Bus law today 9th ed ch22

BUSINESS LAW TODAY
Essentials 9th Ed.

Roger LeRoy Miller - Institute for University Studies, Arlington, Texas
Gaylord A. Jentz - University of Texas at Austin, Emeritus

Chapter

22

Promoting Competition

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Learning Objectives
 What is a monopoly? What is market power?
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



How do these concepts relate to each other?
What type of activity is prohibited by
Sections 1 and 2 of the Sherman Act?
What are the four major provisions of the
Clayton Act and what types of activities do
these provisions prohibit?

What agencies of the federal government
enforce the federal antitrust laws?
What four activities are exempt from
antitrust laws?

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Introduction

 Common law actions intended to limit
restraints on trade and regulate
economic competition.
 Embodied almost entirely in:
The Sherman Antitrust Act of 1890.
The Clayton Act of 1914.

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The Sherman Antitrust Act
 Section 1 and 2 contain the main
provisions of the Sherman Act.
Section 1:

• Requires two or more persons, as a person cannot
contract, combine, or conspire alone.
• Concerned with finding an agreement.

Section 2:
• Applies both to an individual person and to several
people, because it refers to every person.
• Deals with the structure of monopolies in the
marketplace.

 Jurisdictional Requirements.
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Section 1 of the Sherman Act
 Section 1 regulates what are called
“horizontal” and “vertical” restraints.
 Per se violations vs. the Rule of
Reason.
Per se violations are blatant and substantially
anticompetitive.
Rule of reason agreements do not
unreasonably restrain trade.

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Horizontal Restraints
 Horizontal restraints are agreements
among Sellers (or Buyers) that restrain
competition between rival firms
competing in the same market.
Seller Seller Seller

Buyer Buyer Buyer
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Horizontal Restraints: Price
Fixing
 An agreement between competing
firms in the market to set an
established price for the goods or
services they offer.
 Price fixing is a per se violation of the
Act.

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Horizontal Restraints: Group
Boycotts
 Agreement between two or more sellers
to refuse to deal with a particular person
or firm.
 Group boycotts are per se violations of
the Act.

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Horizontal Restraints:
Horizontal Market Division
 Occurs when competitors in the same
market agree that each will have
exclusive rights to operate in a
particular geographic area.
 Horizontal market divisions are per se
violations of the Act.

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Horizontal Restraints:

Trade Associations
 Industry specific organizations created to

provide for the exchange of information,
representation of the business interests before
governmental bodies, advertising campaigns,
and setting of regulatory standards to govern
their industry or profession.
 Rule of reason is applied to determine if a
violation of the Act has occurred.
 Concentrated Industry: small firms control
large percentage of market sales.

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Vertical Restraints
Vertical restraints are
per se anticompetitive
agreements imposed
by Sellers upon Buyers
Buyer
(or vice versa) that may
include affiliates in the
Buyer
entire supply chain of
production.

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Seller
Buyer


Vertical Restraints
 Agreements between firms at different
levels of the manufacturing and
distribution process.
 Vertical restraints may restrain
competition among firms that occupy the
same level in chain.
 Vertical restraints that significantly affect
competition may be per se violations.
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Vertical Restraints: Territorial
or Customer Restrictions
 Imposed by manufacturers on the
sellers of the products, to insulate
dealers from direct competition with
each other.
 Territorial and customer restrictions

are judged under the rule of reason.

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Vertical Restraints: Resale Price
Maintenance Agreements
 An agreements between a manufacturer and a




distributor or retailer in which the
manufacturer specifies the retail price at
which retailers must sell products furnished
by the manufacturer or distributor.
This is a type of vertical restraint and is
normally a per se violation.
CASE 22.1 Leegin Creative Leather Products,
Inc. v. PSKS, Inc. (2007). The Supreme Court
held that the per se rule did not apply to
“minimum resale prices.”

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Section 2 of the Sherman
Antitrust Act
 Section 2 of the Sherman Antitrust Act
deals with:
Monopolization.
Attempts to monopolize.

 Predatory pricing.
Attempt by a firm to drive its competitor from the
market by selling its product at prices
substantially below the normal costs of
production.
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Monopoly Power
 Monopolization in violation of the act
requires two elements:
The possession of monopoly power and
The willful acquisition and maintenance of the
power.

 Exists when one firm has sufficient
market power to control prices and
exclude competition.

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Monopoly: Relevant Market
 Before court can determine whether firm
has dominant market share, it must
define the “relevant market” which
consists of two elements: (1) relevant
product market, and (2) relevant
geographic market.

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The Intent Requirement
 Anticompetitive behavior must be
“willful acquisition of power.”
 Anticompetitive intent to monopolize is
difficult to prove.
 Intent may be inferred from evidence
that the firm had monopoly power and
engaged in anticompetitive behavior.
 In certain circumstances, a unilateral

refusal to deal my violate antitrust laws.
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Attempts to Monopolize
 Firm actions are scrutinized to determine

whether they were intended to exclude
competitors and garner monopoly power
and had a “dangerous” probability of
success.
 CASE 22.2 Weyerhaeuser Co. v. RossSimmons Hardwood Lumber Co. (2007).
Held: for Weyerhaeuser. Supreme Court held
the same standards apply to both predatory
pricing as well as predatory bidding.
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The Clayton Act
 The Clayton Act (Robinson-Patman Act)
deals with:
Price Discrimination.
Exclusionary Practices.
Mergers.

Interlocking Directorates.

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Section 2: Price Discrimination
 Price discrimination is the charging of
different prices to competing buyers for
identical goods. Exceptions:
 Charge of lower price was temporary and in good faith
to meet another seller’s equally low price to the
buyer’s competitor.
 A particular buyer’s purchases saved the seller costs
in producing and selling the good.

 Defenses: Cost Justification, Meeting the
Price of Competition, and Changing Market
Conditions.
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Section 3: Exclusionary
Practices
 Exclusive Dealing Contracts.

A contract under which a seller forbids a buyer to
purchase products from the seller’s competitors.
Prohibited if the effect of the contract is to
“substantially lessen competition or tend to
create a monopoly.”

 Tying Arrangements.
The conditioning of the sale of a product on the
buyer’s agreement to purchase another product
produced or distributed by the same seller.
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Section 7: Mergers
 Horizontal Mergers occur between firms at the




same level in the production and distribution
chain.
CASE 22.3 Chicago Bridge & Iron Co. v.
Federal Trade Commission (2008). Using the
Herfindahl-Hirschman Index, FTC correctly
calculated that CB&I’s acquisition of Pitt-Des
Moines violated Section 7 of the Clayton Act.
Vertical Mergers occur between firms at

different levels in the production and
distribution chain.

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Section 8: Interlocking
Directorates
 Occurs when an individual serves on the
board of directors of two or more
competing companies simultaneously.
 These are prohibited if the two firms
meet certain size requirements.

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Enforcement and Exemptions

 Agency Actions:
U.S. Department of Justice.
The Federal Trade Commission
enforces the FTCA. FTCA provides that:
• “Unfair methods of competition in or

affecting commerce, and unfair or
deceptive acts or practices in or affecting
commerce are hereby declared illegal.”

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