Economics 411 Handout 1 Professor Tom Khceco016/econ411/Br1.doc · Web viewraises price in a declining market and in an industry with overcapacity, and then all firms match the price

Economics 411 Handout 1 Professor Tom K. Lee

Part 1: Review of economics concepts and theories

Market price is the price determined by the actions of all the buyers and sellers of a market. Demand price of a product is the maximum amount a consumer is willing to pay for the last unit of a product.Two views of a demand curve: positive versus normative viewsConsumer surplus is the difference between the maximum amount that a consumer is willing to pay for the quantity demanded and the actual payment of the purchase.The First Law of Demand states that as the market price of a product increases the quantity demanded of the product decreases.Own-price demand elasticity is the percentage change in the quantity demanded of a product per percentage change in the market price of the product.Cross-price demand elasticity is the percentage change in the quantity demanded of a product per percentage change in the price of another product.Supply price of a product is the minimum that one has to pay to induce a seller to produce and supply the last unit of a product.Two views of a supply curve: positive versus normative viewsProducer surplus is the difference between the actual amount a seller receives and the minimum that the seller is willing to accept for the quantity supplied.The First Law of Supply states that as the market price of a product increases the quantity supplied of the product increases.Own-price supply elasticity is the percentage change in quantity supplied of a product per percentage change in the market price of the product.Cross-price supply elasticity is the percentage change in the quantity supplied by all other firms in an industry of differentiated products per percentage change in the price of the product of one firm.Equilibrium price is that price where quantity demanded equals quantity supplied.Equilibrium price and quantity determinationThe Law of Supply and Demand states that, whenever the market price deviates from the equilibrium price, there are market forces that would bring the market price back to the equilibrium

price so that transactions take place at the equilibrium price.


Perfect competition model -many small price-taking buyers -many small price-taking sellers -no transaction cost(free entry & exit) -perfect information -homogeneous private product -no externalityShort-run profit maximization conditions of a competitive firm: -price equals to short-run marginal cost. -short-run marginal cost is increasing. -price is no less than average variable cost.Long-run profit maximization conditions of a competitive firm: -price equals long-run marginal cost. -long-run marginal cost is increasing. -price is no less than minimum long-run average cost.Zero profit equilibrium conditions of a competitive industry -price equals long-run marginal cost. -long-run marginal cost is increasing. -price equals minimum long-run average cost.Efficiency of zero profit equilibrium of a competitive industryA perfectly contestable market is when -entrant firms and existing firms are symmetric in information, technology, quality of product and market. -no sunk costs, i.e. all costs associated with entry are fully recoverable. -entry lag is less than the price adjustment lag for existing firms.Perfectly contestable market equilibrium is efficient.Sources of monopoly(market) power -essential input -economies of scale -product differentiation -government regulation -entry barrierLerner’s index of market power is the price-cost margin.Natural monopoly is a one seller situation where for all relevant levels of demand the average cost curve is declining.Entry barrier is the situation when potential entrants have higher costs for all output levels than existing firms.

Entry barrier(Stigler) is the extra cost of production which must be borne by entrant firms but is not borne by existing firms. this could occur in face of market imperfections or incompleteness.Limit Pricing is the maximum price a seller can set without having to face entry.Predatory pricing is the situation where existing firms will lower price to drive out entrant firms and when entrant firms exit the market, the existing firms will raise price up again.


Problems of existing rules for testing predatory pricing -the Areeda-Turner rule: A price at or above reasonably anticipated average variable cost (or better, marginal cost if you can get the data) should be conclusively presumed legal; otherwise it is illegal. -the Marginal Cost rule: Post-entry output greater than pre-entry output is legal only if post-entry price is no less than short-run marginal cost. -the ATC rule: Pricing below ATC plus substantial evidence of predatory intent is illegal. -the Output Restriction rule: Post-entry output greater than pre-entry output is illegal. -the Joskow-Klevorick Two-Stage rule: Stage one: is market structure likely to have successful predation? If not, stop; if yes, proceed to stage two. Stage two: use one of the above cost-based or pricing behavior tests.Pure monopoly model -many small price-taking buyers -one price-setting seller -no entry -no substitutes -perfect information -no externalityTotal revenue, average revenue and marginal revenue curvesShort-run profit maximizing conditions of a monopoly: -marginal revenue equals marginal cost. -change in marginal cost exceeds change in marginal revenue.

-price is no less than average variable cost.Social costs of a monopoly - Harberger's triangle - rent-seeking cost - dynamic cost - X-inefficiencyTwo-part tariff monopoly is a single seller charging a entry fee and a per unit price of a product to its customers.All-or-nothing monopoly is a single seller set a price per unit of a product and a fixed quantity of purchase or no deal.Monopsony is a one price-setting buyer & many price-taking sellers market situation.The Structure-Conduct-Performance Model of Industrial OrganizationA market consist all products with large cross-price elasticity of demand and all participants with large cross-price elasticity of supply.The n-firm concentration ratio is defined as the share of the total industry sales accounted for by the n largest firms.


The Herfindahl Hirschman Index of Concentration is defined as the sum of square of the market share of all firms in an industry. With a single firm in an industry, HHI attains its maximum value of 10,000. An HHI value of 1500 is considered to be critical by the antitrust agencies.The Collusion Hypothesis states that the more concentrated an industry is, the less competitive are firms and thus the higher the price-cost margin. It treats concentration as exogenous.Demsetz’s Differential Efficiency Hypothesis states that there is no causality in high concentration and price-cost margin. Instead concentration of an industry is endogenous. E.g. a few firms in an industry have a cost advantage will be highly concentrated and those firms will have high price-cost margin as well.Conditions of price discrimination -market power -ability to separate consumer groups -no resale1st degree price discrimination is the charging of different prices for different units of a product to each consumer.2nd degree price discrimination is the charging of different

prices for different blocks of units of a product to each consumer.3rd degree price discrimination is the charging of different prices to different consumers(possibly in different markets).4th degree price discrimination is the charging of the same price for a product or service to different consumers, but the cost of providing the product or service differ across consumers.The inverse demand elasticity ruleOutput effect versus allocative efficiencyMonopolistic competition model -many small price-taking buyers -many small price-setting sellers -product differentiation -zero transaction cost(free entry & exit) -perfect information -no externalityZero profit equilibrium of a monopolistic competitive industry: -marginal revenue equals marginal cost -change in marginal cost exceeds change in marginal revenue -price equals long-run average costInefficiency of monopolistic competition -price > marginal revenue = marginal cost -long-run average cost > minimum long-run average cost


Excess Capacity Hypothesis states that at the zero profit equilibrium of a monopolistic competitive industry, average cost is not at the minimum average cost, that is further increase in output will lower average cost.Dominant-firm price leadership model and residual demandOligopoly: Cournot(quantity) versus Bertrand(price) rivalryGame theory -number of players -information sets of players -preferences of players -strategy sets of players -equilibrium concepts, e.g. Nash equilibriumPrisoners’ Dilemma gameDeterminants of cartel stability -demand elasticity -number of sellers and/or industry concentration -degree of product differentiation -organization cost of cartel/ cost of detecting cheater(s) &

demand & cost uncertainty/ best price sale policy/ ease of entry/ ease to punish cheaters/ symmetry of cartel members -interest rate -antitrust enforcement effortEntry in normal versus extensive game form and sub-game perfect equilibriumChain-Store Paradox

Part 2: Introduction to antitrust(CH 1, pp 1-5, CH 4)Antitrust is public policies to prohibit monopolization, attempt to monopolize (but not monopoly because of patent, copyright laws and government regulation), and unfair and deceptive trade practices that may deter competition.Rationale for antitrust: to promote static and dynamic economic efficiency.The wealth of a nation, as defined by Adam Smith, is measured by how much the consumers consume today and in the future and not by how much profits firms make.Antitrust agencies -Department of Justice: Antitrust Division -Federal Trade CommissionPrivate antitrust lawsuits through U.S. District Courts have been the major form of antitrust enforcement for the last fifty years. Over 85% of antitrust cases per year are private ones. They typically involve practices such as tying, exclusive dealing, dealer termination, and price discrimination. Almost 90% either settled or voluntarily dropped by the plaintiff.


However, the most lengthy and costly cases are government cases. About two-thirds of DOJ cases have involved horizontal price fixing, with the second most frequent cases being monopolization. Most cases ended by consent decree, or orders.Two rules of antitrust: -per se rule applies when a business practice has no beneficial effects but has harmful effects. -rule of reason applies when per se rule is not applicable. It consists of two parts, the first being the “inherent effect” of market shares, and the second being the “evident purpose” or intent of the business practice.

Part 3: Introduction to Antitrust Laws(CH 3 pp66-74, CH 7 pp 208-210))The Sherman Act of 1890: -Section 1 prohibits contracts, combinations, and conspiracies in restraint of trade, specifically price-fixing arrangements. -Section 2 prohibits monopolization, attempts to monopolize, and combinations or conspiracies to monopolize "any part of the trade or commerce among several states, or with foreign nations," specifically for market dominance.Horizontal restraint of trade is the concerted actions among firms to reduce potential or actual competition with one another. (i) Actual and implied horizontal price-fixing is per se illegal. Collusion to raise prices for the sole purpose of reducing competition is called “naked” price fixing and is per se illegal. Agreement on a price range is not allowed. (ii) Horizontal agreements that affect prices are illegal per se, e.g. agreements on common standards for the purpose of affecting price is illegal. (iii) Output restriction in which competitors act in concert to limit supply in order to raise prices is illegal. (iv) Competitors’ agreements to divide territory markets or customers are per se illegal. (v) Sellers concerted refusal to deal with a known price

cutter, or buyers joint boycott of a high price seller are per se illegal.

Direct or circumstantial evidences may be sufficient to prove illegality. Parallel action alone will not be sufficient to prove violation of antitrust laws. However, if a price leader raises price in a declining market and in an industry with overcapacity, and then all firms match the price increase, it can be construed be sufficient evidence of price fixing.


Vertical restraint of trade is the concerted actions of sellers and buyers to reduce potential and actual competition either in the sellers’ market or the buyers’ market or both.

Vertical price-fixing in which a seller and a buyer agree with respect to price at which the buyer will resell is illegal per se. An example will be retail price maintenance agreement. Maximum retail price maintenance agreement is guided by rule of reason. Manufacture retail suggested price is allowed. In consignment sales to a true agent, a seller is free to set the price at which his products are sold, even though the agent is otherwise an independent business. Non-price vertical restraints are governed by rule of reason.(i) Exclusive selling agreements (e.g. exclusive

franchise to a particular dealer in a specified territory) is allowed.

(ii) Territorial and customer restrictions (e.g. orderly marketing plans are subject to rule of reason,

depending on whether the anticompetitive effect of the restraint on intra-brand competition is outweighed by the pro-competitive effect of inter-brand competition generated by strengthening the seller’s ability to compete) are subject to rule of reason.

(iii) Section 3 of the Clayton Act prohibits exclusive dealing agreements in which a buyer has to purchase all its requirements for the product from a seller, if these agreements are likely to substantially lessen competition.

(iv) Sherman Act and Section 3 of the Clayton Act prohibit tying agreements. Tie-in are per se illegal if a seller possesses sufficient market power in the tying product, and coerces a buyer to buy the tied product of substantial value as a condition to buy the tying product, when the buyer can buy the tied product elsewhere at a lower price.

(v) Refusals to deal are usually subject to the rule of reason. However, a seller agrees with some buyers not to sell to another buyer who is a price cutter is per se illegal.

The Clayton Act of 1914: -Section 2(a) outlaws price discrimination if it substantially lessens competition. (However, price discrimination of consumers or buyers who do not resale is legal.) -Section 2(b) allows “good faith” defense to meet competition, i.e. to meet but not to beat a low price offer of a rival, or to charge different prices due to differences in cost of manufacturing, sale or delivery.(What is the problem here?)Economics 411 Handout 8 Professor Tom K. Lee

-Section 2(c) forbids hidden form of price discrimination such as claiming a discount as a brokerage commission. -Section 2(d) and 2(e) prohibit discriminatory behavior in providing promotional allowances and services. -Section 2(f) prohibits a large buyer to extract illegal concessions from a relatively small seller. -Section 3 prohibits tying clauses, requirement contracts, exclusive dealings and territorial restraints that lessen competition. -Section 4 allows any person injured in his business or property due to violation of antitrust laws to sue in any district court of the United States to recover treble damages, and the cost of the lawsuit, including a reasonable attorney’s fee. -Section 4(b) sets a four-year statute of limitations, unless there is government action pending. The four-year period does not begin until the victims discover (or should have discovered) the antitrust violations. In addition, a court of appeals ruled that “So long as a monopolist continues to use the power it has gained illicitly to overcharge its customers, it has no claim on the repose that a statute of limitations is intended to provide”. -Section 5(a) makes a judgment in a suit brought by the United States “prima facie evidence” in a private suit, thus giving private plaintiffs an advantage as a result of a government victory without subjecting them to any disadvantage from a government loss. However, this section shall not apply to consent judgments or decrees entered before any testimony has been taken. (This encourages settlement before costly trial.) -Section 5(b) to 5(h) require the United States to publish for public comment any proposed consent judgment that would settle a case in which it is a plaintiff. The Government must summarize the competitive effects of the settlement. After a period in which comments may be submitted, the district judge must determine whether the proposed judgment is in the public interest. The court can reject a proposed settlement if it determines that the proposed decree is not in the public interest. If it is rejected, the case must be tried. -Section 7 prohibits interlocking directorates, and mergers between competitors to the extent that they would substantially lessen competition or tend to create a monopoly, but exempts labor unions.Price discrimination in sales of goods of like grade and quality is illegal only if it is likely to result in substantial

injury to buyers’ competition(injury in the secondary line) or to sellers’ competition (injury in the primary line). To prove injury in the secondary line, the buyers must be competing geographically and be on the same functional line. Economics 411 Handout 9 Professor Tom K. Lee

Primary line injury requires stronger prove of actual or likely impairment of competition. In primary line (sellers) injury, a seller sells a substantially lower price in an area facing competition from other sellers, but at a substantially higher price in an area facing no competition may be illegal, but selling at a lower price in good faith to meet the equally low ( but not lower) price of a competitor is a good faith defense. If a direct-buying retailer is charged less than a wholesaler whose retail customers compete with the favored direct-buying retailer is illegal. Price discrimination to a wholesaler (who does not compete with a retail buyer) and a retail buyer is allowed. Promotional allowances of unequal terms are not allowed. If a large buyer is the one who induce a seller to price discriminate, the buyer may be found in violation of the Robinson-Patman Act. Fourth degree price discrimination is allowed. Same f.o.b. price to all buyers plus freight cost that varies among buyers are allowed.The Federal Trade Commission Act of 1914 under section 5 outlaws unfair and deceptive business practices and creates the Federal Trade Commission to perform investigatory and adjudicative functions. Sherman Act is a subset of the FTC Act.The Webb-Pomerene Act of 1918 exempts export cartels from antitrust.The Capper-Volstead Act of 1922 exempts agricultural cooperatives from antitrust.A 1922 Supreme Court decision exempts professional sport teams.The Robinson-Patman Act of 1936 amends Section 2 of the Clayton Act largely to protect small, independent retailers from the newly emerging chain stores, e.g. A&P, through outlawing price discrimination among large and small buyers of products for resale.The Miller-Tydings Act of 1937 exempts state fair trade laws that

allowed minimum RPM from antitrust to protect small, independent retailers from large chain store competition. This law is repealed by the Consumer Goods Pricing Act of 1975 making RPM per se illegal again.The Celler-Kefauver Act of 1950 amends Section 7 of the Clayton Act to read: “That no corporation engaged in commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital and no corporation subject to the jurisdiction of the Federal Trade Commission shall acquire the whole of any part of the assets of another corporation engaged also in commerce, where in any line of commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to create a monopoly.”Economics 411 Handout 10 Professor Tom K. Lee

The Hart-Scott-Rodino Act of 1976 adds section 7a to the Clayton Act requiring the prior notification of large proposed mergers to both the FTC and DOJ for review before merger can occur. E.g. in 1997, 52 of the 3,702 merger proposals were eventually challenged through court or administrative actions and settlement proceedings, and 7 were abandoned by the firms involved before enforcement action was announced.Beginning in the late 1990s, the antitrust division offers amnesty to the first corporate co-conspirator in a price-fixing case to confess. E.g. in May 1999 the world’s two largest vitamin producers, Hoffman-La Roche and BASF AG, were fined $725 million by the DOJ and the third largest vitamin producer, Rhone-Poulenc of France, received amnesty for cooperation with the DOJ.

Part 4: Major Antitrust Cases(CH 9 pp 263-277 291-292, CH 7 pp 201-208, CH 5 pp 122-134)Major antitrust cases are developed over four time periods -1890-1914: the first 25 years under the Sherman Act I) defining jurisdiction & scope of the Act U.S. v. E.C. Knight Company (the sugar trust) 156 U.S. 1 (1895) II) horizontal restraint of trade U.S. v. Addyston Pipe & Steel Co. (price fixing) 175 U.S. 211 (1899) III) monopolization & merger Standard Oil Co. of New Jersey v. U.S. 221 U.S. 1 (1911)

U.S. v. American Tobacco Co. 221 U.S. 106 (1911) IV) vertical restraint of trade & RPM Dr. Miles medical Co. v. John D Park & Sons Co. 220 U.S. 373 (1911) -1915-1939: the rule of reason period I) defining the rule of reason U.S. v. U.S. Steel Corp. 251 U.S. 417 (1920) II) interplay of patents & antitrust laws U.S. v. GE 272 U.S. 476 (1926) Standard Oil Co. (Indiana) v. U.S. 221 U.S. 1 (1931) III) limits to rule of reason U.S. v. Trenton Potteries Co. 273 U.S. 392 (1927) IV) interplay of regulation & antitrust laws the Keogh case Appalachian Coals, Inc. v. U.S. 288 U.S. 344 (1933) V) settlement before trial U.S. v. IBM (1932)

Economics 411 Handout 11 Professor Tom k. Lee

-1940-1974: the per se rule & focus on market structure period I) horizontal restraint of trade

1) Price fixingU.S. v. Socony-Vacuum Oil Co.,310 U.S. 150 (1940)Charles Pfizer & Co., Inc. et. al. v. U.S.City of Philadelphia v. Westinghouse Electric

2) BoycottsFashion Originators’ Guild of America v. U.S.312 U.S. 457 (1941)

3) Market divisionTimken Roller Bearing Co. v. U.S.White Motor Co. v. U.S., 372 U.S. 253 (1963)

4) Price discriminationFTC v. Morton salt 334 U.S. 37 (1948)

5) RPMKlor’s, Inc. v. Broadway-Hale Stores359 U.S. 207 (1959)

II) monopolization U.S. v. Alcoa (1945) American Tobacco case, 328 U.S. 781 (1946) U.S. v. IBM (1952) U.S. v. United Shoe Machinery Corp. U.S. v. E. I. du Pont (the cellophane case)

351 U.S. 377 (1956) U.S. v E.I. du Pont, 353 U.S. 586 (1957) Utah Pie Co. v. Continental Baking Co. 386 U.S. 685 (1967) III) vertical arrangements International Salt Co. v. U.S., 332 U.S. 392 (1947) U.S. v. Loew’s Inc., 371 U.S. 38 (1962) Siegel v. Chicken Delight, Inc. Standard Oil Co. (California) v. U.S., 337 U.S. 293 (1949) IV) merger Brown Shoe, Co., Inc. v. U.S., 370 U.S. 294 (1961) U.S. v. Alcoa et.al. (1964) U.S. v. Von’s Grocery Co. et. al., 384 U.S. 270 (1966) FTC v. Proctor & Gamble Co. et. al., 386 U.S. 568 (1967) V) limits to per se rule U.S. v. Container Corp. of America, 393 U.S. 333 (1969) U.S. v. Topco Associates, Inc., 405 U.S. 596 (1972)


-1974-present: modern development of antitrust laws I) per se rule v. rule of reason

1) Horizontal restraint of tradeA) price fixing

California Dental Association v. FTC National Society of Professional Engineers v. U.S., 435 U.S. 679 (1978) Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1 (1979) Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975) NCAA v. Board of Regents of the U. of Oklahoma, 468 U.S. 85 (1984) The NASDAQ case B) Boycotts Northwest Wholesalers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284 (1985)

C) Market division Jay Palmer v. BRG of Georgia, Inc.

Monsanto Co. v. Spray-Rite Services Corp., 465 U.S. 752 (1984) Continental TV, Inc. v. GTE Sylvania 433 U.S. 36 (1977)

2) Monopolization Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985) The Xerox case Berkey Photo, Inc. v. Eastman Kodak Co. The Kellogg case The ATT case

3) Vertical arrangements Eastman Kodak Co. v. Image technical Services, Inc., 504 U.S. 451 (1992)4) Exclusionary conduct Microsoft case

II) antitrust as an administrative process1) Horizontal Merger guideline2) Vertical Merger guideline3) Guideline for collaborations among

competitors4) Guideline for Licensing of Intellectual

Property


The 1895 United States v. E.C. Knight Co. (the Sugar Trust Case) -Prior to March 1892, the American Sugar Refining Co. had acquired all but five of the sugar refineries in the United States. During March 1892, America Sugar Refining acquired the four of the “holdouts” that were based in Philadelphia by exchanging shares of its own stock for shares of theirs. The fifth firm remaining refined only 2% of the U.S. sugar. By 1985 the portion of U.S. sugar not refined by American Sugar Refining had risen to 10%. The trial court dismissed the case. The Appeal Court and the Supreme Court affirmed. The courts reasoned that commerce is not a part of manufacturing. An attempt to monopolize, or actual monopoly of, the manufacture

was not an attempt to monopolize commerce.The 1898 United States v. Addyston Pipe & Steel Co. -The United States filed suit to enjoin six manufacturers of cast-iron pipe from allocating among themselves the right to serve particular customers through four steps: 1) The firms designated “reserved cities” in which one of their member was granted the right to make all pipe sales by having that member firm bid the lowest price while the other firms all bid higher prices to make it appeared legal. 2)Firms that won the contracts paid part of the profit into a pool to be divided among the other firms. 3)If a firm sold outside of their territory, the firm had to paid a specific portion of the profit into a common fund for distribution to other firms. 4)At a later stage of the cartel, member firms bid among themselves for the right to get particular contract, that is whoever willing to pay the most to the pool had to right to win that contract. Evidence showed that sometimes a firm outside the cartel could underbid their designated winner when the cartel set the winning bid too high. Also when member firms sold in “free” territory, i.e. territory outside the “reserved cities”, they sold for less even though they faced higher shipping costs. The trial judge dismissed the case, but on appeal, the Appeal Court reversed the dismissal and ordered the perpetual enjoining of the defendants from maintaining the combination in cast-iron pipe.The 1911 Standard Oil Co. of New Jersey v. United States case -the Rockefeller brothers built their trust by acquiring more than 120 rivals to achieve a 90% share of the production, refining, distribution, and sale of petroleum products in the 1870s to 1890s. They were accused of predatory pricing to drive competitors out of business, of buying up pipelines in order to foreclose crude oil supplies to rivals, of securing discriminatory rail freight rates. The Supreme Court created thirty-three companies by geographical regions out of John D.

Rockefeller’s Standard Oil.The 1911 United States v. American Tobacco Co. case -in 1890, five leading firms that accounted for 95% of cigarette production in United States merged and formed the American Tobacco Co to enjoy economies of scale in production and to reduce advertising costs. American bought up its competitors for their brand name cigarettes and closed their inefficient factories down, but entry to cigarette manufacture was relatively easy. Its share of the cigarette market declined to 74% in 1907. From 1895 to 1907, the price of leaf tobacco per pound rose from 6 to 10.5 cents. Through acquisition it manufactured and sold 80% of the nation’s snuff in 1902. By acquiring almost all the producers of licorice paste, an essential input to chewing tobacco production, it captured 95% of the chewing tobacco market. Justice White of the Supreme Court cited the following facts: (1) the original combination of cigarette firms in 1890 was “impelled” by a trade war; (2) an “intention existed to use the power of the combination as a vantage ground to further monopolize the trade in tobacco”, and the power was used; (3) the Trust attempted to conceal the extent of its control with secret agreements and bogus independents; (4) American’s policy of vertical integration served as a “barrier to the entry of others into the tobacco trade”; (5) American expended millions of dollars to purchase plants, “not for the purpose of utilizing them, but in order to close them up and render them useless for the purposes of trade”; and (6) there were some agreements not to compete between American and some formerly independent tobacco manufacturers. He ordered to break up American Tobacco Company according to product lines.The 1911 Dr. Miles Medical Co. v. John D. Park & Sons Co. -Dr. Miles Medical Co. was engaged in the manufacture and sale of proprietary medicines, prepared by means of secret methods and formulas and identified by distinctive packages, labels and trademarks. It fixed the price of its own sales to jobbers and wholesale dealers and the wholesale and retail prices. Dr. Miles Medical Co. sued John D. Park & Sons Co. for inaugurating a “cut-rate” or “cut-price” system at the wholesale level

causing harm to its profits and that of its other agents. The Circuit Court dismissed the case and the Appeal Court confirmed stating that the case was not about the process of manufacture, but the manufactured product, and that Dr. Miles Medical Co. was looking to sale and not to agency for its products. What Dr. Miles Medical Co. was doing was resale price maintenance and was illegal.The 1920 United States v. US Steel Corp. case -in 1901, 180 independent steel producers that accounted for 80 to 95% of U.S. production of iron and steel products merged to form United States Steel Corporation. Since its formation, United States Steel found its market share fell steadily to 40% by 1920. The Supreme Court ruled in favor of United States Steel for lack of substantial monopoly power.The 1926 United States v. General Electric Co. -General Electric Co. had three patents covering the process of manufacturing tungsten filaments, the use of tungsten filaments in the manufacture of electric lamps, and the use of gas in the bulb by which the intensity of the light was substantially heightened. The Government alleged that General Electric Co. fixed the resale prices of lamps in the hands of purchasers and a licensee, Westinghouse Co. that make, use and sell lamps. The District Court dismissed the case and the Supreme Court confirmed stating that the owner of patents was not violating antitrust laws by seeking to dispose of its patented products directly to consumers and fixing the price by which its agents transfer the title from it directly to such consumers.The 1927 United States v. Trenton Potteries Co. -Twenty three corporations engaged in the manufacturing or distribution of 82 % of the vitreous pottery fixtures produced in the United States for use in bathrooms and lavatories. They were members of a trade association known as the Sanitary potters’ Association. They fixed and maintained uniform prices

for the sale of sanitary pottery and limited sale of pottery to a special group of “legitimate jobbers”. The Supreme Court ruled that the aim and result of every price-fixing agreement, if effective, was the elimination of one form of competition. The power to fix prices, whether reasonably exercised or not, involved power to control the market and to fix arbitrary and unreasonable prices. The reasonable price fixed today might through economics and business changes became the unreasonable price of tomorrow. The Supreme Court reversed the Appeals Court and reinstated the District Court conviction of violation of the Sherman Act.The 1931 Standard Oil Co.(Indiana) v. United States -in 1913 Standard Oil Co. (Indiana) perfected the process of cracking in the production of gasoline. Three other companies secured numerous patents covering their particular cracking processes. To avoid the litigation and losses due to these patents, each firm was allowed to use these patents, empowered to extend license of its process to independent concerns. Each firm was to share in some fixed proportion the fees received under these multiple licenses. Up to 1920 all cracking plants in the United States were owned by Standard Oil Co. (Indiana) alone, or were operated by licenses from it. In 1924 and 1925, after the cross licensing arrangements were in effect, the four companies owned or licensed only 55% of the total cracking capacity, and the remainder was distributed among 21 independently owned cracking processes. This development and commercial expansion of competing processes was clear evidence that the cross licensing arrangement did not slow competition. The output of cracked gasoline was about 26% of the total gasoline production in those years. Ordinary gasoline was indistinguishable from cracked gasoline and the two were either mixed or sold interchangeably. The Supreme Court ruled in favor of Standard Oil Co. (Indiana).


The 1932 United States v. IBM case -IBM and Remington Rand, Inc. entered into agreements

(a) to lease only and not sell tabulating machines;(b) to adhere to minimum prices for the rental of

tabulating machines as fixed by IBM; and(c) to require customers to purchase their card

requirements from the lessor or pay a higher price for the rental of machines.

The restrictive agreements between IBM and Remington Rand, Inc. were cancelled in 1934 prior to trial and the antitrust case was dropped.

The 1933 Appalachian Coals, Inc. v. United States -Throughout the 1920s the economic condition of the coal industry was deplorable. Due to the large expansion under the stimulus of the Great War, the bituminous mines in United States had a developed capacity of 700 million tons with a demand of less than 500 million tons. Coal had been losing markets to oil, natural gas and water power and to greater efficiency in the use of coal. There existed organized buying agencies and large consumers buying substantial tonnages, thus creating a buyers’ market of coal. Numerous producing companies had gone into bankruptcy or in the hands of receivers, many mines had been shut down, the number of days of operation per week had been greatly curtailed, wages to labor had been substantially lessened, and the concerned states had difficulty in collecting taxes. Governors of concerned states held a general meeting in December 1931 to recommend the organization of regional sales agencies, leading to 137 producers of bituminous coal in the Appalachian territory to form the Appalachian Coals, Inc. as an exclusive selling agency. The United States sued the combination in violation of sections 1 and 2 of the Sherman Act. The Supreme Court ruled against the government stating that the Sherman Act did not preclude business entities to make an honest effort to remove abuses, to make competition fairer, and thus to promote the essential interests of commerce.The 1945 United States v. Alcoa case 148 F. 2d 416 (1945) -District Court Judge Caffey cleared Alcoa of all wrongdoing. On appeal by the government to the Supreme Court, the Supreme

Court was unable to hear the case because four of its justices had previously participated in antitrust actions against Alcoa when they served at the DOJ. After more than two years of delay, Congress passed a special act on June 9, 1944, allowing a U.S. Circuit Court of Appeals to hear the case. Circuit Court Judge Learned Hand in 1945 ruled against Alcoa for illegal monopolization even though there were no anticompetitive behavior. He included Alcoa’s own fabricated ingot use, and excluded secondary ingot use to arrive at the conclusion that Alcoa virgin aluminum production market share of 90% as a measure of Alcoa monopoly power. The building of capacity ahead of demand growth from Alcoa new use development was considered an intent to monopolize. Subsequently many of the government aluminum production plants from the war effort were sold to Reynolds Metal and Kaiser Aluminum to create competition in the aluminum industry.The 1946 American Tobacco Co. et. al. v. United States case -the Supreme Court found the big three tobacco firms: Reynolds, American and Liggett & Myers, guilty of conspiracy based on conscious parallelism, i.e. based on observable anticompetitive behavioral conduct.The 1947 International Salt Co., Inc v. United States case -the Supreme Court ruled against International Salt Company for violating section 1 of the Sherman Act and section 3 of the Clayton Act in tying its patented salt-dispensing machines used in food processing and salt and salt tablets supplied by the company.


The 1948 FTC v. Morton Salt case -the Supreme Court concurred with the FTC (and reversed a Circuit Court of Appeals) in ruling against Morton Salt in

violating section 2 of the Clayton Act that although Morton Salt offered volume discount to all retailers, wholesalers and to chain stores, only five customers (of which four are large chain stores) ever took advantage of the large volume discount.The 1952 United States v. IBM -IBM was charged with violations of Section 1 and 2 of the Sherman Act in owning 90% of all tabulating machines in the United States and manufacturing and selling about 90% of all tabulating cards sold in the United States. The suit was terminated by the entry of a consent judgment in January 25, 1956.The 1953 United States v. United Shoe Machinery case 110F.Supp.295 -the District Court ruled against United Shoe for monopolizing 75 to 90% of the markets for shoe machinery and parts in the United States through acquisition, and in restricting entry by not selling 178 of 342 its machines but leasing them on ten year terms with free repair services and requiring lessees to use United machines if work was available and to pay the balance of the lease payments even if the machine was returned before the lease expired. United Shoe was required to end its restrictive lease agreements, to make any machine for lease for five years and for sale (at comparable price), to separate service charge from leased machine charge, and to restrain from acquisition. The DOJ appealed to the Supreme Court in 1967, and the Supreme Court agreed 391 U.S. 244 (1968) and ordered a lower court to work out a divestiture. United was ordered to divest itself of shoe machines, manufacturing assets, and patents. United was ordered to provide service and parts for the divested independent competitor, Transamerican Shoe Machinery Corporation, and to refrain from active competition with Transamerican for a period of five years.The 1957 United States v. E.I. du Pont case -the Supreme Court ruled against du Pont under the amended section 7 of the Clayton Act by noting that du Pont was not a major GM supplier until after its purchase of 23% of GM stocks in 1917-1919. By 1946 du Pont supplied 67% of GM’s requirement for finishes and 52.3% of GM’s fabric needs, but there were du Pont products that were not chosen by GM.

Economics 411 Handout 16 Professor Tom K. Lee The 1961 City of Philadelphia v. Westinghouse Electric case -seven middle-management executives of General Electric, Westinghouse, Allis-Chalmers, and Federal Pacific involved with secret meetings were sentenced to jail for thirty days, the firms were fined almost $2 million for price-fixing, and the total treble damages awarded to harmed customers in subsequent civil cases were approximately $400 million.The 1962 Brown Shoe v. United States case -Brown Shoe, the fourth largest shoe manufacturer in the United States, proposed to acquire G.R. Kinney Company, the twelve largest shoe retailer. While these two firms had a combined share of about 4% of the national market, they had 57% of the market for woman’s shoes in Dodge City, Kansas. The Supreme Court ruled against the merger under the Clayton Act arguing that all other shoe manufacturers would be in a competitive disadvantage to Brown when Kinney purchased shoe for sale in their retail stores. The 1962 United States v. Loew’s Inc. case -the Supreme Court ruled against Loew’s, Inc. for distributing pre-1948 copyrighted movies for television broadcasting on block booking basis. This constituted a violation of section 1 of the Sherman Act.The 1964 United States v. Alcoa et. al. case -the Supreme Court ruled against the acquisition of Rome Cable by Alcoa. Alcoa produced bare aluminum wire and cable and insulated aluminum wire and cable while Rome Cable produced the copper counterpart. Only the insulated aluminum wire and cable competed with the copper counterpart. Rome Cable was a substantial and aggressive competitor of Alcoa in that market.The 1966 United States v. Von’s Grocery Co. et. al. case -the case involved Von’s, the third largest grocery chain in the Los Angeles area in 1960, and Shopping Bag Food Stores, the sixth largest. The two firms had the combined share of 7.5%

of the market. The Supreme Court, citing that the number of single store owners dropped by 35% between 1950 and 1963, stated, “The basic purpose of the 1950 Celler-Kefauver Act was to prevent economic concentration in the American economy by keeping a large number of small competitors in business.”The 1967 FTC v. Proctor & Gamble Co. et. al. case -the Supreme Court ruled against Proctor & Gamble in its acquisition of Clorox citing that Proctor & Gamble was the most likely entrant to the liquid bleach market where Clorox has a 49% of the national market. This violated Section 7 of the Clayton Act.


The 1967 Utah Pie v. Continental Baking case -the Supreme Court ruled in favor of Utah Pie, a local Salt Lake City firm, and against Continental Baking, a national firm, in setting prices less than its direct cost plus an allocation of overhead and in charging prices less in markets with competition than in markets without competition. This constituted a violation of sections 1 & 2 of the Sherman Act and section 2a of the Clayton Act.The 1969-1982 IBM case -in 1969 IBM was charged with violations of Section 2 of the Sherman Act in attempt to monopolize and in monopolizing 76% of the value of all purpose digital computers through manufacturing and marketing policy that prevented competing manufacturers from having an adequate opportunity effectively to compete for business in the general purpose digital computer systems and peripheral equipment markets. The case was dismissed by William F. Baxter of the DOJ in January 8, 1982 after incurring over $200 million in legal costs, and after a related case Telex v. IBM lost on the Appeals Court.The 1972 Siegel v. Chicken Delight, Inc. case -the Supreme Court ruled against Chicken Delight in requiring licensed franchises to purchase specific cookers, fryers, package mixes, and spices from Chicken Delight, but allowed Chicken Delight, Inc. to collect royalty on its franchises.

The 1973 Charles Pfizer & Co., Inc. et. al. v. United States -the Supreme Court ruled that the parallel pricing of Pfizer, Cyanamid, Bristol, Upjohn, and Squibb did not indicate price fixing.The 1973 SCM Corp. v. Xerox Corp. case -on July 31, 1973 SCM Corporation sued Xerox Corporation for violation of sections 1 and 2 of the Sherman Act and section 7 of the Clayton Act. The district court dismissed the case. SCM Corporation appealed and the Appeal Court affirmed the district court decision on March 12, 1981.The 1975 Goldfarb v. Virginia State Bar case -the Supreme Court found the Virginia State Bar in violation of Section 1 of the Sherman Act in suggesting minimum attorney’s fees for various services for lawyers to be in good standing.The 1975 Xerox case -in January 1973 the FTC filed a complaint against Xerox Corporation for violation of section 2 of the Sherman Act. On July 29, 1975 the case was settled by consent decree that Xerox would license patents, supply “know-how” to competitors, sell as well as lease copy machines, and alter its pricing policies.


The 1977 Continental T.V., Inc. v. GTE-Sylvania Inc. case -the Supreme Court ruled in favor of GTE-Sylvania in imposing a territorial restriction on its franchisee, Continental, citing the declining market share of GTE-Sylvania and so the “rule of reason” applied.The 1979 Berkey Photo, Inc. v. Eastman Kodak Co. case -the Second Circuit Court of Appeals ruled in favor of Kodak citing that Kodak did not have to pre-disclose information about its 110 Pocket Instamatic photographic system to its rivals even though the system required a new Kodacolor II film. Kodak had the right to profit from invention.The 1981 Kellogg case

-in April 26, 1972 the FTC filed Docket No. 8883 to complain against Kellogg, General Mills, General Foods, and Quaker Oats with the four firms selling 90 percent of the ready-to-eat cereals market. The firms almost always follow Kellogg when charging their market prices. The firms maintain their market position by introducing dozens of new cereal types. Quaker Oats was subsequently dropped from the case. In 1981, FTC Judge Alvin Berman ruled in favor of Kellogg that brand proliferation was a legitimate means of competition even though Kellogg has 45% of the ready-to-eat cereals market.The 1982 ATT case -the case was settled by consent decree that ATT divested it telephone-operating companies and to separate the regulated telephone utilities from their unregulated equipment supplier, Western Electric.The 1984 NCAA v. University of Oklahoma et. al. case -in 1981 the NCAA negotiated contracts with ABC and CBS that limited the number of games that could be broadcasted by each member university and the price each member university could receive per broadcast. While the lower court used the per se rule to find NCAA practice as illegal, the Supreme Court used the rule of reason (because NCAA is a non-profit organization) to find NCAA practice as illegal under section 1 of the Sherman Act. The Court recognized the NCAA’s exemption from the Sherman Act on efficiency ground on some activities such as game scheduling, rule interpretations, etc.The 1992 Eastman Kodak v. Image Technical Services, Inc. case -the Supreme Court ruled against Kodak in a tying case of repair services to parts for Kodak photocopiers foreclosing independent service companies from repairing Kodak photocopiers.


The 1994 NASDAQ case -a class action suit was filed by investors against thirty-seven

NASDAQ dealers in quoting almost exclusively in even eighths when the rules of NASDAQ enforce the minimum spread to be one- eighth for stocks whose bid price exceeds $10. In December 1997, thirty-six of those NASDAQ dealers agreed to an out-of- court settlement of around $1 billion without admitting any wrongdoing.In 1990 FTC began investigating Microsoft’s acquisition and maintenance of monopoly power in operating system software market. FTC deadlock 2-2 in deciding whether to file a complaint against Microsoft and suspended the investigation.In 1993 Novell, a rival software vendor, filed a complaint with the Directorate General IV of the European Union alleging that Microsoft was tying its MS-DOS operating system to the graphical user interface provided by Windows 3.11. Before the introduction of Windows 95, which integrated the two, Microsoft marketed the DOS component and the Windows component of the operating system separately, and Windows 3.11 could be operated with other DOS products. Novell, which marketed a competing DOS product, DR-DOS, complained that by means of licensing practices such as “per processor and per system” licenses, Microsoft was forcing OEMs to preinstall MS-DOS as well as Windows 3.11 to force out its competitors. The 1994 United States v. Microsoft Corp. case -In July, 1994 DOJ filed a civil complaint under the Sherman Act charging Microsoft with unlawfully maintaining a monopoly of operating system for IBM-compatible PCs and unreasonable restraining trade in that market through anticompetitive practices which consisted of: (i) the use of contract terms requiring original equipment manufacturers(OEMs) to pay Microsoft a royalty for each computer the OEM sells containing a particular microprocessor (namely, an x86 class microprocessor), whether or not the OEM has included a Microsoft operating system with that computer, (ii) executing contracts with major OEMs requiring minimum commitments and crediting unused balances to future contracts and (iii) imposing nondisclosure agreements on some independent software vendors(ISVs) which would restrict their ability to work with competing operating systems companies and to develop competing products for an unreasonable long period of time. A

consent decree to last for 78 months was proposed by DOJ which prohibits Microsoft from entering per processor licenses, licenses with term exceeding one year, licenses containing a minimum commitment, licenses that are expressly or impliedly conditioned upon: (i) the licensing of any Covered Product, Operating System Software product or other product, or (ii) the OEM not licensing, purchasing, using or distributing any non- Economics 411 Handout 20 Professor Tom k. Lee Microsoft product, and unduly restrictive nondisclosure agreements on Microsoft’s most popular operating system products(MS-DOS, Windows and Windows 95) but does not cover Windows NT products. In February, 1995 the district court Judge Sporkin issued an order denying DOJ’s motion to approve the consent decree charging that the consent decree did not contain provisions that would (1) bar Microsoft engaging in vaporware (which is public announcement of a product before it is ready for market to deter consumers from purchasing a competitor’s product), (2) establish a wall between the development of operating system software and the development of applications software, and (3) require disclosure of all instruction codes built into operating systems software designed to give Microsoft an advantage over competitors in application software market. In June 1995 the United States Court of Appeals reversed and ordered the consent decree, citing that Judge Sporkin had exceeded his authority to include charge of vaporware that was not included in the government original charges, and the observed biasness of Judge Sporkin in allowing three anonymous companies, known as the “Doe Companies”, to participate as plaintiff. A new district court judge, Thomas Jackson, was assigned to handle the case. In August 1995 Judge Jackson ordered the consent decree.The 1997 United States v. Microsoft Corp. case -The first three versions of Internet Explorer (IE) were included on the Windows 95 master disk supplied to OEMs. IE 4.0 was initially distributed on a separate CD-ROM and OEMs were not required to install it. When DOJ learned that Microsoft intended to start requiring OEMs to preinstall IE 4.0 as part of Windows 95 in February 1998, DOJ filed a petition seeking to hold Microsoft in civil contempt of the 1994 consent

decree, and requesting the district court to order Microsoft to cease and desist from employing similar agreements with respect to any version of IE. Finding the language of the 1994 consent decree ambiguous, Judge Jackson denied DOJ’s contempt petition, but entered a preliminary injunction on Microsoft’s practice to licensing with the stipulation that Microsoft would be in compliance with the injunction if it extended the options of (1) running the Add/Remove Programs utility with respect to IE 3.x and (2) removing the IE icon from the desktop and from the Programs list in the Start menu and making the file IEXPLORER.EXE “hidden”. In June 1998 the United States Court of Appeals found that the district court erred procedurally in entering the preliminary injunction without notice to Microsoft, and substantively in its implicit construction of the consent decree on which the preliminary injunction rested. IE 4.0 and Windows operating system are complements used in fixed proportions. IE 4.0 provides system Economics 411 Handout 21 Professor Tom K. Lee

services (such as the HTML reader) to enhance the functionality of many applications and to upgrade some aspects of the operating system (such as customizing the “Start” menus and making possible “thumbnail” previews of files on the computer’s hard drive) unrelated to Web browsing. Product design should not be overseen by antitrust laws and enforcement.The 1998 United States v. Microsoft Corp. case -on May 18, 1998 DOJ along with representatives from 20 state governments filed an antitrust suit against Microsoft. It is alleged that Microsoft violated Section 2 of the Sherman Act in predatory conduct to thwart the development of emerging technologies that would allow application, such as word processors, games, and other useful programs, to be written so they would run on operating systems other than Microsoft’s Windows without costly adaptation; and to protect its monopoly from erosion by Netscape Navigator Web browser and Sun’s Java software that can be run on a wide variety of operating systems. It is also alleged that Microsoft violated Section 1 of the Sherman Act in tying its Internet Explorer web browser with Windows. On November 5, 1999, the District Court Judge Jackson entered its Finding of Facts and ordered the parties to engage in mediation before Chief Judge Posner of the U.S. Court of Appeals for the Seventh Circuit. On April 3, 2000, after four months of intensive mediation efforts that

ultimately failed, the district court entered its Conclusions of Law holding that Microsoft violated Sections 1 and 2 of the Sherman Act. On June 7, 2000, the district court entered a Final Judgment that requires Microsoft to submit a plan to reorganize itself into two separate firms: an “Operating System Business” and an “Applications Business”. Microsoft appealed the case to the United States Court of Appeals on grounds that the District Court failed to allow Microsoft an evidentiary hearing on disputed facts, and that the trial judge committed ethical violations by engaging in impermissible ex parte contacts and making inappropriate public comments on the merits of the case while it was pending, thus compromising the District Judge’s appearance of impartiality.


The 2001 United States v. Microsoft case

-the Appeals Court affirmed in part and reversed in part the District Court’s judgment that Microsoft violated section 2 of the Sherman Act by employing anticompetitive means to maintain a monopoly in the operating system market; reverse the District Court’s determination that Microsoft violated section 2 of the Sherman Act by illegally attempting to monopolize the internet browser market; and remand the District Court’s finding that Microsoft violated section 1 of the Sherman Act by unlawfully tying its browser to its operating system. The Appeals Court vacate the Final Judgment on remedies because the District Court failed to hold an evidentiary hearing to address remedies-specific factual disputes, and because the trial judge engaged in impermissible ex parte contacts by holding secret interviews with members of the media and made numerous offensive comments about Microsoft officials in public statements outside of the courtroom, giving rise to an appearance of partiality. The Appeals Court remanded the case for reconsideration of the remedial order, and required that the case be assigned to a different judge on remand.The 2002 United States v. Microsoft -Without admission to guilt by Microsoft, District Judge Judy Colleen Kollar-Kotelly ordered and decreed the Final Judgment on Microsoft:

1) Microsoft shall not retaliate against an independent hardware vendor (IHV), independent software vendor(ISV), original equipment manufacturer(OEM).

2) Microsoft shall provide Windows Operating System Product to OEMs with uniform license terms and conditions.

3) Microsoft shall not restrict IHV, ISV, and OEM in using, distributing, launching or offering users options to launch any Non-Microsoft Middleware.

4) Microsoft shall disclose the application programming interfaces (APIs) and related Documentation.

5) Microsoft shall make available any Communication Protocol for use by third parties on reasonable and non-discriminating terms.

6) Microsoft shall not enter into any exclusionary agreement with any internet access provider (IAP), internet content provider (ICP), IHV, ISV, or OEM.

7) Microsoft shall allow end users and OEMs to enable or remove access to, or to interchange Microsoft Middleware

Product and Non-Microsoft Middleware Product.8) The Windows Operating System Product shall not

automatically alter an OEM’s configuration of icons, shortcuts or menu entries.


9) Microsoft shall offer to license to IAPs, ICPs, IHVs, ICVs and OEMs any intellectual property rights owned or licensable by Microsoft that are required to exercise to the above orders.

10) Microsoft shall not be required to document, disclose or license to third parties API, Documentation or Communications Protocols that might jeopardize the integrity and security of any Microsoft product against piracy, virus, encryption or willful violation of intellectual property rights.

The 1997 Staples-Office Depot case -an FTC administrative judge issued an injunction to block a proposed merger of Staples and Office Depot citing that Staples’ prices were significantly lower in cities where Staples competed with Office Depot than in cities without Office Depot.

Part 5: Merger (CH 7 pp192-198)Five merger waves -the 1890-1904 merger for monopoly wave, e.g. US Steel, GE, American Can, du Pont, Eastman Kodak, and American Tobacco. -the 1916-1929 merger for oligopoly wave, e.g. Bethlehem Steel. -the post-war conglomerate merger wave -the 1980s leverage buyout wave, e.g. Philip Morris’s purchase of Kraft, Campeau Corporation purchase of Federated Department Stores, and Kohlberg, Kravis, Roberts & Co. purchase of RJR- Nabisco. -the 1990s deregulation and efficiency wave, e.g. Travelers Group-Citicorp merger, SBC-Ameritech merger, Bank of America- Nationsbank merger, and Exxon-Mobil mergerReasons for merger -monopolization -economies of scale & economies of scope -reducing management inefficiencies -diversification of risk -others e.g. retirement, empire building The 1997 DOJ/FTC Horizontal Merger Guidelines

The 1997 DOJ/FTC Non-horizontal Merger Guidelines


Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, a Premerger Notification and Report Form is required if:

(1) either firm to the proposed merger has annual net sales or

total asset of at least $100 million and the other firm has annual net sales or total assets of at least $10 million; and(2) as a result of the impending merger, the acquiring firm

will hold more than $15 million of the acquired firm’s stock and/or assets. An acquisition of another firm’s voting securities of less than $15 million also require reporting if, as a result of the impending merger, the acquiring firm will hold 50% or more of the voting securities of the acquired firm that has $25 million or more annual net sales or total assets.

After the acquiring firm pays $45,000 filing fee, the two firms cannot consummate the impending merger for a period of 30 days (15 days for cash tender offers) unless the government decides before the 30-day period is over that the impending merger poses no threat to competition. If the impending merger appears to pose a threat to competition, the government may issue a “Second Request” for information. After the compliance to the second request, there is an additional 20 days (10 days for a cash tender offer) waiting period. If the government opposes the impending merger, it can seek an injunction in federal court and seek relief in partial divestitures or other behavioral relief.

The FTC Guides Against Deceptive PricingThe FTC Guides Against Bait Advertising

Suggested antitrust cases for term paper

1. 1899 United States v. Addyston Pipe & Steel Co.175 U.S. 211

2. 1911 Standard Oil Co. of New Jersey v. United States221 U.S. 1, 31 S.Ct.502, 55 L.Ed. 619

3. 1911 United States v. American Tobacco221 U.S. 106, 31 S.Ct. 632, 55 L.Ed. 663

4. 1920 United States v. US Steel Corp.251 U.S. 417, 40 S.Ct. 293, 64 L.Ed. 343

5. 1926 United States v. G.E., 272 U.S. 4766. 1933 Appalachian Coals, Inc. v. United States

288 U.S. 3447. 1941 Fashion Originators’ Guild of America v. US

312 U.S. 4578. 1945 United States v. Alcoa, (monopolization case)

148 F.2d 4169. 1946 American Tobacco Co. et. al. v. United States

328 U.S. 781, 66 S. Ct. 1125, 90 L.Ed. 157510.1947 International Salt Co., Inc. v. United States

332 U.S. 392, 68 S. Ct. 12, 92 L.Ed. 2011.1948 FTC v. Morton Salt,

334 U. S. 37, 68 S.Ct. 822, 92 L.Ed. 119612.1953 United States v. United Shoe Machinery, 110 F.Supp.

29513.1956 United States v. E.I. DuPont (cellophane case)

351 U.S. 377, 76 S.Ct. 994, 100 L.Ed. 126414.1957 United States v. E.I. DuPont

353 U.S. 586, 77 S. Ct. 872, 1 L.Ed.2d 105715.1959 Klor’s, Inc. v. Broadway-Hale Stores

359 U.S. 20716.1961 City of Philadelphia v. Westinghouse Electric

210 F. Supp. 48317.1962 Brown Shoe v. United States

370 U.S. 294, 82 S.Ct. 1602, 8 L.Ed.2d. 51018.1962 United States v. Loew’s Inc.

371 U.S. 38, 83 S.Ct. 97, 9 L.Ed.2d 1119.1963 White Motor Co. v. US, 372 U.S.25320.1964 United States v. Alcoa et. al. (merger case)

377 U.S. 271, 84 S.Ct. 1283, 12 L.Ed.2d 31421.1966 United States v. Von’s Grocery Co. et. al.

384 U.S. 270, 86 S.Ct. 1478, 16 L.Ed.2d 55522.1967 FTC v. Proctor & Gamble Co. et. al.

386 U.S. 568, 87 S.Ct. 1224, 18 L.Ed.2d 30323.1967 Utah Pie v. Continental Baking

386 U.S. 685, 87 S.Ct. 1326, 18 L.Ed.2d 40624.1969 United States v. International Business Machine

U.s. D.Ct. S.D.NY, Civil Action No. 69 Civ. 20025.1972 Siegel v. Chicken Delight, Inc.

405 U.S. 955, 448 F.2d 43(9th Cir.)26.1973 Charles Pfizer & Co., Inc. et. al. v. United States

367 F.Supp. 91 (S.D.N.Y.)27.1975 Goldfarb v. Virginia State Bar, 421 U.S. 77328.1975 SCM v. Xerox, 463 F.Supp.2d.29.1977 Continental T.V., Inc. v. GTE-Sylvania Inc.

433 U.S. 36, 97 S.Ct. 2549, 53 L.Ed.2d 56830.1979 Berkey Photo, Inc. v. Eastman Kodak Co.

603 F.2d 263 (2d Cir. 1979)31.1981 FTC v. Kellogg, FTC Docket No. 8883, April 26, 197232.1982 MCI v. AT&T, 708 F.2d 1081 (7th Cir. 1983)33.1984 NCAA v. University of Oklahoma et. al.

468 U.S. 85, 104 S.Ct. 2948, 82 L.Ed.2d 7034.1992 Eastman Kodak v. Image Technical Services, Inc.

504 U.S. 451, 112 S.Ct. 2072, 119 L.Ed2d 26535.1995 United States v. Microsoft Corp.

56 F.3d.1448, 504 U.S. 451, 112 S.Ct. 2072, 119 L.Ed.2d 26536.1998 United States v. Microsoft Corp.

147 F.3d 93537.1999-2000 United States v. Microsoft Corp.

84 F.Supp.2d 9, 87 F.Supp.2d 30, 97 F.Supp.2d 59,530 U.S. 130

38.2001 United States v. Microsoft Corp.No. 00-5212, No. 00-5213, U.S. Court of Appeals for the District of Columbia Circuit, decided June 28, 2001

Documents

Economics 411 Handout 1 Professor Tom Khceco016/econ411/Br1.doc · Web viewraises price in a declining market and in an industry with overcapacity, and then all firms match the price