reasons was unlawful.
· D. Essential Facilities
o A second branch of the refusal to deal cases involves the essential facility or bottleneck doctrine. This doctrine requires the plaintiff to prove
§ Control of the essential facility by a monopolist
§ A competitors inability practically or reasonably to duplicate the essential facility
§ The denial of the use of the facility to a competitor
§ The feasibility of providing the facility
o However, in Trinko, Court noted that it had never recognized nor found reason to.
· E. Leveraging
o A firm violates Section 2 by using its monopoly power in one market to gain a competitive advantage in another, albeit without an attempt to monopolize the second market-2nd Circuit
o Supreme Court has said though that Section 2 makes the conduct of a single firm unlawful only when it actually monopolizes or dangerously threatens to do so.
· F. Vertical Agreements
o Exclusive dealing by a monopolist can violate Section 2 under Lorrain. The attempt to destroy an upstart competitor by foregoing current revenues in order to later reap monopoly profits.
o C. Attempts to Monopolize
§ Section 2 prohibits attempts to monopolize. Attempts can be a felony, but few cases have tried. Holmes said that attempted monopolization consists of conduct that closely approaches but does not quite attain completed monopolization, plus a wrongful intent to monopolize.
· So the test is there has to be a specific intent to monopolize and a dangerous probability that if unchecked such conduct will ripen into monopolization.
