ClassNotesAntitrustBrunell

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Antitrust

Prof. Rick Brunell

Thursday, May 30, 2002 (Class 1)

• Sherman Act
  • Sections 1 and 2, have remained unchnged since 1890
  • Section 1: criminalizes concerted action
    • Horizontal agreements: agreements between competitiors
    • Vertical agreements: agreements along distribution chain (e.g., manufacturer and dealer)
  • Section 2: criminalizes monopoly
  • Although sections provide for $10,000,000, federal sentencing guidelines provide much higher penalties and supercede Sherman Act.
  • Violations can be prosecuted as civil cases as well as criminal cases. Section 2 is almost always civil; Section 1 is usually civil.
  • Suit can be brought by the federal government, states, or individuals.

Price-Fixing

• One of the 'hard-core' anti-trust violation, usually prosecuted criminally.
• Agreement between competitors (horizontal agreement) to set the price of their product.
• Allows firms to extract more money from consumers--redistributes wealth from consumers to producers.
• By raising prices well above cost of productions, inefficiency results: consumers who would like to purchase product but can't or won't because of price. Negative effect on allocative efficiency.
• Sometimes, though, producers will be poor and consumer rich; is price fixing still bad?

United States v. Trans-Missouri Freight Ass'n

[166 U.S. 290] 1897 United States Supreme Court (cb32)

• Sherman Act and Commerce Act passed in wake of growth of railroad industry.
• Railroads agreed to set rates, claim rates were reasonable and thus not a violation of Sherman Act.
• Peckham holds that all price fixing is prohibited by language of act.
• As a matter of law, prices determinable by competition are reasonable.
• Standard Oil case, on the other hand, adopted dissent from Trans-Missouri Freight Ass'n, saying only unreasonable restraints of trade were illegal, leading to passing of Federal Trade Commission Act.

Chicago Board of Trade v. United States

[246 U.S. 231] 1918 United States Supreme Court (cb189)

• Brandeis holds that every contract restrains trade in some sense, thus cannot read Sherman Act literally.
• "To bind, to restrain, is of their very essence. The true test of legality is whether the restraint imposed is such as merely regulaes and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition."
• Rule only allowed trading after trading hours at prices fixed by 'men occupying positions of strength'.
• Thus, holds that only unreasonable restraints are prohibited by Sherman Act.
• Factors in determining whether rule is reasonable
  • Nature, scope, effect
  • History
  • Evil
  • Reason for adopting the rule
  • Facts peculiar to the business in which the restraint was imposed
• Essentially concerned with effect of rule and purpose of rule
• Brandeis finds the rules in question don't have a significant negative effect on competition; government never showed rule had effect on price level.
• Brandeis also describes numerous positive (potential) effects of the rule

United States v. Trenton Potteries Co.

[273 U.S. 392] 1927 United States Supreme Court (cb193)

• Question: will actual price-fixing now be determined under the rule of reason?
• Holding: don't need to look at whether the agreement itself was reasonable, since practice itself is unreasonable.
• Differences with Chicago Board of Trade: Board of Trade needs to have rules to run (ancillary restraint of trade), whereas Trenton Potteries is more naked price fixing.

Appalachian Coals, Inc. v. United States

[288 U.S. 344] 1933 United States Supreme Court (cb197)

• 137 producers, accounting for 74% of Appalachian territory coal producers, agree to have exclusive agent to ell their coal.
• Court finds, under the circumstances, hat arrangement is not unreasonable.
• Agreement stabilizes prices, thus has the same effect as agreement in Trenton Potteries, but intent is to rescue troubled industry.
• 'Cut-throat' competition: when producers cut prices below their costs.
• Argument: this sort of price fixing is equivalent to merger. But: mergers involve integration of production, best production techniques are adopted, inefficiency mines would be closed. Naked price fixing seems to involve no efficiency gains.
• Economists have suggested that it may be necessary to temporarily fix prices to prevent firms from going out of business

United States v. Socony-Vacuum Oil Co.

[310 U.S. 150] 1940 United States Supreme Court (cb201)

• Rejects cut-throat competition argument for price-fixing
• Major oil companies are concerned because small producers are dumping oil on spot market, having negative effect because their dealers seem to be pegged to spot market.
• Companies decide to buy up small distressed producer's oil to keep supply off the market. Each company will deal with one refiner.
• Justice Douglas holds that this is per se illegal, companies are conspiring to fix supply.
• Technically, according to the court, the price that is being fixed is the price they're paying to keep the oil off the spot market. In reality, agreement is a scheme to raise prices at the consuming level.
• Crime is conspiring to fix price, intended result need not occur for conviction.

• Hypothetical: Two children, Noah, 11, Jacob 8. Each sets up lemonade stand in front of house. Noah charges $0.50 per cup, Jacob charges $0.10 per cup. Jacob gets all the business. Noah tells Jacob that if he raises his price to $0.50, he can play with Noah's baseball bat.
• Question: ignoring interstate commerce and age issues, have Noah and Jacob committed per se violation of Sherman Act?

Tuesday, June 4, 2002 (Class 2)

• Price fixing
  • Per se rule: Trenton Potteries, Socony Vacuum (for all intents and purposes overrules Appalachian Coal)
  • Rule of reason: Chicago Board of Trade

United States v. Container Corp. of America

[393 U.S. 333] 1969 United States Supreme Court (cb224)

• Companies exchanged information about prices without explicitly agreeing to fix prices
• What's wrong with exchanging information?
  • Could be implicit form for price fixing
  • If competitors are 'cooperating', maybe there's more exchanged than just 'information'.
• How could exchanging information help consumers?
  • Competitors may be able to undercut each other if they know what they're charging.
  • Depends on whether consumers have access to information, as well. If so, the market is more 'transparent', may help consumers.
• Civil antitrust prosecution.
• Court holds that price information exchanges are illegal per se, although concurrence (and dissent) disagree.
• Products sold by companies are virtually identical, thus only basis for competition is on price.
• Demand for product is inelastic--customers not likely to substitute other products if price rises or buy more if prices drop.
• Fortas concurrence: wants to look for restraints of trade effects. Price exchanges may or may not stabilize prices, need to see if they actually do before finding them unlawful.

United States v. United States Gypsum Co.

[438 U.S. 422] 1978 United States Supreme Court (cb230)

• Competitiors were exchanging information as to price of gypsum board.
• Difference from Container Corp.: instigated by customers. Customer tells one company they can get board from another company at a certain price, then that company calls the first company to see if this was true.
• Company's defense: trying to comply with Robinson-Patman Act, which makes illegal price discrimination
• Criminal antitrust case
• Industry more concentrated than in Container Corp., but demand is changing as result of increased construction.
• Effect: government proved that prices were stabilized.
• Conviction is reversed, because there had to be intent for this to be a crime.
• Very hard to prove that a defendant knew price exchange would increase prices.
• Thus, in order to prove criminal antitrust charge, do not need to show effect of raising prices, but just intent to fix prices.

Meaning and Scope of Rule of Reason

National Society of Professional Engineers v. United States

[435 U.S. 679] 1978 United States Supreme Court (cb236)

• Members of NSPE were prohibited from competitive bidding, would be selected by customer on the basis of reputation and background without knowing the price ahead of time.
• Defense: competition would be harmful to the public, because engineers will be tempted to substitute inferior materials for lower courts.
• Under rule of reason, do not look to see if purpose is reasonable, but rather if effect on market is reasonable. Only justifications under Sherman Act is that agreement is not anti-competitive. Social welfare factors can't be taken into account.
• Truncated rule of reason: Court will listen to justifications (not condemn immediately as price fixing), but then condemn it, without further analysis, as anti-competitive. ('elaborated per se ').

Broadcast Music, Inc. v. Columbia Broadcasting System

[441 U.S. 1] 1979 United States Supreme Court (cb242)

• Case literally involves price-fixing--setting a price on a license--but analyzed under rule of reason.
• BMI and ASCAP are associations of musicians. Musicians give associations non-exclusive rights to license their works for radio and television.
• License gives licensee ability to replay recording as many times as they want for fee based on revenue of licensee.
• CBS wants per use license fee, but BMI and ASCAP won't offer per use license.
• Court does not find BMI/ASCAP arrangement to be per se illegal: licenses are non-exclusive, so CBS could go directly to artists for per use license.
• Blanket license is essentially a new product, quite different from what the composers might offer separately, thus does not count as naked price fixing (i.e., every time a company sets a price for a product, it can't be considered price-fixing.)
• Distinction from joint selling agency: BMI offers different product, is not formed exclusively to fixed prices, does not prohibit people from going directly to artists.

Thursday, June 6, 2002 (Class 3) (Assignment 3)

• 'New product' idea from Broadcast Music, Inc.: e.g., nationwide competitive bidding for health services, several small regional suppliers band together to submit a nationwide bid--their nationwide service could be considered a 'new product' that wouldn't exist without cooperation between competitors.

Catalano, Inc. v. Target Sales, Inc.

[446 U.S. 643] 1980 United States Supreme Court (cb253)

• Beer suppliers collectively agreed to eliminate short term credit terms
• Court finds agreement constitutes per se antitrust violation
• Defendant justifies agreement as pro-competitive, claiming that it lowers barriers to entry into the market (but any measure that elevates price could be justified as creating opportunities for new competitors) and that it makes prices more visible (but, again, any price fixing will make it easier to know what the price is).

• Hypothetical: what if all phone companies agree to use 'flat-rate' billing instead of various plans? Probably would not survive under Catalano.
• What if brewers all agreed to use a certain kind of hops to save money? Consumers are interested in price and quality.

Problem 4.2: Visa and Mastercard

• Bank credit cards, terms set by each bank.
• Banks agree to charge individual card holders $15 annual fee--naked price fixing, illegal.
• Agree to 18% annual charges, Catalano says is illegal
• Agree to charge merchants who accept VISA card 1.5% fee. BMI--too inefficient to have merchant call each bank every time they get a card.
• Agree not to issue VISA cards to someone who has lost VISA card from another bank due to non-payment--eliminates competition.

Problem 4.3: Financial Aid Packages

• Elite schools agree on financial aid packages to top students
• Justification: if colleges start competing to provide aid to top students regardless of need, then most needy students will suffer. Colleges offer a 'new product' (diverse student education) that couldn't be offered without these restrictions.

Arizona v. Maricopa County Medical Society

[457 U.S. 332] 1982 United States Supreme Court (cb256)

• Physicians agree to maximum price
• Court holds that maximum price fixing is also per se illegal--don't look for exceptions.
• No suggestion that doctors are threatening to boycott insurers if they don't agree to fee schedule.

National Collegiate Athletic Ass'n v. Board of Regents

[468 U.S. 85] 1984 United States Supreme Court (cb265)

• NCAA had rules limiting number of games that could be televised, also setting minimum aggregate price for networks to pay for package of football games
• University of Oklahoma and University of Georgia are challenging the limit--they would prefer to be able to air more games.
• Justification of rule: preserve attendance at games, maintain balance between teams.
• Without some kind of limitation, there wouldn't be a 'product':
  • League rules, i.e., points for touch down
• Court uses 'truncated' rule of reason analysis:
  • Output limitation; not condemned per se, but nonetheless court concludes rule is not necessary for league to function and thus condemned without any analysis of competitive effects
• Did not need to show that league had market power -- the ability to raise prices itself.
• Not analogous to BMI--no transactions justification for rule.
• Rules such as limitation on weeks in season, while having an 'output limitation' effect, are necessary to league system (functions as an ancillary restraint).

Friday, June 7, 2002 (Class 4) (Make-Up Class)

California Dental Association v. Federal Trade Commission

[526 U.S. 756] 1999 United States Supreme Court (sp15)

• Case brought by Federal Trade Commission, heard by Administrative Law Judge
• FTC act makes "unfair methods of competition" illegal--Sherman Act violations are included
• CDA rule requires advertising to not be misleading--has many restrictions on what can actually be included in advertisement. All services discounted need to be listed, with non-discounted fee, etc.. Prohibit quality claims.
• FTC found price advertising restrictions to be per se violations, and quality restrictions violated as 'quick look' rule of reason.
• Appeals court found that per se rule should not apply to either, but that a 'quick look' suffices to show that measures are unlawful.
• Supreme Court holds that anticompetitive nature of measures was not obvious enough; needs to have more detailed examination (dismissed on remand).

Conspiracy Doctrine

• § 1 of Sherman Act requires agreement--how to determine if there is an agreement or conspiracy.

Interstate Circuit v. United States

[306 U.S. 208] 1939 United States Supreme Court (cb280)

• Interstate: exhibits first run motion pictures in Texas, concerned about second-run theaters showing films for less
• Interstate sends letter to major motion picture distributors, asking them to restrict supply of movies to second-run theaters, require them to be priced at $0.25 or more and not be offered as double-features. Implies that they will not show films otherwise.
• Eventually, second-run theaters fall into line with Interstate's demands, except in Austin and Galveston.
• Not per se illegal--vertical agreements are always analyzed under Rule of Reason (except with price fixing).
• No evidence of express agreement
• Why would there have been exception for two cities if theaters weren't all working together?
• Issue of conspiratorial motive--in many cases, conduct won't make sense unless you assume there was some kind of assurance that other parties would go along

Theatre Enterprises, Inc. v. Paramount Film Distributing Corp.

[346 U.S. 537] 1954 United States Supreme Court (cb285)

• Jury finds no conspiracy when first-run movies were confined to downtown movie theaters.
• Conscious parallel behavior was not found, itself, to constitute an agreement (that would violate Clayton Act.)

Wednesday, June 11, 2002 (Class 5)

• Oligolopy pricing--price leadership, where industry leader raises price to see if others will follow

E.I. Du Pont de Nemours & Co. v. FTC

[729 F.2d 128] 1984 2d Circuit Court of Appeals (cb304)

• Attempt to regulate oligolopy pricing.
• Can § 5 of FTC act be used here § 1 of Sherman act cannot?
• § 5 has no agreement requirement.
• Du Pont, Ethyl, and other manufacturers adopted policies for sale of antiknocking compounds for gasoline
• Price quoted included delivery, price increases were given advanced notice, and no customer would be charged a higher price than any other customer.
• 'Advanced notice' practice gave competing firms time to set their prices at same level.
• 'Most favored nation' practice made discounting very unlikely, since manufacturer would have to give discount to all customers.
• Court found practices did not violate § 5 of FTC, because it found no anticompetitive intent in practices, each had legitimate business justifications.
• Techniques were not oppressive, which Court held to be the standard for illegality under § 5 of FTC act.
• No evidence that practices actually had anticompetitive effect.
• Case frequently cited for high standard for FTC act § 5 violation.
• After this case, FTC abandoned attempts to attack oligolopies head on.

• 'Gap' in antitrust laws: activity that doesn't violate § 1 because there's no agreement and doesn't violate § 2 because there's not enough market share. § 5 of FTC act doesn't appear to have filled that gap.

Copperweld Corp. v. Independence Tube Corp.

[467 U.S. 752] 1984 United States Supreme Court (cb311)

• Case signals the demise of the 'intra-corporation conspiracy doctrine'.
• Can a corporation and its wholly owned subsidiaries conspire under § 1?
• In practice, even wholly owned subsidiaries sometimes behave independently from parent corporation.
• Court found a 'unity of economic interest' between parent and subsidiaries, and thus it makes no sense to apply § 1 of Sherman Act.

Matsushita Electronic Industrial Co. v. Zenith Radio Corp.

[475 U.S. 574] 1986 United States Supreme Court (cb325)

• Claim that Japanese television manufacturers conspired to engage in predatory pricing, selling TVs below production cost, in order to put American manufacturers out of business.
• Court takes broad view of predatory pricing: pricing below the level necessary to sell the product or below some appropriate measure of cost.
• Each company agreed to sell no more than five United States distributors.
• Japanese trade ministry established 'check prices'--minimum prices in the United States, but evidence showed that manufacturers tended to undercut prices.
• Court holds that none of this evidence is evidence of a predatory pricing regime in the United States.
• Price setting in Japan could only come under United States jurisdiction if there were a market effect in the United States; however, even if this were the case, plaintiff American companies suffered no 'antitrust injury' and thus have no standing to sue for that conspiracy.
• Fixing of minimum price and 5-company rule has same price-rising effect as conspiracy to raise prices, thus competitors have no standing to attack those practices.
• Competitors claim that high prices in Japan resulted in glut of products and thus dumping in the United States.
• Court holds that simply because prices are depressed isn't sufficient to survive summary judgment.
• Antitrust laws are not concerned with situation where companies lose sales because of depressed price, but only where prices are set below cost.
• Although discussion concerns whether or not there was a conspiracy, opinion seems to be driven by lack of below-cost pricing.
• Court finds theory of harm so implausible that it is essentially requiring a higher level of proof to survive summary judgment: plaintiff must present evidence that tends to exclude the possibility that alleged conspirators acted independently (taken from Monsanto case, dealing with vertical conspiracy.)
• Dissent suggests that there was predatory pricing, and other conspiracy evidence was probative.

Market Allocation Agreements

• Agreements among horizontal competitors to allocate territories, customers, or products.
• With price fixing, there may still be competition on quality, other terms, etc., but with territorial monopoly there may be no competition.

Thursday, June 13, 2002 (Class 6)

United States v. Sealy

[388 U.S. 350] 1967 United States Supreme Court (cb351)

• 30 manufacturers form joint venture in Sealy, which holds trademark.
• Sealy trademark gives exclusive geographical territorial licenses for Sealy brand mattress (manufacturers can still sell non-Sealy brands in any geographic area).
• Court sees relationship as a horizontal arrangement, because Sealy is not independent of manufacturers.
• Seems to suggest arrangement is per se illegal.

United States v. Topco Associates

[405 U.S. 596] 1972 United States Supreme Court (cb354)

• Claim that Topco, cooperative association of 25 small supermarket chains, violates antitrust when they set up a private label arrangement and establish geographic territories for each label.
• Member stores can buy Topco-brand products, through joint-purchasing and joint-branding operation.
• Topco argues that geographical exclusivity is essential for 'private label' program.
• 'Free-riding' justification (not spelled out): if one supermarket does a lot of advertising for Topco brand, other local supermarket that does not advertise could benefit.
• Court found this was a horizontal trade restraint, per se violation of § 1 of Sherman act.
• Not Topco's place (or Court's) to decide whether interbrand or intrabrand competition is more important.
• Is Topco still good law after BMI? Unclear. Could be argued that 'private label' brand is 'new product' which can only exist with these restraints.

Polk Bros. v. Forest City Enterprises

[776 F.2d 185] 1985 7th Circuit Court of Appeals (cb362)

• Polk Bros. is home appliance story, Forest City sells lumber/hardware, decide to form joint venture and agree not to compete in one building.
• 'Free rider' justification: if one company advertised product at location and other sold it for less, they could benefit from advertising without paying for it.
• Finding: without covenant, companies wouldn't have entered into venture.
• Court looks at conditions when restraint was adopted by parties.
• No loss of competition because of restraint, initially, because joint venture wouldn't have occurred without restraint.

Group Boycotts

• Fashion Originator's Guild of America v. FTC: Manufacturers boycotting retailers who do business with pirates
• Klor's: Broadway-Hale's agreement with manufacturers to boycott Klor's--horizontal agreement is at level of manufacturers. Per se illegal, regardless of whether competitor being affected was small or large.
• NYNEX Corporation v. Discon, Inc.: Boycott between AT & T and Materiel Enterprises against Discon (conspiracy to get higher rates set by regulators). Unlike Klor's, which was horizontal arrangement between manufacturers, this is a vertical agreement, thus not per se illegal, not anti-competitive under rule of reason.

Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co.

[472 U.S. 284] 1985 United States Supreme Court (cb388)

• Northwest is buying cooperative, gives rebate at end of year to members.
• Pacific Stationery got kicked out for violating by-laws.
• Not per se illegal, since expulsion is necessary for cooperative.

Tuesday, June 18, 2002 (Class 7)

Toys 'r' Us

• Similar to Korr's, although FTC did not rely on Korr's.
• Market power analysis: market power is only a surrogate for showing anticompetitive effects. In this case, the boycott worked, thus proving anticompetitive effect (don't need to ask if Toys 'r' Us had enough power to make it work, because they did make it work).
• 'Free rider' defense: discount wholesalers are taking advantage of investment in Toys 'r' Us.
• Manufacturers were paying for advertising, wanted to have some discount 'non-frills' wholesalers, so Court does not accept 'free rider' argument.

FTC V. Indiana Federation of Dentists

[476 U.S. 447] 1986 United States Supreme Court (cb395)

• 100 dentists in 3 cities refusing to submit x rays to insurers for benefits determination.
• Dentists argue that care level will suffer if x rays have to be submitted.
• Not classified as per se illegal group boycott: not instance with market power firms boycotting suppliers or customers to discourage them from doing business with competitor.
• Court doesn't look at market power, beyond high concentration in certain areas. Agreement is anti-competitive on its face: dentists agree not to compete on a non-price term, which must be justified by pro-competitive argument.
• Looks like a 'truncated rule of reason' analysis--practice is found to be illegal.

Associated Press v. United States

[326 U.S. 1] 1945 United States Supreme Court (cb404)

• AP by-laws prohibit AP members from selling news to non-members, grant AP members power to block new members.
• Court finds by-laws unreasonably anticompetive on their face.
• Is exclusionary rule reasonably ancillary to purposes of joint venture?
• Could argue that exclusionary rule is pro-competitive, since it creates incentive for excluded companies to create competiting service.
• Property argument: AP created this information, they should be able to do what they want with it.
• Response: by contracts/combinations, cannot unduly hinder natural flow of commerce.
• Free riding argument: only comes into play when venture is excluding competitors

Vertical Agreements

• Only area that is per se illegal are Resale Price Maintenance (and sometimes 'tying' arrangements).
• RPM restricts intrabrand competition, precludes competition on the basis of price amongst retailers.
• Resale Price Maintenance that raises retail price could be advantageous to competitors: they will have an easier time undercutting competition. Thus, as a matter of law, competitor can't challenge competitor's minimum RPM.
• But if all competitors engage in RPM, can facilitate cartel at the manufacturer level or oligolopy pricing.
• With RPM, no incentive for manufacturers to reduce wholesale price, since profits would just go to retailers.
• Can also facilitate cartel at dealer level, since dealers may all charge same minimum price.

Thursday, June 20, 2002 (Class 8)

Resale Price Maintenance

• Vices
  • Intrabrand Competition
  • Interbrand competition
    • Dealer Cartel
    • Manufacturers Cartel
  • Multibrand Dealers
• Virtues
  • Free rider
  • Dealer promotion: Dealers might work harder to sell product at higher produce ('pro-competitive')
  • High price image

Dr. Miles Medical Co. v. John D. Park & Sons, Co.

[220 U.S. 373] 1911 United States Supreme Court (cb421)

• Dr. Miles only permits retailers to sell at authorized price, and refuses to allow them to sell to non-authorized retailers.
• Restraints on alienation are disfavored--court doesn't like Dr. Miles' restrictions once it has sold the products to its retailers.
• Restraint is per se illegal
• Holmes' dissent: manufacturer knows best. Manufacturer's interest is aligned with consumer, it wants to sell as many products as possible.

State Oil Company v. Khan

[118 S. Ct. 275] 1997 United States Supreme Court (cb441)

• Albrecht held that maximum resale price maintenance was per se illegal, highly critized by scholars.
• Where retailer has monopoly, could gouge consumers if not for maximum resale price.
• State Oil had 'suggested' retail price; any profits over that had to go to manufacturer.
• Problems with maximum price fixing:
  • Manufacturer might set price too low to provide services consumers may desire
    • But this would be against manufacturer's interest--market should fix this
  • Maximum might be disguise for minimum price--all dealers may price at the maximum
• Difference between dealer maximum price and maximum RPM: can't trust dealers; they have motive to get as much from consumers.
• Can Dr. Miles survive after Khan? Should minimum RPM be analyzed under rule of reason, just like maximum?

• When would maximum RPM be illegal under rule of reason?
  • When manufacturer has 'monopsony' power--more like manufacturer is 'buying' the services of the retailer. If retailer has no real alternative and manufacturer sets price too low, could be anticompetitive.

Non-Price Vertical Restraints

Continental T.V., Inc. v. GTE Sylvania, Inc.

[433 U.S. 36] 1977 United States Supreme Court (cb476)

• Sylvania's franchise agreement with dealers sells dealers can only sell products from agreed-upon franchise locations.
• Continental is in San Francisco, wants to sell from another location.
• Schwinn had held that this sort of restraint was per se illegal, on 'property rights' and 'restraint of alienation' arguments.
• Court overrules Schwinn, which found conduct per se illegal; need to consider non-price vertical restraints on a case-by-case basis for competitive effects.
• Same 'virtues' as Resale Price Maintenance: could increase dealer margins, encourage dealer to invest and promote produt; avoids free-riders; maintains brand image, etc..
• Question of 'economics-based' versus legal antitrust theory.
• Distinction that court wants to try between non-price restraints and price restraints is not so clear in reality.
• Possible justification for adopting per se analysis of minimum RPM but not other non-price restraints: congressional intent.
• Congress repealed Miller-Tydings Act which had allowed vertical price restrictions.

• Analysis of vertical non-price restraints:
  • Is there market power? If not, probably don't need to go further.
  • Was restraint something the manufacturer initiated, or was it foisted upon manufacturer by group of dealers or large, powerful dealers?

• If you have express resale price maintenance agreement between manufacturer and dealers. Dealer cuts price, violates the agreement, and is terminated. Dealer sues, alleging termination is illegal because it is pursuant to unlawful RPM.
  • Agreement was per se illegal, manufacturer will have to pay damages.
• No express agreement, instead manufacturer publishes suggested retail prices, and announces that it will not deal with dealers who do not adhere to prices. All dealers except one acquiesce, that one is terminated.
  • Not illegal under Colgate doctrine.
  • Court holds there is no agreement between manufacturers and dealers under these circumstances
• If manufacturer tells competitor it has to raise prices or it will not provide it with something it needs, is this horizontal price fixing?
  • Vertical relationship: selling product to competitor, horizontal relationship: competitors.
  • Under Interstate Circuit, there is agreement where manufacturer says 'do something' and other manufacturer does it.
• Colgate is exception carved out of normal agreement/conspiracy doctrine, to protect manufacturer's prerogatives. Ameliorates effect of per se rule against RPM.

Tuesday, June 25, 2002 (Class 9)

• Microsoft Case and pages 84-97 for Thursday.

United States v. Colgate & Co.

[250 U.S. 300] 1919 United States Supreme Court (cb437)

• Colgate doctrine: makes it hard to prove violation when manufacturer announces retail price and refuses to deal with any parties that won't adhere to prices. Manufacturer can select customers.
• Government failed to charge an agreement, thus Court finds no unlawful combination.

Monsanto Co. v. Spray-Rite Service Corp.

[465 U.S. 752] 1984 United States Supreme Court (cb451)

• Needs to be evidence that excludes possibility that manufacturer and distributors were acting independently to prove violation.
• Mere fact of complaints by distributors leading to termination is insufficient to meet standard--could still be independent action.
• Holding in dicta, since Court upheld finding of agreement: Monsanto approached non-conforming dealer, who said they would comply, very important to finding of conspiracy.

Business Electronics v. Sharp Electronics

[485 U.S. 717] 1988 United States Supreme Court (cb458)

• Two dealers in Houston: Business Electronics (discounter) and Hartwell.
• Hartwell complained to Sharp that Business Electronics prices were too low, threatened to stop distributing if Sharp didn't terminate relationship with Business Electronics--Sharp then terminated Business Electronics.
• No dispute that Sharp terminated Business Electronics because of its price cutting, but not per se illegal because no Retail Price Maintenance--no agreement on what prices would be charged by non-terminated dealer.
• Possibility of free riding effects, may occur in the context of discounting.
• No evidence, however, that Business Electronics was free riding or was providing lower level of services.
• Furthermore, same argument would justify express Retail Price Maintenance--plausible efficiency justifications.

Compact Disc Case

• Hypothetical: manufacturer has policy of providing cooperative advertising support for dealers who charge specified minimum price.
  • When manufacturer says you must charge a certain price or you will be terminated, then per se illegal resale price maintenance. If dealer doesn't agree, protecting by Colgate.
  • Where you have agreement to charge minimum price, whether by negative or positive coercion (e.g., advertising funds), then same result--resale price maintenance, per se illegal.
  • If dealer doesn't respond, but raises prices and accepts advertising support, also seen as agreement and per se illegal. But without advertising support and simply agreement not to terminate, protected by Colgate.
• CD case: manufacturer would advertise at certain prices, dealers can charge whatever they want and advertise lower prices in advertising not paid for by manufacturers.
• Minimum Advertised Pricing (MAP) Policy: upheld as legal (or at least rule of reason analysis) by Court.
• Manufacturer requires dealers to advertise at suggested retail price, regardless of who pays for ads, but dealers can charge whatever they want at store (Time Warner case).
• Agreements as to advertised price has been held not to be per se illegal but analyzed under rule of reason. In this case, however, FTC held that restrictions were unreasonable restraints of trade:
  • Effect was to stabilize prices across the industry, because all major record companies had imposed policies.
  • If dealers couldn't advertise lower price, unlikely they would charge a lower price. Even in-store displays were held to advertising restrictions.
• No free-rider justifications.
• FTC holds that it will henceforth hold this sort of agreement illegal.

Interbrand Vertical Restraints

• Exclusive dealing and tying arrangements
• Restricts distributor from dealing with competing manufacturers
• Requirements contracts
• Common in soft drink industry: different fast food chains having exclusive arrangements with certain brands
• Supermarkets: agree only to carry particular brands
• American Express, Visa, Mastercard: could only use Visa at Olympics.

• Exclusive dealing: can violate § 1 of Sherman Act (includes services, etc..), or § 3 of Clayton Act (cb1098)--only applies to goods and commodities.
• Rule of reason analysis, like other non-price vertical restraints.

Thursday, June 27, 2002 (Class 10)

Tampa Electric Co. v. Nashville Coal Co.

[365 U.S. 320] 1961 United States Supreme Court (cb507)

• Tampa Electric locked in to 20 year contract with Nashville Coal.
• Exclusive dealing could negatively impact competitive ability of other manufacturers. Foreclosure effect is principle concern of antitrust.
• Coal prices increase, Nashville Coal seeks declaratory judgment that contract violates antitrust.
• Analyzed under Rule of Reason, as exclusive dealing arrangements always are.
• Issue of market share: do we look at coal sold in peninsular Florida or entire market for appalachian coal?
• Competitors which are 'harmed' are the 700 producer in appalachia, who sell 360 million tons of coal, thus degree of foreclosure by eliminating Tampa Electric as an outlet is minimal.
• Same analysis if there is a vertical merger.

Tying Arrangements

• May be unlawful under § 1 of the Sherman Act or § 3 of the Clayton Act.
• Clayton § 3: illegal to condition sale on understanding that purchaser won't deal in products of competitor.
• Tie can involve explicitly promise to not buy another product from competitor, or agreement to buy another product, thus not from competitor.
• Desired product is tying product and undesired product is tied product.
• Treated more harshly than exclusive dealing arrangements--thought that exclusive dealing arrangements are more pro-competitive.
• If profit-maximizing monopolist imposes tie that consumers don't like, some consumers will stop purchasing tying product.
• Argument that monopolist can't do 'worse' by imposing tie.
• Efficiency: manufacturer may be able to charge less for bundled products than otherwise, could be produced more cheaply. E.g., shoes are much more efficiently manufactured and sold in pairs.
• Price discrimination: allows manufacturers to charge more for users who use product more. Unclear whether it is beneficial to consumers.

Times-Picayune Publishing Co. v. United States

[345 U.S. 594] 1953 United States Supreme Court (cb520)

• Court holds that Clayton Act requires either monopolistic position in "tying" market or substantial volume of commerce in "tied" market, while Sherman Act requires both.
• Agreement necessary for Sherman Act typically occurs when sale is made (even if agreement is coerced).
• Times-Picayune has 40% of classified advertising, but Court does not find this is monopolistic position.
• Court finds that "tying" is very efficient. Also, for tying arrangement you need to have two products, and where efficiencies are present may be just one product.

Northern Pacific Railway v. United States

[356 U.S. 1] 1958 United States Supreme Court (cb524)

• Northern Pacific Railway require parties that purchased or leased land to use Northern Pacific as shipper if rates were competitive.
• To find arrangement per se illegal, government must prove that seller has sufficient power to force buyers to accept tied product.
• May not be case of consumer being forced to take something it doesn't want but rather foreclosure of competition from other rail companies.

Jefferson Parish Hospital District No. 2 v. Hyde

[466 U.S. 2] 1984 United States Supreme Court (cb536)

• Hospital only use anesthesiology from Roux Associates, claimed to be unlawful tying arrangement.
• Exclusive dealing arrangement, resulting in tie for consumers.
• Necessary elements
  • Two products
  • Probable existence of market power in tying product
  • Coercion/conditioning: purchaser is being forced to take product that it doesn't want in order to get tying product
• Concurrence: would never want surgery without anesthesia, thus not separate products.
• But--CD players and CD are separate markets, even though you would never want one without the other.
• Hospital's justification: arrangement insured 24 hour scheduling, professional standards, etc..
• Quality justifications are no defense, because Court says there are less restrictive means to accomplish these goals.

Tuesday, July 2, 2002 (Class 11)

Eastman Kodak Co. v. Image Technical Services, Inc.

[504 U.S. 451] 1992 United States Supreme Court (cb553)

• Tying product is copier parts, tied product is service.
• Kodak doesn't have market power in the copier market.
• Very little discovery, Kodak moves for summary judgment claiming no market power in equipment market, thus no market power in parts market, thus no valid tying claim: consumers could chose another brand if product as a whole is too costly.
• Counterargument: consumers don't necessarily do life-cycle purchasing (e.g., Federal Government has separate agencies for equipment and maintenance), also policy changed after customers purchased equipment.
• Responses (not considered in great detail by court): some consumers do life-cycle pricing, others without information can benefit from informed consumers, since Kodak prices the same for all customers. Also, would not be in Kodak's long term interest to exploit relationship with locked in customers.
• Kodak claims equipment, parts and service is one product; but separate demand for parts and service exists, thus under Jefferson Parish sufficient to establish multiple products--efficient for other firms to provide service. Court rejects 'functional link' test.
• Business justifications:
  • Free riding: Kodak's investment in its equipment justifies control of service. Court rejects this argument.
  • Inventory management: efficiency argument, but breakdown rates are predictable and parts could be manufactured on that basis.
  • Quality: Kodak wants to control the quality of its products, doesn't want to ruin its goodwill.
  • Pro-competitive justification: charging less for copiers, making it up with service, but no evidence that this was actually happening.
• Monopolization claim: Kodak was monopolizing service and parts market.
  • Kodak has 100% of parts market.
  • Kodak argues that single brand of product can never be relevant market.
  • Court rejects argument, holding relevant market is consumers who own Kodak machines.
• 'After-market' cases, following Kodak, require some kind of consumer lock-in.
• Court distinguishes Matsushita--maybe theory here is not as improbable, or maybe behavior in Matsushita involved lower prices which will require higher burden on plaintiffs.
• Scalia's dissent: criticizes Court for turning § 2 for extraordinary agglomerations of economic power into all-purpose remedy for business torts.

Microsoft Case

• In 1995, government brought minor case against Microsoft, challenging licensing practices. Microsoft charged based on number of computers equipment makers sold, not on number of copies of Windows. Consent decree agreed on, included anti-tying provision preventing Microsoft from conditioning licensing of additional products on operating system, but Microsoft could still develop 'integrated products'.
• When Microsoft told computer makers that they needed to take Internet Explorer with operating system, challenged by government, but Microsoft claimed it was an integrated products.
• District Court (Judge Jackson) granted preliminary injunction against tying, Court of Appeals reversed injunction in very pro-Microsoft decision, saying it was consistent with tying law. Where products are being physically integrated (technological tie vs. contractual tie), question is whether there are plausible benefits to putting products together.
• Government brought new case against Microsoft in 1998, asserting Microsoft was monopolizing operating systems market. Principle conduct was tying.
• States then joined with federal government. Judge Jackson found for government almost across the board. Upheld for the most part by DC Circuit Court, reversed some claims (including per se illegal tying). Government dropped tying claim then.
• Principal alleged tying: refusing to allow computer makers to uninstall or remove Internet Explorer. Designed Windows 98 so consumers couldn't remove, themselves, Internet Explorer. Behavior held to be monopolizing conduct.
• Other allegations: Microsoft was requiring computer makers to license Internet Explorer with Windows at bundled single price. If IE was being added for free, then there would be no 'tie'.

Tuesday, July 9, 2002 (Class 12)

• Microsoft Case
  • Possibly creating new exception from per se rule for tying, without indicating that Supreme Court is heading that way.

Monopoly

• Monopolist has to lower price to sell more units, thus its marginal revenue will be less with each additional unit.
• When prices are set by monopolist, 'dead weight loss' occurs from consumers who don't purchase at all, and 'consumer surplus' is transferred to 'producer surplus' at higher price.

United States v. Alumnium Co. of America

[148 F.2d 416] 1945 2d Circuit Court of Appeals (cb611)

• Two part test: monopoly exists, and defendant has engaged in monopolistic/exclusionary conduct.
• Alcoa had monopoly power in aluminum ingot market.
• Court looks at market share to determine monopoly. Profit is 10%, but just because company is not exploiting monopoly power does not excuse monopolist.
• Also, problem converting 'accounting' profits into 'economic' profits
• Market share is only one way to determine whether firm has monopoly power; may be ways to directly determine whether firm is monopoly.
• Discussion of various ways of calculating market share.
• With vertically integrated firms, self-production tends to be included in the market as in this case.
• Other 10% of market was held by foreign producers. Court considers aluminum that actually ends up being imported, not entire amount available overseas.
• Foreign production has significant cost disadvantages such that they are excluded from market.
• Monopolistic conduct: expanding supply to meet demand.

Thursday, July 11, 2002 (Class 13)

Problem 6.1

(cb636)

• Three gas stations at one intersection, nearest gas station is 30 miles away. A and B accues C of monopolization. Parties stipulate that market include only these stations.
• C has sold 2000 galloons, A and B have each sold 500 gallons.
• C has 8 pumps, A and B each have 6 pumps.
• Each pump accommodates 40 cars daily, with 10 gallons average sale per car.
• A and B's capacity: 2400 gallons, C capacity: 3200 gallons.
• C can't raise prices too much, however, since A and B can undercut and keep customers.
• Market share should really be measured by sales/capacity = 2000/6800 = 29%.

United States v. E.I. Du Pont de Nemours & Co.

[351 U.S. 377] 1956 United States Supreme Court (cb636)

• Market in question: flexible wrapping materials
• If commodities are reasonably interchangeable, then they are in same market.
• Government's argument: items cannot be in same market since they have different properties and are priced differently.
• If there is a degree of cross-elasticity for products, should they be in the same market? Court seems to think yes, known as cellophane fallacy.
• Dissent: Du Pont's pre-tax profit was 31%. There must have been barriers to entry that allowed Du Pont to earn such high profits.
• Cigarettes makers have inelastic demand for cellophane, but doesn't make sense to treat them as separate market, because normally seller can't discriminate on price.

Telex Corp. v. IBM Corp.

[510 F.2d 894] 1975 2d Circuit Court of Appeals (cb645)

• Issue of whether market was peripherals for IBM or for all computers.
• Makers of non-IBM peripherals could easily switch to make IBM peripherals--cost for switching would be less than 1% of product purchase price--supply was elastic, thus IBM was not monopolist.

Friday, July 12, 2002 (Class 14)

United States v. Grinnell Corp.

[384 U.S. 563] 1966 United States Supreme Court (cb653)

• Company offers burglary and fire protection services, with central station calling system.
• 'Commercial realities' may dictate that services need to be bundled together.
• How to determine whether night watchman service is in same market as central office protection? Could look at cross-elasticity of demand.
• Geographical market? Court holds that market is national, relying mostly on supply-side elasticity.
• How to define market in general? If firms increase prices, will consumers switch to another firm? Will other firms serve this area?

United States v. United Shoe Machinery Corp.

[110 F. Supp. 295] 1953 District of Massachusetts (cb659)

• Three different tests for monopolization: when a monopolist 'does business', it monpolizes, with possible defenses; unreasonable restraints of trade as under § 1 practiced to maintain monopoly under § 2; and having power to exclude competition and exercising that power.
• United only leased but did not sell its machines.
• Full capacity clause: manufacturers had to use United machines when they had work for them.
• Return clause: had to pay fee to return machine.

Aspen Skiing Co. v. Aspen Highlands Skiing Corp.

[472 U.S. 585] 1985 United States Supreme Court (cb690)

• Separate mountains had previously had shared lift tickets; Aspen Skiing purchased three mountains and then stopped multi-mountain pass.
• Court finds excluding Highlands from pass to be monopolistic conduct. Not sufficient in and of itself.

Tuesday, July 16, 2002 (Class 15)

Problem 6.6

(cb703)

• Since there was no pre-existing agreement, Aspen might not apply.
• Court held that Molar and Bicuspid were not 'competitors' and stopped analysis there.
• Essential facilities doctrine: duty to provide access to limited resources, e.g., phone lines, cable lines, etc..

United States v. Microsoft Corporation

[253 F.3d 34] 2001 District of Columbia Circuit Court of Appeals

• Monopoly power
  • Microsoft's argument: need direct evidence, claims court has incorrectly ruled out Apple and middleware as part of market. Because it's a dynamic market, can't just look at market share.
  • How can middleware be potential competitor that Microsoft squashed and at the same time not part of the market? Because middleware is nascent product, not yet option for consumers to turn to.
• Exclusionary conduct
  • Plaintiff needs to show anticompetitive effect; defendant then needs to give procompetitive justification; then plaintiff has burden of showing procompetitive justification is pretextual or that anticompetitive effect outweighs procompetitive benefits (sounds like rule of reason).
  • MS prevented hardware manufacturers from changing boot-up sequence or having different browser, didn't allow IE to be removed, commingled code
  • Exclusive dealing arrangements with ISP and ISV
  • Java 'pollution'
• DC circuit overturned remedy, ordered conduct restrictions until divestiture was complete.

Attempted Monopolization

• Elements (Spectrum Sports)
  • Exclusionary conduct
  • Dangerous probability of achieving monopoly power
  • Specific intent to monopolize
• Microsoft case: attempted monopolization of browser market
• Attempted price-fixing: does offer to fix prices constitute crime?

Predatory Pricing

• Pricing below cost, and recoupment after competitors have been forced from market
• Court tends to be hostile to predatory pricing claims

Brooke Group Ltd. v. Brown & Williamson Tobacco Corp.

[509 U.S. 209] 1993 United States Supreme Court (cb735)

• No dispute that Brown & Williamson cut prices below cost and had specific intent to carry out predatory pricing scheme.
• Issue: Liggett failed to show that recoupment was likely.

• Read through General Dynamics for Thursday.

Thursday, July 18, 2002 (Class 16)

Brooke Group Ltd. v. Brown & Williamson Tobacco Corp.

[509 U.S. 209] 1993 United States Supreme Court (cb735)

• Court finds there is not sufficient evidence that Brown & Williamson will be able to recoup losses from alleged predatory pricing in generic cigarette market.
• Also: output of generic cigarettes was higher at end of predation than beforehand.

• What is 'below cost pricing'?
  • Fixed vs. variable costs
  • Areda-Turner test:
  • Pricing below average variable cost is conclusively predatory, between average variable cost and average total cost is presumptively okay
  • All circuits except 9th hold above total cost pricing to be legal
  • Massachusetts has fair pricing law, prohibiting below-cost pricing by anyone, not just monopolist.
  • Problem with Areda-Turner test: at high end of output, might price below marginal cost but well above average variable cost, since marginal costs get very high at high end of output.

Mergers

• Only way to really deal with 'structural' issues
• Three types of measures:
  • Horizontal
  • Vertical
  • Conglomerates (elimination of potential competition)
• Horizontal mergers:
  • Have potential to create market power, permit firms to raise prices, similar to price-fixing
• Section 7 was amended to make clear that standard of illegality for mergers is much lower than standard for illegality under § 1 or § 2

Brown Shoe Co. v. United States

[370 U.S. 294] 1962 United States Supreme Court (cb819)

• Market: national on wholesale level (local at retail level)
• Challenge to merger between Brown Shoe and Kinney
• No issue of concentration at manufacturing level
• Dodge City, Kansas: 57% in combined market for women's shoes
• Should market be defined as women's shoes? Low cross-elasticity of demand, but high elasticity of supply
• Question of geographic market, as well--need to look at where people will travel if prices increase
• Court found prices would likely decrease as a result of efficiencies from being part of national chain

Tuesday, July 23, 2002 (Class 17)

Brown Shoe Co. v. United States

[370 U.S. 294 (1962)] 1962 United States Supreme Court (cb819)

United States v. Philadelphia National Bank

[374 U.S. 321] 1963 United States Supreme Court (cb827)

• Relevant market: commercial banking services, in four county Philadelphia metropolitan area
• Resulting bank would be largest in area--34%-36% depending on how it is measured.
• Argument: banks need to merge to compete with large New York banks. But Court will not allow anticompetitive effects in one market to be justified by procompetitive effects in another market.
• As Clayton act is interpretated, cannot argue for 'local presence' as justification for merger (e.g., Fleet Bank/Bank? Boston merger).

United States v. General Dynamics Corp.

[415 U.S. 486] 1974 United States Supreme Court (cb837)

• Alleged relevant market: production and sale of coal, in Illinois or Eastern Interior Coal Province Sales Area.
• Combined market share of merging parties in Illinois 21.8% in 1967, 10.9% in region
• Market concentrated, sufficient under Philadelphia National Bank standard
• prima facie case rebutted by lack of coal reserves, market share statistics didn't give accurate picture of market going into the future
• Merger occurred in 1959, but lawsuit wasn't brought until 1967
• Later, act required notice to government about merger--after that, mergers rarely attacked after they take place
• Last year, Congress changed thresholds for filing, such that smaller transactions are exempt from notice requirement, thus some mergers being examined after-the-fact attack
• No real 'statute of limitations' on mergers, as bad effects continue forward in time

Horizontal Merger Guidelines

• Herfendal-Hirschman Index: sum of squares of market shares, measures market share
• 2 * merging firmers = change in HHI
• 100% market share = HHI 10000 (100^2)
• 100 firms, each with 1% = HHI 100 (100*1^2)
• 10 firms, each with 10% = HHI 1000
• See guidelines cb1080 for general standards on HHI

Tuesday, July 30, 2002 (Class 19)

United States v. Waste Management, Inc.

[743 F.2d 976] 1984 2d Circuit Court of Appeals (cb871)

• Committed entrant: requires some sort of "sunk" investment--money that you won't get back if operation does not exceed.
• Entry into waste hauling business--probably not sunk costs, since you could rent a truck, e.g..
• Assuming prices increase as a result of merger, why would firms enter market if prices will eventually return to pre-merger prices? Because price spike give new firms opportunity to gain market share without lowering prices.

Federal Trade Commission v. H.J. Heinz Co.

[F.3d] 2001 DC Circuit Court of Appeals (sp85)

• Relevant market: baby food. Market leader is Gerber. Heinz acquiring Beech Nut.
• Premerger 5000, change as result of merger is over 500.
• Little innovation or change in industry.
• FTC staff had recomended that merger be permitted, but overruled by commission. District Court would have allowed merger, but overruled by DC Circuit.
• Potential argument: Two small competitors merging to compete better against large dominant firm.
• Heinz argues that numbers not reflective of competition: Beech Nut competes more directly with Gerber but Heinz is discount brand which doesn't compete with Gerber.
• Thus, Beech Nut and Heinz don't compete directly at retail level, thus merger should be permissible.
• DC Circuit didn't accept argument, however, holding that Beech Nut and Heinz are competitors at supermarket level.
• Heinz and Beech Nut needed to pay supermarkets to be second brand on shelf after Gerber.
• Claimed efficiencies/cost-savings: claimed cost of production will be 43% less after merger.
• Court doesn't recognize 43% figure; holds that total manufacturing cost savings will only be 22%.
• Issue is not whether Beech Nut's costs would be lower, but whether Heinz's costs would be lower, because it would be the surviving company.
• Efficiencies need to be merger specific--only be achieved through this merger.
• Merger-specific efficiency claim: Beech-Nut had better recipes. But Heinz could invest to get better recipes, merger is not only way to get efficiency.
• Collusive potential when there are only two firms is high, does not outweigh efficiencies--merger to monopoly or near-monopoly is almost never justified by efficiencies.

Conglomerate Mergers

• Issue: whether there is a loss of potential competition

United States v. Continental Can Co.

[378 U.S. 441] 1964 United States Supreme Court (cb883)

• Continental Can is acquiring Hazel-Atlas: Continental Can makes "cans" and Hazel-Atlas makes "glass containers."
• Continental Can is second-largest producer of metal containers, with 33% market share; Hazel-Atlas is 3rd largest glass container producer with 9% of market.
• Much harder to stop merger between potential competitors rather than actual competitors. If market is broadened, challenge to merger is strengthened as firms become horizontal competitors.
• Anticompetitive problem: can-maker might not invest in improving glass container technology since Continental would want to protect its can market.

United States v. El Paso Nat. Gas Co.

[376 U.S. 651] 1964 United States Supreme Court (cb889)

• El Paso seeks to acquire Pacific Northwest; Pacific had not sold any natural gas in Southern California, so at first blush looks like potential competitors rather than actual competitors.
• In the past, however, El Paso has bid for projects in Southern California. Could look at Pacific's capacity to serve Southern California market, as well as other firms that had capacity, in order to determine market.
• More natural to examine as horizontal merger.

FTC v. Procter & Gamble Co.

[386 U.S. 568] 1967 United States Supreme Court (cb891)

• True 'conglomerate merger' case--no question of whether parties are in same market, all lost competition is potential competition.
• Procter & Gamble is acquiring Clorox; relevant market is bleach.
• Procter & Gamble doesn't currently sell any bleach, but does sell complementary household products.
• P&G's acquisition could 'entrench' Clorox's position in the bleach market and block further entry into bleach market.
• P&G could enter bleach market if it didn't acquire Clorox, thus could create a lot of competition in market.
• P&G's existence at the 'edge of the market' exercised significant price controls on Clorox, for fear that P&G would enter market.
• If P&G could prove economies of scale for advertising in merged entity, and this would make it more difficult for new firms to enter market: these efficiencies were not seen as defense to merger but rather as reason for condemning the merger.
• Advertising efficiencies would probably not be cognizable today, since they are not 'merger-specific'.

Thursday, August 1, 2002 (Class 20)

General Electric/Honeywell? Merger

• Standard in European Community: create or strengthen a dominant position (vs. lessen competition under Clayton Act).
• If 'dominant position' means 'monopoly' than EC standard would be much more lax than Clayton Act standard, but in practice 'dominant position' can be as little as 30%.
• Conglomerate merger: non-competing products (GE was willing to divest horizontal overlap).
• Issue was not potential competition.
• GE was dominant in jet engines, Honeywell in avionics/non-avionics.
• Merger of complementary products, not competing products.
• GECAS is largest purchaser of airplanes, only purchases jets with GE engines.
• Suggestions that merger could go through if GE would spin off GECAS, but GE held that to be a 'deal breaker'.
• Exclusive dealing with GE Capital: airframe manufacturers that received GE capital funding had exclusive dealing arrangements with GE (not threshold issue, though).
• Bundling: company would bundle GE engines with Honeywell avionic systems, sell them at a discount as a package deal. Under US analysis, this would be competitive efficiency, but under EC analysis 'tends to create or strengthen a dominant position'.

Vertical Mergers

United States v. E.I. du Pont de Nemours & Co.

[353 U.S. 586] 1957 United States Supreme Court (cb786)

• du Pont acquired 23% of stock of GM in 1917, challenged in 1957.
• Market foreclosure for automotive fabrics and finishes would be equally to GM's market share if GM got all of its finishes from du Pont. 38-68% of requirements were actually purchased from du Pont, however.
• Dissent: market was finishes and fabric, not just for automobiles. Thus market foreclosure would be much smaller.

Brown Shoe Co. v. United States

[370 U.S. 294] 1962 United States Supreme Court (cb790)

• Horizontal aspect: competition in retail for shoe stores
• Vertical geographic market: national market

Tuesday, August 6, 2002 (Class 20)

Time Warner/Turner?

• Time-Warner: largest cable programmer (HBO, Cinemax), 2nd largest MVPD market--distribution (17%)
• Turner/TCI: 3rd largest programmer (CNN, TNT, WTBS), largest MVPD--27% (TCI)
• Time-Warner owned 20% of Turner
• Turner owned 27% of TCI
• Time-Warner-Turner would have 40% of programming market, and 41% of subscribers
• Merger has horizontal and vertical aspects
• Horizontal: concentration in programming market
• Tying arrangement: could force MVPDs to take unwanted stations along with CNN, HBO, foreclosing station slots to other programmers.

Standing

Illinois Brick Co. v. Illinois

[431 U.S. 720] 1977 United States Supreme Court (cb96)

• Case holding indirect purchasers cannot sue for treble damages, even if they were 'harmed' by antitrust violation.

Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc.

[429 U.S. 477] 1977 United States Supreme Court (cb115)

• Certain injuries do not constitute antitrust injury; not all injuries are cognizable

Thursday, August 8, 2002 (Class 21)

• Radio station problem
• Actual potential competition: would enter market but for the merger. Not applicable here.
• Perceived potential competition: other players keep prices low because of fear of competition; perceived potential competition eliminated by merger.
• Horizontal guidelines: firm that's not currently in market but will be within a year in response to small price increase--uncommitted entrants: considered part of the market.
• If WAMC doesn't need to put any additional 'sunk costs' to enter market, they are essentially in the market.
• Market definition?
  • Advertising on radio stations
  • Advertising on radio and newspapers
  • Advertising on television stations
• Consider competitive effects--coordinated or unilateral
  • Evidence that market is somewhat competitive now--while newspapers charge local advertisers more, radio stations do not
• Barriers to entry
  • Only one license available--thus no easy entry
• Efficiencies
• Philadelphia National Bank presumption
• Entry: big factor cutting against merger
• Lack of efficiencies against merger
• Absence of coordinated action or unilateral effects would favor merger