Norman, Antitrust, Spring 2016
The theory of antitrust is somewhat antithetical. While the free market in the United States is designed to promote the impulse of businesses and individuals to grow as large and profitable as possible, antitrust law is there to curb the naked greed that can ultimately harm competition. So, the goal of antitrust law is to promote competition and not individual competitors. There is an alternate theory, however, that antitrust law is also designed to protect consumers. Lastly, there is the Chicago school of thought that antitrust law is based on the goal of efficient utilization of resources (espoused by such luminaries as failed Supreme Court Justice nominee Robert Bork). Much of this comes in the context of mergers, which ostensibly eliminates competition from the market. Agencies (see Jurisdiction, infra) can operate from a position of presumptive unlawfulness, and have free reign to investigate mergers.
Under economic theory, as the price for a good or service increases, market demand will correspondingly fall. Similarly, through decreasing the availability of a good or service in the market, the price will correspondingly increase.
The problem, under antitrust law, is when the price of a good or service is artificially increased or, in the alternative, if the quantity of a good or service is artificially decreased.
In the graph above:
P1 = Fair market (competitive) price
P2 = Monopolistic price
Q1 = Market demand at competitive price
Q2 = Market demand at monopolistic price.
The triangular area formed below the quantity slope represents the harm in the market, as consumers are denied access to goods and services, and resources that would otherwise be efficiently used are left unutilized. Although Sharfman did not term it as such, under economic theory this triangular area is termed the “contraction in demand.”
Consumer surplus: The excess money that people would pay over the competitive price for a good is called the consumer surplus.
Inelastic: A good for which the demand doesn’t change much even if the price changes.
Competitive cost: A consumer price that includes a reasonable profit for the business.
Monopoly price: The price a vendor can demand if that vendor has monopolized the market (read: some price higher than the competitive price). The monopoly price is where profits are maximized (anything higher would reduce consumer purchases to the point where none would buy).
Reserve price: The maximum price a consumer would be willing to pay for a good or service before either substituting another good or service or forgoing purchase altogether.
Consumer surplus: The price some consumers would be willing to pay over the competitive price to obtain a good or service. In a certain light, this could be considered a foregone profit.
Predatory pricing: Collusion between companies to drive out competition by lowering prices below cost and then, once vanquished, raising prices back toward monopoly prices. The problem, of course, is that other competitors could come back into the vacuum.
Supracompetitive price: Any price above the competitive price but below the monopoly price.
Market power: The ability of a firm to set prices or otherwise control a market.
Market definition: Set both by market share and geographic location. Narrowing the scope of geographic location and/or the relevant product market makes it more likely to find market power.
Quick look analysis: A largely abandoned method to determine if a particular behavior violates antitrust law. Designed for violations that are not illegal per se, but are sufficiently anticompetitive on their face that a rule of reason analysis is not required. Places burden on the defendant to prove the action is not anti-competitive nor reduces quantity or increases price. No need for plaintiff to prove defendant has market power under the quick look analysis.
Rule of reason analysis: Burden is on the plaintiff to prove that the actions of the defendant are anticompetitive, reduce quantity, or increase price; plaintiff also has to show the defendant has power in the defined market.
Horizontal merger: A merger of competing companies.
Vertical merger: A merger of companies with complementary products
Portfolio effects: In mergers, the anticipated effect of mergers between companies offering complementary products. Also referred to as “range effects.” The theory is that consumers often prefer to purchase a complete line of products from a single supplier. The proposed merger between Honeywell (a major aerospace equipment and instrument provider) and GE (the largest manufacturer of jet engines) was blocked on this basis.
Entrenchment: The result of a firm benefiting from a merger’s portfolio effects, as it solidifies its dominance in markets.
RPM: Retail price maintenance.
Main Statutory Provisions
Sherman Act (passed July 2, 1890)
Sherman Act, Sec. 1, sentence 1: Costs are (artificially, through contract or conspiracy) driven up and thereby a segment of consumers are being deprived of the benefit of goods as fewer are being transacted for in the market.
You can’t violate section one unilaterally; at least two actors are required.
You can be liable both civilly as well as criminally. Fines and prison time could be the result.
Generally to prove a Section 1 violation you must show the defendant has market power.
Sherman Act, Sec. 2: Every person who monopolizes, or attempts to monopolize (dangerous probability of success, and yet fail to), is liable for violating the statute. Affirmative defenses are listed in 2(c) through 2(e), the biggest is due allowance for cost (such as delivery to smaller retailers who require greater service during distribution).
Sherman Act, Sec. 4 (jurisdiction, who has standing): Federal courts have jurisdiction, under common law the government could not bring a case, but now the government can. Any person can also bring suit.
Sherman Act, Sec. 7: “Person” includes corporations.
Clayton Act (passed 1914, amends Sherman Act)
Clayton Act, Sec. 2: (a) No price discrimination except for valid business costs, sellers can still
(b) FTC can prohibit price discrimination but the presumption is rebuttable
Clayton Act, Sec. 3: Forbids sellers from offering discounts on goods (not services) to obtain exclusivity; seems to trigger an automatic Sherman Act Section 1 violation. This is the foundation for tying claims.
Clayton Act, Sec. 4: 4A: Anyone who is injured in cash or property by an antitrust action has standing to bring suit in district court and can recover treble damages. Prevailing plaintiff rule: You can recover attorney’s fees as well.
4B: Four year SOL.
4C(a)(1): State attorneys general have standing.
4C(a)(2): Treble damage awards are possible.
4D: Profits made through illegal overcharges can also be awarded.
4E: Court has discretion in apportioning damage awards.
4F: Feds and states can join cases.
4G: Sole proprietorships and partnerships are not classified as persons under the law and therefore have no standing.
Clayton Act, Sec. 5:Successful state or federal case against a defendant can serve as prima facia evidence for private plaintiffs.
Clayton Act Sec. 7: Clause prohibiting mergers that promote monopolies; gives FTC jurisdiction.
Clayton Act Sec. 7A: Prior to the passage of Section 7A through the Hart-Scott-Rodino Act, mergers could only be challenged after that had been transacted – the “unscrambling the egg” problem. Section 7(a) requires filing notifications by the transacting parties to the government and a waiting period for merger. Section 1 of the Sherman Act and Section 7 of the Clayton Act are ex post, whereas Section 7(a) of the Clayton Act is ex ante.
Note: There is private standing within section 7, but no private standing under section 7(a) of the Clayton Act (only the government can object under section 7(a).
If the acquirer’s value is greater than $200M, or worth more than $50M but less than $200M and have net sales or assets of greater than $10M, then mergers are subject to federal notification. The parties have the obligation to notify and wait 30 days (this can be extended).
Clayton Act, Sec. 16: Besides money damages, you can also get injunctive relief.
Federal Trade Commission Act (passed 1914)
Federal Trade Commission Act, Sec. 5: Permits the FTC to take pre-emptive steps to prevent antitrust violations (subject to judicial review, see Brown Sh
1899 – 1906: The trust reconsolidates and recapitalizes and begins to spread west.
The decision: 38 companies and seven individuals go down; the company was give the “death penalty” and broken up. The trusts and covenants employed by Standard Oil to build its monopoly were unreasonable. Cp. Alcoa, infra.
Northern Securities v US (1904)
P63: Arose because of a merger between two railroads to prevent access by a third railroad (Union Pacific) to a lucrative route (The Burlington Line) in violation of the Sherman Act. This type of activity is addressed later in Section VII of the Clayton Act.
US v. American Tobacco (1911)
P66: Five firms responsible for 95% of US tobacco sales merged into a single company. They then purchased other tobacco related businesses to vertically integrate the operation, then formed other agreements to stifle competition. Through its analysis the SCOTUS essentially overruled Trans-Missouri and set a standard of reason for evaluating antitrust cases (rather than saying all contracts could be in violation).
Price Fixing and Other Per Se Violations
There are certain kinds of behavior (price fixing, product tying, and a few others, see the list in the section Theories of Harm supra) that are considered illegal per se; meaning if the plaintiff proves the defendant as taken such actions, the case is essentially over. There are very few “pre se” violations remaining, most cases require a rule of reason analysis (pro/anticompetitive, increase/decrease in quantity, increase/decrease in price). Courts adopted the per se rules in an effort to achieve judicial economy.
Chicago Board of Trade v. US (1918)
P207: In order to participate in the exchange one must become a member by buying a seat. There were three types of transactions: Spot (in Chicago), Futures (not yet harvested), and in transit (on its way to Chicago). The Board set a rule that in after hours trading, all grain had to be sold at the closing price of the previous session. The SCOTUS, providing a laundry list of reasons on page 210, found several pro-competitive reasons for allowing the behavior to continue. The main thing to take away from the case is not just to condemn an artificial restraint on trade, but instead look at its intent and effect.
Appalachian Coal v. US (1933)
P211: 137 coal mining operations group together to protect the rapidly falling price of coal. Has all the hallmarks of a price fixing agreement, but the SCOTUS disagrees. The District Court decreed it illegal on the logic of Addyston Pipe (above). The SCOTUS took a look at the overall condition of the industry and decided that since it and the poor people working in it were teetering on the edge of disaster that maybe it wasn’t so bad. Hideous logic, but another instance of “reason” when discerning whether there is a violation. Note, too, that what was being decided was merely the lifting of an enjoinder of a plan, not an actual practice.
US v. Socony-Vacuum (1940)
P214: Socony was a fully integrated petroleum firm, owning everything from the wells to the pumps, and in its geographic market (Mid-Western States) sold 83% of the gas. Socony coordinated two separate campaigns to fix the price of gas, buying “distressed” gas on the spot market to preserve its position. SCOTUS found sufficient market power on the part of Socony to essentially fix the price of retail gasoline through setting an artificial floor.