ANTITRUST OVERVIEW

A n titru s t S ta tu tes

E xem p tion s F romF ed era l

A n titru s t L aw

Th e R oots o fA n titru s t L aw

M on op o liza tionA n a lys is

A ttem p tedM on op o ly

M on op o ly

M erg er A n a lys is

M erg ers In te rn a tion a lIm p lica tion s &A p p lica tion s

A n titru s t L awM on op o lies & M erg ers

The goal of antitrust law/policy is thepreservation of the free market. Or more specifically, preservation of competition, democracy and small business. Moregenerally speaking, the preservation of the “American Dream” and reshaping America to benefit all people, not justbig business.

Preservation of competitionPreservation of democracyPreservation of American DreamAn Expression of political radicalism

The Roots of Antitrust Law

• Since the U.S. Constitution does not protect citizens from abuses of power by private entities (but does protect against government power abuses) the legislature must step in with the passage

of antitrust legislation.

Antitrust Statutes• Sherman Anti-trust Act:

prohibits restraints of trade and monopolization. It allows both the government & private individuals to seek civil and criminal penalties against violators

• Federal Trade Commission Act: Created the FTC with the authority to prevent anti-competitive behavior

• Clayton Act: prohibits a number of anti-competitive behaviors including price discrimination, mergers tending to create a monopoly,tying arrangements, & requirements contracts.

Don’t Forget!

• Patents, Copyrights & Trademarks: Each of these is essentially an anti-competitive device, but since their benefits are thought to out weigh the anti-competitive effects of those laws.

• State Law: Many states have their own antitrust legislation and the U.S. Supreme Court has upheld states’ authority to do so.

Public UtilitiesNot Regulated By Anti-trust

Monopolies/Oligopolies• A monopoly exists when there is only one

seller or service provider in an industry

• Oligopoly refers to the situation in which a few sellers or service providers dominate an industry.

5 Stages to Determine an Illegal Monopoly:• #1 Product Market Define

the market (usage of the “cross-elasticity” of demand concept helps identify same product market goods)

• #2 Geographic Market: Define the area where the product can be purchased. “any section of the country where the product is sold in commercially significant quantities.”

• #3 Market Power: How much % of market is controlled by the entity.

• #4 Intent: A predatory intent to acquire monopoly power (not necessarily a predatory conduct).

• #5 Defenses: If a defendant can establish that a monopoly has been “thrust upon” them (ie. innocently acquired)

Barriersto Entry

Attempted Monopoly • Attempted Monopolization will be found

where:–1) The defendant has engaged in anti-

competitive conduct.–2) An attempt to monopolize–3) There exists a dangerous probability

of achieving monopoly power.

Property of two firms is combined and only oneof the two remains in existence. *HORIZONTAL MERGERS (2 competitors in the same product and geographic market)*VERTICAL MERGERS (2 firms at different levels of the manufacturing chain combine)*CONGLOMERATE MERGERS (2 totally unrelated firms merge)

AOL TimeWarner

American Airline& British AirwaysMerger Attemptsfrom 1998 -2002

Horizontal Merger Analysis• #1 Market: defined as the smallest product & geographic market in which

a monopolist could raise prices.• #2 Market Concentration: statistical market share measurement (HH Index)• #3 Adverse Effects: The government is concerned about whether a merger

is likely to permit the merged firm to behave like a cartel.• #4 Ease of Entry: If it would be easy for new firms to enter the market after

the merger then the merger is not as threatening.

• #5 Defenses: “Efficiency” defense & failing company doctrine. • For the most part, the government and legal system are most

interested in prohibiting horizontal mergers over vertical or conglomerate mergers.

Horizontal Mergers in Violation of Anti-Trust Laws

Staples & Office Depot (two office supply giants) wished to merge…..the U.S. Government throughthe FTC prevented such a merger…by first acquiringan Injunction.... See page 384. The two companies ultimately abandoned theirefforts to become one after the injunction wasgranted. Is this an example of the government becoming to involved in the market or is it an example of how our government should step in at timesto prevent a market imperfection?

Vertical Merger Analysis

• The primary threat is market foreclosure. The merger of a supplier with one of its purchasers may deny other purchasers their source of supply.

Mergers

Selected beneficial effects possible from merging: Permits the replacement of inefficient management and the threat of replacement

may discipline managers to be more productive. May permit stronger competition with previously larger rivals. May improve credit access. May produce efficiencies and economies of scale.

Possible problems from merging: Too much power concentrated in too few hands threatening economic well-being

and undermining democracy. A particular merger may trigger a merger movement among industry competitors. Higher market concentration may lead to higher prices for consumer and lower

prices for suppliers. Innovation may be harmed as smaller companies grow into larger, more

bureaucratic structures. Some companies may become so large that we cannot allow them to fail.

McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

Hart-Scott-Rodino Antitrust Improvements Act (HSR)

Requires reporting and documentation of proposed mergers to FTC if: After the merger, the acquirer will control >$200 million of

stocks/assets of acquiree One of the companies has >$100 million in sales/assets and

the other has at least $10 million, or After the merger, the acquirer will hold >$50 million of

stocks/assets of acquiree After receiving information, FTC determines whether to do

nothing, require some divestitures, or challenge the merger in court.

McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

AntitrustInternational Applications

• In 1992 the Justice Department announced that it would apply U.S. antitrust law abroad and prosecute foreign firms that violate the law if the activity effects the U.S.

Foreign Antitrust Laws Exist Also in the EU, Germany, Japan,

Microsoft Anti-Trust Trial: On November 1, 2002 ,The trial court that was re-evaluating the Penalty phase of the case due to judicial misconduct and under orders from the appeals court to fashionA remedy due to Microsoft’s anti-trust activities approvedthe settlement of the case which requires Microsoftto stop entering into exclusive requirement type agreementsWith computer manufactures and donate some computersTo less privileged school children.

Closing the window on innovation?

A n titru s t L aw --R es tra in ts o f Trad e

R u le o f R eason P er S e V io la tion s

H orizon ta lP rice F ixin g

A ttem p tedP rice F ixin g

H orizon ta l D ivis iono f M arke ts

R efu sa ls to D ea l

H orizon ta lR es tra in ts

R esa le P riceM ain ten ce

Tyin g A rran g em en ts

E xc lu s iveD ea lin g

P riceD isc rim in a tion

B u yerD isc rim in a tion

M ic roso ft E xam p le

V ertica l R es trian ts

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Trad e

“Rule of Reason”• Articulated by the U.S. Supreme Court in

1911, this test states that only “unreasonable” restraints of trade violate the Sherman Antitrust Act. This test applies to evaluating violations of sections 1 & 2 of the Act.

Per Se Violations• Certain arrangements

(ie. horizontal price-fixing) are per se violations of the antitrust laws. In recent years, however, fewer acts have been held to be per se violations of the law.

Horizontal Price Fixing

Historically, a contract, combination or conspiracy that reduced price competitionwas a per se violation of the Sherman Antitrust Act. Inrecent years the judiciary hasnot held all such arrangementsto violate the law and has applied the “rule of reason” test.

To establish “contractcombination or conspiracy”

*Agreement with direct evidence--direct evidence of collusion *Agreement without direct evidence--defendants covertly agree

& circumstantial evidence is used to show collusion *Agreement based on tacit understanding--no direct exchange of assurances occur, but the parties “tell” each other tacitly that they are in agreement*Agreement based on mutual observation--defendants know each other so well that they can anticipate each other’s pricing behavior.

Refusals to Deal:

• In a group boycott, a group of traders

collectively refuse to deal with another trader. A group boycott may be a per se violation of the Sherman Antitrust Act or may be analyzed under

the “rule of reason”

Vertical Restraints

• Manufacturers often try to specify the price at which retailers may resale the manufacturer’s products for three reasons

• 1) To maintain a certain reputation

• 2) To prevent discount outlets from undercutting retail outlets

• 3) To prevent free-riders.

Non-price Restraints• Sellers often wish to apply other

restrictions other resale of their products (ie. where and to whom the products may be resold) Because they reduce competition, such restrictions usually have been struck down by the courts. The “rule of reason” is applied to these types of arrangements on a case-by-case basis.

*Horizontal restrictions are those amongcompetitors themselves.*Vertical restrictions are those among parties at different levels in the chain of distribution. Horizontal restrictions are usuallyunlawful per se (but the trendIs now to apply the “rule of reason”, while the latter are resolved under the“rule of reason” analysis.

Tying Arrangements• These are typically when a customer is permitted to purchase the

desired product (the tying product) only if they also purchase another product (tied product). The concern is that a party who already enjoys market power over the tying product is given an easy way to extend that power to the tied product and competitors of the tied product are denied an equal access to the market.

• Proof of the following under the “rule of reason” establishes a violation: 1) Existence of separate products; 2) Proof of a tying arrangement; 3) Market power in the tying product; 4) Substantial amount of commerce in the tied product being effected.

Other Antitrust Violations

• Exclusive Dealing Contracts: a buyer agrees to buy form only one seller.

• Requirements Contract: a seller contracts to supply all of a buyer’s needs and/or a buyer agrees to purchase all of the seller’s output.

Courts will look at what percentage of the relevant market is foreclosed by the agreement? Does it lessen competition substantially?

Price Discrimination• This involves selling

substantially identical goods (not services) at reasonably contemporaneous times to different purchasers at different prices if the effect may be to lessen competition substantially or to create a monopoly.

DuPont’s Ten Don’ts of Antitrust

1. Don’t discuss prices with competitors.

2. Don’t divide customers, markets or territories with competitors.

3. Don’t agree upon or attempt to control a customer’s resale price.

4. Don’t attempt to restrict a customer’s resale activity.

5. Don’t offer a customer prices or terms more favorable than those offered competing customers.

6. Don’t require a customer to buy a product only from you.

7. Don’t use one product as bait to sell another.

8. Don’t disparage a competitor's product unless the statements are true.

9. Don’t make sales or purchases conditional on reciprocal purchases or sales.

10. Don’t hesitate to consult with your legal counsel.

McGraw-Hill © 2004 The McGraw-Hill Companies, Inc. All rights reserved.

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