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ANTITRUST James Diamond

Professor Greaney T 4-6, R 4-5

I. INTRODUCTION TO AT LAW
 Generally
 Central Concern of AT Law
 Particular type of market failure → failure of competition; anticompetitive behavior
 Purpose of AT Law
 (1) To protect competition by govt regulation of pvt economic conduct
 The historic view, widely accepted until the 1960’s
 Help the little guy (populist justification for AT laws)
 (2) Promote economic efficiency
 Law and Economics View
 Includes protecting consumers in the end
 Newer viewpoint, ends up protecting competition
 AT laws are supposed to close the gap bt markets in abstract and in reality.
 Markets Generally
 Competition is generally a good thing for consumers
 forces producers to meet consumers demands at lowest possible $ and fewest resources
 increases societal wealth but does not cause equal distribution (leads to ‘help the little guy’
mentality in AT)
 In a perfect world, the market decides what is produced and at what price.
 The market is consumer driven
 Cooperation bt rivals can damage consumer interests
 Suppress production
 Raise prices
 Decrease innovation
 The primary goal of any biz is profit maximization
 Trends in AT
 Globalization of AT law and its concepts
 Increased incidence of trans-national conduct that threatens to diminish competition

 Economics for Understanding Markets

 Basic economic knowledge
 Markets - any place where at least one buyer and one seller come tog for purpose of exchanging goods
and svcs
 Demand - A rel showing how much of a partic good or svc buyers wd be willing and able to purchase
at various market prices and during a specific time pd. The biz environment operates by Social
Darwinism – only strongest, most profitable/efficient bizes survive.
 Demand Curve


 Illustrates Diminishing Value/Basic Price Theory
 An inverse relationship bt price and consumption rate. Price ↑ = Demand ↓

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 Supply - A rel showing how much of a partic good or svc sellers wd be willing to make available for
sale at various market prices and during a specific time pd
 Elasticity - measure of responsiveness of quantity demanded of a good or svc to a change in its price
 Inelastic
 Sig increase in price results in little change in quant sold
 Elastic
 Increase in price results in large change in quant sold
 Perfect Competition
 Defn: An industry made up of a large # of small firms, each selling homog (identical) products to a
large # of buyers.
 Presumptions of Perfect Competition
 Elasticity - consumers det production, price, market place and are free to change their minds
 Many buyers/sellers
 No one buyer/seller can unilaterally affect the market.
 Buyers/Sellers equally possess perfect market info
 Complete absence of barriers to entry into the markets
 Marginal Cost Curve

P
A
R

C
E
E

B
Q UANTITY

 A – Demand Curve
 B – Marginal Cost of Production
 E – Intersection, in perfect competition this is where the price will end up.
 Selling below the Marginal Cost line is selling at a loss.
 Selling above MC line is a higher than usual rate of return (suspect, in old AT = guilty)
 Monopoly – A seller who can unilaterally fix/control/raise/alter prices w/o losing market share. A
producer driven market.
 Hints: Low/no elasticity, high barriers to entry and selling to the left of E.
 When the person complaining is the competition, be leery of the motives.
 AT protects competition, not competitors.
 Monopoly statues are fairly worthless; their interpretation in case law matters… wc/ changes w/ the
winds of politics.
 Natural Monopolies → utilites bc impossible/impractical to have separate companies/suppliers
 Regulation is the watchdog over natural monopolies
 Flaw cd be inadequate regulation
 Advantages of Monopolies
 efficiency
 huge benefits to producer (wealth transfer to monopolist)
 Disadvantages of Monopolies
 loss of choice
 decrease in quality
 diminution of output
 increase in price

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 Deadweight Loss
 society loses bc socially valuable purchases cannot be made
 Greaney outline hypo
 Sherman Act § 2 - Monopolizing trade a felony
 Price Controls: used to control $ in an attempt to make goods and svc affordable and accessible to all
 Price Ceilings
 The max price at wc/ an individual can sell a good or svc, set by law
 Increases demand
 Reduces supply
 Price Floors
 The minimum price at wc/ an individual can sell a good or svc
 Reduces demand
 Increases supply
 Indications of Anti-competitive Behavior
 Similar cost regardless of seller is #1 indication of AT
 Competition shd drive price down to cost
 Lack of divergence in price among competitors
 Uniformity in price changes regardless of underlying cost to seller
 Ex: Gasoline, Utilities, cable tv
 Mergers
 Horizontal - all those directly producing the same product (80% of AT concerns)
 Vertical - all those selling the inputs necessary to produce the product

 Cases
 U.S. v. Andreas (7th C 2000) Harvest King - Lysine Cartel; Price-Fixing
 Facts: Few countries produced & sold lysine, including U.S. They all colluded & agreed to charge the
same fixed higher price for lysine & reduced output. Formed a “cartel” & their motto was: our
competitors are our friends. Our customers are the enemy. Customers were hurt bc they cdn’t “shop
around” for subs bc all producers of lysine were in cahoots, limiting competition, wc/ AT is against.
 Leniency program: gov’t incentive to inform bc granted full immunity to first company or
individual to come forward w/ E of AT. (In this case the guy was also acting illegally)
 G/R: “AT only covers trade/sales in America affecting interstate commerce (as a matter of j.d.);
however, it does reach foreign firms & their conspirators wc/ desire to sell in America”
 Discussion
 Barriers to cartelization (collusion)
 (1) reaching the agreement- must have meeting of the minds
 bc members have diff goals, issues, needs, etc
 (2) price- making sure every will in fact charge the same price
 Note: fixing prices for products that have differentiation (where there’s a lot of variety
w/the product...i.e. cereals) is more difficult
 (3) sales/vol-making sure this is set in advance to minimize the risk of “cheating” in wc/ on
member of the cartel may charge a lower price (in the absence of having a set volume to sell)
in order to take all the biz away from the rest of the members who are charging the agreed
upon higher price (distribution systems vary by company)
 (4) secrecy- keeping the conspiracy & cartel a secret from prying eyes of the gov...must
disguise meetings, agendas, etc.
 (5) policing- the cartel must have a mech of punishing those who don’t stick to the agreement
(bc strong incentive to cheat)
 (6) tracking mech/end of yr audit- in wc/ cartel will be able to see who is & who isn’t
sticking to the agreement
 (7) paying off cartel members who’ve been shortchanged- as seen in JTC
 Case to be discussed, in “bidding” cases, only one member of the cartel will get the job
but other members of the cartel who didn’t get the biz need to be paid off.
 Ex of successful cartel: vitamin cartel

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 Prosecutors will use circum E such as above to make the case of conspiracy and AT
 AG is responsible for prosecuting AT cases
 Brown v. MIT (3d C 1993) OUTLIER CASE - Shows tension in bedrock principals of AT
 Facts: Students were victims of a cartel (the Ivies) Cartel agreed to compare scholarship offers that
each school was making to students & agreed not to engage in a competitive pricing war w/each other
(against AT). Price fixing by fixing discounts
 Question: Why is this scholarship agreement seen as price fixing?
 Answer: If they fix how much of a discount they will give students (i.e. scholarship), the schools
are fixing the price that the student’s will pay for tuition (the discount is being rigged in a way that
denies some of them a greater discount)
 Rule 1: “In any case where you allege a restraint of trade, Δ has an opportunity to assert a
justification” [does not apply to per se violations]
 Here, the colleges’ justification was to promote socio-economic diversity classes & they alleged
this justification was pro-competitive
 Here, the restraint of trade wd be the colleges not being able to give greater scholarships to
students than each other (everyone must give out the same scholarship amts to at need students)
 Rule2: Justifications for restraint of trade MUST be pro-competitive (advancing a pro-competitive
purpose) Only pro-competitive justifications excuse anti-competitive restraints.
 Rule3: “Advancing” consumer choice is a pro-competitive purpose, wc/ Δ’s in this case did
 per Greaney, this case looks like 3rd C is shoe horning social ends into pro-competitive
justifications
 Rule4: The focus of AT is on the preservation of competition ( & competitive markets) & the
consumer

 Conduct That Can Impair Proper Functioning Competitive Markets

 Structural features of competitive markets:
 (1) suff buyers & sellers to insure competitive pricing (not fixed pricing), features, quality &
innovation
 Comp is just not focused on $ - firms can also compete on quality, amenities, variety, etc.
 (2) homogeneous (i.e. undifferentiated) products or svcs
 (3) ease of entry, expansion & exit by firms; and
 (4) rel unhindered information (perfect info) & knowl re: sellers/buyers knowl of market conditions
 Note: “AT law is primarily concerned w/2 of the features associated w/perfect competition (1) the
numbers of buyers & sellers & (2) the conditions of entry”
 Structural features of anti-competitive markets:
 (1) reduced number of buyers or sellers (equates to higher prices for the consumer)
 (2) created impediments to entry (equates to ltd competitive opportunities)
 (3) ltd access to info (equates to consumer deception)
 (4) impaired innovation, quality or variety (equates to ↓product quality, ↓consumer choice, ↓product
innovation & wealth transfer)

Comparison of Characteristics of Competitive ad Non-Competitive Markets

Characteristics of Competitive Markets Associated Benefits
• Numerous buyers and sellers • Marginal cost pricing (production efficiency)
• Ease of entry • Societal resources are well-allocated
(allocative efficiency)
• Complete knowledge/info • Consumer welfare is maximized
(consumption efficiency)
Possible Variations from Competitive Model Potential Anticompetitive Consequences
• ↓ # of buyers/sellers • ↑prices
• Creating impediments to entry • Ltd competitive opportunities
• Limiting access to information • Consumer deception
• Impairing innovation, quality or variety • ↓product quality, ↓consumer choice, and
↓product innovation
• Wealth transfer

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 When are Mergers & Acquisitions Anti-competitive?

 Brunswick v. Pueblo (US 1977) AT Injury Doctrine Illustration
 Facts: Π bowling alley claimed that when Brunswick bought out competitor bowling alley, it hurt
Π (but for the merger, the competitor was a failing company) & caused economic damages bc Π
would’ve made more profit had Brunswick not merged.
 TREBLE DAMAGES
 Rule: §4 of Clayton Act: “Any person who shall be injured in his biz or property by
reason of anything forbidden in the AT laws (wc/ prohibits the lessening of competition)
[can recover treble damages]
 App: Here, Π was injured in fact in his biz but he was not injured by anything forbidden by
the AT laws: Π was not injured by the lessening of competition but by the increase in
competition. Thus he cannot recover.
 Rule: “Only the bizes that are hurt by reason of AT injuries are entitled to treble damages”
 Comments:
 Illustrates lts on standing; judge made lts; some cases say who can sue (those directly injured
or those indirectly injured); Statute says anyone injured in biz or property, standing doctrine
sets lts on wc/ injured parties can sue (usually only those directly injured)
 This case puts another restriction on standing: only pvt Πs who suffer an AT injury by loss of
competition can bring a suit
 AT laws protect competition, not competitors
 Conduct Seen As Anti-Competitive
 (1) Collusion- Competitors coming tog & raise price, lower quality, reduce output w/ a direct effect
on competition & on the consumer. Direct and obvious effects
 When substantial competitors decide to agree on prices, or in some circs to merge rather than
compete, the consequence is more likely to be ↓ output & ↑ prices for consumers. (See pg 45)
 (2) Exclusion- When a rival is not part of the collusion, parties in the collusion may, if in a position to
do so, raise the rival’s costs (by cutting it off from key inputs to its production) or lt a rival’s access
to the market (by cutting off its access to a key channel of distribution).
 Effect is always indirect on competition & the consumer
 May hurt the consumer bc the rival excluded may have been the “price-cutting Maverick” in the
industry so that the cartel cd not raise price, but when they get rid of him they can raise the price
(a round about indirect way of raising the price)
 However, sometimes exclusion doesn’t affect consumers
 Ex: When a hospital denies a doc staff privileges.... consumers have lots of docs to go to &
the doc has other hospitals to work at.
 JTC v. Piasa (7th C 1999) Example of exclusionary conduct
 Facts: 3-4 applicators (road builders) who colluded to “bid-rig” for a partic govt job re-paving
public roads. The “bid-rigging” was that none of the applicators wd out-bid the other both (1)
agreeing not to compete amongst themselves & (2) agreeing to fix price; both anti-competitive
conduct, wc/ is illegal; govt wd surely pick one of the applicators - since all of them charge the
same & the winner wd “pay off” the others who weren’t chosen {Note: they’re able to “pay off”
the others who didn’t get the bid bc they are charging above the competitive level, thus allowing
them to have excess $}. One applicator, JTC, did not want to be a part of the collusion &
threatened to be the price-cutting Maverick, wc/ potentially wd foil the applicators’ plan & the
govt may chose it if it offered a lower price than the colluding applicators. To stop this, the
applicators–who provided the “asphalt producers” sig biz – said they wd boycott the producers if it
supplied JTC w/the asphalt it needed to perform re-paving work. This, in turn, wd make it more
costly for JTC to perform the work & thus JTC’s bid would be higher in the end.
 illustrating an indirect way of affecting price {allowing them to get the higher price that they
wanted to charge in the first place}
 Theory 1 of exclusionary conduct: raising rival’s cost
 Theory 2 of exclusionary conduct: causing harm by threatening to reduce purchases from
the supplier [see exclusionary boycotts below]

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 Take away: The applicators clearly colluded to raise prices to the consumer (the govt) [illegal
under §1 of the Sherman Act]. But to effectuate it, they excluded a rival. To have standing, JTC,
had to show harm (their exclusion). Not harmed by the collusion bc they were not a supplier.
 Attempts to Monopolize
 Π must prove
 1) Δ has specific intent to harm competition (must show that Δ sought to destroy competitors/hurt
competition);
 2) anticompetitive conduct to achieve this unlawful purpose; and
 3) offending acts create a dangerous prob of the success of the attempt to monopolize (must show
Δ already has considerable power, requiring defn of market, proof of Δ's share, and proof of other
structural elements that bear on power).
 Thus, as w/monopolization offense, power and conduct are crucial wrt attempts. Often, only diff
is degree of market power that must be shown. Must define mkt

 Overview Of Competition Law Systems

 Scope of Competition law
 pvt conduct: AT/competition law only reaches pvt NOT public (govt) conduct that tries to restrict
competitive markets
 Design of the Enforcement Mechanism
 Potential AT prosecutors:
 executive dept (DoJ–AT Division)
 independent admin agency (FTC)
 states (atty generals of the states)
 individual consumers, competitors, of the alleged violator
 Ramifications of Decentralized Enforcement: Diversifying prosecutorial power among 2 or more
agents has 3 basic rationales. . .
 (1) to guard against default by any single prosecutorial agent
 (2) the relative efficacy of pvt lawsuits
 compared to a gov’t bureau, the victim of a price-fixing cartel may be closer to the RL info
about a viol & may have stronger incentives to attach such conduct aggressively
 (3) competitive benefits of diversification
 having 2 enforcement institutions, such as the DoJ & the FTC “compete” ag each other can
induce each agency to improve law enforcement (i.e. developing more effective ways to
attack harmful behavior...)
 Potential Problems
 decentralizing prosecutorial power entails costs
 treasury must pay for some duplication in personnel & spend some
resources to ensure that 2 public agencies do not extensively examine the
same apparent misconduct
 splintering authority across a # of prosecutorial agents can
 reduce the clarity & predictability of competition law
 Where one agent’s decision not to prosecute does not bind other agents, a
company must assume that it cd be opposed by any of the agents
 Reliance on the courts: Although indiv agents may proceed on diff theories, judicial decisions estab
binding principles that apply to all agents. The cts interpret the elaborate AT rules.
 Possible Remedies for AT Violations
 Criminal Civil
imprisonment damages (double, treble (or more)
fines (corp & individual) injunctive relief
*conduct prohibitions
*divestiture or other structural relief
asset forfeitures
injunctive relief attny’s fees
 Competition Policy
 Promoting free enterprise: The freedom g’teed each & every biz, no matter how small, is the freedom

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to compete - to assert w/vigor, imagination, devotion, & ingenuity any economic muscle it can muster
 Sherman Act as an example: Act was designed to be a comprehensive charter of economic
liberty aimed @ preserving free & unfettered competition as the rule of trade.
 Rests on the premise that unrestrained interaxn of competitive forces will yield the best
allocation of our economic resources, the lowest prices, the highest quality & the greatest
material progress . . .

II. AGREEMENTS HAVING COLLLUSIVE ANTICOMPETITIVE EFFECTS

 Concerted Action Among Competitors
 § 1 of Sherman Act
 § 1 of the Act declares:
 “Every K, combination, in the form of trust or otherwise, or conspiracy,
 IN RESTRAINT OF TRADE is unlawful civilly & criminally
 Key Elements: An offense under § 1 of Sherman consists of 2 elements
 (1) concerted action- a “K, combination or conspiracy” (AGREEMENT) AND
 (2) an anti-competitive effect- (Restraint Of Trade)
 Ct interpreted under CL
 Understandable rules
 Enforceable rules (make economic sense)
 History
 Per Se → Trans-Missouri: Ct said everything that restrains trade is illegal. Literal reading of the
statutory language. Earliest formation of per se rule.
 UnR Restraint → Standard Oil: Series of agreements constituting price-fixing put tog by Standard Oil
trust (biz orgs that were not commonly owned but had trust agreements so they cd control the market).
Question was wh this was restraint of trade. Ct said yes, restraint of trade and illegal, but not per se.
Needs to be an unR restraint of trade.
 RR → Chicago Bd. of Trade: Found certain restrictions on Chicago grain exchange legal. Announced
RR (p.82-83).
 RR: True test of legality is wh the restraint imposed is such as merely regulates and perhaps
thereby promotes competition or wh it is such as may suppress or even destroy competition.
 Ct must ord consider the facts peculiar to the bizs to wc/ the restraint is applied;
 its condition bf and after the restraint was imposed;
 nature of the restraint and its effect, actual or probable.
 History of the restraint,
 evil believed to exist, reason for adopting the particular remedy,
 purpose or end sought to be attained, are all RL facts. This is not bc a good intention will
save an otherwise objectionable reg or the reverse; but bc knowl of intent may help the ct
to interpret facts and predict consequences.
 Problem: When everything is RL, nothing is dispositive
 Per Se/RR Combination → Addyston Pipe: Dev formula to sep out what was per se and what was RR.
 Analysis Under § 1: Not every “restraint of trade” violates § 1; do a RR analysis to det wc/ violate § 1.
 2 types of restraints
 naked restraints: where parties get tog (combine or conspire) & have no other objective besides
restraining trade [these types of restraints are per se violations of § 1]
 ancillary restraints: restraint exists, but restraint is ancillary/subordinate & necessary to
something that is actually a pro-competitive event [these do not violate § 1]
 Ex: An agreement by seller of an ongoing biz, (ex. bakery) not to enter into competition w/the
buyer for 3 yrs after purchase w/in a radius of 5 miles. Such ancillary restraints, in this case a
“covenant not to compete,” actually facilitated the underlying, legitimate txn, & cd be
justified on the ground that they promoted trade - in this ex the sale of a biz
 RR analysis (per Addyston Pipe): Where the restraint is not a per se violation, you must analyze the
restraint under Addyston Pipe’s modified “RR” test as well as Chicago Board of Trade’s test to see if it
violates § 1.
 Addyston Pipes test: Is the restraint ancillary/subordinate to a legitimate pro-competitive
txn/event? And if so, is that restraint necessary to accomplish that pro-competitive purpose? If

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so, the restraint is R

 Factors to consider if utilizing Chicago/Addyston “RR” test: sometimes may require an
incredibly complicated & prolonged economic investigation into the entire history of the industry
involved, as well as related industries, in an effort to det at large wh a partic restraint is unR.
 What Constitutes an Illegal “Restraint of Trade?”
 Per Se Condemnation: Two Approaches
 (1) Literal Per Se Rule (Trans-Missouri Freight) – Every restraint of trade is unlawful [this
approach no longer relevant]
 (2) The “Naked Restraint” Per Se Rule (Addyston Pipe, J. Taft) – Per se if not related to legit main
purpose; no purpose/effect other than restraint (presumption of illegality)
 The RR: Two Approaches
 (1) Unstructured RR (Standard Oil / Chicago Bd. of Trade, Js. White and Brandeis) – Look to
purpose, nature, and effect of restraint
 (2) Ltd and Structured RR (Addyston Pipe, J. Taft) – Only ancillary restraints can be justified on
Rness grounds; only look to economic necessity and duration of the restraint
 Per Se Violations Of § 1:
 Price fixing is a per se violation; therefore, no need for a “reasonableness” RR inquiry, no inquiry into
market power, & no justifications entertained [Trenton Potteries]

ROL: Uniform price-fixing by those controlling in any substantial manner a trade or biz in interstate commerce is
prohibited by the Sherman Act, despite the Rness of partic prices agreed upon. US v. Trenton Potteries
(1927, p.85).
 Allegation was price fixing of toilets.
 Issue: Wh prices were R and judge at DC level did not allow jury to consider this issue. Judge putting s
over his ears (the per se rule in axn).
 Rationale: Bright line; everyone will be able to follow; economic rationale – the R price today might not be
the R price tomorrow; ct cannot continually monitor the Rness of the price. Finally, no one knows what the
“R” or “competitive” price is. Too hard for the judge to det (nonworkable).
 Per se rule - any “agreement” that restraints trade is illegal (w/o inquiry into Rness).
 Court: The rule might punish a few misguided innocent people, but will capture mostly those whom the law
wants to punish. It’s like punishing stunt flying; don’t want competitors going rt to the edge and then
coming into ct and saying they wouldn’t have been able to do it anyway.
 The law is against the conspiracy to control price (the agreement) not the Rness of the agreement or the
ability to carry it out.
 Cf. Appalachian Coals: Conduct here was joint selling agency. Jt selling agency diff from price-fixing?
No! Nevertheless, SCt upheld agency as R. (During the Depression.) This really was an aberrant exercise
for the ct and has been virtually overruled. Politics sometimes help in determining what the ct was actually
doing.
 Price-fixing bc the single agency empowered someone to bargain for the industry. (diff from collective
bargaining for unions)
 Ct said it was okay bc of compulsion (distressed industry) forced them to do this

 HYPO: The Blockbuster “end of late fees”- reason? Maybe more competition from prior non-competitive
sources (On Demand cable, Tivo, etc.). Also new entrants into the market (Netflicks) – the threat of them –
causes some impact in the marketplace. So what is the market now? Used to be just video rental places;
now may include HBO, other players, etc.

ROL: Output restriction is treated essentially like price-fixing and an agreement to fix prices is illegal (w/o E of
purpose or effect). Socony-Vacuum Oil Co. (1940, p.90). PER SE RULE
 Facts: s (the major oil comps; vertically integrated comps) were buying up fuel that was refined by their
rivals and stored it. Essentially, s were restraining output and thus increasing price. It was an agreement bt
independents & jobbers that excess gas from the independents’ refiners wd be taken off of the market,
hence restricting output, in order for the price of gas to raise, which puts more $ in their pockets. If output
is reduced, price increases.
 Holding: Characterization of activity, output restriction, is treated essentially like price-fixing.

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 Ct saying “this is just like price-fixing bc it has the same effect.”

 Leading Price fixing Rule: “Under the Sherman Act, a combination, K, or conspiracy formed for
the purpose OR w/ the effect of raising, depressing, fixing, pegging, or stabilizing the price of a
commodity in interstate or foreign commerce is ILLEGAL PER SE. It does not matter wh or not
the price fixers have market power w/respect to the commodity to actually cause some sort of
harm: no inquiry is given to market power” Justice Douglas
 “Further, all defenses, justifications, etc. (i.e. to demonstrate Rness) are precluded & fail when there’s a
per se violation: no inquiry is given to possible defenses/justifications” [there’s no acceptable
justification to fixing prices; even when the industry may be going down the toilet, there’s no defense to
mess w/price]
 Per Se Rule Caveat: Normally, if there has been a per se violation of §1, no inquiry is given into market
power, Rness, or potential justifications. However, it is important to note that per se analysis means diff
things in different categories of restraint (i.e. in “tying analysis”, you would have to investigate/show
market power in order to find a per se restraint)
 The gov’t does not have to show the effect of fixing prices; merely the conduct (attempt) is illegal
 Takes big burden off the Π
 Problem w/the per se Rule: It is too “broad sweeping.” It covers all price fixing agreements, which may
include those that will not harm competition.

 HYPO: Suppose all furniture companies who advertise on TV agree to stop biz of giving free credit
for 6 months. Is that price fixing under Socony?
 Price-fixing: Arguably raising price of furniture over time, from consumer standpoint. Credit
extension is a component of the price. Almost like a discount on the price to give interest free
credit for 6 months or 1 year. This is an agreement on a component of price [Catalano, Inc. v.
Target Sales, Inc. (1980, p.106) (Held that a collective refusal to compete on credit terms was
indistinguishable from an agreement to fix prices. To fix a component of price is to fix price)].
 HYPO: An agreement that no one wd price under 10% over their costs. Wd price at least 10% over
their costs. Is this price fixing under Socony?
 This doesn’t fix a price bc each co has diff level of costs. But it is still considered price fixing bc it
fixes a portion of the cost wc/ is passed on to the consumer. Now the lowest price you pay as
consumer is 10% more than what they wd have pd bf this agreement.
 HYPO: What about agreement among auto dealers of Detroit that they wouldn’t be open on Saturday
or Sunday? Why wd this be per se illegal?
 Conceivably, dealers were reducing output by refusing to sell on Sat and Sun, wc/ wd be pure AT
violation if you cd prove it.
 Also reducing amount of time consumers have to peruse the diff dealers and make a good choice
(restricting consumers search options and increasing search costs).
 FTC said that part of what consumer is buying when purchasing a car is convenience and svc of
making the purchase. So in a way, the dealers didn’t have to compete on this level of svc
(weekend hours). FTC said this was a way of diminishing quality and quality is an element of
price.
 HYPO: What about an agreement that sets a maximum price?
 Pegs prices at the max price; tends to pull prices up
 Decreases quality, innovation, product improvement
 In each of these examples, the companies are acting in such a way not to benefit the consumer but only
to benefit themselves. This makes it naked restraint of trade.

ROL: Blanket licenses, although literally price-fixing agreements, are not categorized as per se unlawful
agreements to fix price. Broadcast Music, Inc. v. Columbia Broadcasting System, Inc. (1979, p.99).
[evaluate under RR.]
 Facts: BMI and ASCAP are orgs that operate like clearinghouses. They acquire rts to songs and then sell
those rts to tv/radio/etc. in a blanket license (“any and all” license). Price-fixing allegation was that all
people who owned copyrights (competitors) got together w/ joint sales agent (ASCAP, BMI) and sold
copyrights for one negotiated price.
 Issue: Wh the issuance by ASCAP and BMI to CBS of blanket licenses to copyrighted musical

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compositions at fees negotiated by them is price-fixing per se unlawful under the AT laws.
ROL: In characterizing the conduct under the per se rule, the inquiry must focus on wh the effect and the purp of
the practice are to threaten the proper operation of the predominately free-market economy, (i.e., wh the
practice facially appears to be one that wd always or almost always tend to restrict competition and
decrease output, and in what portion of the market), OR INSTEAD one designed to increase economic
efficiency (i.e., lower costs) and render markets more, rather than less, competitive. Broadcast Music, Inc.
v. Columbia Broadcasting System, Inc. (1979, p.99).
 Price-fixing exists along a continuum of very anti-consumer to pro-consumer arrangements such as the
one here
 Ct also said that ASCAP was selling a wholly diff product than what indiv composers cd sell on their own.
Sometimes horizontal cooperation complete w/ price-fixing among horizontal competitors sep and apart
from what they cd sell indiv results in a new product (here, the availability of the music) Price-fixing is
ancillary to a pro-competitive feature
 Takes in out of the per se box; does not nec mean that it is legal,
 Now must be evaluated under the RR and all its factors
 Is not condemned on its face
 Beginning of the concept of the “jt venture” – when agreement comes together to create a new product, will
not be treated under per se rule (might still have problems under RR).

ROL: Docs setting the max fees that they cd claim in full payment for health svcs provided to specific policy
holders is horizontal price fixing; thus, per se illegal. AZ v. Maricopa Cty Med Soc. (1982, p.106).
 Facts: Foundations in this case were like today’s PPOs (w/ one exception). The foundation was controlled
and owned by docs who constituted a large part of the docs in the market. Docs reached agreement that
foundation wd sell their svcs to insurers (i.e., BCBS) a pkg of svcs – insureds cd go to any foundation doc
and be assured that doc wd only charge an agreed upon fee. Ct treats this as sales agreement bt docs to
charge a set fee through the foundation.
 Issue: Wh Sherman Act had been violated by agreements among competing physicians setting, by majority
vote, the maximum fees that they may claim in full payment for health svcs provided to policy-holders of
specified insurance plans.
 Price fixing element is pretty clear (docs are voting on what they are going to get paid; max price; max
prices often act as “magnetic ceilings” b/c most people would be inclined to charge the max price). This is
horizontal price-fixing.
 Ct says OH YEAH this is per se. We’re back in per se land, people. Rejected argument of BMI v. CBS.
 How is this distinguished from BMI v. CBS? Foundation is not offering a diff product (like ASCAP and
BMI). Cd it be diff product bc you get to go to any doc in the county and are assured a single price (one-
stop shopping mentality). But medicine is not as differentiated as copyright (docs more competitors than
Nelly and Celine Dion). What’s going on here is a somewhat diff bundle vis-a-vis the insureds, but there
was nothing stopping the ins cos from dealing w/ the docs outside of the foundation. It wasn’t necessary to
do the packaging, at least to the extent of setting the price. To meet the BMI rule, it has to be nec to fix the
price in order to make the arrangement work.
 Had these docs accepted risks (as in an HMO) it would be more like a joint venture. That’s why HMOs
don’t encounter the price-fixing problems.

 Rule is still pretty firm that price fixing is per se illegal (don’t have to prove market power, effect)
provided that agreement does not fall into BMI category or joint venture category.
 Ex: A & B agree to sell a product which is sold by 15 other people in the market. A & B’s market share is
5 %. They agree to raise the price of the product. They are in violation of Sherman (a per se violation)
even though consumers aren’t hurt by their agreement, nor is competition. Price competition still exists for
the product among the other 15 sellers & consumers have plenty of alternatives available to them (the other
15 sellers).
 Note: “BMI” [the “blanket license case in which blanket licences promoted efficiency & greater
output, which is interpreted as promoting competition] tried to curb this broad sweeping of Socony by
allowing for pro-competitive justifications in price fixing cases; however, Maricopa, followed & tends
to re-iterate the rule in Socony.

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 Price fixing hypos [Are the following instances of price fixing under Socony?]
 Competitors agree not to grant free credit to buyers
 Answer: Yes, price fixing. Can make an argument that credit is part of the price.
 Competitors agree that they’ll each charge 10% above their costs (note: each will have different
costs)
 Answer: Yes, arguably price fixing/raising. They aren’t fixing price in the literal sense, but they
are controlling something that tends to elevate price. Also, can make an argument that “raising”
price w/respect to their profit margins: they are making sure that not only will they be covering
their costs, but are fixing their profit margins
 Competitors agree to have the same list price but don’t agree on whether they will offer
discounts or not
 Answer: Yes, price fixing/raising. If you know everyone’s posting the same listing price (not the
asking price), sellers don’t have any initiative to offer it @ a lower price (hence a way of raising or
stabilizing price. Further, people are most likely not to ask for discounts.
 Competitors agree not to be open on weekends
 Answer: Yes, price fixing/raising. Might tend to elevate price b/c the competitors must still cover
their costs. They lose 2 opportunities to make $ since they’re closed on the weekend..so to cover
this loss, the prices may be raised.

 Side note: “price fixing” includes both minimum & maximum price fixing.

 Market Division by Competitors

 Why is market division so troubling (even more so than price-fixing)? Market division eliminates all
competition, whereas price-fixing eliminates competition on price but not on quality or other factors.
 HYPO: There are only two companies on the planet making big planes, Airbus and Boeing. How might
they divide markets if they chose to? Cd divide by geographic dimensions (Boeing only sells to North and
South America and Airbus only sells to Europe; agree to not sell in the other’s territory). Cd divide market
by product lines (one sells only planes w/ over 300 seats and other sells planes w/ 100-300 seats). Cd
divide by purchaser (i.e., difft. airlines).

ROL: Geographic market division by competitors is per se illegal. United States v. Topco Assoc., Inc. (1972,
p.118).
- Topco is separate corp owned/operated by couple dozen smaller supermarkets to purchase, and
actually brand, certain items that will be sold in the grocery stores. The agreement had a market
allocation aspect to it - only one Topco member per market was allowed to sell Topco brand products.
- If BMI-kind of analysis was applied here, court might have found something else going on here.
Dissent says that agreement prevented free-riding. Market division encouraged them to promote the
label in their area. There is probably an efficiency story here that overrides the market division story,
but this is never discussed in the case.

ROL: Market division by competitors is per se illegal when there is no pro-competitive justification. Palmer v.
BRG of Georgia (1990, p.125).
 Facts: Georgia bar review company and Bar-Bri divide the market. BRG gets Georgia and Bar-Bri takes
rest of country. BRG is going to pay Bar-Bri $100 per student.
 PER SE
 What is different about this case from a per se standpoint? The huge price increase ($150-400) of BRG’s
bar review course the day after Bar-Bri leaves the market. Immediate evidence of effect. But this is proof
of effect, so it is really per se?
 What is missing here that would have encouraged ct to go into RR land? There is no pro-competitive
justification put on the table here. Simply a naked restraint of trade (purpose is to decrease competition,
raise profits).
 No pro-competitive justification = per se illegal

 Group Boycotts
 Boycotts w/ Collusive Effects = Per Se Illegal (no need to det market power; don’t look at efficiencies;

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just look at conduct).

 Collusive Group Boycotts: Concerted refusals to deal that result in collusive effects (those that directly
restrict output or raise price).
 Collusive vs. Exclusive Boycotts: How do you tell?
 Eastern States Retail Lumber Dealers’ Ass’n v. United States (1914, p.130)
 Bunch of retailers who competed w/ each other in sale of lumber got together and decided to
exclude a lumber wholesaler who was also selling retail.
 Collusive or exclusive boycott? Posner said collusive, but Scalia said more exclusionary.

ROL: Group boycotts unsupported by an efficiency rationale are per se illegal. Klor’s, Inc. v. Broadway-Hale
Stores, Inc. (1959, p.132).
 Facts: Klor’s was basic mom-n-pop retailer selling appliances, etc. in downtown SF. One of its rivals was
Broadway-Hale. Through agreement bt B-H and whole variety of appliance manufacturers, B-H got the
manufacturers to agree not to sell to Klor’s.
 Why would manufacturers want to cut off sales to Klor’s? One sol’n is offered by economists (the
free-riding Klor’s store; no E in the record for it).
 Holding: SCt says that this is per se illegal. What’s the collusive/exclusive story that makes sense here?
What’s the problem w/ telling a collusive/exclusive story here? Wh/not B-H has sufficient market power to
control the appliance manufacturers. Were they really even exercising monopoly power here? Or was it
horizontal conspiracy bt manufacturers that operated at the retail level?
 Opinion speaks in terms of populist AT theory – AT is here to protect the independence of the lil’ biz
man; protecting trade freedom; protecting the local entrepreneur. (Now view is really that AT is to
protect prices.)
 Only real explanation is that this was a boycott and there was no efficiency rationale to support it.
 Seems like vertical agreement; not a horizontal boycott, but is treated as a horizontal case.
ROL: Boycotts w/ the end goal of raising prices and unsupported by an economic efficiency rationale are per se
illegal. FTC v. SCTLA (1990, p.137). CLASSIC COLLUSIVE BOYCOTT
 Facts: An agreement bt trial lawyers in DC Circuit to w/hold legal svcs to DC govt to represent indigent Δs
in criminal trials until they got a pay raise. Had some good rationales for demanding pay raise (wd Δs get
good counsel w/ those low wages?).
 Why doesn’t BMI (economic efficiency) come into play here? Not saying that they were creating new
product, creating efficiencies, increasing competition, lowering “costs.” Also can’t argue good svc,
save the world, save dolphins, etc.
 Per se rationale very strongly defended in this opinion by Stevens.
 Not just a rule of judicial convenience, but also prevents people from engaging in risky behavior that,
if person is lucky and successful, will hurt the consumer.
 This was a collusive agreement w/ a collusive effect – end goal was to raise prices (really very close to a
price-fixing agreement; could say it was a boycott in aid of a price-fixing agreement).
 Impact of the 1A and the Noerr Doctrine: SCTLA claimed that it was petitioning the DC govt to pass a law,
to vote, to pay the PDs more money.
 Noerr involved a sit where the activity was petitioning the legislature of CA to pass a law involving
competition essentially to the benefit of the RR and the truckers. RRs were petitioning to pass
anticompetitive legislation that wd deter competition bt RRs and truckers. Cd say that RR was
agreeing among themselves or w/ legislature to inhibit competition that they were feeling from the
truckers.
 Wasn’t an AT violation bc the means/mechanism by wc/ you were going to squash competition
was not an anticompetitive act but was an act of the legislature.
 The boycott or petitioning itself was not harming competition.
 AT law only reaches pvt restraints of trade that affect competition, not public/legislative acts that
may be anticompetitive.
 Noerr not applicable bc here trial lawyers are boycotting not attempting to get legislation passed wc/
was the case in Noerr. (see page 141)
 Also looked at O’Brien (1A case; govt can’t act in way that impeded free speech), but said O’Brien has
its lts and AT laws are more than an incidental reg gov’tal interest.
 Naked Restraint = In the pigeon hole + no cognizable justification

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Boycotts w/ Exclusionary Effects = Ambiguous Per Se Std (look at more, just stopping short of RR analysis).

 Rule of Reason
 Application
 When applying the rule of reason (RR), cts engage in a broader inquiry, consider more facts, and
attempt to create a more detailed record.
 Caution:
 Simply bc ’s conduct is being looked at under RR (instead of per se) does not mean “everything
goes.” Also does not mean there are no shortcuts or groupings w/in the RR analysis.

RR: True test of legality is wh/ the restraint imposed is such as merely regulates and perhaps thereby
promotes competition or wh it is such as may suppress or even destroy competition. [weighing net
effect on competition, balancing of competitive effect through consideration of factors relating to nature,
scope & effect of alleged anticompetitive restraint.] To det that question the ct must ordinarily consider the
facts peculiar to the biz to wc/ the restraint is applied; its condition bf and after the restraint was imposed;
the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to
exist, the reason for adopting the partic remedy, the purpose or end sought to be attained, are all RL facts.
This is not bc a good intention will save an otherwise objectionable reg or the reverse; but bc knowl of
intent may help the ct to interpret facts and predict consequences. Chicago Bd. of Trade (1918, p.146).
 s in case were essentially price-fixing (horizontal agreement)
 Holding: Ct decides to treat this conduct under RR rather than per se rule. Ct sees the conduct as
actually promoting competition. Seems to be making the pt that this conduct is not bad and in fact it is
good for competition.
 Improved conditions of competition by making info more widely available.
 Also efficiency advantages (save costs in mechanics of the trading). Kind of like BMI in that it is a
mech that improves the ability of the market to be free.
 Major Propositions
 (1) True test of legality wh the restraint imposed is such as merely regulates and perhaps thereby
promotes competition or wh it is such as may suppress or even destroy competition
 (2) Three categories of Factors to Consider: Nature; Scope; Effect
 Relevant Factors:
 facts peculiar to the business
 conditions of business bf & after restraint was imposed
 nature of the restraint
 its [pro-competitive] effect, actual or probable (requires analysis of market & market
power) [i.e. showing that the restraint won’t have that big of a negative/anti-competitive
effect on the market or competition but rather a pro-competitive one]
 history & purposes of the restraint
 evil believed to exist
 reason for adopting particular remedy
 purpose or end sought to be attained
 these are “all relevant factors”

ROL: Purpose of the RR analysis is to form a judgment about the competitive significance of the restraint; it is
not to decide wh a policy favoring competition is in the public interest, or in the interest of the members of
an industry. NSPE v. United States (1978, p.150).
 For a time, it was thought professionals were immune from AT laws bc they were not in it for the
money. In reality, there is no exemption for learned professionals (doctors, lawyers, etc)
 Facts: Govt challenged NSPE’s code of ethics on ground that it was price-fixing. Not really price-fixing,
but a ban on competitive bidding (pvt conspiracy among a trade association). Parallel to price-fixing bc
customers are prevented from making price comparisons at the initial inquiry and txn costs will rise bc
customer wd have to hire the engineer, find out his price, then decide wh or not to accept the price or seek
out another engineer. In their defense, they admit that but for this restraint, there wd be lower prices so it is
parallel to price-fixing.

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 Justifications by Engineers:
 (1) Safer and better product bc no shortcuts to get a lower bid
 (2) Restraint inures to the public benefit by preventing the production of inferior work and by insuring
ethical behavior.
 Ct will not consider any justifications bc assumption that competition is best method of allocating
resources in a free market recognizes that all elements of a bargain (cost, quality, durability, svc,
safety) are favorably affected by the free opportunity to select among alternative offers. Market
shd regulate
 Job of making the determination that things are unsafe is the job of legislature, not the NSPE or the
judiciary.
 Don’t want the cts to do it bc cts are not trained to make these kind of judgments.
 Process by wc/ ct wd reach decision wd be one or two cases w/ narrow sets of facts. Broad reg
decisions shd not be made based on such a narrow view of the situation.
 Holding: The RR does not support a defense based on the assumption that competition itself is unR. Ban is
the equivalent of price-fixing bc the ban impedes the ord give and take of the market place and
substantially deprives the customer of the ability to utilized and compare prices in selecting engineering
svcs.

ROL: There are two kinds of restraints: (1) naked restraints and (2) ancillary restraints. Naked restraints have no
pro-competitive justification and are created solely for restraint of competition; thus, they are per se illegal.
Ancillary restraints, OTOH, are subordinate to some other K or obligation wc/ is both legal and pro-
competitive. Ancillary restraints must be nec to accomplish the main, pro-competitive purp and shd be the
least restrictive alternative for accomplishing main purp. Cts will inquire into the Rness of ancillary
restraints to determine legality or illegality. Addyston Pipe (1898, p.156).
 Straight-forward price-fixing and market division case. J. Taft couldn’t overrule the SCt, so he wrote an
opinion that put down framework for the structured RR that is used today. It has been hailed as greatest
opinion in AT. Was invoked and used in BMI.
 Naked restraints
 no pro-competitive justification
 sole logic is the restraint of competition
 Ancillary restraints
 (1) must be subordinate to some other K or obligation wc/ is both legal and pro-competitive;
 (2) must be nec to accomplish the main, pro-competitive purpose and;
 (3) must be no greater than nec (least restrictive alternative; no broader than nec to accomplish main
purpose
 Classic example is sale of bakery w/ covenant not to compete. (CL example of allowable restraint
of trade)
 Will inquire into Rness in a structured way. Want a justification that is pro-competitive.

ROL:Although horizontal price fixing and output limitation are ordinarily condemned as a matter of law under
an “illegal per se” approach bc the probability that these practices are anticompetitive is so high, when such
practices are challenged in an industry in wc/ horizontal restraints on competition are essential to product
availability, the RR approach shd be used. NCAA v. Bd. of Regents of the University of Oklahoma (1984,
p.169).
 Facts: Alleged that NCAA’s TV plan unR restrained trade in televising of college football games. Think of
this as a horizontal conspiracy. Colleges are all agreeing through NCAA how to sell their broadcast games.
Conspiring about their rts to sell their broadcast games on TV. Net effect as a kind of cartel. Set the # of
games and total aggregate deal w/ networks. Teams cd them negotiate w/ networks, but only w/in
framework. Networks were “victims” bc they pd more money due to lted output. Beneficiaries were NCAA
colleges.
 Holding: Ct finds that TV plan constitutes a horizontal restraint that lts output and fixes price, but declines
to apply the illegal per se approach bc the case involves an industry in wc/ horizontal restraints on
competition are essential if the product (i.e., marketing of competition - contests bt competing institutions)
is to be available at all.
ROL: Test for det wh product constitutes a sep market is wh there are other products that are R substitutable for

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the product. If so, product is not its own market. NCAA v. Bd. of Regents of the University of Oklahoma
(1984, p.169).
 Absence of proof of market power does not justify a naked restriction on price or output. Need pro-
competitive justifications.
 Ct found that output actually was reduced bc of this plan (actual anticompetitive effects) and there were no
pro-competitive justifications even offered for TV plan, so it was violation of §1.
 Legal Analysis:
 Not Per Se bc this is an industry in wc/ horizontal restraints on competition are essential if the product
is to be available at all. (need cooperation bt schools to set rules, schedules, etc)
 Not RR bc No pro-competitive justification - have to marry the restraint to something that improves
competition
 No bright line bt per se and RR

ROL: If the challenged agreement promoted enterprise and productivity at the time it was adopted, the ct must
apply the RR to make a more discriminating assessment. Polk Bros., Inc. v. Forest City Enterprises, Inc.
(1985, p.888).
 Facts: One merchant owned big building and decided to divide it. Lease other part of building to home
furnishings store w/ covenant that they couldn’t sell lawn mowers, etc. Buyer argued that this was market
division.
 Glance ahead at what ancillary restraints have done. Easterbrook decided that this is the classic
ancillary restraint (like the bakery store sale w/ covenant not to compete). Pro-competitive purpose
was development of the market and it was necessary to have covenant not to compete in order to do so.
 Holding: Ct must ask wh/ an agreement promoted enterprise and productivity at the time it was adopted; if
it arguably did, then ct must apply RR to make a more discriminating assessment.

HYPO: How wd NSPE apply if AMA appointed a cmte wc/ it called the Cmte on Quackery to deal w/
chiropractors, whom they thought were quacks; set up a rule that said no member of AMA can refer to a
chiropractor, teach at chiropractic school, have any dealings/biz w/ chiropractors.
- This wd be an exclusionary boycott (keeping competitors out of their biz).
- What wd holding be on this kind of case? Consumers/market are able to recognize that chiropractors have
diff certifications, etc. than docs and can decide on their own wh/not to see a chiropractor rather than
doctor. Can’t cut off choice of consumers
- Wilke v. AMA (special RR case; allowed ct to see if scientific claim is plausible bf applying per se rule)
- Must find pro-competitive reason for the restraint bf going to RR analysis

HYPO: Baseball owners essentially agreeing among themselves as to salaries (price-fixing). This is illegal.
Boycott among baseball owners of Pete Rose (bc he gambled on games). No one can hire Pete Rose to manage,
etc. This is legal.
- Why can baseball owners boycott but not fix prices?
- What is the overarching pro-competitive purpose to wc/ boycott is subordinate? By not allowing gambling
in baseball, you preserve the competitive nature of baseball (more marketable, more sellable if people think
they are going to see a legitimate game). Part of the product being sold is the competition and rules that
promote the legitimacy and credibility of the competition are nec.
- Why is price-fixing illegal? If you are going to fix prices, then certain levels of players wd be pd the same,
teams wd be “equally good,” and competition wd cease in the sport. Incentive to make more money wd
make players improve, thereby increasing competition.

HYPO: What about the college draft? What is the overarching purpose of the NFL agreeing among themselves
to have rules that restrict negotiations bt college players and pro teams? Promotes competition bc worst team
gets chance at best player. Product is creating a competitive team, marketing of a desirable product (in sports,
must be a competitive product). But is this the least restrictive alternative? There have been some cases where
cts have said that draft need not be so draconian as to the player (i.e., how long a team cd hold draft rights, etc.).
In applying LRA test, might have some restrictions on how draft will work.

HYPO: What about rule that you can’t draft a player until his senior year? NFL depends on college to be a sort
of “minor league” where players are cultivated, thus preserving competition in the NFL by assuring that well-

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developed players are entering the profession. It wd hurt the product to be drafting 18 yo

HYPO: What about moving franchises in the NFL? What is main purpose for preventing franchise from
moving? NFL argued that if you are moving teams w/o any restrictions, how is a fan going to be come attached
to a particular team (league interest in preserving solidarity, permanence of teams)?

 “Quick Look” Approaches to Rule of Reason

 Overview
 end of dichotomous approach to AT (either per se or RR) but does stand for: “there’s some type of
intermediate scrutiny bt per se & RR”
 still have per se & RR, but for intermediate cases, maybe we can do something/an analysis that is
somewhere in bt
 Quick Look to Condemn (NCAA, IFD):
 Analysis turns on (1) a facial review that indicates harm to competition; (2) a plausible efficiency
defense sufficient to justify abandoning the per se rule, but (3) condemnation when it appears the
defense is not supported by E.
 In both cases, Π has direct E of actual anticompetitive effects from ’s conduct. Direct E of actual
effects was sufficient to shift the BoP to s to offer sufficient E of pro-competitive justifications.
 Serves a method for identifying conduct that falls outside of a per se category yet warrants only
abbreviated consideration bf concluding that it constitutes an unR restraint of trade.
 Quick Look to Exonerate (Easterbrook):
 Filters are used to weed out non-meritorious cases.
 (1) First filter wd be market power
 (2) if no plausible E of market power, then case shd be dismissed, even if conduct falls w/in per se
category

ROL: Absent some countervailing pro-competitive virtue (i.e., the creation of efficiencies in the operation of the
market or in the provision of goods/svcs), an agreement limiting consumer choice by impeding the
“ordinary give and take of the marketplace” cannot be sustained under the RR. FTC v. Indiana Federation
of Dentists (IFD) (1986, p.178).
 Facts: IFD’s policy takes form of horizontal agreement among participating dentists to w/hold from
customers a partic svc that they desire (forwarding of x-rays to ins cos along w/ claim forms). Like a quasi-
boycott (collusive) + reduction in info output + reinforcement of dentists’ ability to keep prices up by
increasing # of svcs performed and pd for by insurance.
 Nature of Restraint: horizontal agreement; reduction in info output; price elevating mechanism bc claims
won’t be denied if insurance company can’t deny svc bc they can’t evaluate the rx
 Issue: Wh the FTC correctly concluded that a (horizontal) conspiracy among dentists to refuse to submit x-
rays to dental insurers for use in benefits determinations constituted an “unfair method of competition.”
 Holding: A refusal to compete w/ the pkg of svcs offered to customers ... impairs the ability of the market
to advance social welfare by ensuring the provision of desired goods and svcs to consumers at a price
approximating the marginal cost of providing them.
 Ct shoots down IFD’s justifications
 No elaborate industry analysis is req’d to demo anticompetitive character of horizontal agreements
among competitors to w/hold a particular desired svc.
 Proof of actual detrimental effects can obviate the need for an inquiry into market power, wc/ is
but a “surrogate for detrimental effects.”
 A concerted and effective effort to w/hold (or make more $) info desired by consumers for purp of
det wh a partic purchase is cost-justified is likely enough to disrupt proper functioning of price-
setting mech of the market that it may be condemned even absent proof it resulted in higher $ or
purchase of higher $ svcs than wd occur in its absence.
 IFD’s non-competitive “quality of care” justifications were irRL to RR analysis here.

ROL: “Quick look” analysis shd be applied in cases when the great likelihood of anticompetitive effects can be
easily ascertained. What is req’d is an enquiry meet for the case, looking to the circs, details, and logic of a

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restraint. The object is to see wh the experience of the market has been so clear, or necessarily will be, that
a confident conclusion about the principal tendency of a restriction will follow from a quick look, in place
of a more sedulous one. California Dental Ass’n (CDA) v. FTC (1999, p.183). J. Souter
 Facts: A horizontal agreement through trade association. Rule in code of ethics affecting price/quality ads
by dentists (not a flat prohibition). Enforcement of this rule went beyond the bare prohibition ag false and
misleading ads. FTC alleged that CDA’s guidelines unR restricted two types of ads: price ads, part
discounted fees, and ads related to the quality of dental svcs.
 Issue: Wh a “quick look” sufficed to justify finding that certain advertising restrictions adopted by CDA
violated AT laws? Is a prohibition on advertising suff to justify per se or maybe quick look?
 Holding: This is an imperfect market. Consumers do not know what they are buying. Where there is
imperfect market info (asymmetry of info), may be some room for a justification and the ct shd consider
that. If the restraint made advertising more intelligible, then it might be justified.
 Comments:
 Really talking about burden-shifting here. Amount of info here was not enough to shift the BoP lack
of anti-competitive effects to Δ.
 Quick look is alive and well, but given complex facts and where  has some kind of pro-competitive
story to tell and Π’s story is not based on proof of actual anti-competitive effect  need a more careful
quick look.
 Why might restriction on advertising be subject to per se or quick look rule? Net effect of price
advertising seems to be in category that drives prices up (Breyer’s dissent)
 Souter says no per se or quick look bc of asymmetry of info consumers cannot gauge the truth/fallacy
of the ad; professional constraint filters any harm that might come to the consumer; might be pro-
competitive to screen out the information that is false or misleading
 Now it is up to the lower ct, using the RR, to see if consumers will benefit from a filtering of
information
 Std for Evaluating Cases: “Enquiry meet for the case” → look at nature of restraint and determine how
suspect the restraint is and then determine the level of enquiry req’d

2000 AT Guidelines for Competitor Collaborations

- To date, the most ambitious effort to synthesize the two quick looks, the per se rule, the traditional RR and the
The Question:
ancillary restraint model. Did conduct by competitors have
- Seeks to accomplish three goals: an unR anti-competitive effect?
(1) Avoid full blown market inquires when anti-competitive effects are evident.
(2) Avoid inquiry into justifications and efficiencies when evidence of market power is lacking.
(3) Preserve the flexibility to promptly condemn conduct having plausible efficiencies when those efficiencies
cannot inIffact be orsubstantiated.
“always If No Actual If E of Actual Comp
almost always Anti-Competitive Effects, (higher If other E of
prices or exclusion Market Power ...
tends to raise Effects and No
of comps, but
price or to reduce Market Power
plausible
output” efficiency ...

Per Se Unlawful, No Challenge No detailed market analysis Detailed market

so
(Quick Look to analysis:
CHALLENGE Burden shifts to competitors to
Exonerate) - market power
demonstrate justifications
- conditions of entry

If insufficient If economic If market power justifies

justifications, justifications interference of anti-
CHALLENGE are sufficient, competitive effects, burden
(Quick Look to no challenge shifts to competitors
Condemn)

If restraint is 17
If restraint is
more than is reasonably
reasonably necessary, no
necessary, challenge
CHALLENGE
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CHARACTERIZATION OF RESTRAINTS REVIEW [§1-Sherman]

Legal Standard Per Se “Pidgeon Holes”
1. Per Se 1(a) Price fixing
1(b) Collusive Boycott
1(c) Market division

[All 3 of these are the most important horizontal collusive restraints; collusive restraints are the most problematic in
AT]
Per se: applies to naked restraints, arguably, like the ones above, that don’t have any other purpose but to restrain
trade/competition & thus no redeeming competitive virtue [no inquiry into market power, reasonableness, & no
justifications accepted [hard for Δs to win]

2. Quick look: an intermediate analysis bt per se & RR.

3. Rule of Reason (RR): there may be an “ancillary” restraint, but if a pro-competitive justification can be found,
we’ll use RR (more demanding test, a lot of proof req’d (i.e. in depth market analysis, history, etc.) [harder for Πs to
win]

 Categories of Joint Ventures:

 R&D Joint Ventures
 Pool intellectual and financial resources to pursue dev of new products, processes, etc
 Frequently involves cross-licensing of intellectual property
 Can lead to the creation of new IP
 Production Joint Ventures
 Undertaking to produce something new
 Can work in combination w/ R&D
 Natl Cooperative Research and Production Act of 1993 (15 USC §4301)
 Provides some ltd exemptions from AT coverage
 Distribution Joint Ventures
 Combine capabilities of firms to bring new or existing products or svcs to market
 Combine, improve upon, or expand existing capabilities or create new ones
 Common Characteristics
 Integration of assets, know-how, etc
 Involve efficiencies
 Require contractual restraints

 Possible Anti-Competitive Effects of Joint Ventures:

 Serve as vehicle for setting prices, reducing innovation or restricting some other dimension of competition
 Risk of “spill over” effects
 Inclusiveness
 Exclusion

 Anticompetitive Theories Associated w/ Joint Ventures

 At Formation:
 Collusive Effects 
 Are co-venturers rivals?
 Will they together be able to raise prices or restrict some aspect of competition?

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 Are there protections in the formation papers that will prevent such actions?
 Exclusionary Effects 
 Is the venture exclusive to its members?
 How competitively significant will access to the venture be?
 Will members enjoy advantages not reasonably obtainable by non-members?
 In Operation:
 Collusive Effects 
 How do the venture docs contemplate operation of the venture?
 Will the venturers divide markets?
 Are there ancillary restrictions that will prevent or facilitate collusive effects?
 Exclusionary Effects 
 Do the venture docs contemplate exclusive dealing, licensing or tying?
 Are there features of the venture that in operation likely will impair or exclude non-members from
access to input suppliers or dealers?

 Legal Framework for Analyzing Joint Ventures

 Factors Test from US v Penn-Olin (SCt 1964)
 Statutes
 § 1 of the Sherman Act
 § 3 of the Clayton Act
 § 7 of the Clayton Act
 Export Trading Company Act of 1982
 Natl Cooperative Research and Production Act of 1993 (15 USC §4301)
 Guidelines
 AT Guidelines for Collaborations Among Competitors (2000)
 AT Enforcement Guidelines for International Operations (1995)
 AT Guidelines for the Licensing of IP (1995)
 Horizontal Meger Guidelines (1982 - 1997)
 Stmts on AT Enforcement Policy in HC (1996)
 Cases
 Polygram Holdings v. FTC (DC Circuit 2005) Most Useful Description of AT Law
 Procedural Posture: Δ record co and several affiliates petitioned for review of an order of the FTC, wc/
held that the record company violated 15 U.S.C.S. § 45 of the FTC Act by entering an agreement w/ a
competitor to temporarily suspend advertising and discounting of two record albums, one distributed
by Polygram and the other by the competitor (Warner).
 Overview: FTC's analytical framework did not conflict w/ judicial precedent regarding restraint of
trade bc as applied, it allowed ct to ascertain wh the challenged restrain hindered competition.
Although FTC used the term "inherently suspect," the applied framework gave rise to a rebuttable
presumption of illegality based on the close family resemblance bt the suspect practice and another
practice that already stood convicted in the ct of consumer welfare. The co's agreement w/ Warner had
a deleterious effect upon consumers as it looked suspiciously like a naked price fixing agreement bt
competitors. Although the temp moratorium appeared likely to mitigate the spillover effects that cd
have been expected to follow the cos aggressive launch of an album, the "free riding" to be eliminated
was nothing more than the competition of products that were not part of the joint undertaking. Thus,
the company did not id any competitive justification for the agreement. The remedy was R as the
finding of a sig risk for similar, future arrangements was supported by substantial E.
 Outcome: The petition for review was denied
 Comments: Ult. looking at anti vs. procompetitive reasons; after Calif Dentist, quick look vs. per se does
not really matter bc the ct now shows a continuum of analysis Standard used: MA Board of Optometry
 “inherently suspect conduct” – by its nature, the conduct is likely to affect price competition.
Alternatively, called a “close family resemblance” to another decided cases facts.
 Here, prohibiting advertisings and discounting old Cds is inherently suspect
 This shifts the burden of production shifts to the Δ to show a procompetitive justification.
 The justifications must be plausible (related to benefiting competition) and cognizable
(recognizable as legitimate).

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 If met by the Δ, the gov must rebut by, either

 “First, the Commission may explain why it can confidently conclude, without adducing evidence,
that the restraint very likely harmed consumers.
 Alternatively, the Commission may provide the tribunal with sufficient evidence to show that [actual]
anticompetitive effects are in fact likely.” “If the Commission succeeds in either way, then the
evidentiary burden shifts to the defendant to show the restraint in fact does not harm consumers or has
"procompetitive virtues" that outweigh its burden upon consumers.”
 Quick look applied here:
 Is plausible → cutting discounts is similar to other bad action decided in ct → justification (free riding
argument rejected) → no justification equals loss
 Free riding argument: the older Cds would benefit from the New CD b/c, of the overlap, the
promotion of the current concert promotes the old Cds.
 Rejected b/c the free riding is in separate products that are individually produced.
 US v. Visa (2d C 2003)
 Procedural Posture: Π, the U.S. DoJ, brought a civil enforcement axn challenging the organizational
structure of Δs, Visa and MasterCard. The complaint charged that the companies conspired to restrain
trade. DCt for NY, entered a judgment finding that Δs violated §1 of the Sherman AT Act and imposed
an injunction. Δs appealed.
 Overview: The appeal concerned the propriety of Δs "exclusionary" or "exclusivity" rules, wc/
prohibited members of their networks from issuing competitors' cards. The ct agreed that the
exclusivity rules were anticompetitive bc they restricted the ability of Δs’ competitors to compete w/
Δs in marketing their "network svcs" to banks. As a result of these exclusionary rules, the competitors
had been effectively foreclosed from the biz of issuing cards through banks. Δs’ exclusionary rules
harmed competition by reducing overall card output and available card features, as well as by
decreasing network svcs output and stunting price competition, product innovation, and output. Δs
were consortiums of competitors. The restrictive provision was a horizontal restraint. Far from being
"presumptively legal," such arrangements were exemplars of the type of anticompetitive behavior
prohibited by the Sherman Act. Further, Δs failed to show that the anticompetitive effects of their
exclusionary rules were outweighed by procompetitive benefits
 Outcome: The judgment of the DCt was affirmed

I US v. Visa
 The credit card business.
 Visa and MC are controlled by their member banks (C=14k banks, MC=20k banks), so are treated as
horizontal agreements individually.
 Merchant → Acquiring Bank → Issuing Bank → Customer.
 The issuing bank issues cards to customer.
 The acquiring bank deals w/ the merchant; hands the transaction on behalf of the merchant who is
submitting the bill.
 When a purchase is made, info goes from consumer and money goes to the merchant
 American Express wants to sign up some of these member backs, however a member agreement
prohibits member banks from issuing any cards except MC and V
 Standard: Rule of Reason analysis (w/ elaborate market inquiry)
 Must show either 1) market power or 2) actual effect.
 Market definition: 3 markets here, 2 of real importance
 1. general purpose card market
 2. more important – “network svcs” (the svcs used for transmitting info/cash in the
transaction).
 1. Market power:
 Here, these parties have market power (73% of market)
 2. The actual effect.
 E.g., before and after picture
 Procompetitive justification (burden on Δ)
 Here, Δs could not meet the burden
 Rejected justification: create customer loyality

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 Rejected b/c: both V and MC cards were issued, so there was not customer loyality
 Thus, the Rof R is the “defendant’s paradise” b/c it is difficult for Π to meet showing market power or
actual effect.

Problem: Midwest Truck Leasing (p.209)

 Near per se analysis
 Facts: are local co’s who lease trucks.
 The agreement is to
 (1) members can’t open another facility w/in 25 miles of another member.
 (2) members can’t join a competing national organization
 (3) the svc agreement: every member agrees to svc another members trucks svc in their market, but
don’t agree on prices.
 Nature of the restraint: horizontal restraint among competitors b/c
 Geographic restriction on competition is like Bar Review Course, but learning form BMI, etc, get a
quick look.
 Step 1: inherently suspect/close family resemblance: yes b/c market division
 Step 2: plausible and cognizable justification: necessary in order to compete w/o canabalizing each
others business (free rider of brand recognition re advertising/marketing).
 Here, would be plausible if they did have a need to separate from each other to cooperate in
the business (e.g., creating an advertising brand). That was not the case here, where they only
had an agreement to fix each others trucks
 Fails here, Δ loses
Problem 2: Mountain Medical
 Distinguished from Mericopa
 Facts: 2 physician groups
 1) Hospital1 owned
 2) independent doc’s who engage in joint marketing, adopt common name, don’t integrate/offer new
product, no agreement on price (in Mericopa, they agreed on price).
 Agreement: not to negotiate individually w/ HMO
 Analysis
 Inherently suspect: restriction on individually negotiating w/ HMO is like price fixing (or collusive
boycott).
 Is like joint advertising or referral svc. However, the negotiating w/ HMO gets them in trouble.
 Plausible/cognizable justifications: none here.
 Thus, Δ loses

CHAPTER THREE DISTINGUISHING CONCERTED FROM UNILATERAL ACTION

 Introduction
 § 1 Sherman Act: “Contract, combination ... or conspiracy”
 Shorthand: “agreement”
 Plurality of actors
 Embraces unspoken, informal, loose agreements
 § 2 Sherman Act: Monopolization
 Single actor, unilateral conduct
 Does not address single actor who is not a monopolist
 Issues in the law of conspiracy
 (1) Issues resulting from harsh prohibitions ag concerted trade restraints
 aggressive Sherman Act enforcement drove many cartels underground
 promoted tacit collusion
 Caused cts/prosecutors to
 (a) formulate policies that wd help to flush out direct E
 (b) develop analytical methods for estab agreement w/o express or direct E
 reliance on informants, corp leniency programs, offers of immunity
 (2) Issues resulting from increased reliance on circum E and inference to estab conspiracy
 hard to show in intra-corporate agreements

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 conflicting goals: preserve incentives of indiv firms to compete aggressively and protect ag the
effects of combined economic power

ROL: A Section 1 conspiracy requires a plurality of actors. Copperweld Corp. v. Independence Tube Corp.
(1984, p.214).
 Facts: Copperweld (parent corp) bought subsidiary (Regal). The sales agreement bound the seller
corporation (Lear) and its subsidiaries not to compete with Copperweld. A corporate officer of Lear formed
Independence to compete in the same market as Regal. Independence claims Copperweld and Regal
conspired to keep them from obtaining nec steel tubing.
 Issue: Wh a parent and its wholly owned subsidiary are capable of conspiring in violation of §1 of the
Sherman Act?
 Holding: Copperweld and Regal were incapable of conspiring w/ each other for purposes of § 1 of the
Sherman Act. Ct reasoned that AT liability shd not depend on wh a corp subunit is organized as an
unincorporated division or a wholly owned subsidiary
ROL: A parent corporation and its wholly owned subsidiary are not considered two different entities and are
therefore incapable of conspiring with one another for purposes of § 1. Copperweld Corp. v. Independence Tube
Corp. (1984, p.214). Reasons: Parent and subsidiary have unity of purpose ([a] unity of control, [b] unity of
economic motivation), unlike colluding competitors.
 The case tells us:
 (1) Difference bt §1and §2 of Sherman Act
 §1 - deals w/ concerted axn (multiparty conduct)
 §2 - deals w/ monopolization (unilateral axn)
 (2) Why Congress created two categories
 With multiparty axn, congress is concerned about decreasing competition; decreases
independence; no unity of interest bt the firms; they are independent and have separate goals,
interests, etc (separate “souls”)
 With unilateral axn in wholly owned subsidiary, there is a “unity of interest”; the subsidiary exists
totally and wholly to serve the interests of the parent; ultimately will act the same (pragmatic
reasoning)
 (3) How these two pieces fit together; Ct tells us how to fill in the “gap”
 The gap → §2 leaves untouched a single firm’s anticompetitive conduct (short of threatened
monopolization) that may be indistinguishable in economic effect from the conduct of two firms
subject to §1 liability (penalized under §1 for something that is allowed under §2)
 Logic behind the gap → something inherently more dangerous in allowing the conduct bt rivals
than in a single firm; “subjecting a single firm’s every axn to judicial scrutiny for Rness wd
threaten to discourage the competitive enthusiasm that the AT law seek to promote.” (the reward
for invention, innovation in a single firm)

 What about non-wholly owned subsidiaries and their parent corporations? Can they collude? Courts are
undecided on this issue (split). Still unity of control. But you cd say that there is a divergent economic interest that
is in the mix of the agreement; Ex: Parent owns 40%, Shareholders own 60% (who controls, depends on the BoD,
how much influence the parent has on the board) (Zanesville question)

A. AT’s Special Scrutiny of Collective Action

 Intro
 Provable by circumstantial E where direct proof is lacking
 Implicit agreements
 “Wink and nod”
 Signals and responses
 “Tacit collusion”: NO AGREEMENT, controversial extension (two firms acting in parallel but not in
conscious agreement)
 In criminal PF cases: agreement is the whole ballgame (Andreas)

B. Modern Economics of Collusion

 1. Cartel Problems

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 The Three “Cartel Problems” = Obstacles to Conspiracy

 (1) Reaching consensus
 (2) Deterring derivation (i.e., cheating)
 (3) Preventing new competition (entry into market)
 Cartels are not always easy to form or maintain.
 George Stigler: must overcome several problems: reaching an agreement; detect cheating; punish
cheating; preventing entry from “outsiders”; secrecy
 Cartels are fragile, even if they succeed in overcoming the cartel problems
 Cartels in Action
 Case Study I: OPEC
 Problems: reach consensus, deter cheating, prevent new competition
 Natural incentive to cheat by increasing production; not keeping to production quotas. Buyers
induced cheating. Members are not equal in their ability to produce (may value the deal
differently). Also different objectives as to price, setting output; market share problems (all the
problems of reaching the agreement)
 Things going for them: high inelastic demand of product
 Case Study II: 4 Corners Gas Stations
 Why successful?
 Cheating can be detected very easily; cheating very visible
 Interdependence (game theory)
 Problem of reaching an agreement?
 Price leadership may solve this prob (the price leader, already decided on the price)
 Case Study III: Delicatessen
 What cartel problems found here? What solutions available?
 Problems in product differentiation, method of sale (what if prices are not visible; i.e., catered
lunches to exclusive clients).
 Andreas: Had to overcome diff capacities of diff co-conspirators; used big capacity to deter
cheating (ADM); had diff manners of sale; fully delivered pricing (deter cheating)

Factors Facilitating or Frustrating Coordination

Facilitating Frustrating
*Few firms *Many firms
*Product homogeneity *Product heterogeneity
-simple products -complex, changing products
*Excess capacity (multiple firms) *Excess capacity(individual firm)
*Inelastic market demand *Vertical integration
*Low marginal costs relative to price *Sale of complementary products
*Open transactions *Private transactions
*predictable demand *Unpredictable demand
*Small transactions *Lumpy sales
*Small buyers *Large buyers

 2. Incomplete Coordination
 Def’n: collusion that falls short of replicating the price a monopolist wd charge
 Reasons
 Inability to punish rivals
 Inability to allocate the monopoly profits satisfactorily to all participants
 Uncertainty of strategies (marketing, etc) of rivals
 Difficulty identifying the monopolist price

 3. Solving Cartel Problems in Practice

 In Re Brand Name Prescription Drugs AT Litigation (7th C 1997, Posner)
 Facts: Consolidated for decision were four appeals from rulings in a price-fixing case covering
hundreds of separate cases under the Sherman Act, brought by Πs, retail pharmacies, against Δs,

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manufacturers and wholesalers of prescription drugs. Πs complained that the Δs conspired among
themselves to deny all pharmacies, including chains and buying groups, discounts off the list price of
brand-name drugs that the Δ manufacturers sold to the Δ wholesalers who in turn resold to the Π
pharmacies.
 Issue: Wh enough evidence of violations existed to require that the case be allowed to proceed to trial.
 Holding: Reversed the grant of SJ to one Δ manufacturer and Δ wholesalers holding that enough E
existed for issue of Sherman Act violation for suit to go to trial.
 Sidebar 3-1: The Prisoners’ Dilemma

C. The Development of Traditional Conspiracy Law

 1. Coord Strategies for Firms and Proof Strategies for Πs
 Form Immunized Overt Agreements w/ Competitors
 Form Overt Agreements Supported by R Biz Justification
 Form Illegal Agreements Covertly w/ Competitors
 Collectively Adopt “Facilitating Practices”
 Engage in “Conscious Parallelism”
 Unilaterally Adopt Facilitating Practices

 2. Inferring Conspiracy from Circumstantial Evidence

ROL: Acceptance by competitors, w/o previous agreement, of an invitation to participate in a plan, the necessary
consequence of wc/, if carried out, is restraint of interstate commerce, is sufficient to establish an unlawful
conspiracy under the Sherman Act. Interstate Circuit (1939, p.247). Example of “hub and spoke” model
conspiracy
 Classic problem in § 1 cases → infer conspiracy from circumstantial E
 Facts: Movie distributors and exhibitors were Δs; US was the Π. Interstate ran 43 first run theaters and
Consolidated ran 66 theaters. The exhibitors got tog and tried to force distributors to set the prices for
movies at first run and second run theaters; Exhibitor “suggested” to 8 distributors that they disadvantage
the exhibitors competitors by setting prices for first and second run movies
 Issue: Is there a horizontal conspiracy among competitors?
 Decision: “It is elementary that unlawful conspiracy may be formed . . .W/out simultaneous axn or
agreement. Acceptance by competitors of a plan which is restraint of interstate commerce is sufficient to
establish an unlawful conspiracy under the Sherman Act.”
 An exercise in common sense when you don’t have a “smoking gun”
 Interesting in part bc of its rather peculiar facts:
 2 groups of people (movie theatres and film studios)
 Alleged conspiracy is bt the diff film studios
 Letter from movie theatres to film studios (knew others also got it) w/ demands
 Sooner or later, all film studios accept demands
 Elements: (1) Invitation to conspire known to all & (2) all acted in parallel fashion & (3) critical element;
it was against self-interest to do this independently and there is no good biz explanation for it.

ROL: E that a biz consciously met the pricing of its competitors does not prove a violation of the AT laws.
Theatre Enterprises (p.255).
 Facts: All major producers and distributors refused to release (license) first run movies to suburban theatres
 Decision: “Circumstantial E of consciously parallel behavior may have made heavy inroads into the
traditional judicial attitude toward conspiracy; but ‘conscious parallelism’ has not yet read conspiracy out
of the Sherman Act entirely.”
 A good, legit biz reason existed for doing so independently (acting as they did) → rebuts inference of
conspiracy if PF case is proved by Π; no interdependent behavior
 Profit motive (existed for all producers and distributors - all cd make more money in the cities)

 3. “Parallelism Plus” Doctrine

 Conspiracy = Parallel conduct (i.e., parallel pricing) + Presence of “plus” factors
 Conscious Parallelism = process by wc/ firms in a concentrated market might in effect share monopoly
power, setting their prices at a profit-maximizing, supracompetitive level by recognizing their shared
economic interests

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 “Plus” factors (Interstate Circuit; Amer. Tobacco) Act as signals to others

 (1) Communication or opportunity to communicate (mtgs, trade assoc. conferences)
 (2) Rational motive to behave collectively (inelastic demand, diff conditions of entry)
 (3) Axns contrary to self-interest unless pursued collectively (failure to alter price based on changes in
supply and demand)
 (4) Market conduct that appears irrational absent agreement (failure to price based on relative cost
advantages)
 (5) Past history of industry collaboration (historic E of successful interdependent or collusive axn)
 (6) Facilitating practices (pre-announcement of price increases)
 (7) Industry structure (oligopolistic market structure, homogenous products, diff entry conditions, large
#s of purchasers, info asymmetries, frequent txns)
 (8) Industry performance (stability of market shares over time, sustained and substantial profitability,
persistently supra-competitive pricing)

ROL: Neither proof of exertion of the power to exclude nor proof of actual exclusion of existing or potential
competitors is essential to sustain a charge of monopolization under the Sherman Act. American Tobacco v. U.S.
(1946, p.252). The petitioners have been found to have conspired to estab a monopoly and to have the power and
intent to estab and maintain the monopoly; E was parallel pricing over extensive period of time
 Procedural Posture: Cert was granted to 6th C to det wh, as that ct held, actual exclusion of competitors
was not essential to the crime of monopolization under § 2 of the Sherman Act
 Overview: Δs (tobacco companies) dominated the market for domestic cigarettes and engaged in collusive
practices to ensure that all of them wd buy tobacco at the same price and in the same markets. CtoAp
affirmed judgment finding Δs guilty of monopolization and related offenses. SCt affirmed bc lack of proof
of actual exclusion of existing or potential competitors was not fatal to the charge of monopolization. Proof
that a monopolist had both the power to monopolize and the intent to monopolize was sufficient. It was not
nec that such power actually be exercised. The monopolization convictions under § 2 of the Sherman Act,
were affirmed bc exclusion of competitors was not an essential element of the crime of monopolization
 Issue: Whether actual exclusion of competitors is necessary to the crime of monopolization under § 2 of the
Sherman Act
 Outcome: The Court affirmed the convictions

 Sidebar 3-2: The Turner/Posner Debate on Conscious Parallelism

 Turner: endorsed Theater Enterprises; oligopolist must acct for its rivals’ rxns; unR to interpret the
Sherman Act to condemn rational and unavoidable unilateral behavior even if the economic
consequences mirrored those of a conspiracy; the remedy wd not work bc the ct wd have to order them
to make irrational price and output decisions
 Posner: oligopoly market equals tacit agreement for concerted axn; this tacit collusion requires
additional, voluntary behavior and so violated §1 of the Sherman Act
 Turner’s view (conscious parallelism) has generally prevailed judicially
 Cts have consistently held that conscious parallelism alone does not support an inference of agreement

D. Contemporary Agreement Issues

 2. Parallelism and Plus Factors as Basis for Inferring Agreement

ROL: The std in a price-fixing claim is that if it is as R to infer from the E a price-fixing conspiracy as it is to infer
permissible activity, the the Π’s claim, w/out more, fails of SJ. Blomkest v. Potash Corp. (2000, p.283).
 Procedural Posture: Plaintiffs, a certified class of potash consumers, appealed from an order of MN DCt
wc/s granted Δs, potash producers, SJ on Πs claims under § 1 of the Sherman Act
 Overview: Πs, a certified class of potash consumers, appealed a DCt’s grant of SJ in favor of Δs, potash
producers, in an axn for conspiracy in restraint of trade under the Sherman Act. Δs maintained that the price
increase was the product of the interdependent nature of the industry, conscious parallelism, and industry
rxn to the privatization of potash production in Canada. The CtoA affirmed the DCt’s decision. Holding:
The ct found that there was insufficient E to support an agreement to stabilize and maintain prices in
violation of §1 of the Sherman Act. The ct noted that E that Δs were aware of each other's prices was not
enough to show an AT conspiracy. Δs entitled to SJ.

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 Outcome: DCt’s SJ order was affirmed on finding E that Δs were aware of each other's prices was not
enough to show an AT conspiracy.

CONTRASTING THE BLOMKEST MAJORITY AND DISSENTING OPINIONS

Blomkest Majority
Interfirm communications
• Few in number
• Lack of cxn w/ price increases
• Does not exclude possibility of
unilateral decision-making
• Absence of direct E of agreement • Structure of the potash industry
No axns against self-interest
• Independent biz justifications
• Expert testimony flawed
Blomkest Dissent
“Situational Factors”
• Crisis in the potash industry
“Volitional Factors”
• Sudden changes in pricing patterns
• Solicitations to collude
• Voluntary disclosure and exchange of info
on pricing
• Communications among rivals
• Cheater punishment program
• Advance knowledge of price moves
Defendants’ Response
• Governmental intervention fails to explain
pricing behavior

 Other Recent Cases of Interest (from TU pages 25-30)

 In Re High Fructose Corn Syrup(HFCS) AT Litigation (7th C 2002)
 Class axn by direct purchasers of HFCS ag HFCS producers.
 Structural Features favoring collusion: small number of sellers, standardized product, substantial
industry excess capacity
 Structural Features disfavoring collusion: presence of large buyers
 Other E of possible collusion: avoiding or limiting price competition, sellers bought product from
each other during the period of the alleged conspiracy when it cd manufacture product at a lower
cost, and little change in market share even though demand had substantially increased
 7th C overturned DCt’s award of SJ for Δs: “all of this E is consistent w/ the hypothesis that Δs
had a merely tacit agreement, wc/ at least for purposes of this appeal the Πs concede is not
actionable under §1 of the Sherman Act.”
 Williamson Oil Co. v. Philip Morris USA (11th C 2003)
 Class axn by cigarette wholesalers ag cigarette manufacturers
 Structural E favoring collusion: four firms accounted for 97% of cig market; inelastic demand for
product, high entry barriers, fungible product
 Economic E favoring collusion: axns contrary to self-interest
 11th Circuit affirmed SJ for Δs: Because the wholesalers cannot demonstrate the existence of a
plus factor, they cannot estab an inference of conspiracy
 In re Flat Glass AT Litigation (3rd C 2004)
 Class axn by buyers of flat glass and auto glass ag glass manufacturers.
 Ct affirmed SJ for auto glass manufacturers, but overturned SJ for flat glass makers.
 Flat Glass Market: E → the industry structure was conducive to coord, senior execs among sellers
communicated extensively about prices, firms knew about their rivals’ pricing plans in advance
 Auto Replacement Glass Market: Prices had risen and fallen in parallel but there was no plus
factor from wc/ to infer agreement
 Twombly v. Bell Atlantic Corp (2d C 2005) cert granted by SCt
 Background: Class axn by consumers ag 5 lg local phone companies. Class alleged that phone
companies conspired in a market division agreement and by an agreement to make it costly for

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new companies to come into the market to prevent new entrants into the market. DCt dismissed Πs
on a FRCP 12(b)(6) motion bc its complaint alleged only conscious parallelism and did not
include allegations of sufficient plus factors.
 Issue: Wh the evidentiary std for SJ (Matsushita) or equivalently for judgment as a matter of law
(Monsanto), in conspiracy cases shd also be used as the pleading std when agreement is alleged?
 Std: That the allegations tend to exclude the possibility that the alleged conspirators acted
independently
 Sidebar 3-5: What is an Agreement?
 Various Views
 (1) process, involving negotiation and exchange of assurances, not an outcome (Baker)
 (2) meeting of the minds; conscious commitment to a common scheme (judiciary)
 Circumstantial E
 In circum E cases, the judicial defns are not the best
 Bc wd see collusion in consciously parallel axn bt oligopolists
 Result: all agreements bt oligopolists are per se violations
 Problem: cts cd not come up w/ an effective remedy to correct it
 Mere lead-follower behavior is not illegal
 Solution: use “plus factors” to evaluate firm behavior in oligopoly cases
 Indicators of negotiation and not conscious parallelism
 (1) firm behavior that is more complex than wd be plausible otherwise
 (2) weak or pretextual explanations offered by the parties
 (3) E of opportunity to communicate; particularly overt communications spurring immed
responses

 Revival of the Hub and Spoke Model

ROL: Acceptance by competitors, w/o prev agreement, of an invite to participate in a plan, consequence of wc/, if
carried out, is restraint of interstate commerce, is sufficient to estab an unlawful conspiracy under the Sherman Act.
Toys R US v. FTC. (2000, p.308). In affirming the FTC’s finding that TRU had engaged in a conspiracy w/ its
suppliers in violation of §5 of the FTC Act, the ct indicated that Interstate Circuit’s approach retains vitality.
 Procedural Posture: Toys R Us (TRU)appealed from the final order of the FTC wc/ found that TRU had
coordinated a horizontal agreement among a number of toy manufacturers in violation of § 5 of the FTC
Act, and had entered a number of vertical agreements that did not pass scrutiny under the AT RR.
 Overview: TRU was found by FTC to have orchestrated a horizontal agreement among numerous toy
manufacturers through creation and enforcement of multiple vertical agreements in wc/ each manufacturer
promised to restrict distribution of its products to low-priced warehouse club stores, on condition the other
manufactures wd do the same. TRU appealed, attacking both the sufficiency of the E and the scope of
FTC’s remedial order.
 Holding: Although other conclusions were possible, there was substantial E to support the finding that TRU
had created a horizontal agreement among toy manufacturers, rather than merely a series of sep, similar
vertical agreements bt TRU and various toy manufacturers, as urged by TRU. Additionally, the ct held that
FTC’s finding of market power did not req an extensive inquiry into TRU’s market share; that TRU had
misconstrued the concept of free-riding, and that FTC’s remedial order was w/in it's power to restrict biz
options of the comp
 Outcome: The court affirmed the final order of the FTC, finding that, although RPP cd differ on the facts of
the record bf it, FTC’s decision was supported by substantial E and that its remedial decree was w/in the
broad discretion granted under the FTC Act

Problems and Exercises (page 336-338)

 Problem 3-1: Durab
 Facts: Three battery firms (Durab, Allthere, and Batteron) account for 90% of U.S. sales of small batteries.
D and A have 35% of the market share each; B has 20%. These shares have been fairly stable for the past
five years. Recently, Caman entered the small battery market, but its sales are ltd bc it cannot get suff retail
distribution. Nisobat has recently begun to import batteries to US from Japan but the transport costs are
high. Elec-City (natl chain) accts for approx 20% of retail battery sales in US. Elec-City also sells “pvt
label” brands produced by the big three sold to it at a substantial discount. In Dec, the CEO of Durab gave a

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speech and said prices wd rise 10-12%. This was reported in the news. Basically, the other two lg battery
firms soon announced similar increases.
 Problem: Whether a full-scale investigation of possible collusion in the small battery industry is warranted
by the DoJ?
 Discussion:

CHAPTER 4 VERTICAL INTRABRAND AGREEMENTS

 Introduction
 Vertical Restraints/Agreements
 Coordination among firms that do not directly compete
 Reason to cooperate → firms performing distinct fxns at diff stages of distribution
 Coordination bt complementary products or svcs
 Have collusive or exclusionary competitive effects
 Horizontal → bad; Vertical → good (per economists)
 Posner → believed in per se presumption in favor of vertical restraints
 Types of Vertical Restraints
 (1) Intrabrand Restraints (aka intrabrand competition)
 Competition bt sellers of the same brand (i.e., rival Chevy dealers);
 Retailers compete w/ price and other factors other than brand
 Authorized by manufacturer
 sell only from specified location or w/in geog area
 typically dealing w/ manufacturers agreeing w/ someone in vertical chain to sell product at
certain price (vertical price fixing);
 exclusive distributorship - the manufacturer has agreed to market its products exclusively
through a single wholesaler, and has agreed not to appoint any other wholesaler
 Collusive effects (product manufacturer maintains his oligopoly vis-à-vis other manufacturers;
distributor can keep up his margin)
 Important to extent that products are differentiated you need intrabrand competition
 (2) Interbrand Restraints
 Limit competition bt competing brands (i.e., Chevy and Ford)
 Prohibit suppliers from carrying competing brands
 Raise concerns about exclusion
 Exclusive dealing: manufacturer B cannot sell to Dealers, who have agreed to purchase solely
from Manufacturer A
 (3) Tying
 Requires a dealer or consumer to buy a second, generally unwanted product or svc as a condition
of buying a desired item
 Often found in interbrand agreements
 Manufacturer B cannot sell Product 2 to Consumers or Dealers who can only buy Product 1 from
Manufacturer A if they also agree to buy Product 2
 Distinctions
 Intrabrand restraints - concerns about collusive effects
 Usually addressed under §1 of Sherman Act
 Interbrand restraints - exclusionary effect concerns
 Addressed under §1, 3 of Clayton Act (w/ legally distinct std of proof)
 Can also be RL claims of monopolization/attempted monopolization
 Tying - often labeled per se
 Sometimes RR
 A. Price vs. Non-Price Vertical Restraints
 Introduction
 What is the legality under the Sherman Act of agreements bt firms at diff levels of distribution to set
prices
 Resale price is usually set by the upstream firm (manufacturer)
 Minimum resale price (floor)

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 Maximum resale price (ceiling)

 1. Minimum Resale Price Maintenance
 Minimum RPM: Placing a floor under the price a downstream firm can charge for a specific product;
most directly concerned w/ elimination of discounting.
 Economics of Minimum RPM
 Anticompetitive Theories:
 Monopoly pricing
 Dealers’ cartels
 Manufacturers’ cartels
 Dampening competition
 Pro-competitive Theories:
 Eliminate free-riding
 Protect output-enhancing dealer svcs
 Safeguard quality/image

Evolution of Per Se Rule for RPM

Per se rule Miller Tydings (Fed. “Fair Trade” Law) 1975: Miller Tydings “OK” to unilaterally
Governs Allows states to authorize FT repealed; Dr. Miles announce terms &
(Dr. Miles) → prices; protectionism legislation → reborn → stick to them
for retailers/wholesalers (Colgate)

ROL: Agreements or combinations bt dealers, having for their sole purpose the destruction of competition and the
fixing of prices, are injurious to the public interest and void. They are not saved by the advantages wc/ the
participants expect to derive from the enhanced price to the consumer. Dr. Miles Medical Co. v. John D.
Park & Sons Co. (1911, p.343). Vertical Price-Fixing is Per Se Illegal
 Facts: Π is manufacturer of branded, patented medicine. He had 2 kinds of agreements: (1) consignment K
- wholesale (give to distributor but retain title to it) and (2) retail agency K (outright sale of medicine to
distributor). Ks were challenged as illegal restraints on trade.
 Holding: Restrictions on products that Miles had no ownership rts over were illegal per se. Can control
price of goods as a manufacturer if you act through a consignment though. So consignment was okay;
retail agency K was illegal per se.
 Economic rationale: It may impair the kind of competition you wd want at the distributor level to compete
away higher prices.
 Theory: The public is hurt bc it is not able to benefit to whatever advantage might be derived from
competition bt jobbers/wholesalers.
 Property rts rationale: once you have bought something you have alienated your rts to it and the new owner
can deal w/ it as he pleases (old type of argument)
 Benefit to manufacturer: If wholesaler is getting bigger margins, then might put more into ads, etc. Also
loyalty from wholesaler to mfg’s product. This explanation actually sounds pro-competitive bc it allows
mfg to compete ag other mfg’s better (interbrand competition).
 What if mfg didn’t have “free rider” justification? Is there another justification that wd still induce mfg to
RPM? Restraints may be product of dealer cartel (dealers are one’s w/ interest in keeping price up, so
dealers lean on mfg to keep margins up).
 Today: Retailers cannot be told specifically what exact price to sell a product as; has been whittled away a
lot though (such as stamp of “MSRP”)

Colgate Doctrine: “In the absence of any purpose to create or maintain a monopoly, the [Sherman] Act does not
restrict the long recognized rt of trader or mfg engaged in an entirely pvt biz, freely to exercise his own ind
discretion as to parties w/ whom he will deal. And, of course, he may announce in advance the circs under wc/ he
will refuse to sell.”
 Rts can be forfeited if manufacturer undertakes efforts to cajole or coerce the resisting dealer into adhering
to specified prices, through, for example, threats to terminate sales.
 RPM law places a premium on the agreement element of §1 Sherman Act charge based on RPM-E
agreement
 An agreement exists (need agreement bc still under §1), even if unwillingly entered into, when dealer

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agrees to RPM or nonprice restriction

 Colgate: no agreement when mfg unilaterally announces terms on wc/ he will sell and refuses to deal on
other terms or terminates noncomplying dealers
 But if he lets a noncomplier back into the fold, there is an agreement
 Cf. Intestate Circuit on horizontal agreements
 Rationale: Escape valve from harshness of Dr. Miles

 2. Vertical Non-Price Restraints & Rule of Reason

ROL: Vertical non-price restraints shd be evaluated under the RR. Continental T.V., Inc. v. GTE Sylvania
Incorporated (1977, p.350). RR is the normal methodology; per se reserved for cases where cts have great
confidence the conduct almost always restrains competition. (No per se rule on non-price restraints)
 Procedural Posture: Petitioners, a franchisee and others, sought review of 9th C judgment holding in favor
of mfg on Πs’ cross-claims ag Δ for violations of §1 of the Sherman Act
 Facts: Δ manufactured televisions. Δ’s marketing plan req’d franchisees to sell Δ’s products only from the
location at wc/ that franchisee was franchised. Δ estab an additional retailer as a franchisee one mile from
Π franchisee. A dispute arose bt the parties wc/ resulted in a suit in wc/ Πs cross-claimed ag Δ asserting Δ
violated §1, by prohibiting sales other than from specified locations. DCt applied per se rule and held in
favor of Πs. CtoA applied RR and found in favor of Δs
 Holding: SCt held that bc such restrictions were widely used, and bc there was no showing that the
restrictions had a pernicious effect on competition or that the restrictions lacked any redeeming virtue, the
per se rule was the incorrect std under wc/ to analyze the restrictions. Instead bc such cd be adequately
policed under the RR, that std applied, and the judgment of the CtoA was affirmed
 Comments:
 Landmark decision; “sea change” for AT
 Non-price restraints diff from price restraints
 Kinds of non-price territorial restraints
 Location (i.e., can only sell from approved store)
 Customer (i.e., only to end-users, not to other wholesalers)
 Geographic (i.e., can only sell to a certain geographic region)
 Explanation: “The impact of vertical restraints is complex bc of their simultaneous reduction of
intrabrand competition and stimulation of interbrand competition.”
 Two things going on at same time: hurt intrabrand, but help interbrand competition
 Interbrand competition is the primary concern of AT (drives the economy) and it is a check on
exploitation of intrabrand power.
 Economic Rationale: retailers market better bc they care more (only dealer around so v. little
competition)
 Schwinn (overturned in Sylvania): Per se analysis applied; key to analysis was passage of title
 So what does this mean:
 Interbrand competition is the “primary concern of AT” (n.19)
 Free-rider and other justifications show that vertical restraints are often pro-competitive.
 Consumer viewpt: In situations where the products are easily interchangeable (bt mfgs), interbrand
competition is the primary concern. Not so when products are not easily interchangeable (great
differentiation bt product of diff mfgs).
 Also think: Interbrand competition is going to drive intrabrand competition (if people are not
buying your products, then might think about changing things)

Justifications for Vertical Non-Price Intrabrand Restrictions Recognized in Sylvania

• Induce competent retailers to carry new products
• Induce retailers to promote existing products
• Defeat market imperfections, such as free-riding
• Insulate manufacturers from product liability exposure by ensuring safety
• Protect manufacturer’s reputation by protecting quality

 RR methodology: Shifting Burden of Production

 Π must show (1) restraint (2) market power

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 Δ must counter w/ explanation of pro-competitive benefits (e.g. interbrand benefits and need for
restraint) - see above chart
 Π must prove, on balance, interbrand benefit does NOT outweigh intrabrand harm

 Sidebar 4-1: RR & Vertical Non-Price Restraints

 Good for Δs → (3 cases, total, in wc/ Π won under RR)
 ITEK: Δ had 70% of market, so intrabrand lessening must affect competition. Π wins.
 Eiberger: No pro-competitive justifications advanced, so Π wins.
 Std is vague, impossible → Weigh interbrand (pro-competitive) effects ag intrabrand (anticompetitive)
effects
 End result  Distributors go to state ct on theories of K, franchising law, commercial tort

 3. Supreme Ct’s Efforts to Accommodate Sylvania and Colgate

ROL: On a claim of concerted price fixing, the std of proof (SoP) for showing an “agreement” is satisfied by E
that tends to exclude the possibility that the mfg and non-terminated distributors were acting independently.
Something more than E of complaints is req’d. AT Π shd present direct or circum E that R tends to prove
that the mfg and others “had a conscious commitment to a common scheme designed to achieve an
unlawful objective.” Monsanto Co. v. Spray-Rite Svc Corp. (1984, p.364). Eroding the Per Se Rule of Dr.
Miles for Vertical Price-Fixing (RPM)
 Facts: Terminated distributor sues mfg alleging AT violations. Spray Rite was discount operator and one of
the biggest distributors of Monsanto’s product; Monsanto rationalized termination on fact that SR failed to
hire trained salespeople & promote sales to dealers adequately; SR said he was a price cutter & Monsanto
got complaints from other distributors of his price-cutting. Next thing SR knows, it’s terminated. It alleged
that its termination following competitor complaints was suff to support an inference that Monsanto & the
competing distributors (who complained) were in cahoots to fix prices.
 Rule: New Std- “On a claim of concerted P-F, the std of proof (SoP) for showing an “agreement” is
satisfied by E that tends to exclude the possibility that the mfg & non-terminated distributors were acting
independently. Something more than E of complaints is req’d.
 An AT Π shd present direct or circ E that R tends to prove that mfg and others “had a conscious
commitment to a common scheme designed to achieve an unlawful objective.”
 SoP was satisfied (mtg w/ salesman; never discussed criteria/reasons for termination; Monsanto went
to supervisor; newsletter).
 Here, Monsanto cd have very well have had its own ind reasons for terminating SR & its termination
wd have occurred even in the absence of complaints. Did Π present enough E? yes
 Ct will not infer agreement through termination based on complaints
 Rationale: Only relying on complaints and fact that termination occurred wd inhibit management’s exercise
of ind biz judgment. Price and svc are pretty much joined at the hip – mfg needs info on prices to find out if
prices reflect svcs of distributor and thus negatively affect mfg’s product.
 Effect: Limits permissible inference in vertical cases involving terminations. Mere complaint plus
termination is not enough.

ROL: [Expanding Monsanto] An agreement bt a mfg and a dealer to terminate a “price cutter,” w/o a further
agreement on the price or price levels to be charged by the remaining dealer, fails to show that such an
agreement almost always tends to restrict competition and reduce output. Business Electronics Corp. v.
Sharp Electronics Corp. (1988, p.370).
 Not enough votes to overrule per se rule for price fixing, so Ct did next best thing.
 Adjusted the substantive req’ments, making it very difficult for Π to satisfy per se rule
 Must show Mfg and dealer had an agreement as to “the price or price level to be charged by remaining
dealers.” Agreement w/ “survivors” must be to set a specific price or range of prices.
 Cf. Socony: No specific price need to be set
 Rationale: Cartels are fragile, likely not to last, so agreement to terminate price cutter insufficient bc
remaining dealer(s) cd still raise price.

Monsanto + Business Electronics = While restating the nominal rule of Dr. Miles, the decisions together indirectly
erode the precedent by making it more difficult for Πs to prove the sort of RPM agreement that triggers application

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of the per se rule.

Sidebar 4-2: The Economics of Minimum RPM

Some Pro and Anti-Competitive Uses of Minimum RPM
Pro-Competitive Anti-Competitive
• Eliminate free-riding • Facilitate mfg cartel
• Protect output-enhancing dealer svcs • Facilitate dealer cartel
• Safeguard quality/image • Impose excess svcs on consumers
• Dampening Competition •

 4. Maximum Resale Price Maintenance (Max RPM) & Rule of Reason

 Maximum RPM: Placing a ceiling on the prices a downstream firm can charge for a specific product.
ROL: Vertical max RPM is to be evaluated under RR (overruling Albrecht (1968, p.381) wc/ held that minimum
and max RPM were indistinguishable and shd be treated alike, i.e., as per se unlawful). State Oil Co. v.
Khan (1997, p.382). Removes max Vertical P-F from per se treatment
 Facts: Agreement bt State Oil & Khan was that Khan cd charge any amt for gas sold to his station’s
customers, but if price charged was higher than State Oil’s suggested retail price, the excess was to be
rebated to State Oil. In effect, this agreement fixed max gas prices by making it worthless for Khan to
exceed the suggested retail price.
 Holding: SCt held that vertical max price fixing is not per se violation of the Sherman Act
 Comments:
 Economic harm? Very ambiguous
 Only if it acts as a mask or magnetic ceiling (ct: we can tell it when it happens)
 Or reduces dealer svcs? (But that’s likely to hurt the mfg, so why wd mfg want to do that?)

 5. Contemporary Trends in the Public and Pvt Enforcement of the Dr. Miles Rule
 Sidebar 4-3: Permissible Variations of Minimum RPM (p. 389)
 In addition to the use of MSRP and consignment sales (no passage of title from mfg to wholesaler),
three other pricing strategies have tested the lts of Dr. Miles by penetrating the per se rule and being, at
times, found R by cts &/or FTC.
 (1) Cooperative Advertising
 Mfg offers to share in dealer’s expense of advertising its product; as condition of providing
advertising allowance/support, mfg may preclude dealer from (1) including any info on
pricing in the ad, or (2) from including any price other than MSRP or the mfg’s suggested
“sale” price
 Incentive  price agreement
 Effect: Incentivize efficient promotion
 (If lawful) Typically does not (1) require dealer to participate, or (2) prohibit dealer from
taking out ads on its own that include pricing info.
 FTC decision: In a vertical setting, the per se rule applies only to agreements to fix resale
prices that prevent the dealer from making independent pricing decisions.
 (2) Minimum Advertised Pricing (MAP)
 Restrict dealers from advertising below some minimum price determined by supplier.
 Usually used in conjunction w/ cooperative advertising programs.
 Unlikely to have any significant anticompetitive effects if dealers remain free to determine
their actual resale prices and to advertise their prices outside of the supplier-supported
advertising program.
 In the Matter of Sony Music (2000): MAP program made retailers who sought any
cooperative advertising funds adhere to distributor’s set prices in all of their advertising,
including advertising that they funded themselves. MAP policies constituted unR vertical
restraints bc they effectively precluded many retailers from communicating prices below
MAP to their consumers.
 (3) Discount Pass Through

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 A request from a wholesaler for a lower price from its supplier for the partic purpose of mtg a
lower price in the retail market. Supplier discounts price to wholesaler on condition that
savings is passed on to dealer or ultimate consumer.
 Such arrangements can be pro-competitive, facilitating “price wars” by providing retailers w/
an incentive to pursue new customers and suppliers w/ an effective means of encouraging
them to do so.
 FTC’s Amer. Cyanamid Complaint: Pass through programs have always been permitted, as
long as the dealer is free to discount to an even greater extent than the pass through amount.

ROL: An AT injury occurs where the injury to the dealer involved is aligned w/ the ult harm to the consumer.
Pace Electronics, Inc. v. Canon Computer Systems, Inc. (2000, p.395). Π suffers an AT injury if the injury
claimed resulted from anticompetitive aspect of the challenged conduct.
 Procedural Posture: Appellant (Pace, Π) sought review of an order of the DCt dismissing its pvt AT claim
under the Clayton Act involving the termination of a wholesale dealer's K. They dismissed Π’s case on a
12(b)(6) holding that, even though Δ’s P-F agreement was per se illegal, Π’s termination was not the type
of market injury that the AT laws were designed to forestall.
 Facts: Pace, a wholesale dealer, had its K w/ Canon, the supplier, terminated for refusing to acquiesce in an
alleged vertical minimum P-F conspiracy. Π suffered damages in lost profits that it wd have been able to
obtain as a dealer of Δ’s products. Therefore, Π suffered both an injury-in-fact and an AT injury
 Issue: Wh the termination constitutes an AT injury.
 Injuries were termination as a wholesale dealer and lost profits bc it may no longer obtain profits from
selling Canon products as “dealer prices.” Ct concluded these allegations of injury sufficed to
establish AT injury.
 A restriction on dealer independence wrt pricing decisions is an anticompetitive aspect of vertical
minimum P-F agreements. Thus, a maverick dealer, like Pace, wc/ is terminated for charging prices
less than those set under such an agreement, suffers an AT injury for wc/ it may recover damages
flowing from the termination (i.e., lost profits).
 Holding: Ct reversed dismissal of Π’s case and remanded for trial, bc, in cases of per se illegal conduct,
market-specific analysis was unnecessary to determine Π’s injury. Π’s termination for refusing to abide by
Δ’s illegal agreement was both actual and AT injury, allowing Π to maintain Clayton Act axn
 Rule: “AT protects competition not competitors!! To state a claim for damages, a Π must not just show
injury to themselves, but actually injury to competition: An AT injury occurs where the injury to the dealer
involved is aligned w/the ultimate harm that accrues to the consumer (their harm is aligned w/consumer’s
harm. . .the consumer must be harmed in some way)”

ROL: Exclusive distributorship (as opposed to exclusive dealership) does not restrict new entrants into the market
or foreclose sale to competitors. Paddock Pub v. Chicago Tribune Company (1996, p.400).
 Procedural Posture: Π appealed a judgment from the DCt Illinois dismissing its complaint under 12(b)(6)
on a claim in an axn alleging that a pattern of exclusive distribution rts for supplemental news svcs violated
the Sherman Act. The appellate ct affirmed.
 Holding: Ct affirmed dismissal of Π’s complaint in an AT axn related to a pattern of exclusive distribution
rts for supplemental news svcs bc Π failed to establish
 (a) concerted action,
 (b) harm to consumers, or
 (c) that it had illegally been denied the opportunity to purchase the services.
 The ct held that Π was free to bid for the exclusive rts to supplemental news svcs enjoyed by Δs, two
larger area newspapers. The ct rejected Π’s argument that the pattern of exclusive distribution rts
illegally impaired the growth of smaller newspapers. Further, the complaint failed to allege concerted
axn, a prereq for a claim under § 1 of the Sherman Act.
 In addition, Π’s claims failed to estab that the exclusive distributorships harmed consumers or illegally
denied Πs or other competitors the opportunity to purchase the supplemental news svcs through their
own bidding and negotiating efforts.

C. CHARACTERIZATION CHALLENGES
 1. Dual Distribution & Market Division

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 Mfg is both a supplier and a competitor of wholesaler (i.e., sells directly to retailers)
 Imposes restraint on wholesalers
 Vertical, not horizontal
 The vertical/horizontal distinction: tension bt “Topco” (horizontal agreements restraining territories => per
se) and “Sylvania” (vertical agreements restraining territories => RR)
 Dual distributor: often litigated when Δ was a “dual distributor” (mfg who sold to intermediaries but also
competed w/those intermediaries by selling directly to retailers/consumers).
 bc of Δ’s position as competitor of intermediaries, these restrictions were initially viewed as horizontal
and given per se condemnation. This changed after “Sylvania”
 RR evaluation: Absent some complicating factors, vertical restrictions imposed by dual distributors will
very likely be evaluated under RR

 2. Supplier or Dealer Exclusivity & Concerted Refusals to Deal

 Scenario: Supplier substitutes one exclusive distributorship for another. Former distributor alleges that
supplier & new distributor have engaged in horizontal “concerted refusal to deal” (affecting competition bt
distributors). Supplier defends by emph vertical nature of all dealer relations & the genl legality of
exclusive distributorships
ROL: A buyer’s decision to buy from one supplier rather than another, when that decision cannot be justified in
terms of ordinary competitive objectives, is not evaluated under the per se rule. Nynex Corp v. Discon,
Inc. (1998, p.409). Anytime you replace someone w/ someone else, you cannot call it a boycott.
 Facts: After AT&T was broken up and regional companies were formed to provide local svc, it became
nec to remove old switching equipment and install new equipment. The Π was in the biz of providing
removal svcs, but one phone company refused to engage the Π’s svcs and hired another company to
remove its equipment, driving the Π out of biz. This other company had cxns to the prior monopoly, so the
Π sued, raising claims under the Sherman Act. What really went on in this case was a scheme to promote
fraud of regulatory industry, not a scheme to inhibit competition. But this fraud does not hurt competition
 Procedural Posture: Δ were granted cert to review the judgment CtoA (2 C), wc/ reversed in part the DCt’s
order to dismiss and that ruled Π contractor's complaint stated claims for conspiracy to monopolize and a
per se boycott restraint of trade, where one phone company refused to use the Π’s svcs. The DCt dismissed
each of the claims, but the CtoA ruled that Π stated claims of conspiracy and per se restraint of trade under
the group boycott theory.
 Holding: SCt disagreed and ruled that the § 1 per se group boycott rule for horizontal agreements did not
apply in the case of a vertical restraint where a single buyer favored one seller over another, even if that
decision was improper and cd not be justified in terms of ord competitive objectives. Given this conclusion,
reconsideration by the CtA of its § 2 ruling was also necessary
 Outcome: The judgment of the CtA was vacated, and the case was remanded for further proceedings

CHAPTER 5 HORIZONTAL MERGERS

 Introduction
 Definitions
 Merger: Occurs when one firm acquires another firm in its entirety
 Acquisition: Transaction in which a firm buys some or all of the stock or assets of another firm
 § 7 of the Clayton Act; promulgated in 1914, passed bc of upset over unenforcement of the Sherman
Act (ticked at the judiciary); created the FTC

 Types of Mergers and Acquisitions

 Horizontal: Involve sellers of substitutes (i.e., competitors)
 Vertical: Involve firms and their suppliers, customers, or other sellers of complements
 Conglomerate: Involve firms that sell neither substitutes nor complements

A. PRIMER ON MERGER ANALYSIS IN U.S.

 1. Intro to Statutory Framework
 Challenges to Mergers
 Most mergers reviewed under § 7 of Clayton Act (15 USC § 18)
 § 7 Clayton Act language (p.1191): May substantially lessen competition; “Incipiency” std;

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Probabilities, not certainties

 Where in any line of commerce, in any section of the country -
 any line of commerce (product market)
 any section of the country (geographic market)
 any line of commerce, any section of the country - global merger of two world giants in one
small market (product) in one small village is enough to stop the merger
 Can also be challenged as violating §1 of Sherman Act (agreements in restraint of trade) or § 2 of
Sherman Act (attempts to monopolize) or § 5 of FTC Act (unfair methods of competition)
 1950s Congress sees holes in Clayton Act; amends § 7 to cover stock and asset acquisition and to stop
mergers that were harmful to competition
 DOJ/FTC Guidelines - influential, but do not have the force of law (on TWEN)

 2. Motives for Merger Among Rivals

 Anticompetitive Effect
 Coordinated effects (oligopoly)
 Unilateral (monopoly or differentiated products)
 A lot of the axn is in differentiated products (i.e. strong consumer brand preference)
 Exclusionary (vertical mergers)
 Pro-Competitive Effects
 Increase efficiency
 Lower costs
 MAY DO BOTH; see diagram p.422
 Lower cost
 Creates Market power
 Do a CBA and see how it comes out
 Structure-conduct-performance paradigm
 Market structure leads to collusion (or tacit collusion or lock strip pricing) leads to higher prices
(deadweight loss) to consumers

 3. Historical Perspectives on Merger Enforcement

 In General
 Mergers come in waves: 1900, late 1920s, late 1960s, 1980s, late 1990s
 1990s Sectors
 defense, energy, financial svcs, health care, pharmaceuticals, telecommunications (lg
proportion)

B. THE EMERGENCE AND EROSION OF THE STRUCTURAL PARADIGM

 1. Guide to the Cases
 Fear of Market Concentration
 Where market is being reduced from multiple firms to only a few (market concentration), wc/ is result
of some mergers.
 This limits alternatives/substitutes available to consumers & so hurts competition
 Underlying Economic Theory = Structure-Conduct-Performance Paradigm
 Market structure leads to collusion (or tacit collusion or lockstep pricing), which leads to higher prices
(dead weight loss) for consumers

Structure Conduct Performance

(market concentration, AFFECTS (pricing, product inputs WHICH IN (profits, consumer
entry conditions, coordinated interaxn) TURN AFFECTS welfare)
product differentiation)

• In short, concentration leads to firms acting interdependently (colluding or acting in lockstep) wc/
results in higher prices and reduced consumer welfare.

 2. Emergence of the Structural Presumption

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 To prove case under Clayton Act, need to show that merger

 (1) may substantially lessen competition
 (2) in any line of commerce AND
 (3) in any section of the Country.

ROL: To prove a case under the Clay Act, Π neesed to show that the proposed merger may substantially lessen
competition in any line of commerce and in any section of the Country. Brown Shoe Co. V. U.S (1962,
p.425). “May” indicates probability, not certainty.
 Overview: Π fed govt filed an action alleging that a contemplated merger bt Δ shoe companies (Kinney and
Brown), through an exchange of stock, wd violate the Clayton Act. Complaint sought injunctive relief to
restrain consummation of the merger.
 Holding: SCt affirmed DCt and CoAp, holding that the trial ct was correct in concluding that the merger wd
tend to lessen competition substantially in the retail sale of men's, women's, and children's shoes in the
overwhelming majority of cities and their environs in wc/ both Δs sold through owned or controlled outlets.
 Comments: Δs failed to present any mitigating factors, such as biz failure or inadequate resources, wc/
might have prevented them from maintaining their competitive position. Δs also failed to present a
demonstrated need for the combination in order to enable small companies to enter into a more meaningful
competition w/ those dominating the RL markets
 Brown: 4-6% of shoe mfg. market (#4) - vertically integrated
 Kinney: 0.5% of shoe mfg. market (#12) - vertically integrated
 Case was tried as BOTH a vertical merger and horizontal merger bc
 When firms combine vertically w/ they have more outlets (retail stores and distributors), it can
have a significant foreclosure impact if independent shoe stores cannot then sell product to outlets.
 Still, here, only treating case as horizontal merger challenge.
 Factors motivating the SCt:
 History of the shoe retailing industry (trend towards mergers; fear of lock-step)
 Concerned about a concentration of the industry in fewer firms (trend toward
concentration in the industry)
 Merger wd create large natl. chain integrated w/ a mfg operation
 Legislative history says that this situation is what Congress is concerned about; increased
concentration in industries and the demise of the “little guy” (specifically seen in 1950
amendments)
 “If we don’t stop this one, then how will we stop the next one ... and the next ...”
 1950 Amendments: What do these aspects suggest about merger analysis?
 Intent
 Incipiency
 “May” substantially lessen competition
 How is this going to hurt competition? Ct does not tell us. Opinion is completely devoid of any
economic analysis/reasoning.

ROL: A merger wc/ produces a firm controlling an undue percentage share of the RL market and results in a sig
increase in the concentration of firms in that market is so inherently likely to lessen competition
substantially that it must be enjoined in the absence of E clearly showing that the merger is not likely to
have such anticompetitive effects. United States v. Philadelphia Natl. Bank (1963, p.429) A merger
resulting in a lg market share is presumptively illegal, rebuttable only by a demo that the merger will not
have anticompetitive effects. KEY CASE
 Overview: The proposed merger by banks was enjoined bc the proposed merger was unlawful under § 7 of
the Clayton Act, bc it had the effect of substantially lessening competition in the RL market. The US
charged banks w/ violations of the Sherman Act, and the Clayton Act.
 Holding: SCt reviewed the background of commercial banking in the US and the proposed merger. The Ct
held that § 7 of the Clayton Act was applicable to bank mergers and that the specific exemption for
acquiring corps that were not subject to the FTC's jxn excluded from coverage only asset acquisitions by
such corps when not accomplished by merger.
 Comments: The proposed merger was unlawful bc the effect of the merger was to substantially lessen
competition in the line of commerce (product market) in a section of the country (geographic market). Ct

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determined that Δs’ biz justifications for the merger were unwarranted
 Once the govt makes its statistical showing combining firms wd hold 30%+ of the RL market
(represents threat to competition), it has estab its PF case (satisfied burden of production) and has the
benefit of a presumption of illegality.
 Taking an already concentrated market (oligopoly) and further concentrating it through merger
meets the presumption of illegality. (Ex. Top four own 70% of banks)
 Once PF case was established by US, the BoProof shifted to the Δs to show merger will not have
anticompetitive effects. (Δs justifications for merger not accepted.)
 Outcome: The SCt reversed the order and agreed w/ the US that a proposed merger by banks was forbidden
by the Clayton Act and had to be enjoined bc the proposed merger was unlawful and had the effect of
substantially lessening competition in the RL market. The Ct denied banks’ commercial justifications for
the proposed merger and remanded w/ direction to enter judgment enjoining the proposed merger.
 Market concentration
 Consumers fare worse in concentrated markets
 Tendency toward coordination
 Less vigorous competition
 When market concentration increases to a certain pt that gives the gov’t its PF case and Δ must
rebut
 Clues to establishing the presumption
 High concentration (look at top 4 firms are in the market and what % do they control; if
greater than 70% it is a concentrated market already)
 When merging firms are significant (such as 2 or the big 4)
 Δ carries its burden of production when... (Genl Dynamics)

 Note on Von’s and Pabst (page 433)

 The following two cases represent the high water mark of judicial effort to stop rising tide of industrial
concentration
 Ct prohibited mergers among firms wc/ by today’s stds had small market shares in largely
unconcentrated markets
 US v. Vons (1966) - merging grocery stores; together wd acct for only 7.5% of the total; merger
not allowed bc acquisitions and mergers in the LA retail grocery market have continued at a rapid
rate and the ct wants to stop it.
 US v. Pabst (1966) - merger of Pabst and Blatz breweries; decline in number of breweries, ct
wanted to stop it; narrowly defined markets

HYPO
 Schnucks merger w/ National
 Product market? (who is included? only traditional grocery stores or specialty stores as well?)
 Geographic market? (North St. Louis, South City, etc)
 Market share = > 60% post-merger
 Remedy?
 INJUNCTION
 Settlement by spin off (spectacularly unsuccessful)
 To whom? What qualifications?
 What incentives did Schnucks have in finding a buyer?

 3. Market Structure: Establishing the Presumption of Illegality (Erosion of the Structural Presumption)
 Change in merger analysis w/ General Dynamics
 Cts begin to look at factors beyond market concentration (combined market share of largest firms in
the market, e.g. the 4-Firm ratio)
 including
 Market share (merging firms’ share)
 Rank of the merging firms; gaps to the next largest
 HHI index
 Entry conditions

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 Other market facts, e.g. product differentiation

ROL: Statistics will satisfy govt’s PF case only if the statistics are RL to a reliable prediction of future
competitive strength (the govt does not satisfy its BoP unless the govt produces good, reliable statistics).
United States v. General Dynamics Corp. (1974, p.435) The presumption of anticompetitive effect derived
from market concentration is rebuttable. Market share and concentration are not conclusive indicators of
anticompetitive effect.
 Procedural Posture: Π US sought review of a judgment of the DCt (IL), finding no violation by Δ of § 7 of
the Clayton Act
 Facts: US alleged that the acquisition of a coal company's stock by Δ’s predecessor violated § 7 of Clayton
Act (Act). Merging parties: US challenged merger bt (coal mfgs) Genl Dynamics (GD) and United Electric
Coal Co. Π had sought to prove Δ’s viol of the Act primarily through statistical E. Absent other pertinent
factors, Π’s statistical showing wd have sufficed for a det of probable anticompetitive effects. However,
DCt was justified in finding that fundamental changes in the structure of the coal market mandated a
finding that no substantial lessening of competition had occurred or was threatened by the stock
acquisition. US’s statistical E regarding past production did not--in conjunction w/ proof of structure,
history and the probable future of the coal industry--give a proper picture of Δ’s future ability to compete.
Significantly, Δ’s current and future power to compete for long term Ks was severely ltd by Δ’s scarce
uncommitted resources.
 Holding: The judgment for coal companies was affirmed. Π’s statistical E did not support its contention
that the stock acquisition of Δ’s predecessor substantially lessened competition in any product or
geographic market
 Comments:
 J. Stewart dissenting in Vons Grocery (1966, p.433)  “The sole consistency I can find in litigation
under Section 7 is the government always wins.” GD reverses this trend
 Market structure, market data – presumption of illegality? (Ct says that by looking at data, gov’t
satisfied PF case. Statistical #s were pretty high.)
 Statistical showing was not enough to “carry the day” for the U.S.

 Note: Structural Presumption and the 1982 Merger Guidelines

 Federal Merger Guidelines
 issued in 1982; look at variety of factors in assessing the anticompetitive threat of a merger
 DoJ and FTC tend to sue only when a merger reduces the number of companies in the market to
fewer than four.
 Concentration was highly influential but not outcome-determinative in evaluating acquisitions
among rivals
 Particularly important bc nearly impossible for a pvt party to oppose mergers (standing problem)
 Guidelines show you how to get it past the gov’t agencies

 Sidebar 5-1: The SCt and Merger Policy Since 1975

 Important
 § 7 of Clayton Act is “open textured” not self-defining bc of the phrase “may be substantially to
lessen competition”
 Phrase gives considerable judicial discretion
 Three core principles of SCt’s § 7 decision from 1962 to 1975
 (1) Π in § 7 case can create a presumption of illegality by demonstrating a trend toward
concentration, a significant increase in competition, and that post-acquisition market shares have
exceeded a specific level. (see Phil Bank)
 (2) The Presumption of illegality created by market share data is virtually conclusive. In unusual
circs (Genl Dynamic) the Δ can rebut the presumption of illegality by showing that the Π has
calculated market shares based on a measure of commercial activity that fails to give an accurate
picture of the merging parties’ capability to compete for future sales.
 (3) Cts shd subordinate efficiency considerations in favor of attaining a more decentralized
commercial environment (see Brown Shoe)
 Lower cts are split in following the SCt’s core principles

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ROL: No longer will a ct apply the “clearly showing” std of PNB (p.431). To rebut the likelihood of economic
harm,  can show ease of entry, that statistics are unreliable, or the presence of powerful buyers that wd
offset the market power of the merged firm. Any one of a variety of factors can offset PF case and burden
on s is not any more than something that tips the scale. GD implicitly increased the burden on the govt
and govt E can be rebutted by variety of factors. United States v. Baker Hughes (1990, p.441)
 Procedural Posture: Π US appealed from DCt (DC) decision denying its request for a permanent injunction
and the dismissal of its merger violation claim ag Δ mfgs and sellers of HHUDR.
 Facts: The govt challenged the foreign Δ’s proposed acquisition of the domestic Δ’s subsidiary (Tamrock
wanted to acquire Secoma, owned by Baker Hughes) charging that it wd substantially lessen competition in
the US market in violation of § 7 of the Clayton Act. US argued that the lower ct did not expressly state the
legal std it applied in its analysis of rebuttal E and failed to apply a sufficiently stringent std.
 Holding: Ct affirmed the lower ct's ruling in favor of Δs, (using mult factors). First, Π’s proof of a PF case
was flawed bc market share statistics of the domestic market were volatile and shifting. Secondly, the
sophistication of HHUDR consumers was likely to promote competition. The ct was satisfied that Δs had
proven Π’s PF case inaccurately predicted the probable effect on future competition
 Comments:
 Ginsburg and Thomas on DC Ct of Appeals (DC Circuit most powerful outside of SCt)
 Market - hard-rock hydraulic underground drilling rigs (HHUDR)
 Govt wants numbers alone to be sufficient to show problem w/ merger; Thomas says you have to show
something more
 Factors considered by Thomas: changing market conditions, financial condition of firms in RL market,
special factors affecting foreign firms, nature of product and terms of sale, info about the txn, buyer
market characteristics, conduct of firms in market, market performance, efficiencies
 Why is entry important? (rebuts idea that merger will raise prices)
 Issue raised is ease of entry. If you want to rebut out showing of high market concentration, you
have to come up and show that entry is likely and will be effective by clearly shown E. Entry is
one of the most if not the most sig economic factors to rebut the likelihood of economic harm
from a merger. If easy to break in, PF case numbers are inaccurate (don’t show what gov’t wants it
to show)
 How is PNB interpreted/distinguished?
 What is ’s burden of persuasion now? Not heightened std anymore for Δ.
 Today, s have fairly wide opportunities to intro diff kinds of E to say that simple scenario
presented by govt won’t happen bc […..].

ROL: At the preliminary injunction stage, the govt’s burden is diff than it wd be at a full trial on the merits. Std is
likelihood of success on the merits. Govt must raise questions going to the merits so serious, substantial,
diff and doubtful as to make them fair ground for thorough investigation, study, deliberation and
determination. FTC v. Heinz Co. (2001, p.446) Combo of a concentrated market and barriers to entry is a
recipe for price coordination. The creation of a durable duopoly affords both the opportunity and incentive
for both firms to coordinate to increase prices.
 Procedural Posture: Appellant FTC sought review of a DCt’s (DC) order denying its request for a
preliminary injunction pursuant to § 13(b) of the FTC Act to enjoin the merger of Δs, two baby food mfgs
 Facts: Δs (Heinz and Beech-Nut, 2nd and 3rd largest baby food mfgs) entered into a merger agreement.
FTC sought a preliminary injunction to enjoin the merger. The injunction was sought in aid of an FTC
proceeding instituted to challenge the merger as violative of § 7 of the Clayton Act. Ct of Appeals reversed
the DCt and remanded for entry of a preliminary injunction ag Δs. The Ct of Appeals accepted the mfgs’
arg that they did not compete and said that the DCt failed to address the record E, that the 2 did price ag
each other, and that, where both were present in the same areas, they depressed each other's prices as well
as Gerber’s even though they were virtually never all found in the same store.
 Holding: DCt’s denial a preliminary injunction to enjoin merger was reversed and case was remanded bc
DCt failed to adequately address E that the 2 mfgs did compete ag each other (cartel problems if merger is
allowed). The FTC raised serious and substantial questions and the appellate ct concluded that the public
equities weighed in favor of preliminary injunctive relief
 Comments:

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 Stores tended to stock Gerber and either Heinz or Beech-Nut.

 How do you turn this into an arg for the merger? Pt out that Heinz and Beech-Nut really are not
competing w/ each other, only competing w/ Gerber at retail level. But there is competition to get
into the retail market at the wholesale level to get into the store (and this trickles down and
benefits the consumer eventually). Analogous to entry arg or special market
 Ct says no bc they are still competing for that 2nd slot on the shelves
 How is this opinion different from Baker Hughes? How is concentration treated differently?
 Here, the presumption created by the concentration numbers if the merger is allowed is much
stronger. E of high concentration seems almost impossible to rebut in Heinz. The merger wd create
a duopoly and the E attempting to rebut the presumption were not strong enough
 Is the ct setting a presumption that where concentration E is so strong and overwhelming, it will take a
lot more on the rebuttal side to counter it? Also, maybe when there is not much rebuttal, the
concentration E holds more weight. It’s the sliding scale concept. Also can look at it as different
judges, different facts, and different views.

 Sidebar 5-2: Conglomerate Mergers and Potential Competition

 Conglomerate mergers - mergers bt firms not related horizontally or vertically
 THIS IS HISTORY.
 AT law in no way concerns itself anymore w/proposition that companies have just gotten too
big ... not a reason alone to condemn a merger.
 Product Extension Mergers (sometimes considered a 4th type of merger)
 Merger bt companies who produce complementary products (i.e., laundry detergent and bleach)
 Market Extension Mergers:
 Merger bt companies who sell the same product in diff geographic markets
 Potential competition theory can be of some significance.
 Competition story, not conglomerate merger story, but about firms that don’t yet compete.
 Explanation: Oligopolistic market (3 competitors); another potential competitor is thinking about
entering the market; one of the oligopolistic firms merges w/ the potential competitor
 If A merges w/ F, who is a potential competitor, then the worry is that it might lessen competition
down the road. But must do market defn analysis bc if there was already vigorous competition
already in market or low concentration and likely entry by other firms, then losing that little bit of
potential competition does not matter.
 Potential competitors are treated as a market participant and assigned a market share
 Merger can be opposed on this theory
 Types of Potential Competition
 Actual Potential Competition - firm can be shown to have a plan to enter the market
 Perceived Potential Competition - don’t have to prove firm was going to enter only that other
firms thought it was going to enter (fringe)

C. MERGER ANALYSIS UNDER THE DOJ/FTC MERGER GUIDELINES

 Introduction
 Merger Guidelines
 Promulgated by fed AT enforcement agencies (DoJ/FTC)
 Current version issued in 1992 w/ revisions in ‘97
 Describe how DoJ and FTC will exercise their prosecutorial discretion
 Ltd to analysis of horizontal mergers
 They bind the agencies, but not the courts
 Influential w/ judges bc of their systematic approach to mergers
 Informed by case law and contemp economic thinking
 also bc SCt hasn’t decided a merger case on the merits since the mid-70s
 Focus on market power as the source of concern under AT laws
 Analytical Process for Determining Wh a Merger is likely to Harm Competition
 (1) determine market concentration
 (2) assess potential adverse competitive effects
 (3) assess wh entry wd deter or counteract adverse effects,

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 (4) assess potential pro-competitive efficiencies, and

 (5) determine wh one of the merging firms is in such severe financial distress as to qualify as failing
 Sidebar 5-3: Pre-Merger Notification and the Merger Enforcement Process in the U.S.
 Whole structure of merger law analysis relies on govt
 Very hard for pvt parties to bring suit to stop mergers so govt brings suit bf merger occurs by
preliminary injunction.
 Prospective evaluation of mergers
 Govt has to find out about merger in advance  Hart-Scott-Rodino Act (HSR Act)
 To give opportunity to FTC and DOJ to review merger bf it is consummated
 Companies buying other companies now have to report it and cannot consummate merger for
30 days (gives gov’t chance to get some info bf merger goes forward)
 Problem of gun-jumping – parties announce merger, file HSR, and get friendly bf the merger
 agree on competitive strategy, i.e., fixing prices (need to stay apart or legal consequences)
 gov’t then has the problem of trying to undo what was already done
 Companies still may face challenges from state govts, even if the fed govt has taken a pass on
challenging the merger.
 State is operating under own AT law, so not preempted by fed challenge.
 Stages of Merger Review at the Fed AT Agencies
 (1) Filing: txn filed w/ FTC and DOJ
 (2) Clearance: DOJ/FTC decide wc/ agency will investigate (investigation is discretionary)
 (3) Initial Waiting Period: merging firms can’t consummate the merger for 30days following the
date of filing (allows time for initial investigation; depos, docs, etc)
 (4) Second Request: Investigating agency may request additional info; typically extensive
 (5) Second Waiting Period: Investigating agency decides wh to challenge the merger and get a
temp restraining order to prevent consummation of the merger
 Most mergers are not investigated beyond the initial waiting period (only 2% are req’d to go through
second request)

 1. Market Definition, Market Participants, & Market Concentration

 Remember
 Defining markets and determining market shares is not the only way to demo market power and;
 Measurement of market power is not the only way to prove anticompetitive effect in AT analysis
 Market Definition Stds
 Two dimensions:
 Product and geographic
 Use:
 Means to generate market share and concentration data (wc/ in turn serves as a proxy for market
power), identify market participants
 Important in § 1 (RR), § 2 (monopolization [market power and illegal use of that power]), § 7
(merger) cases
 Market - collection of products such that if a hypothetical monopolist raised price by SSNIP, it wd be
profitable (i.e., buyers wd not substitute other products or wd do w/o product)
 Geographic market: Same deal (buyers wd not go beyond the circle that is the alleged market even in
the event of a SSNIP).
 Economic version of common sense!
 Methods of Proving Substantial Market Power
 Direct E
 Measure demand elasticities (see explanation below)
 Exclusion by means other than efficiency
 Indirect E
 Persistently high market shares in properly defined RL markets
 Currently high profits or price-cost ratios

ROL: Commodities R interchangeable by consumers for the same purposes make up that RL market. Defining the

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part of the trade or commerce, monopolization of wc/ may be illegal. US v. Du Pont (1956, p.464). When an alleged
monopolist has power over price and competition, an intention to monopolize in a proper case may be assumed.
 Procedural Posture: Π, the fed govt, appealed the judgment of DCt (DE) holding in favor of Δ company in
Π’s suit ag Δ for monopolizing, attempting to monopolize, and conspiracy to monopolize interstate
commerce in violation of § 2 of the Sherman Act
 Facts: Δ produced 75% of the cellophane sold in the U.S. This cellophane constituted less than 20% of all
flexible packaging material sales. Π sued Δ under § 4 of the Sherman Act for monopolizing commerce in
cellophane in violation of § 2 of the Act. The DCt held in Δ’s favor. Π sought the Ct's review, asserting that
bc cellophane and other wrapping materials were neither fungible or like priced, the market for other
wrappings was distinct from cellophane's market, and that the competition afforded cellophane by other
wrappings was not strong enough to be considered in determining wh Δ had monopoly powers.
 Issue: Wh du Pont possessed monopoly power (power to control prices or exclude competition)
 Holding: The Ct held that bc the facts established that cellophane was functionally interchangeable w/ other
flexible pkging materials, there was no cellophane market separate and distinct from other flexible pkging
materials. Additionally, the facts disposed of any arg that competitors were excluded by Δ from the pkging
material market. Therefore, Δ was not shown to have monopolized cellophane
 Comments:
 § 2 case: Issue of market defn almost always critical bc govt must estab  had monopoly power.
Whatever the market may be, control of price or competition establishes the existence of monopoly
power under § 2. 8 2 req’s the application of a R approach in det the existence of monopoly power.
 This is the classic case – market defn makes all the diff on question of monopoly power
 Du Pont produced almost 75% of cellophane sold in US; cellophane constituted less than 20% of
all ‘flexible packaging materials’ sales.
 Market delimination: Ult consideration is wh s control the price and competition in the market for
such part of trade or commerce as they are charged w/ monopolizing. Control in the RL market
depends upon the availability of alt commodities for buyers
 wh there is a cross-elasticity of demand b/w ’s product and similar products
 Interchangeability is gauged by the purchase of competing products for similar uses considering
the price, characteristics and adaptability of the competing commodities.
 Determination of the competitive market for commodities depends on how diff from one another
are the offered commodities in character or use, how far buyers will go to sub one commodity for
another.
 Products do not have to be fungible (replaceable) to be considered in the RL market.
 In determining the market under the Sherman Act, it is the use(s) to wc/ the commodity is put that
control. Test focuses on buyer substitution possibilities.
 An element for consideration as to cross-elasticity of demand bt products is the responsiveness of the
sales of one product to price changes of the other. (substitutability → how much are consumers willing
to substitute one for the other)

 Applying the Du Pont Test

 Ct relied on the following facts:
 Fxnal interchangeability (perform similar functions? similar services?)
 Cost differences
 Many end uses employ cellophane and use other forms of wrapping (p.468)
 Switching by consumers; lost biz by one firm from another firm (in many ways, this is the best
“on the ground” test)
 Cross elasticity of demand →
 Distinguish: “own price elasticity;” elasticity of demand for a product: do buyers change if this
product’s prices rise?
 Cross-elasticity asks wh buyers switch when another product’s price rises.
 how responsive are a product’s buyers to changes in the price of a different product
 Cross Price Elasticity = % of change in quantity (A)
% of change in price (B)
 If the sale of one product increases when the price of another product increases, the two products can
be said to be substitutes for one another.

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 Hard Issues
 Cluster markets
 Supermarkets; banks (at one time); hospitals
 Submarkets
 Misnomer, confusing concept that makes economists angry (they don’t exist per them)
 Price discrimination markets
 See page 478
 Can charge different prices to different consumers/different markets
 In situation where you can isolate the buyers and prevent arbitrage/resale

 Sidebar 5-4: Cellophane fallacy

 Ct got it wrong.
 Ignored the possibility that switching was due to fact that Du Pont was already pricing at monopoly
levels.
 Correct question to ask: Wd they be substitutes at competitive price (not at monopoly price, where
you wd see substitution bc of high pricing levels)?
 Product market is a collection of products such that if a hypo monopolist raised by a SSNP it wd
be profitable (this is a forward looking conceptual test)
 Conceptual test: “reasonably interchangeable”
 By whom? The consumer.
 Under what conditions?
 How to operationalize the conceptual test:
 Interviews/questionnaire on the hypothetical question: i.e., “wd you switch if …?”
 Past switching: historical examples
 Experience in analogous markets
 Nature, characteristics of products
 Efforts by firms to induce or protect ag switching (advertising, marketing, strategic docs)
 Price differences? (often a misleading test)
 Cf. Brown Shoe referred to “practical indicia” (p.477)
 Ssnp - small, but sig increase in price (test)

 Exercise 1: Make a common sense jury appeal to jury that Du Pont did not have market power.
 There are diff materials that serve as sufficient substitutes for cellophane.
 Use characteristics are similar bt cellophane and other flexible wrapping materials.
 Test is what the R consumer considers a R, plausible substitute for the product.
 In the industries, cellophane is not an exclusive wrapping for any product (see %s on p.468). If
cellophane is used for 25% of candy wrappings, then something else is used for the remaining 75% of
candy wrappings.
 Cross-elasticity of demand (if price of one increases, then demand for substitutes also increases).
 Product prices? Can higher priced item be in same market as lower priced “substitute?”
 Higher priced product might have superior characteristics than possible substitutes.
 If there is quality difference separating the two products, then consumers might be relatively
indifferent to the differences in price.
 Ultimate question is wh/ consumer regards them as substitutes despite quality differences. If so,
then probably in same market.
 What about price over time bt two products?
 Here, cellophane’s price went down over time while sales actually increased.
 What if other flexible wrappings followed the same trajectory (similar price movements)? Might
say it’s in the same market bc responding to same consumer demand conditions.
 Exercise II
 Identify a product or service that may arguably constitute a RL AT market
 What are leading contenders to also include
 Why reject them

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 How would you go about proving that it constitutes a RL market?

 Facts, data
 Witnesses
 Economic evidence
 Possible Example: Sales to high risk individuals (car market)
 Is this a separate and distinct market?
 Need specialized skill
 Possible Example II: Extracts for baking (vanilla)
 Due to labor in processing the beans is the extract itself a sep market
 Similar to bagged lettuce
 To analyze: get actual data (what happens to sale of product when alternatives are on sale price)
 Come up with our own example (substitutability is the key issue)
 Example: granola bar/nutrigrain bar/power bars
 Operationalize it by SNNP test → assuming product is a market, cd they monopolize it by a SNNP
(5%) and still be profitable (i.e., switch away to other products); if answer is yes, there is a market;
if answer is no bc individuals wd switch away, then you don’t have a product market
 If you find a market, conclusion is that the products (ex) handheld toothbrushes and electric
toothbrushes are in the same product market move to next larger market and ask the same
questions
 Next, look at next market (toothbrush vs. electric toothbrush vs. water pick) → keep
expanding the market until there isn’t substitutability

October 10th, 2006

Pages 473-511; TU 32-42

 2. Horizontal Merger Guidelines (HMG)

 (a) Market Definition Stds (see DuPont)
 (b) Market Definition
 Goal of Market Defn
 Facilitate prediction that merger/acquisition will likely cause exercise of market power
 Facilitate Goal
 id the (1) products/svcs sold by the merging firms, (2) the geo areas in wc/ they are offered for
sale, and (3) the collection of substitute products/svcs available to buyers from other sellers.
 Requires
 Ct “consider only substitutes that constrain pricing in the R foreseeable future, and only products
that can enter the market in a relatively short time can perform this fxn.” US v. Microsoft Corp.
(D.C.Cir.2001).
 Takes into account
 Economic force of demand (buyer) substitution (possibility buyers wd defeat an attempt by sellers
to exercise market power by purchasing alt products in place of those for wc/ price has risen).
 HMG Approach
 A market is a collection of products/svcs and a geog region that wd form a valuable monopoly
 IOW → buyer/demand substitution = basis of defining market definition
 If price increases, buyers won’t go outside the market
 [Supply Substitution (product flexibility) - id of market participants/analysis of entry/nature of
rivalry among the firms in the market]
 Price rise at issue → A “small but significant and nontransitory” increase in price (SSNIP), i.e., a
benchmark of 5% price increase lasting for the foreseeable future.
 A merger w/in a RL market wd be considererd anticompetitive if it seems likely to lead to any
increase in price no matter how small
 Note: Applying HMG Approach to Market Defn
 When deciding bt alt defns, HMG focus on wh the hypo collusive price increase among sellers of all
[narrow market products] wd be profitable, or wh it wd be made unprofitable by buyers responding to
the high price by switching to [products found in broader market defn].

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 Direct E of demand substitution

 examine buyer response to price increases in the past or surveying likely responses to potential
future price increases;
 studies of the elasticity of product demand;
 comparison of price in monopolized markets w/ price in otherwise similar markets thought to
perform competitively.
 Indirect E of demand substitution
 examining distribution of product or locational characteristics
 views and axns of sellers
 Evidence of similarities/differences in product prices is generally not indicative of likely buyer
substitution responses
 No one type of E is dispositive; other info may bear on the market defn question
 Probative value of direct or indirect E varies from case to case
 Sidebar 5-5 Current Controversies in Market Definition
 Submarkets
 W/in broad market, well-defined submarkets may exist wc/ in themselves, constitute product
markets for AT purposes.
 The boundaries of submarket may be det by
 examining industry or pubic recognition of the submarket as a separate economic entity
 product’s peculiar characteristics and uses
 unique production facilities
 distinct customers, distinct prices, sensitivity to price changes, and specialized vendors.
 Misnomer; confusing concept that makes economists angry
 Price Discrimination Markets:
 where a hypothetical monopolist of a group of products and geo locations wd likely charge diff
prices to diff groups of buyers, and in consequence raise prices to a class of targeted buyers.
 Ex: passenger airline monopolist who raises prices for biz passengers on certain city-pair routes.
 In order to be successful, the buyers charged a low price must be unable to resell the product
cheaply to buyers charged a high price.
 Cluster Markets:
 Concept that includes in the same market products/svcs that are not substitutes from the standpoint
of buyers (i.e., commercial banking services [at one time], supermarkets, hospitals).
 A proposed cluster market is called into ques (i.e., may not be a cluster market) when competition
from seller of a partial line of products/svcs can constrain the pricing of the full line sellers
offering the cluster.
 (c) Identifying Market Participants
 Purpose
 Determination of what firms sell in the defined product and geo markets allows market
concentration to be calculated.
 HMG Defn
 Firms participating in the market =
 All firms that currently produce or sell in the market
 Vertically integrated firms to the extent that such inclusion accurately reflects their
competitive sig in the RL market prior to the merger
 Firms not currently producing or selling the RL product in the relevant geo area IF they cd
enter the market quickly and enter w/o prospect of incurring sig capital costs upon exit
 Few “sunk” (unrecoverable) costs to enter OR exit
 Hit and run entrant
 “Uncommitted entrants” count as participants under HMG
 BUT not the same as other potential entrants
 (d) Measuring Market Concentration – Herfindahl-Hirschman Index (HHI)
 Count
 (1) all participating firms, (2) all vertically integrated firms to extent inclusion reflects their
competitive sig in the RL market prior to the merger and (3) uncommitted entrants

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 HHI computation
 square the market share of each firm and sum the resulting numbers
 always includes ALL firms in the market
 Concentration stds in the HMG
 (1) the post-merger HHI and
 (2) the increase in the HHI pre- and post- merger (how much did the HHI increase or decrease)
 Ex: pre-merger HHI is 900; post-merger HHI is 500; diff is > 100; merger is likely to be
challenged
 HHI ranges from 0 to 10,000.
 HHI ≈ 0 means that no firm in the market has a market share of 1%
 HHI = 10,000 means that firm is monopolist
 If all firms in industry were identically sized, HHI = 10,000 divided by # of firms
 HMG Safe Harbors
 Exist for mergers in relatively unconcentrated markets or for mergers in more concentrated
markets that do not increase concentration very much
 Mergers unlikely to be challenged if:
 Post-merger HHI is below 1,000 (unconcentrated markets)
 Post-merger HHI is bt 1,000 and 1,800 (mod concentrated markets) and HHI rises by no more
than 100 pts
 Post-merger HHI is above 1,800 (highly concentrated markets) and HHI rises by no more
than 50 pts
 If merger does not fall w/in safe harbors based on low market concentration, HMG call for further
competitive analysis, w/ market shares taken into acct to the extent they bear on the likely
competitive effects of the txn

ROL: BoP for govt in merger case is to show likelihood of success on the merits; earn presumption of illegality.
Steps: 1. Define the Market (Product market and Geo market); 2. Define Market Participants and; 3. Calculate
Market Share (Market Concentration) FTC bv. Cardinal Health, Inc (1998, p. 485)
Facts:
-Two mergers simultaneously occurring in the same market (Cardinal w/ Bergen and McKesson w/ Amerisource)
Manufacturers

Wholesalers

direct mail order

Retail Hospitals Chain Pharmacies

Pharmacy

Consumer

 s want the market to be all sellers of pharmaceuticals (all forms of distribution)

 Prosecutions case:
 Market definition – Want Product market to be only sales on wholesalers
 $54 billion out of $94 billion are on the wholesaler level
 Wholesalers provide valuable services
 Pharmacies need drugs very quickly; need a lot of storage space …. and retailers do not have those
capabilities
 considered only other wholesalers their competitors; their internal docs showed that geo market:
US and submarkets in SF, LA and Seattle
 Market participants: Wholesalers

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 Market Share/Concentration: 47% combined and 30% combined

 Four firms together = 80%
 HHI: from 1648 to 2450 and from 1648 to 2277, and if 4 merge, from 1648 to 3079
 HHI level far beyond that of a highly concentrated market
 Procedural Posture: Π commission initiated an axn that sought to enjoin Δ corps from merging on the
grounds that the mergers wd violate § 7 of the Clayton Act and the FTC Act
 Overview: The corps were the 4 largest wholesale drug distributors in the country. They proposed a merger
alleging it was nec to reduce operating costs, increase efficiency, and lower consumer costs. The
commission said the merger violated the Clayton Act and §5 of the FTC Act. The DCt found the
commission was entitled to a preliminary injunction bc it held that the commission wd likely be successful
on the merits. E estab that the merger wd reduce the # of national wholesalers from 4 to 2. The corps wd
then control over 80% of the wholesale market. Ct reasoned the change wd reduce the competitive balance
beyond what was legally permissible. They also found that in certain areas of the country, the corps wd
control 100% of the market and there wd be no competition for the corps in order to control pricing
 Holding: Ct granted the application for injunctive relief bc the commission estab the injunction was in the
public interest and the commission wd likely be successful on the merits
 Comments:
 Wholesalers: value added for those who purchase from them; diff from others who buy from the mfgs
 Interview the customers to det PF case; ask around the edges of the SNNIP test; ask what wd it take to
switch; internal memos of merging firms; how do the merging firms market, advertise, etc.; practical
inquiries into how substitutes are viewed
 Scope of geo market: entire U.S.

 Sidebar 5-6: Economists’ Theories on Structural Presumption

 Economists want to id empirically the rel bt market concentration and market power
 Attempts
 Demsetz: if firms w/ high market shares have high price-cost margins is it bc the lg firms are able
to exercise market power or bc the lg firms have obtained efficiencies that allow them to lower
both costs and prices rel to their rivals?
 Weiss: addressed the problems by relating [market] to price; partly successful approach
 Recently: reinforced Weiss and made clear that increasing in concentration, partic substantial
ones, may generate lg increases in price
 Empirical economic E does not support the structuralist view that high [market] makes tacit collusion
inevitable
 No empirical E that can id any partic concentration level common across industries at wc/ price
increases kick in or raise competitive concerns
 Sidebar 5-6a: Importance of Market Concentration in Enforcement Agency Practice
 Enforcement axn = consent settlement, litigation, abandonment of the txn
 Closed = investigation is discontinued w/ no relief sought
 HHI and FTC Horizontal Merger Enforcement in “Other” Markets
 Importance of market concentration as an indicator of agency concern
 Most axn occurs where post-merger HHI is at least 2400 and the increase is at least 300
 Number of Significant Rivals and FTC Horizontal Merger Enforcement
 Significant competitor = firm w/ approx 10% of market share
 The fraction of investigated mergers leading to enforcement axn increases as the # of sig
competitors declines
 Diff markets have diff indicators of what axns will be enforced
 Hot Docs and FTC Horizontal Merger Enforcement
 Hot Docs = internal memos of the merging firm that state “this merger will permit us to raise
prices”
 Presence of such docs improve agency’s litigation prospects (no kidding)
 If the market is highly concentrated post merger, enforcement is likely regardless of the presence
of hot docs
 Close call cases based on concentration (# of competitors falls from 4 to 3) hot docs move the case
from close call to one in wc/ enforcement is likely

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 Strong Customer Complaints and FTC Horizontal Merger Enforcement

 Customer complaints substantially increase the frequency of the enforcement for mergers reducing
the # of sig rivals from 4 to 3
 These mergers are close class absent customer complaints, but are commonly challenged w/ such
complaints
 Possibility that customer complaints make a diff in agency decisions for mergers in less
concentrated markets

 2. Competitive Effects of Collusive Markets

 Generally
 Competitive Effects Theories
 HMG’s ideas about ways market structure resulting from mergers reduces competition
 (1) Coordinated Effects of the Merger
 oligopoly
 acting in lock step
 colluding
 (2) Unilateral Effects of the Merger
 Monopsony power
 Exercise of market power by firms as buyers by depressing the price they pay for an input
 Reduce purchases of an input, driving down the price pd to suppliers
 Mergers and monopsony power
 If a merger lets a firm exercise monopsony power, the lower input prices don’t nec benefit the
consumer
 Have buying power in dealing w/ suppliers, but are selling in a competitive market
 Input quantity utilized falls, inducing merged firms to K the output of the good it sells to the
consumer and raise its prices
 Results in efficiency loss
 (a) Coordinated Competitive Effects
 Threat that the firms in a market might act together to harm competition
 Includes the threat of higher prices resulting from “conscious parallelism” and price leadership
 Burden of Proof is on the Δ
 Sidebar 5-7: Criminal Cartel Prosecutions; Lessons Learned
 (1) Cartels can involve a fairly lg # of firms
 goes against collective wisdom
 (2) Industry concentration matters
 (3) Cartels often use multiple tools to enforce compliance
 coordination through P-F, sharing info, etc
 (4) the ability of lg sophisticated buyers to defeat cartel activity may be overrated
 often seen that the big buyer is the victim bc big buyer is small part of overall biz activity
 (5) excess capacity in the hands of leading firms can be an effective tool for punishing cheating
and thereby enforcing collusive agreements
 (6) cartels are more durable than sometimes thought
 (7) lg, publicly traded companies are not immune from the temptation to engage in cartel activity
 (8) trade associations and industry publications that report detailed market info are important in
facilitating cartel activity
 (9) cartel participants tend to be recidivists
 (10) while product homogeneity and high entry barriers may facilitate cartel behavior, they are not
essential to it.
 Impediments to Coordination: (1) reaching a consensus and; (2) discouraging cheating

ROL: Key test for defining a market is wh preference wd stand the test of monopoly-like pricing (if so, market
exists); Difference bt products does not negate them as substitutes. Menasha v. NAMIS (2004, Supp 32) Making
monopoly profits shd be E of a separate market (but not always true).

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 Procedural Posture: Π, a mfg of at-shelf coupon dispensers, sued Δ competitors under US AT law, alleging
exclusionary dealing. The DCt (ND IL) granted SJ for the Δs. The Π mfg appealed.
 Overview: The DCt granted SJ for the Δs after concluding that no R juror cd find that producing a lg share
of at-shelf coupon dispensers conferred market power.
 Issue: Wh at-shelf coupon dispensers were an economic market.
 Analysis: At-shelf coupons competed w/ other means of promoting a product--signs and placards, end caps,
sales, coupons included on (or in) the product's pkg, coupons distributed at the checkout counter, and
coupons distributed by mail or newspaper. Even a stranglehold over at-shelf coupon dispensers wd affect
only a tiny portion of those means.
 The mfg offered no econometric analysis in support of its case. Instead, it offered "a potpourri of
survey research and armchair economics."
 The DCt properly rejected one "survey" under FRE 702. The persuasive value of report that relied on
that survey then collapsed, as did that of a 2nd report that relied on the 1st report
 Holding: The appellate court affirmed the judgment of the district ct of SJ for the Δs.

ROL: A merger will be denied when it can be shown that the change in market structure resulting from the merger
cd make coordination more likely or more effective. HCA v. FTC (1986, p.500) Reducing the # of firms makes it
easier for remaining sellers to work out and differences over the terms of the coordination or detect cheaters.
 Procedural Posture: HCA sought review of an order of the FTC that Δ violated § 7 of Clayton Act by
acquisition of 2 corps and by assumption of Ks to manage 2 other hospitals
 Issue: Wh the challenged acquisition is likely to facilitate collusion.
 Facts: HCA acquired 2 hospitals in Chattanooga, TN area and assumed the Ks to manage 2 more. The
Product is in patient hospital services in the few counties around of Chattanooga. Market participants are
hospitals in the market. The reduction is from 11 hospitals to 7. The gov’t showed that this was likely to
cause collusion. (counts managed hospitals as owned hospitals bc unlikely they will outbid themselves in
pricing)
 Analysis: FTC’s E - Considering (1) [market], (2) the absence of competitive alts, (3) the regulatory barrier
to entry, (3) the low elasticity of demand, (4) the exceptionally severe cost pressures, (5) the history of
collusion in the industry, and (6) the sharp reduction in the # of substantial competitors in the market
brought about by acquisition of 4 out of 11 hospitals in the city, the ct cd not say that the FTC's decision
was not supported by substantial E. The FTC’s order for advanced notification of future acquisitions was
not unR. They had broad discretion to decide what relief was necessary to cure a violation of law
 Holding: The ct affirmed the DCt's judgment bc the E supported findings that the acquisitions were likely
to foster collusive practices, harmful to consumers, in the hospital market
 Further Analysis
 Demand for possible svcs in inelastic bc insurance company pay the bills and doctors are making
decisions not the consumers
 CoN law: prevent cartel cheating and makes it hard for new entrants to come in or small participants to
expand
 Tradition of cooperation bt market participants
 Participants are under pressure from 3Ps wc/ causes them to stick together
 ’s counter-claims (wc/ were ultimately not accepted by the court):
 Svcs are complex and heterogeneous → products are easily differentiated → makes it easy to
cheat by increasing quality, types of svcs offered
 Rapid technological and economic change
 “Buyers are large so collusion might be easily detected,” but that also means that if you
collude you will make a lot of money just from a single buyer
 “FTC investigation was triggered by competitors complaint,” but that does not mean if merger
happens competitors would not be better off if you collude
 “Not-for-profit status,” but that does not mean they are not susceptible to collusion (generally
courts do not see this argument as a strong one)

FACTORS URGED BY THE PARTIES AS FACILITATING AND FRUSTRATING TACIT COLLUSION IN HCA
FACILITATE TACIT COLLUSION (FTC) FRUSTRATING TACIT COLLUSION (HCA)
Reduction in # of competitors, leading to a market Hospital svcs are complex and heterogeneous

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controlled by 4 firms
Absence of competitive alternatives w/in the RL Sellers are heterogeneous
geographic market
Regulatory limitations on output expansion or entry by Industry is undergoing rapid technological and economic
non-merging firms (state CoN law) change
Highly inelastic demand under-competitive conditions Buyers are large and sophisticated
Tradition of cooperation among rival sellers, including FTC investigation was triggered by a competitor
routine exchange of info on prices and costs complaint
Sellers understand that cooperation wd permit them to
resist external pressures to lower price (motive to
coordinate)

 Sidebar 5-8: Mavericks and the Coordinated Competitive Effects of Mergers

 Incomplete coordination leads naturally to mavericks (not part of cartel; may be cost-cutter or
price-raiser, constrain the effects of coordination)
 Why coordination fails:
 Coordinating firms may not be able to punish cheating rivals as severely as wd be nec to
support fully-collusive pricing
 Coordinating firms may not be able to allocate the monopoly rents they achieve in a manner
satisfactory to all the participants bc they may be unable to compensate each other directly
 When firms are uncertain as to the strategies o=their rivals pursuing and have diff inferring
cheating from marketplace observations the coordinating firms may find it nec to undertake
expensive strategies for deterring cheating
 The firms may have diff in id the jt profit maximizing outcome
 Identifying Mavericks
 Revealed preference: might be identified by observing that it actually constrains industry
pricing
 Natural Experiments to id the firm that constrains pricing
 A Priori Factors Approach: Determine why a firm wd prefer a high or low price in the
particular market under investigation
 Significance of Mavericks for Merger Analysis
 Mavericks can act as a sword or a shield in merger review (identify bt anticompetitive and
pro-competitive mergers)
 Mavericks as Swords
 Merger removes maverick from the market place
 The merged firms wd likely prefer higher prices than the maverick
 Merger removes a constraint on coordination and leads to higher prices
 Mavericks as Shields
 Maverick continues to constrain the prices after the merger
 Undermines AT challenges to a merger that increases market concentration
 Merger cd promote competition by creating a new industry maverick
 Customer complaints are important; competitor complaints are not

October 12, 2006

 (b) Unilateral Competitive Effects of Mergers
 Traditionally: merger enforcement focused on coordinated competitive effects (easier for merged firm
to work w/ other firms to coordinate to harm consumers)
 Modern: Focus on Unilateral Competitive Effects
 Mergers may harm competition unilaterally by making it possible for the merged firm to raise
price on its own, w/o consideration of the likely responses of non-merging firms;
 most clear in “merger to monopoly” situation where merger creates firm w/ sufficient market
power to raise price on its own
 HMG set forth 2 main unilateral competitive effects theories:
 Theory for markets in wc/ products are homogeneous (HMG § 2.22 - firms distinguished primarily

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by their capacities); plants to produce lg quantities

 Theory for markets in wc/ products are differentiated (HMG § 2.21 - creates capacity in certain
specified circs to raise prices unilaterally w/o regard to competitors)
 Differentiation of goods/svcs can include diff in:
 features, colors, styles, geo locations, point-of-sale &/or post-sale svcs (demos,
warranties), seller reps for quality, delivery time, defect rate, and non-physical attributes
(brand recognition or image related to lifestyle, i.e., young, cool, cutting edge).
 Markets where differentiation is common:
 Branded consumer product industries
 Markets where buyers see important differences in nature or quality of svcs offered by
potential suppliers
 Industries where differences in seller locations are important to buyers (supermarkets,
hospitals)
 The merged firm combines the first and second choice for a substantial # of consumers.
 Allows the merged firm to raise price on its own w/o regard to other competitors bc such
a substantial # of consumers have A or B as their 2nd choice that their lost sales from the
raised price is made up bc the consumer then buys your other product (A or B)
 Efficiencies are a defense to a charge of merging to achieve unilateral competitive effects
 Repositioning: the non-merged firms choose to produce an A or B-like product

ROL: Unilateral anticompetitive effects result when merged firm may be able to raise the price of one product
and capture any sales lost due to that price rise if buyers switch to another product now sold by the merged
firm. NY v. Kraft Genl Foods (1995, p.515) Analysis of likely unilateral competitive effects requires
determinations of consumer consumption, purchase info and econometric evidence.
 Procedural Posture: Π, the State of NY, brought this axn seeking the divestiture or rescission of an
acquisition involving Δ corps pursuant to § 7 of the Clayton Act, and § 1 of the Sherman Act
 Facts: Δ buyer (Kraft Foods) entered into an agreement to buy cereal assets of Δ seller (Nabisco). The
acquisition was consummated, and Δ Nabisco’s assets were fully integrated into Δ Kraft’s. Five weeks
later, the AG of NY, initiated an axn seeking divestiture or rescission of the acquisition. Π argued that the
acquisition might substantially lessen competition in the adult ready to eat cereal (RTE) market or, in the
alternative, the entire RTE cereal market.
 Holding: The ct held that Π NY had failed to show by a preponderance of the E that Δ Kraft's acquisition of
Δ Nabisco’s cereal assets was likely to have the effect of substantially diminishing competition in a RL
product market in violation of § 7 of the Clayton Act
 Outcome: The ct entered judgment in favor of Δs bc Π failed to show a violation of the Clayton Act by a
preponderance of the E.
 Comments:
 Kraft (Post cereals) acquired Nabisco’s cereals in 1992
 FTC passed on merger
 NY AG challenged it after consummation
 200 RTE (ready to eat) cereals, but:
 Kellogg and General Mills have 60% of market
 Kraft is third w/ 16%
 Nabisco is sixth w/ 3%
 Govt’s Unilateral Theory – Grape Nuts (Kraft) and Shredded Wheat (Nabisco) are close competitors so
merger wd have unilateral effects
 Closeness Measures?
 Physical similarities
 “Healthy” reputation, marketed as such
 Retailer perceptions
 Price responsiveness to each other
 Consumer similarities (upscale, young, healthy)
 Pricing and marketing strategies
 Defense
 The products are differentiated so consumers won’t switch from Grape Nuts to Shredded Wheat if

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one raises the price

 Flake vs. Nugget
 Consumer differentiation - those who purchase one are unlike those who purchase the other
 Never regarded each other as their prime competitor to begin with
 Own internal docs reveal that when Grape Nuts was planning a price increase Shredded
Wheat price did not enter into the discussion
 Econometric evidence
 Product placement was different

 HYPO:
 Crunchies v. Fruities
 Pre-merger: Crunchies sells for $2/box to 100 buyers (profit of 90¢/box)
 Fruities sells for $2.10/box
 IF Crunchies tied to raise price pre-merger, it wd lose $ bc consumers wd switch to Fruities
 (see table on p.520)
 Post-merger pricing
 Crunchies acquires Fruities and raises Crunchies prices to $2.10 (3/100 of Crunchies pre-
merger)
 Crunchies makes $ bc it now also owns Fruities, its former competitor
 (see table on p.521)
 Take Away
 When people have a strong brand preference and merger combines two brands that are somewhat
locked together in a product space, the merger allows the firms to keep the profits they wd have
lost by raising prices bf the merger.
 Example
 Geographic Differentiation
 Bars strung out along the beach in Cabo
 Merger bt B and C; apply the same unilateral analysis
 Although a fair # will go to the other geographic locales; a substantial # will only go to B or
C, cd result in the same effects as product differentiation markets

ROL: To decide wh/ burden (of showing likelihood of success on the merits) has been met by FTC, Ct must
consider likely competitive effects of the merger, if any. Analysis of likely competitive effects req’s det of
(1) the “line of commerce” or product market in wc/ to assess the txn, (2) the “section of the country” or
geo market in wc/ to assess the txn, and (3) the txn’s probable effect on competition in the product and
geographic markets. FTC v. Staples (1997, p.522) Case itself did not invoke unilateral effect, but the
elements are there
 Procedural Posture: Π FTC sought a preliminary injunction pursuant to the FTC Act to enjoin the merger of
Δ Staples and Office Depot, pending final disposition wh the merger substantially lessened competition in
violation of the Clayton Act and the FTC Act.
 Facts: Δ Staples and Office Depot filed a pre-merger notification w/ FTC, pursuant to HSR Improvements
Act of 1976. FTC sought a preliminary injunction (P.I.) ag the merger pending the completion of an
administrative proceeding. Following an evidentiary hearing, the ct granted a P.I.. The ct analyzed the RL
product market of consumable office supplies sold through superstores. It found that FTC showed a R
probability that the proposed merger might substantially impair competition and raised questions going to
the merits so serious as to make them fair ground for thorough investigation and determination by FTC and
ultimately by the appellate ct. FTC showed a likelihood of success on the merits.
 Holding: The ct weighed the equities and found that they tipped in favor of granting a P.I. wc/ was found to
be in the public interest.
 Outcome: The ct granted Π FTC a P.I. ag a proposed merger bt Staples and Office Depot. FTC showed a R
probability that the proposed merger wd substantially impair competition and raised serious questions
going to the merits. The P.I. was found to be in the public interest
 Comments:
 Std of proof for P.I. under § 13(B): Likelihood of success on the merits.
 FTC must raise questions going to the merits so serious, substantial, difficult and doubtful as to

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make them fair ground for thorough investigation, study, deliberation and determination by the
FTC in the first instance and ultimately by the Ct of Appeals and that there is R probability that
the challenged txn will substantially impair competition
 In this case, RL geographic market = metropolitan areas.
 MSA - if any one of the markets, there is competitive overlap, that shd be enough to stop the
merger
 Product market?
 FTC says (and Ct agrees) that RL product market is sale of consumable office supplies through
office superstores (very narrow market defn).
 FTC met its burden; HHI is 100% in many geo market
 Other markets the market wd be reduced from 3 to 2
 s argue market shd be overall sale of office products (Δs have combined 5.5% of that market)
 Unilateral Effects??
 Same thing when defining unilateral effects
 Do the same operation and same ult question; ct chose not to use unilateral effect, chose to focus
on defn of product market
 Why use it then? Pragmatic reason; admit the market, explain the unilateral effects

October 17th

 G/R For Merger Cases

 BoP for govt in merger cases is to show likelihood of success on the merits for P.I. to be granted.
 Govt must also earn the presumption of illegality (wc/ works to help prevent the merger from
happening if Δ cannot successfully rebut) by:
 (1) Define the Relevant Market (hopefully narrowly)
 Product Market
 Geographic Market
 (2) Define Market Participants
 (3) Calculate Market Share & Market Concentration
 Factors Making Up a Differentiated Products Unilateral Effects Claim
 (1) products controlled by the merging firms have no “perfect” substitutes
 (2) products controlled by the merging firms are close substitutes
 close substitutes = if a substantial # of customers of one firm wd turn to the other in response to a
price increase
 (3) other products must be sufficiently diff from the products controlled by the merging firms that a
merger wd make a SSNP increase profitable for the merging firms
 (4) repositioning by the non-merging firms must be unlikely
 non-merging firms are unlikely to introduce products sufficiently similar to the products
controlled by the merging firms to eliminate any sig market power created by the merger
 Unilateral Effects - Acceptable Proof
 (1) characteristics of products
 (2) perceptions of buyers (via consumer surveys)
 (3) pre-merger actions of merging parties (marketing, pricing, internal docts, retailer treatment of
products, cross-elasticity of demand of merging products)

 Maverick Identification in Case Law

ROL: When the acquisition (merger) does not lead to the loss of a maverick and Δ can show that the functioning of
a particular market will prevent anticompetitive axn, the merger will be allowed to proceed. FTC v. Arch Coal.
(2004 TU pg. 44)
 Procedural Posture: In consolidated cases, Πs, the FTC & several states, filed motions for a P.I. ag a merger
proposed by Δ companies. The merger involved the acquisition of one of the companies and its two coal
mines located in Wyoming. The companies filed a motion to consolidate the preliminary and permanent
injunction proceedings.
 Facts: In seeking to enjoin the proposed acquisition under § 13(b) of the FTC Act, the FTC argued that the
acquisition wd violate § 7 of the Clayton Act. Txn involved firms producing coal in Wyoming’s South

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Power River Basin (SPRB) where 1/3 of domestic coal is mined. Coal is bought by utilities to produce
electricity. Fourteen mines in the region were owned by 5 sig producers and 2 fringe firms. Arch coal
owned 2 mines, bought 2 more from Triton and immed sold one of the new ones to Kiewit (a new entrant).
The number of producers didn’t change, but the HHI rose by bt 49 and 224.
 FTC’s Arg: merger wd facilitate a coordinated reduction in the rate of growth of industry capacity. Harm
competition bc coal prices spike up when demand hits cyclical peaks, causing the firms to reach short-term
capacity constraints. Merger wd increase the # of spikes and raise the average price. FTC viewed past mine
shutdowns as reflecting past episodes of coordination. By moving excess capacity from the maverick, a
likely cheater, to Arch, the merger facilitated corrodination. (The ct does not buy the arguments - calls it
“novel”)
 Holding: Πs had not met their burden of showing a likelihood of success on the merits. While govt showed
a PF case of increased market concentration, wc/ had the accompanying presumption that the txns wd
substantially lessen competition in the region, the Δs successfully rebutted the presumption.
 Analysis: Πs’ statistical case of increased market concentration was far from compelling and was much
weaker than other FTC AT challenges. Furthermore, the considerable E bf the ct w/ respect to the
particulars of the region's coal market confirmed that it was unlikely that the challenged txns wd
substantially lessen competition. Πs were not likely to succeed on the merits of their claim of a Clayton Act
violation based on the novel theory (bc it was focused on output restriction rather than price coordination)
of prospective tacit coordination on production limits. Finally, the equities did not support enjoining the
txns in the public interest
 Outcome: The ct denied Πs’ requests for a P.I. The ct also denied the Δs’ motion to consolidate the
preliminary and permanent injunction proceedings. Coordination is feasible, but unlikely and had not
occurred in the past. The firms cd not reliably observe each others’ production levels or prices. The
acquired mine was not a maverick. Kiewit was the maverick
 Comments:

ROL: The concept of the unilateral effects theory of liability is valid, but is only applicable where the parties
involved are so distinguished from other competitors that they are, in effect, in a separate market. US v. Oracle
(2004 TU pg. 44)
 Procedural Posture: Πs, the DoJ AT Division, and several states, filed an action seeking to enjoin Δ
company from acquiring, directly or indirectly, the whole or any part of the stock of another company.
Govt alleged that the acquisition wd violate § 7 of the Clayton Act
 Facts: The DoJ was trying to block the acquisition of PeopleSoft by Oracle, arguing that the 2 were each
other’s closest competitors in partic kinds of enterprise software. This looked like a fairly straightforward
case for the AT Division - the 2 companies were vigorous competitors, and it was generally accepted that
there were few (maybe no) others perceived by at least some sig # of customers as real alternatives. The
DoJ lined up a series of sophisticated customers to T that the products from these 2 companies were the
only products they had or wd consider for the partic fxns involved, and that a 10 % price increase wd not
change that conclusion. While there were others offering various pieces of the software suites offered by
Oracle and PeopleSoft, the common perception was that at most one other company (SAP) offered truly
competitive software suites in the fxns at issue, and that SAP was a pretty distant third in the American
market. In short, this seemed to be a relatively classic unilateral effects case, where the competitive concern
is that the combined company will be able to raise its price unilaterally after the txn bc a sig # of customers
do not see any acceptable options..
 Holding: Denying Πs’ request for relief, the ct first held that Πs failed to meet their burden of proving the
RL market for analysis under Clayton Act bc they failed to prove a "node" or an area of localized
competition bt the 2 companies and failed to establish that the area of effective competition was ltd to the
US. Thus, Πs were not entitled to a presumption of illegality under Philadelphia Nat. Bank or the DoJ and
Merger Guidelines. In addition, Πs did not meet their burden of establishing anticompetitive coordinated
effects bc they failed to prove the likelihood that the post-merger company and its competitor wd tacitly
coordinate by allocating customers or markets.
 Analysis:
 (1) Define RL Market
 Product market - Πs must prove factors that make up a differentiated products unilateral effects
claim (see above)

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 Πs - RL market is lg complex enterprises who purchase high fxn software for HR and finance
 Δs - industry has no recog meaning for high fxn software; there is no bright line test for lg
complex enterprises
 Geographic Market
 Πs: U.S.
 Δs: world-wide
 (2) Define Market Participants
 Πs: Oracle, PeopleSoft, and SAP
 Δs: many firms are in the biz of developing, producing, marketing and maintaining HR and FMS
software
 (3) Calculate Market Share and Market Concentrations
 Πs: used an expert W whose T was unreliable
 Δs:

 3. Supply Substitution and Ease of Entry

 Under HMG, once
 Market concentration is found to (1) exceed safe harbor levels and (2) a plausible threat of unilateral
or coordinated competitive effects is demonstrated, the inquiry turns to 2 factors that can mitigate
competitive concerns:
 entry and efficiencies.
 Using ease of entry to rebut the inference of anticompetitive effects
 (1) ease of entry might dilute or weaken the inference or;
 (2) ease of entry might trump everything else
 HMG now:
 Need sufficiency of entry, timeliness of entry, likelihood of entry

ROL: If the threat of entry wd prevent price from rising after a merger, the merger wd not make coordinated or
unilateral price increases more likely, or otherwise generate market power, the merger will be allowed. U.S. v.
Waste Management, Inc. (1984, p.530) Entry by potential competitors may be considered in appraising wh a merger
will substantially lessen competition; trumps everything elese
 Procedural Posture: Δs, a waste management corp and a holding company, appealed from a final judgment
from the DCt (NY) in favor of govt, wc/ found that Δ’s acquisition of Δ holding company violated § 7 of
the Clayton Act, and ordered Δ to divest itself of its subsidiary
 Facts: Govt brought an AT axn challenging Δ waste removal corp's acquisition of Δ holding company's
common stock. The holding company owned a subsidiary wc/ was also in the waste disposal biz. Based on
revenue data, the lower ct found that the combined market share of 48.8% was PF illegal, that Δ’s
acquisition of the holding company violated § 7 of the Clayton Act and ordered Δ to divest itself of its
subsidiary. Δs appealed.
 Holding: The ct held that the potential entry into RL markets by new firms or by firms now operating there
was so easy as to constrain the prices charged by Δ waste management company's subsidiaries. Any
evidentiary error was considered harmless error. The 48.8% market share attributed to Δs did not accurately
reflect future market power. Since that power was found to be insubstantial, the merger did not
substantially lessen competition in the relevant market and did not violate § 7 of the Clayton Act
 Comments:
 Treats “ease of entry” as a trump; thus, Δ must prove that entry is not easy or lose.
 Ease of entry – low cost to enter; no obvious barriers to entry
 Govt argues that ease of entry does not equate w/ likelihood of entry

ROL:  cannot realistically be expected to prove that new competitors will “quickly” or “effectively” enter unless 
produces E regarding specific competitors and their plans and such E is rarely available. U.S. v. Baker Hughes, Inc.
(1990, p.534) In the absence of sig barriers to entry, a company cannot maintain supracompetitive pricing for any
length of time.
 Procedural Posture: Govt appealed from DCt denying its request for a permanent injxn and dismissal of its
merger violation claim ag Δ mfgs and sellers of HHUDR.
 Facts: The govt challenged the foreign Δ’s proposed acquisition of the domestic Δ’s subsidiary charging

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that it wd substantially lessen competition in the US market. DCt concluded that, overall, entry was likely if
the merger led to supracompetitive pricing. US argued that the ct shd have req’d Δs to show that entry wd
be quick and effective.
 Holding: Ct rejected govt’s quick and effective entry std.
 Comments:
 Ginsburg and Thomas on DC Ct of Appeals (DC Circuit most powerful outside of SCt)
 Why is entry important? (rebuts idea that merger will raise prices)
 Issue raised is ease of entry. If you want to rebut out showing of high market concentration, you
have to come up and show that entry is likely and will be effective by clearly shown E. Entry is
one of the most if not the most sig economic factors to rebut the likelihood of economic harm
from a merger. If easy to break in, PF case numbers are inaccurate (don’t show what gov’t wants it
to show)
 Govt uses Waste Management as authority for quick and effective entry test
 Ct say that just bc a Δ may successfully rebut a PF case by showing quick and effective entry does
not mean that successful rebuttal requires such a showing.
 Onerous to require a Δ to show this
 A firm that never enters the market can still exert pressure on the market

 Note: Entry Analysis in the HMG

 Must analyze likeliness, timeliness, and sufficiency of entry
 Likeliness: distinction bt “uncommitted” entry and “committed” entry
 Uncommitted - hit and run
 Can enter w/in one year
 Enter w/ little sunk costs
 Can leave the market rapidly and inexpensively
 Decision to enter based on current price
 Committed - in it for the long haul
 Substantial sunk investments
 Decision to enter depends on consideration of what competition and price will look like after
it enters
 Entry may depress the market bc
 (1) the entrant adds output to the market
 (2) incumbent firms may react to the competition w/ an aggressive competitive response of
their own
 Timeliness
 Wd the new entrant achieve sig market impact w/in 2 years
 Easiest consideration to assess
 Sufficiency
 Is the new entrant of large enough magnitude, character, scope to solve the competition problem

 4. Defenses: Efficiencies
 Benefit of Mergers, joint ventures, and cooperative relationships to the economy
 allow firms to reduce costs or develop better products
 potential to generate sig efficiencies
 permit better utilization of assets
 lower costs
 See HMG § 4.0 - “Cooperation is the basis of productivity.”
 SCt - past view on efficiencies consideration
 questioned if cost savings or other efficiencies from merger shd ever count in favor of a txn that subst
increased market concentration
 Proctor and Gamble v. FTC, Phil Natl Bank
 Consumer will not receive the benefit of the efficiencies
 Still controlling cases, but don’t foreclose consideration of efficiencies in merger cases
 Judicial hostility to efficiencies has steadily decreased

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 Lower Cts (some)

 Efficiencies are a RL consideration in merger analysis
 HMG
 Recognize an efficiencies defense
 Req’s a “clear and convincing E” std (so, rarely succeeds)

ROL: Anticipated efficiencies from a merger may be used to rebut the presumption of resulting anticompetitive
effects if the E gives an accurate prediction of the proposed merger’s probable effect. FTC v. Staples (1997, p.545)
 Procedural Posture: FTC sought a P.I. to enjoin the merger of Staples and Office Depot, pending final
disposition wh the merger substantially lessened competition.
 Issue: Wh a Δ may use an efficiencies defense to rebut the govt’s PF case
 Facts: Δ Staples and Office Depot filed a pre-merger notification w/ FTC. FTC sought a P.I. ag the merger
pending the completion of an administrative proceeding.
 Holding: The ct weighed the equities and found that they tipped in favor of granting a P.I. wc/ was found to
be in the public interest.
 Outcome: The ct granted Π FTC a P.I. ag a proposed merger bt Staples and Office Depot. FTC showed a R
probability that the proposed merger wd substantially impair competition and raised serious questions
going to the merits. The P.I. was found to be in the public interest
 Analysis: This excerpt focused on Staples “efficiencies” defense.
 HMG: “mergers have the potential to generate sig efficiencies by permitting a better utilization of
existing assest, enabling the combined firms to achieve lover costs in producing a given quality and
quantitiy than either firm cd have achieved w/o the proposed txn.” § 4
 Ct here cannot find that Δs’ efficiencies E rebuts the “substantially less competition” presumption
 Ct recognizes a diff bt speculative efficiencies and those based on prediction backed up by sound biz
judgment
 Δs must provide credible E of efficiencies
 Δs’ E
 “Efficiencies Analysis” - merger wd achieve a savings of bt $4.9 and $6.5 billion over 5 yrs
 Increased sales volume wd allow merged firms to lower costs
 2/3 of lower costs wd be passed-through to consumers
 FTC’s expert showed that Δs’ E was unreliable and did not accurately calculate wc/ savings were
merger specific and wc/ were not

 Note: Efficiencies and Consumer Welfare

 HMG: if a merger creates cognizable efficiencies, the agency then asks we they “likely wd be
sufficient to reverse the merger’s harm to consumers in the RL market”
 Prevention of harm = preventing price increases
 HMG focus on consumer welfare rather than on aggregate economic welfare
 HMG makes the consideration of efficiencies part of the competitive effects analysis
 Not a defense to anticompetitive acquisition
 Asks wh and how efficiencies will “reverse” the merger’s potential harm to competition
 Coordinated effects case: merger might promote competition by creating a maverick firm w/ an
incentive to expand output and lower price
 Unilateral Effects case: merger might reduce merged firms’ variable costs wc/ cd lower consumer
prices
 Current HMG - “the greater the potential adverse competitive effects of a merger…the greater must be
the cognizable efficiencies” in order to conclude that the merger will not harm competition
 Efficiencies almost never justify a merger to monopoly or near-monopoly
 Diff bt entry claims (can be successful) and efficiency claims (often not successful)
 Entry claims are more prospective
 Efficiency claims are more speculative

III. Monopolization
CHAPTER 6 DOMINANT FIRM BEHAVIOR HAVING EXCLUSIONARY EFFECTS
 Introduction

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 Congressional aim of AT law: curb power of individual dominant corp. enterprises

 § 2 of Sherman Act
 basic goal = barring unR efforts by single firms to suppress competition
 chief tool for control of unR exclusionary behavior by dominant firms
 Types of § 2 claims
 (1) monopolization
 (2) attempted monopolization
 Elements:
 1. some amount of near-monopoly power (power approaching that of a monopoly)
 2. conduct element
 3. dangerous probability of success (close to succeeding)
 (3) conspiracy to monopolize (almost never brought)
 requires concerted axn and
 specific intent to achieve monopoly power
 Π does not have to prove that Δs have monopoly power
 See American Tobacco Co. p. 563
 Issues in a Competition Policy System Aimed at Monopolies
 (1) Define the status of “monopoly” or “dominance”
 exercise of substantial market power
 ignore conduct of indiv firms that are commercially insignificant
 (2) Define improper behavior
 Evaluate two factors
 Anticompetitive effect of the conduct
 Π shows this
 Pro-competitive rationales
 BoP shifts to Δ to show these
 (3) What constitutes a legitimate business justification for conduct asserted to be improper?
 Lot of ambiguity here
 Balancing:
 Monopolization law tries to prevent anti-competitive effects on consumer, but will tolerate it as a
reward for producing a superior product (innovation).
 Distinction bt monopoly gained through quality and monopolies that are created or maintained by bad
conduct. But for the bad conduct, there wd be more competition. In addition, the natural course of
competition will break up some monopolies (e.g. technology).

Monopolization: Offense of monopoly under § 2 of the Sherman Act has two elements – (1) the possession of
monopoly power in the RL market, and (2) the willful acquisition or maintenance of that power as distinguished
from growth or development as a consequence of superior product, business acumen, or historic accident. See
Grinnell Corp. (p.562).
 Improper behavior is [exclusionary?] conduct that either achieves or maintains the monopoly; conduct that is less
than honestly competitive; bad acts.

Attempted Monopolization: To demonstrate attempted monopolization, Π is req’ed to prove (1) that the Δ has
engaged in predatory or anticompetitive conduct w/ (2) a specific intent to monopolize and (3) a dangerous
probability of achieving monopoly power. See Spectrum Sports, Inc. v. McQuillan (p.562).

HYPO:
Can Justice Department sue Greaney for monopolization since his Health Law book controls most of the market?
• Not on these facts alone. He must do something. Also, it must be improper behavior. Using superior
skill, industry, foresight is not improper behavior. There is benefit to economy, society. Want to
encourage innovation – which is what competition is all about. There is a trade-off being made –
ability to charge higher prices for encouraging innovation.

 A. The Offense of Monopolization

 Generally

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 Legislative concern: how a company obtains or protects a commanding commercial position

 Modern judicial test for illegal monopolization (must meet both criteria)
 1. Monopoly Power (Does Δ enjoy monopoly power?)
 2. Conduct (Did Δ achieve or maintain its preeminence through improper means?)
 1. Measuring Substantial Market Power (a.k.a. Monopoly)
 Intro
 Market Power = ability to raise prices above a competitive level w/o suffering an immediate and
unprofitable loss of sales
 AT systems ordinarily equate monopoly or dominance w/ substantial market power
 Practical Methods for Determining Possession of Substantial Market Power
 Direct E
 (a) measure elasticity of demand for the products of the firm believed to possess a
monopoly
 (b) show that the alleged monopolist actually has used business methods other than
superior performance to exclude its rivals form the market
 Circumstantial E
 Δ’s share of sales
 First - define RL market
 product market = array of products customers regard as acceptable substitutes
 geographic market = location of suppliers from wc/ a customer might buy
acceptable substitutes
 Second - calculate Δ’s market share by comparing its activity in the RL market to the
activity of all firms in the RL market
 Monopoly Power
 Market Share presumption attaches
 Most cts require greater than 70%
 Other factors considered: e.g. entry, etc.
 Kodak, Microsoft lessons important
 a. Market Shares as Circumstantial Proof (Foundational Cases)
 i. Standard Oil (1911) - Std Oil charged w/ monopolizing and attempting to monopolize
 Ct used both direct and circumstantial E to conclude Δ had substantial market power
 Size and durability of Δ’s market share weighed decisively ag its argument that it lacked a
monopoly
 ii. U.S. Steel (1920) - alleged U.S. Steel achieved monopoly power through anticompetitive
mergers w/ competitors
 Ct found for Δ saying no substantial market share existed
 Market share declined significantly by the time the trial was over
 Used both direct and circumstantial E
 b. Standard Oil (1931): Assessing the Impact of New Technologies
 Innovation can create market power until new entrants are able to effectively compete
 Std Oil was sued by DoJ for illegally combining w/ 50 firms to create a monopoly in new
technology
 Δs created a patent pool to share and license rts to use the new tech
 SCt found for Δs by using a broader RL market than DoJ had outlined
 Rockefeller gets monopoly over gas sold both bf and after refining. Used all types of predatory
means.
 The remedy: break up the monopoly.
 market power found by (1) circumstantial E or (2) direct E
 (1) Circumstantial: market share creates an inference of market power
 (2) Direct: e.g. squeezed out competitors.
 Also used to show the conduct element
 c. Alcoa (1945): Identifying Market Participants and Attributing Market Shares
 Used exclusionary tactics to maintain its market dominance
 1937 Alcoa was the sole producer of virgin ingot

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 See case outline below

Element #1: Possession of Monopoly Power in the Relevant Market

J. Hand’s 90% is monopoly power, 33% is not, 64% is doubtful
Rule of Thumb 80% is the lower number at which courts will normally find monopoly. Alcoa.

G/R: Analyzing and defining RL markets and calculating market share may act as a surrogate for an analysis of
market power. See. US v. Alcoa (p.571). This Appeals Ct case has, for precedent purposes, the weight of a SCt case.
 Procedural Posture: The US sought relief from a judgment of a fed DCt, wc/ dismissed its claim under §§ 1
and 2 of the Sherman Act. The US alleged that the axns of Δ corporations monopolized interstate and
foreign commerce, particularly in the manufacture and sale of virgin aluminum ingot
 Facts: The US alleged violations of the Sherman Act, through interstate and international monopolization
of the virgin ingot market and sought dissolution of Δ’s aluminum company. The US alleged that Δs had a
monopoly in production of virgin ingot, perpetuated through unlawful practices. Δs had such a
proportionally lg amount of product that it had control of the supply, despite what actual production
numbers indicated, and secondary market competition was not substantial. The fact that no more than fair
profit was derived from Δs command of the market was not relevant bc all Ks fixing prices in the US were
unconditionally forbidden under the Sherman Act. Size alone did not determine the existence of a
monopoly but, rather, exclusion of competitors, unnatural growth, wrongful intent, and undue coercion
were determinative elements
 Holding: The ct reversed the DCt’s judgment, so far as it held that Δs were not monopolizing the ingot
market. The Ct found violations of the Sherman Act in Δs unrelenting intent to exercise their existing
power to monopolize the market. The court remanded the case
 Comments:
 Gives classic explanation of how to analyze first prong of two-prong test (possession of monopoly
power in the RL market)
 Op Part 1: Market defn issue
 The ques is wh, once defined, the market is sufficient to say a firm has monopoly power. It is the
ability of one firm to raise price by itself w/o that axn being unprofitable.
 Outcome: The relevant market was virgin ingot.
 Alcoa was essentially only producer in US of virgin ingot. They did compete in some sense
w/ recycled aluminum. Question was wh recycled sale competed in the market.
 Was subgroup of customers who were not willing to take the recycled aluminum? Only
virgin ingot was sufficient for these customers.
 But notes after case say that if there are products putting some pressure on the market, like
recycled aluminum here in the virgin ingot market, we shd count them in.
 Captive sales – Alcoa wd buy some of ingot itself and use it to produce spoons, etc. to sell in the
market. Why shd we count the stuff that Alcoa buys itself and never sells in the market as virgin
ingot? They had control over the ult supply – ultimately affects the ult price.
 What about the fact that aluminum was made internationally and a fair amount of it was sold in the
US? How shd we count sales by foreign companies? Only counting market as US, not a global
market (cd say global market if everyone sold everywhere freely). Don’t end up counting the
imports bc of high tariffs and high transportation costs. Shd we count some imports? Maybe the
ones who are already importing but do not count new imports. Also foreign manufacturers first
had to supply their own customers. So we only count what gets in – thus in this case, counts very
little.
 Op Part 2: what counts in determining the market share number?
 Secondary ingot (produced by anyone who bought virgin ingot and uses the scrap remains)
 Ct concedes this puts pressure on the Alcoa price
 Ct does not include bc
 (1) purchasers thought it was an inferior product,
 (2) (and more importantly) that secondary ingot was still under Alcoa power bc it made
the ingot in the first place. It knew that a certain amnt of its output wd used in the future,
so it cd adjust the output to raise price in the future.
 Monopoly power under economic theory: Can raise price substantially and your competitors may take

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a little of your biz, but it is still profitable to raise your price above the competitive level. Does not
help us in ct. So cts have relied extremely heavily on circumstantial E (i.e., market share).
 Most convincing case telling us that market power determination is so important.
 With one flick of the wrist, J. Hand cd go from 30% to 90% of market share, depending on what
he counts into the RL market.
 A second product (aluminum) that Alcoa produced
 Rejected bc Alcoa still controls it
 Imports
 Included to the extent it is actually sold in the US.
 Not included is all the ingot that cd come into the US.
 Argument: the market is the world
 Rationale: This is a barrier to competition.
 only the imports affect the US
 extra-national firms face
 additional tariffs that raise the prices of imports
 additional transportation costs.
 Have political pressure to sell in their own country
 NOTE: wd be different today bc today there are no tariffs, transportation costs don’t seem limiting, and
the market may really be worldwide.

 Sidebar 6-1: Durable Goods Monopoly - Three Economic Issues

 Competition From Used or Recycled Products
 Can the Monopolist Commit to High Future Prices?
 Excess Capacity as a Barrier to Entry

 d. Cellophane (1956): Injecting Economic Analysis into the Market Definition Process Via Cross-
Elasticity of Demand
 Background:
 Did DuPont have monopoly power?
 DuPont argued that RL market was flexible wrapping material
 Trial Ct and SCt bought the argument
 DuPont formula for defining the RL market
 Emphasizes analysis of the cross-elasticity of demand for the Δ’s products
 Remains the basic test courts and enforcement agencies use in modern § 2 cases

WHAT DEFINES THE CONDUCT ELEMENT?

 Element #2: Improper Behavior/Exclusionary Conduct
 2. Identifying Improper Conduct
 a. Introduction
 Chief analytical challenge: det wh specific acts have sig redeeming features or make commercial
sense only if they chasten competitors or drive them from the market
 Categories of behavior analyzed
 Predatory pricing
 Predatory product development and design decisions
 Leveraging
 Refusals to deal
 Focus of each → practical test to det when behavior crosses the lines
 Conduct
 Lots of types: predatory, exclusionary
 Alcoa formulations give range of possibilities
 Tests vary: Exclusionary, lack of biz justification (vs. “competition on the merits”), profit sacrifice
G/R: Analyzing and defining wrongful conduct is not simply a matter of size (size does not determine guilt); there
must be some exclusion of competitors; growth must be something other than natural or normal; there must be
wrongful intent, or some other specific intent; or some duly coercive means must be used by the company. See. US

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v. Alcoa (p.594). This Appeals Ct case has, for precedent purposes, the weight of a SCt case.
 J. Hand rejects the pure no-fault approach (if you got there by skill, industry, foresight, that is not willful
maintenance or acquisition of monopoly power) for this case.
 What did Alcoa “do wrong?”
 Define practices by the negative
 Wrongful intention
 Link wrongful element w/ intent element
 Exclusionary practices
 Lack of business justification (clue to identify good or bad practice)
 Lack of economic justification (clue to identify good or bad practice)
 Coercion
 Continuing practice
 Define practices by the positive
 produce a better product; skill, insight, innovation - good conduct that gives a monopoly
 Not § 2 bad conduct
 Ex: accident, innovation, monopoly thrust upon producer
 Concrete axn that got Alcoa into trouble
 Built new facilities to produce more aluminum
 Used its financially superior position in the market to take advantage of any increase in
demand by building new plants, sometimes even in advance of the new demand.
 Effectively stopped people from competing w/ them. In this sense, it was willful conduct
according to J. Hand.
 We don’t want to discourage expansion any more than we want to discourage innovation. In
support of J. Hand, Alcoa cd have been using their status to keep new entrants out. Question
really is, “Are you doing something market enhancing or something simply to prevent
competition?” Want some behavior that is “exclusionary.”
 United Shoe (p. 597, 1953) - made the machines that made the shoes
 Govt charged
 (1) United Shoe only allowed leases of their machines (cd not buy the machine)
 (2) had to get the machines svced by United Shoe
 (3) Leases were only long-term
 Ct said this combined way of leasing the machines kept other companies out bc no one wd start up a
repair biz bc of the lease clause
 Coupled w/ long-term leases crowded everyone else out of the market
 Net effect was to keep out new entrants and was exclusionary conduct
 Company had contractual barriers to competition; becomes exclusionary conduct and violates § 2
of the Sherman Act

 d. Refusals to Deal
 Section 2 violations include refusals to deal
 Refusals by dominant firms to deal w/ their rivals, customers or suppliers
 Colgate Doctrine: “In the absence of any purpose to create or maintain a monopoly, the Sherman act
does not restrict the long recognized rt of trader or manufacturer engaged in an entirely pvt biz, freely
to exercise his independent discretion as to parties w/ whom he will deal.”
 Question: Whether a firm has lost its “Colgate Immunity” by seeking to “create or maintain a
monopoly”?
 Categories of Refusals to deal
 (1) A dominant firm threatens to cease cooperation w/ a customer or supplier that is considering
forming a relationship w/ the dominant firm’s competitor (Lorain Journal Co.)
 (2) Challenges to a dominant firm’s attempt to w/draw from an existing contractual relationship or
to impose new terms on an existing relationship.
 (3) Refusal of the dominant firm to provide access to a facility (a.k.a. “essential facility”) that
arrival requires in order to compete w/ the dominant firm

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G/R: A dominant firm’s refusal so deal w/ customers or suppliers w/ the intention to maintain a monopoly is
sufficient to establish a violation of § 2 of the Sherman Act. It is not necessary to show that the dominant firm was
successful in its attempt. Lorain Journal Co. v. U.S. (p.631).
 Procedural Posture: Δ newspaper publishing corp and its officials, sought review of the judgment of the
U.S. DCt (OH). Ct found Δs had been engaging in a combination and conspiracy in restraint of interstate
commerce in an attempt to monopolize commerce in violation of §§ 1 and 2 of the Sherman Antitrust Act.
 Facts: The U.S. filed a complaint ag Δs, the sole publisher of an Ohio newspaper, alleging that Δ, together
w/ its officials, had been engaging in a combination and conspiracy in restraint of interstate commerce and
in an attempt to monopolize commerce. Δs were found to have been engaging in such conduct and were
enjoined from continuing such attempt. Δs were found to have attempted to monopolize interstate
commerce by refusing to accept local advertising from parties using a local radio station for advertising.
The conduct was aimed at forcing the station out of biz. Bc both the paper and the radio station were
involved in disseminating of out-of-state news and out-of-state advertising, Δs’ conduct was found to be an
attempted monopolization of interstate commerce in violation of § 2 bc newspaper already enjoyed a
substantial monopoly in its area and had attempted to use that monopoly to destroy threatened competition
 Holding: Newspaper violated § 2 bc of exclusionary activity. The conduct was exclusionary and has no
legitimate business justification behind it.
 Comments: Conduct widely accepted as exclusionary
 Their axn was likely perfectly legal if done by other than a monopoly; perfectly ok for a competitor; in
the hands of the monopolist the axn becomes exclusionary
 RL Market for newspaper: Market for news; market for ads
 Decision is important bc sets up point along continuum that says company may be doing something
that is not wrong/illegal/anticompetitive, but it is really obviously exclusionary and intentionally
exclusionary w/o a biz justification. Ct here decided to do this despite the Colgate Doctrine.
 Δ had an unquestioned monopoly in the geographic market. It will not sell ad space to companies
that advertised on the radio. A refusal to deal (Colgate - unilateral refusal to deal is okay); this ct
says it can amount to exclusionary conduct that is in violation of § 2
 Other possibilities
 Cd also be seen as an exclusive K (ok except where they create a monopoly)
 Cd also force others to boycott
 Ct says all the conduct amounts to exclusionary conduct; no biz rationale except driving out a
rival; not an acceptable biz rationale
 Predatory Behavior (pricing or product development)
 Exclusionary on its face
 No biz justification
 Health Care Example
 Blue Cross had a monopoly in health insurance.
 Docs and Hospitals had to have a K w/ Blue Cross
 Gave Docs a good price in exchange for a promise (most favored nation status) that if the
docs made a better K w/ any other insurance carrier or HMO, the excess discount had to be
given to Blue Cross patients as well
 Exclusionary practice - if they wanted the lower price, they shd have bargained for it in the
first place

 Proving Anticompetitive Effect

 History of AT Suits against leading companies
 US v. Std Oil (broken up into 33 companies)
 US v. Alcoa (WWII era; no divestiture)
 US v. American Tobacco
 US v. IBM (Govt dropped the case)
 US v. AT&T (Break up into 11 operating companies; split off long distance and equipment)

 Microsoft Cases
 US v. Microsoft I (1995)
 Charged MS w/ maintaining its monopoly in OS (Windows) by

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 licensing to equipment manufacturers

 agreements w/ software developers
 Settled by consent decree
 Three years later gov’t alleges MS violated the consent decree (Microsoft II)
 Bundling (tying its Browser (IE 4.0) w/ Windows
 Ct of Appeals: NO VIOLATION of decree but might violate Sherman Act
 US and 20 states sue MS again in 1998 (Microsoft III)
 Fast track trial: five months after complaint filed
 12 Ws per side (GATES by video depo)
 Seventy-six day trial on the merits
 No trial on relief (relief was controversial - how MS was going to be broken up)
 Mediation by Judge Richard Posner after the trial
 Failed (bc of the states?)
 Relief: DOJ’s gentle decree (did not break up MS); states’ case blocked; EU still has a broader
parallel case pending that affects MS

Proving Microsoft’s Monopoly Power

Government Microsoft Ct of Appeals
Persistent high share of defined RL No market power in any RL market Persistent high share in properly
market (dbl inference) (“behavioral” approach) defined RL market
-barriers to entry a. leapfrog competition -barriers to entry
1. sunk costs b. innovation a. applications
2. scale economies c. intense competition
3. switching costs. d. no significant barriers to entry
4. network effects 1. sunk costs
5. applications 2. switching costs
3. network effects
4. applications
Conduct constituting the exercise of Not possible to define a RL market Conduct constituting the exercise of
market power (single inference) and calculate market share market power (single inference)
AND actual anticompetitive effects AND actual anticompetitive effects
-exclusionary a. middleware
-collusive b. servers
1. prices c. other OSs
2. profit margin Profits and margins normal for
software
3. equity value Conduct evidencing vibrant
competition
a. investment in R&D
b. low price for Windows

G/R: Basic gist here: Govt’s expert witnesses prove anticompetitive effects by establishing market power in RL
market and proving significant barriers to entry. Economic power can be used to show monopoly power. U.S. V.
Microsoft Corp. (D.C. District Ct Case 2000 p.828).

G/R: Basic gist here: Ct of Appeals agrees w/ DCt in its entirety. Monopoly power shown by persistent high share of
defined market and conduct constituting the exercise of market power and actual competitive effects. U.S. V.
Microsoft Corp. (Appellate Case 2001 p.850).
 First Prong of § 2: Monopoly Power
 Theory of govt’s case: § 2 monopolization; that MS took steps to maintain (not obtain) its monopoly in the
OS Windows and extend its monopoly power in other markets to gain power in such markets (i.e., markets
for software that supplements OS platform, like Word, Excel, etc.) and protecting against threats to
Windows from browsers (Netscape) and Java that could be “alternative platforms” for software.
 Elements of § 2 Case:

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
First Element = monopoly power
 1) What RL market did MS monopolize? OS compatible w/ Intel (everything but Apple)
 Proof? Barriers to entry E
 Facts militating against govt’s market? Intense competition; leapfrog competition
 2) What markets were excluded?
 Apple OS (req’s different hardware)
 OS for other devices besides computers, e.g., handheld computers, Palm Pilots, etc.
 Other “middleware” that cd serve as “platforms” (browsers and Java)
 Proof of monopoly power?
 Other factors affecting market power
 Applications [software] barrier to entry
 network effects; (value of product increases as more people use it; an applications barrier to
entry) consumers want OS that can support most software; software designers want to write
software for largest OS; most applications written for dominant OS
 Proof of market power: structure
 Windows has 95% of market, 80% if Apple included
 Second Prong of § 2: Conduct
 Theory was that MS did certain things to essentially squash (squish/decimate) Netscape.
 MS saw Netscape as potential rival to Windows.
 MS’s illegal conduct
 (1) “Exclusionary conduct” by:
 Dealings with OEMs; Integrating Internet Explorer into Windows; Efforts to kill Java; Other
conduct
 (2) Conduct re: OEMs
 Govt’s Theory: MS restricted OEMs from using Netscape to keep them from getting “critical
mass” needed to rival Windows as a platform
 Forbid OEMs (through licenses) from removing icons, start menu items, folders
 Altering boot sequence
 Altering appearance of Windows
 Purpose? IE browser wd win over Netscape w/ buyers of new computers
 MS’s Defenses:
 Schmalensee (expert W)
 “Killer apps” etc? - competition is for the market itself; totally diff paradigm than traditional
markets
 High prices explanation (P > mc)?
 What is marginal cost for software?
 Tech is diff from other industries in that the mc is not the real cost (it is the
development, sunk costs, etc); mc is nothing; long-term sunk costs are the
determining costs, not the mc
 What about network effects? Doesn’t really exist; just shows people prefer this product since tech
changes so fast (leapfrog competition)
 Barriers to entry (defn varies from govt’s defn)
 OEM can install multiple browsers; does not need to remove IE
 Interference by OEMs w/ MS’s copyright on Windows

Market Power in Aftermarkets

G/R: Low market share in the original equipment market does not preclude as a matter of law the possibility of
market power (ability to raise prices or exclude competitors) in the derivative market (also called the “aftermarket”)
Kodak v. Image Technical Services (U.S. 1992 p. 583).
 Procedural Posture: In an AT suit initiated by Π independent svc organizations (ISO) pursuant to §§1 and 2
of Sherman Act, Δ film company (Kodak) appealed from a judgment of the Ct of A (9th C), wc/ reversed
the trial ct's decision granting Kodak SJ.
 Issue: Wh/ ’s lack of market power in the primary equipment market precludes, as a matter of law, the
possibility of market power in derivative aftermarkets. (answer is no as a matter of law)

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 Overview: ISOs sued, alleging, among other things, that Kodak’s attempts to preclude them from servicing
its equipment constituted a tying arrangement. They allege Kodak violated § 1 by unlawfully tying the sales
of svc for Kodak machines to the sale of parts and violated § 2 by unlawfully monopolizing the sale of
service for Kodak machines. Although the trial ct granted Kodak’s motion for SJ, the appellate ct
determined that ISOs had presented sufficient E to raise a genuine issue concerning Kodak’s market power.
It rejected Kodak’s claim that competition in the equipment market wd necessarily prevent it from
engaging in a tying arrangement in the svc and parts markets.
 Holding: The Supreme Ct affirmed the lower ct's judgment after determining that Kodak had not met its
burden for SJ. Specifically, it held that ISOs’ economic theory did not dispel direct E that Kodak had used
its market power to raise prices and drive out competition. Acknowledging Kodak’s parts svc and
equipment may have been components of one unified market, ct concluded it wd not reach that conclusion
as a matter of law on a record so sparse
 Comments:
 Claim under § 1 = Tying
 Tying Arrangement: An agreement by a party to sell one product but only on the condition that the
buyer also purchases a diff (or tied) product, or at least agrees that he will not purchase that
product from any other supplier.
 Claim under § 2 = Monopolization of the service and parts of Kodak copiers market
 Exclusionary conduct of not selling the parts necessary for ISOs to svc Kodak equipment, not
letting as matter of Kual obligation others to sell parts in resale market, all w/ objective of
monopolizing the market, wanted to do the service of its machines itself
 Kodak’s business strategy
 Hold onto the “aftermarket” (i.e., svc of machines, replacement of machine parts)
 Market allegedly monopolized by Kodak = derivative market
 Kodak is trying to keep the “aftermarket.” Ltd the market to servicing of its own products, not all
the other copying/office products in the equipment market. Market in wc/ they clearly possess the
product is a market in wc/ they are far from possessing market power in.
 Kodak’s arguments
 Tried to argue that if they don’t have monopoly in primary market, how can they have
monopoly in an aftermarket? (gerrymandered market)
 Also want ct to say (as a matter of law) that the aftermarket (market in wc/ Kodak had no
economic power) cannot be monopolized.
 Legal significance in Kodak of:
 Lock in
 parts not interchangeable, once you buy a Kodak in primary market, you are stuck w/ Kodak
in the secondary market; less to pay for costly svc than to buy a new product
 Lifecycle pricing
 Consumers “think” that prices are inextricably intertwined.
 Consumers do not think about the costs of svc and parts over the life of the machine when
they make the initial purchase
 Information costs
 Price discrimination
 Sophisticated lg companies buy Kodak machines and perform nec lifecycle costing bf making
a big purchase; this ‘smart shopping’ does not discipline the whole market however bc not
enough big buyers out there to influence the market and if there were there wd be no price
discrimination
 An important “Post-Chicago” case
 Brings in real-world economics (how pricing is really occurring); doesn’t’ rely on “perfect”
assumptions (like every consumer will research product and buy w/ lifecycle pricing in mind).
 Tells other cts that bf you accept simplifying assumptions, you need to look behind the scenes and
how imperfections in info, way consumers shop, affects application of microeconomics principles.
 But cts have been very unreceptive on the aftermarket theory. This case depended a lot on taking
the facts as alleged true (bc of procedural posture).
 Aftermath: On remand 9th C holds that “inherent power” of Kodak’s patents do not immunize its
conduct under § 2.

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ii. Threats to Abandon or Alter an Existing Relationship

G/R: A monopolist cannot refuse to cooperate or withdraw from cooperation w/ rivals if there is no good biz
justification for doing so and looks like the biz is trying to drive the other party out of biz (concept of predation:
hurting oneself in short-term to accomplish long-term objective of pushing out competition). Aspen Skiing Co. v.
Aspen Highlands Skiing Corp. (1985, p.641)
 Procedural Posture: Cert was issued to the US Ct of A (10th C) to det if a finding of a violation of § 2 of the
Sherman Act was properly affirmed where the company w/ monopoly power refused to enter a marketing
arrangement w/ its smaller rival.
 Facts: Highland ski resort in Aspen filed suit in DCt (CO) against Aspen Ski Co. Highland operated one of
the ski-able mountains in Aspen; Ski Co operated the other 3. Highland alleged Ski Co monopolized the
local market for downhill ski svcs, in violation of §2 by refusing to continue a long-standing marketing
arrangement. They also alleged Ski Co took add’l axns wc/ made it difficult for Highland to market a multi-
area package of its own. DCt entered judgment on a jury verdict in favor of Highland, after instructing the
jury that a firm possessing monopoly power violates §2 if it willfully acquires, maintains, or uses that
power by anticompetitive or exclusionary means or for anticompetitive or exclusionary purposes, but does
not violate the law by refusing to deal w/ a competitor if there are valid biz reasons for that refusal. The Ct
of Appeals affirmed, holding that the multi-day, multi-area tickets in question could be characterized as an
"essential facility" wc/ the larger operator had a duty to market jointly w/ its competitor, and that there was
sufficient E to support a finding that Ski Co.'s intent in refusing to continue the marketing arrangement was
to create or maintain a monopoly
 Overview: The SCt affirmed the judgment upholding the finding of a violation of § 2. They found the
monopolist elected to make an important change in a pattern of distribution that had originated in a
competitive market and had persisted for several yrs. The absence of an unqualified duty to cooperate did
not preclude a finding that the monopolist's decision not to participate in the cooperative marketing venture
had evidentiary significance as to its liability. The rt to refuse to deal w/ rival firms is not unqualified. Bc
the jury was unambiguously instructed that the monopolist's refusal to deal w/ its rival did not violate § 2 if
valid biz reasons existed for that refusal, the jury concluded that there were no valid biz reasons for the
refusal.
 Holding: SCt affirmed finding a §2 violation where E in the record was adequate to support the finding that
the monopolist made a deliberate effort to discourage its customers from doing biz w/ its smaller rival
 Comments:
 Not suggesting that monopolist always has to enter into jt venture w/ rival or that monopolist can never
w/draw from a jt venture w/ a rival for legitimate biz justification. If you don’t have a legit biz reason
and you are stopping a profitable jt venture that made you money, ct will conclude that reason for
w/drawing is to drive your competition out of the market.
 Critical questions resolved in Aspen Ski are on conduct side (second element of § 2 violation)
 Alleged market: Downhill skiing services in Aspen, CO
 Why is this particularly controversial? There are plenty of skiing resorts in CO besides those in
Aspen. Criticize by looking at wh/ skiers see Breckenridge, Vail, etc. cd be substitutes for skiing
in Aspen and how long do these skiers normally vacation?
 Monopoly structure? Only two players in the market. Looks like monopoly power b/c  owns 3
of the 4 mountains in the market. So  has something approaching 80% of market. Does not
definitely prove monopoly power, but good enough by Alcoa standards. Would defend against
charge of monopoly power by showing that entry was easy in the market (no entry barrier).
 What did  do that constituted monopolization conduct? Withdrew from package arrangement
where skier could buy 6-day pass that allowed skiing on all 4 slopes in Aspen. Essentially,
competitors had joint venture. P alleges economic harm, proved to the satisfaction of the jury, in
form of lost revenue, etc. What does fact that they had a joint venture before show you? The joint
venture was good for everyone.
 What facts are significant to court in proving that this conduct was “bad?”
 Superior quality of the all-Aspen pass
 Consumers were adversely affected by the elimination of the pass. Consumers were angry.
 Π’s inability to compete

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  changed sign in airport to reflect 3 slopes (not 4 slopes); hurting Π’s ability to compete;
giving misleading info to consumer; not allowing consumer to exercise his/her choice based
on all relevant info available
 ’s business justification
 Contrary to good business practice;  doing something that will affect their bottom line in a
negative way; will lose customer base; short-term effect was to hurt short-term profits b/c
customers who would buy pass and visit ’s slopes refuse to do so;  sacrificing short-term
profits in order to monopolize market in long run.
 J. Scalia: Where  maintains substantial monopoly power, his activities are examined through a
special lens: Behavior that might otherwise not be of concern to the AT laws – or that might be
viewed as pro-competitive – can take on exclusionary connotations when practiced by a
monopolist.

 Note: Economics of Exclusion and “Raising Rivals’ Costs” (page 634)

 Thesis, Antithesis and Synthesis? Three Perspectives on Exclusion
 (1) Judge Hand - “only if exclusion is interpreted very narrowly - actuated solely by the desire to
prevent competition -cd Alcoa’s conduct in expanding capacity in advance of the growth of
demand be deemed not exclusionary”
 Hand feared false acquittals - the possibility that AT law by failing to find violations in a
monopolist’s exclusionary conduct cd create lethargic monopolists w/ little incentive to cut
costs or innovate
 (2) Judge Bork - expressed skepticism about exclusion as an AT theory, partic when applied to a
dominant firm. “Where an efficiency potential appears in a case involving an indiv refusal to deal,
AND there is no clear E that the purpose of the refusal was predatory, cts shd generally find the
refusal lawful, bc of tie-breaker considerations and bc predation by an indiv refusal to deal will be
very uncommon.”
 Theory - (1) to prove the benefits of competition, a “potential” is sufficient; (2) to prove harm,
“clear E” wd be req’d; (3) the anticompetitive outcome wd be “very uncommon”
 Worries about false convictions (opposite of Hand)
 Cts today tend to side w/ Bork’s views
 (3) Professors Krattenmaker and Salop - “in carefully defined circs, certain firms can attain
monopoly power by making arrangements w/ their suppliers that place their competitors at a cost
disadvantage. Claims of AT exclusion shd be judged according to wh the challenged practice
places rival competition at a cost disadvantage sufficient to allow the Δ firm to exercise monopoly
power by raising its price”
 Intermediate perspective - highly influential at the fed AT enforcement agencies
 Modern Raising Rivals’ Cost Theories
 Involuntary Cartel - Restricting Rival Access to Supply
 -Firms A and B are colluding
 -Firm C either refused to join Firms A and B, or Firms A and B are not interested in inviting
C to join
 -Firms A and B solicit their suppliers to refuse to sell to Firm C, or at least to refuse to sell to
C on equal terms
 Involuntary Cartel - Restricting Rival Access to Distribution
 -Firms A and B are colluding
 -Firm C either refused to join Firms A and B, or Firms A and B are not interested in inviting
C to join
 -Firms A and B solicit their customers to refuse to buy from Firm C, or at least to refuse to
buy from C on equal terms
 Applying the raising rivals’ costs framework (Analysis)
 Exclusion, or “Raising Rivals’ Costs - has a firm in the role of Firm C been excluded? How does
the conduct alleged to harm competition/disadvantage some rival(s)
 Market Power, or “Power Over Price” - If the excluding firm (A) are able to successfully
disadvantage firm(s) (C), wd Firm A be able to obtain or keep market power?

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 Efficiency Justification - identify any legit biz justifications for the exclusionary conduct; does any
resulting benefit to competition outweigh the potential harm to competition demonstrated in the
first two steps?
 Lorain Journal Revisited
 Step 1: Raising Rival Costs
 Step 2: Market Power
 Step 3: Efficiencies

Predatory Pricing
 Introduction
 usually comes up as an attempted monopolization case BUT can also come up in a completed
monopolization case
 driving out rivals by pricing below some measure of costs:
 some argue AVC shd be the measure of costs
 form of “attempted monopolization” under § 2 Sherman Act
 Also, covered by Robinson Patman Act (Clayton Act § 2)
 prohibits “primary line” price discrimination (charging diff prices in 2 markets & injuring rivals)

G/R: Utah Pie v. Continental Baking (1967, p.605)

 Procedural Posture: Utah Pie sought review of a judgment from Ct of Appeals (10th C), wc/ held that Utah
had failed to establish a PF case against Continental in axn alleging Continental had engaged in illegal price
discrimination in violation of § 2(a) of the Clayton Act
 Facts: In late 1957 Utah joined the frozen pie biz. For 30yrs they baked pies in its plant in Salt Lake City
and sold them in Utah and surrounding states. The frozen pie market was rapidly growing and so was Utah
Pie’s share of this market. Continental and two other big pie mfgers entered the market and began selling
pies below cost. Shortly, Utah’s market share plummeted.
 Holding: The ct held that under § 13(a), a jury cd have R inferred that predatory price discrimination would
have substantially lessened, injured, destroyed, or prevented competition. They further held that
Continental’s persistent sales below cost and radical price cuts were E of their predatory intent toward
Utah. Accordingly, the ct reversed the judgment holding that Utah had failed to make a PF case against
Continental, and remanded the case for further proceedings
 Judgment holding that petitioner had failed to make a case against respondents was reversed because
petitioner provided evidence that respondents had consistently sold their products below cost, and had
made radical price cuts, from which a jury could have inferred that respondents were operating with a
predatory intent to substantially lessen, injure, destroy, or prevent competition

G/R: Predatory pricing is actionable under AT laws per a two-part test: such pricing must be (1) below some
appropriate measure of cost (short run) and (2) it must be probably that the alleged predator will be able to recoup its
losses through the later exercise of market power (long run). Brooke v. Brown & Williamson (19993, p.607)
 Procedural Posture: Cigarette mfger (Brooke - had only 2-5% of market share) sought review of a decision
of the Ct of Appeals (4th C.), wc/ affirmed the trial ct's determination that respondent cigarette mfger
(Brown) was entitled to judgment as a matter of law in Brooke’s price discrimination suit.
 Facts: Brooke sued Brown under the Robinson-Patman Act, alleging price discrimination. Brooke argued
that Brown’s volume rebates to wholesalers threatened primary-line competitive injury by furthering a
predatory pricing scheme designed to purge competition from the generic segment of the cigarette market.
Brown engaged in predation by entering generic market and selling product below cost; theory was that
Brown was trying to use this as hammer against Π. Alleged Brown was trying to get monopoly in generic
market to discipline the generic sellers from putting so much pressure on brand-name sales.
 Trial ct entererd a JNOV after determining that Brown had no R possibility of injuring competition by
limiting the growth of that segment. The Appellate Ct affirmed and Brooke sought further review.
 Holding: SCt affirmed the Appellate Ct’s judgment after determining that there was no E of injury to
competition.
 Specifically, it held that the record did not support a finding that Brown’s alleged scheme was likely to
result in oligopolistic price coordination and sustained supracompetitive pricing in the RL cigarette
market.

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 IOW: Brown did not have a R prospect of recouping its losses from its alleged below-cost pricing
scheme through slowing the growth of the generic market. However, the Ct wd not create a per se rule
of nonliability for predatory price discrimination through oligopolistic price coordination
 Comments:
 Case of attempted monopolization. These cases do not require a pre-existing level of monopoly power
bc you are trying to become a monopolist. There has to be a R probability of becoming a monopoly
(pretty high market share, conditions that will help you get to monopoly power).
 Predatory pricing – monopolist will price below cost in order to drive the prices down so low that the
rival is going to have to go out of biz (once that happens, monopolist will be able to assert monopoly
pricing).
 Here, monopolist is really oligopolist (the cigarette industry). They were trying to engage in predatory
pricing for a specific purpose. This case not typical of single-firm monopoly gradation, but its
principles guide all modern-day predatory pricing cases.
 Predation Story: 1) monopolist dropped price below cost w/ goal and intent of driving out competitor
or disciplining competitor to start acting like rest of industry; 2) dangerous probability that monopolist
can regain short-term losses over time w/ higher prices once it is successful in driving other guy out or
disciplining other guy (Why burden for Π? Π needs to prove future market power; harder in this case
bc  will have to recoup in an oligopoly; wd have to refute premise that oligopolists wd continue to
operate in lock-step); and 3) this will injure competition in the long run (prove that competition will
not restore itself; no new entry; no new innovation over a period of time).
 Predatory pricing std assumes that pricing behavior shd only be of AT concern if it involves profit
sacrifice, as opposed to merer revenue sacrifice.
 New hot area: discount airlines.
 Proving cost element is very difficult to determine.
 Drastically increasing capacity has received mixed treatment. Some cts say this is E of anticompetitve
conduct if a legitimate business justification is not present. Other cts say the focus is just on pricing,
which is difficult to interpret (reasons for reduced prices other than anticompetitve, e.g. just get them
in the store).

G/R: A claim of insufficient assistance in the provision of service to rivals is not a recognized AT claim under the
Ct’s existing refusal-to-deal precedents. Verizon v. Curtis Trinko Law Offices (2004, TU p.657)
 Procedural Posture: Local phone svc customer sued Verizon (incumbent LEC), alleging violations of § 2 of
the Sherman Act and the Telecommunications Act of 1996. The DCt dismissed the complaint. The Ct of
Appeals (2nd C) reinstated the complaint in part, including the AT claim. Cert was granted
 Facts: The customer (class axn suit) alleged that Verizon filled rivals' orders on a discriminatory basis as
part of an anticompetitive scheme to discourage customers from becoming or remaining customers of
competitive LECs, thus impeding the competitive LECs' ability to enter and compete in the market for local
phone svc. The allegation was one of an attempt to monopolize.
 Holding: The Ct held that the complaint failed to state a claim under § 2 of the Sherman Act. The
incumbent LEC's alleged insufficient assistance in the provision of svc to rivals was not a recognized AT
claim under existing refusal-to-deal precedents. Traditional AT principles did not justify adding the present
case to the few existing exceptions from the proposition that there is no duty to aid competitors. The Ct
reversed the appellate ct's judgment and remanded the case for further proceedings
 Comments:
 The 1996 Act does not preclude an AT claim, but it also does not create new AT claims.
 This case is distinguished from Aspen (wc/ is on the outer fringe of refusal-to-deal cases). Verizon had
not voluntarily engaged in a course of dealing w/ its rivals and prob wd not have absent regulatory
compulsion
 Ct is not willing to add a new exception to the general rule that there is no duty to aid competitors.
 Rationale: (1) existence of a regulatory structure designed to deter and remedy anticompetitive
harm (additional benefit of AT enforcement will be small); (2) problem of false positives (CBA);
(3) the 1996 Act attempts to eliminate the monopolies enjoyed by AT&T’s descendents; § 2 of
Sherman Act seeks just to prevent unlawful monopolization
 Local phone co (Verizon); DoJ broke up AT&T and created exclusive geographic LECs; break up
allowed several competitive long distance companies and also hoped to also create several competitive

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LECs; LECs cd not enter the long distance market, but by opening up to other phone companies the
LECs hardware, then Verizon cd enter long distance market; when long distance companies asked for
access, Verizon threw obstacles in the way (disregarding FCC regs); FCC fined them, sanctioned them
etc pursuant to 1996 Act. All to promote competition (promotion of competition by regulation)
 (1) Aspen is a fringe case (do you have a biz justification)
 (2) Profit sacrifice (are there pre-exisitng profits that you are sacrificing?) - ct says maybe this shd be
the test (controversial bc diff from Aspen test and cd potentially excuse illegal exclusionary conduct)
 (3) Essential facility doctrine (SCt says they haven’t recognized it; they have; don’t choose to
recognize it here)
 (4) Leveraging theory - have a monopoly and try to gain an advantage in another market it’s illegal
(ignore)
 Tells us → SCt is not crazy about the Aspen case; solicitous case re: monopolies (favors monopolies);
further, any overlay of a regulatory structure that regulates competition, another good reason not to get
the cts involved

 LePage’s Inc. v. 3M Company (3d C, 2003, cert denied 2004)

 Procedural Posture: Π competitors sued defendant manufacturer, alleging violations of § 2 of the
Sherman Act. The jury Δ in favor of the Π as to the § 2 claims. The DCt (PA) granted the 3M’s motion
for JNOV as to the attempted maintenance of monopoly power claim, but denied the motion in all
other respects. Both sides appealed
 Facts: 3M possessed monopoly power in the US transparent tape market, w/ a 90% market share. The
competitors alleged that 3M violated § 2 of the Sherman Act by (1) offering rebates to customers
conditioned on purchases spanning six of 3M's diverse product lines, and (2) entering into Ks that
expressly or effectively req’d dealing virtually exclusively w/ 3M. 3M did not contest the allegations,
but contended its conduct was legal bc it never priced its tape below cost.
 Holding: Ct affirmed judgment of the DCt against 3M. The ct concluded that a jury cd R find that
3M’s exclusionary conduct, its exclusive dealing and bundled rebates, cd sustain a verdict under § 2.
Also, there was sufficient E for the jury to conclude the long-term effects of 3M’s conduct were
anticompetitive. In addition, 3M failed to show adequate BJ for its practices. Finally, the ct rejected
3M’s arguments as to damages and jury instructions

 B. THE OFFENSE OF ATTEMPT TO MONOPOLIZE

G/R: To prove a claim of attempted monopolization, a Π must show (1) conduct that wd lead to a monopoly; (2)
specific intent to monopolize (knowing undertaking that what you are doing is trying to monopolize; and (3)
dangerous probability of success. Spectrum Sports, Inc. v. McQuillan (1993, p. 671) Not proven here bc intent
cannot be proved by E of of unfair or predatory conduct alone.
 Procedural Posture: Δs appealed a judgment from Ct of A (9th C) affirming judgment ag Δ polymer corp
and others for violations of the Sherman Act and Clayton Act §§ 2 and 3, the Racketeer Influenced and
Corrupt Organizations Act and state unfair practices law. Δs claimed reversal was req’d where Δs’ specific
intent to monopolize was not proven.
 Facts: Π distributor refused to sell its rt to develop athletic products from the material in order to retain its
rts to mfr equestrian products. Δs appointed another distributor. Π brought suit, claming AT and state
violations. The trial ct found Δs liable for attempted monopolization and denied their motions for JNOV
and for a new trial. The appellate ct affirmed. Δs appealed, claiming that Πs failed to prove the elements of
attempted monopolization. The SCt reversed, holding the trial ct erred in finding E of unfair or predatory
conduct was sufficient to satisfy the specific intent and dangerous elements of the offense. W/out proof of
these elements or the RL product market, liability cd not attach.
 Holding: The SCt reversed appellate ct's judgment, finding that Δs had not committed attempted
monopolization where Π failed to prove that there was a dangerous probability Δs wd monopolize a partic
market and Δs’ specific intent to monopolize.
 Comments:
 Distinguishable from actual monopolies bc it is not yet a monopoly; company is taking steps in order
to monopolize
 Element of attempted monopolization demonstrated by:
 Prior to Spectrum it was a “floating” std (saw factors as interrelated)

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 Spectrum: required to show enough market power that you are close to achieving monopoly power
(~70 80%); define a RL market as a Π that the Δ is going to monopolize (and show proximity (~
40 - 60%) to monopolization → said by some post-Spectrum cases)

 U.S. v. American Airlines (5th C 1984)

 Facts: Braniff is trying to get American to fix pricing. § 1 of the Sherman Act doesn’t mention
attempted price-fixing. DoJ tried to go after them as an attempt to monopolize.
 Ct says this is suff as an attempt to jt monopolize
 What was the attempt here? Attempt was the solicitation (the phone call). What is an attempt in
attempted monopolization. Attempt is a nec and last nec step bf fruition of the act; act wd have
been the act of price-fixing (monopolization); dangerous probability of success? Yes; Specific
intent? Crandall did, but other guy did not seem to
 Remedy: DoJ tried to get Crandall banned from the airline industry for life; ct said no and gave a fine

CHAPTER 7 CONCERTED CONDUCT HAVING EXCLUSIONARY EFFECTS

 Introduction
 Includes Exclusionary Boycotts, Tying
 Boycott and Exclusion can apply under §1 and §2 of Sherman Act
 § 2 is harder to prevail upon so they are brought under § 1 usually
 Characteristics of Exclusionary Conduct
 Immediate impact on rivals of the predator
 Customers or consumers may not be affected at all, at first, or affected only indirectly
 Post-Chicago School: advocated increased scrutiny of exclusionary strategies
 A. Exclusionary Group Boycotts
 Group boycotts can be either collusive or exclusive (leads to differing treatment)
 Exclusionary boycotts are more complex than collusive ones for two reasons:
 1) their effects are less obvious
 2) their potentially legitimate justifications are more varied
 Cts try to maintain a “per se” rule to these boycotts; places substantial conditions on using per se rule
G/R: To establish a per se violation Π is req’d to show a group a group boycott or concerted refusal to deal. When a
party challenges expulsion from a jt buying coop, some showing must be made that the coop possessed market
power or unique access to a biz element nec for effective competition. Northwest Wholesale v. Pacific (1985, p.
683) Lack of procedural safeguards against expulsion is not dispositive of wh expulsion constituted a per se viol
 Procedural Posture: Respondent (Pacific) company alleged that its expulsion from petitioner (Northwest)
purchasing cooperative was a per se violation of § 1 of the Sherman Act. The Ct of A (9th C) held that the
facts supported a finding of per se liability bc no procedural safeguards had been provided sufficient to
prevent arbitrary expulsion. Petitioner sought review, and the Ct granted cert
 Facts: Northwest, a purchasing cooperative of office supply retailers, expelled Pacific, a retailer and
wholesaler of office supplies, by a vote of its membership. This axn was taken w/o notice, hearing, or any
opportunity to challenge the decision. Pacific sued, alleging that its expulsion was a group boycott that ltd
its ability to compete and that shd be considered as a per se violation of §1 of the Sherman Act.
 Holding: SCt reversed, holding that the lack of procedural safeguards was not dispositive of wh the
expulsion constituted a per se violation, and remanded for review of the DCt’s analysis of wh the expulsion
was a group boycott or concerted refusal to deal wc/ cd constitute a per se AT violation.
 Comments:
 Cf. Superior Ct Trial Lawyers, Eastern States (ppp.127-45) How is this different?
 In Trial Lawyers, the Ls refused to deal w/ the ct until they got a higher wage (collusive bc they
were trying to have a direct impact on price based on their collusive conduct)
 Benefits Trial Ls directly
 Why is Northwest exclusionary and not collusive?
 Direct or Immediate effect? No (this is seen in collusive group boycotts)
 Some kinds of boycotts will be treated under the RoR when they are exclusionary and not
collusive and the Π will almost always lose

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 Analyzing Exclusionary Group Boycotts Under Northwest Wholesale

 Three Steps/Req’ments
 (1) Exclusionary Conduct
 cutting off access to a supply, facility, or market nec to enable the boycotted firm to compete
 (2) Market Power
 frequently the boycotting firms possessed a dominant position in the RL market
 (3) No Pro-competitive Justification
 no plausible arguments that boycott enhanced overall efficiency

 Interbrand Vertical Restrictions

 Introduction
 Vertical Restraints: Two Types
 Intrabrand
 Bt same brand of product or svc
 Justified by their ability to enhance interbrand competition
 Only pose a significant anti-competitive risk when a firm imposing them either has sig market
power of when the restraints are being used to facilitate cartels (p. 341)
 Feared anti-competitive effect = collusive and direct restraint of trade
 Interbrand
 Affect competition bt different brands, i.e., among rivals
 Most typically take the form of “exclusive dealing” and “tying” arrangements
 Suspect bc of their potential for collusive or exclusionary anti-competitive effects
 Exclusive Dealing
 Usually output or req’ments Ks (can have pro-competitive justifications)
 Indirect effect on consumer
 Tying (Form of Vertical Interbrand Restraint - bt mfg and customer)
 Arrangement whereby a supplier conditions the sale of one product, the “tying” product, on the
purchaser’s agreement to purchase another, usually complementary product, the “tied” product
 Desired product and forced (tied) product
 Consumers cd face higher prices or reduced choice w/ respect to the tied product
 Rivals might be the most direct target of tying
 Wd experience exclusionary effects
 Every tying arrangement precludes some degree of competition in the tied product or svc
 Ubiquitous: PC and keyboard; car and car stereo
 Currently a slim majority that says it is per se illegal
 But, Π must jump through so many hurdles that it’s almost impossible to prove the per se
violation
 1. Tying and the “Leveraging” Problem
 § 3 of the Clayton Act includes a specific prohibition of tying and exclusive dealing agreements that
“substantially lessen competition” or “tend to monopoly”
 Between late ‘30s and late ‘60s, SCt developed strong rule against use of tie-ins by firms w/market
power.
 In United Shoe, (U.S., 1922), Clauses in United Shoe’s leases of prevented lessees from using
competitors’ machines. The Ct held that the lease provisions effectively reduced competition by
preventing lessees from acquiring competitors’ machinery for fear of losing Δ’s machinery.
 In IBM v. U.S., (U.S., 1936), Ct held illegal IBM's lease of its tabulating machine on condition that
lessees use only IBM-manufactured tabulating cards, rejecting claim that axn warranted by IBM's
interest in assuring quality, since others cd manufacture cards mtg req’ments.
 In Int'l Salt v. U.S., (U.S., 1947), salt-injecting machines leased on condition that salt bought from IS,
unless IS fails to meet open-mkt price reduction. Ct ruled against IS, since even if creeping, agmt
tended toward a monopoly. IS had a priority on the biz at equal prices, forcing a competitor to
undercut.
 Four Part Test for Tying
 (1) there must be two distinct products or svcs

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 (2) there must be a conditioned sale (i.e. the tying product must be available only in the condition that
the second, tied product also be purchased
 (3) the seller must have “appreciable economic powe” in the tying product such that “forcing” is likely
(i.e. it appears that the 2nd product wd either not be purchased at all or wd not be purchased from the
seller of the tying product, but for the seller’s market power); and
 (4) the arrangement must affect a “substantial volume of commerce in the tied market”
 Harm from Tying
 Alternate Mfg of product 2 is excluded form selling to the consumer who is forced to buy due to the
tying
 Indirect harm
 Theory: maybe gives monopolist “significant” power such that he can gain surplus profit by gaining
market power in the second market (eventually charge higher prices for 2d product)
 If electrical utility and rates reg by gov’t then utility cd transfer monopoly power to other tied products
 Microsoft there’s another theory
 Cts say you don’t have to prove all these effects (new AT - want to see harm to market; per se rule
against tying not followed)
 Cts will likely make Π show effect in second market

G/R: An essential characteristic of an invalid tying arrangement lies in the seller’s exploitation of its control over
the tying product to force the buyer into the purchase of the a tied product that the buyer either did not want at all, or
might have preferred to buy elsewhere on diff terms. Cts condemn tying arrangements when the seller has market
power in one area sufficient to force a purchaser to do something he’d not do in a competitive market (buy a
potentially inferior product that is insulated from competitive pressures). Jefferson Parish Hosp v. Hyde (1984, p.
695) Not enough market power here to apply per se rule; not anticompetitive, hospital is simply trying to offer better
svcs.
 Procedural Posture: Jefferson Hosp sought review of a decision from the Ct of A (5th C), wc/ held that
hospital's arrangement that restricted pts to using the svcs of certain anesthesiologists w/ whom it had K-ed
was illegal "per se" under the Sherman Act.
 Facts: Jefferson entered into an exclusive K w/ a firm of anesthesiologists and req’d that every pt
undergoing surgery at Jefferson use the svcs of that anesthesiology firm. Respondent, an anesthesiologist,
was denied admission to Jefferson’s staff bct of the exclusive K. Respondent then commenced this axn
seeking a declaratory judgment that the K was unlawful. The DCt held that the K was illegal "per se." Ct of
A found that, while the hospital's arrangement involved the req’d purchase of 2 svcs that wd otherwise be
bought separately, such finding did not nec make the K illegal. Ct concluded that hospital did not have
sufficient market power to force pts to purchase the K-ed svcs as opposed to using svcs at a competing
hospital. There was not sufficient E in the record to provide a basis for finding that the K, as it actually
operated in the market, had unR restrained competition.
 Holding: DCt’s decision below, wc/ found a tying arrangement that was illegal "per se," was reversed and
remanded based on the ct's holding that petitioner hospital did not have sufficient market power to force pas
to buy the svcs under its exclusive K as opposed to using other anesthesiology svcs elsewhere
 Comments:
 Per se condemnation only appropriate if existence of forcing is probable. As threshold, must be a
substantial potential for impact on competition to justify per se rule.
 Π has to prove market and appreciable market power in tying arrangement
 Π must show force (not willingly bought tied product)
 Π must define two products
 Only when seller has either the degree or the kind of market power that enables him to force customers
to purchase a second, unwanted product in order to obtain the tying product, i.e., when anticompetitive
forcing is likely, is per se rule appropriate.
 Here, hospitals req. that its pts obtain necessary anesthesia svcs from Roux combined the purchase of 2
distinguishable svcs in a single txn. Question is wh this involves use of market power to force pts to
buy svcs they'd not otherwise buy. But 70% of residents of town go to hospitals other than East
Jefferson, so kind of dominant market position that obviates need for further inquiry, i.e., per se
application, not established here.

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 Concur: (O’Connor - see page 719) Tying per se requires examination into market power, so might as well
use rule-of-reason, wc/ permits arrangements that are shown to be beneficial (efficiencies). She wants them
to prove actual effect in the tied market.
 Primary concern w/ tying, where power in market for tying product used to create additional market
power in market for tied product, unlikely unless 2 markets in question and nature of 2 products tied
satisfy 3 criteria: (1) power in tying-product market, (2) threat that tying seller will acquire market
power in tied-product market, and (3) a coherent economic basis for treating the 2 products as distinct.
If all three met, then enter rule-of-reason analysis, balancing anticompetitive effect w/contribution to
efficiency. But here, no sound economic reason for treating 2 services differently. Even if there is,
fails rule-of-reason (benefits outweigh harms).
 In det wh an exclusive-dealing K is unR, the proper focus is on the structure of the market for the
product or svcs in question
 Exclusive dealing is an unR restraint on trade only when a sig fraction of buyers or sellers are frozen
out of a market by the exclusive deal
 Exclusive dealing Ks may be substantially pro-competitive by ensuring stable markets and
encouraging long term, mutually advantageous biz relationships

SECTION THAT NEEDS WORK

Microsoft (will be on the final)
Theory of govt’s case: see pages 908-15; exclusionary conduct
Illegal practices to maintain its monopoly in OS (windows)
Extend its monopoly into new markets for software and browsers
Protect against threat to Windows from browsers (Netscape) and Java that cd be alt platforms for software
Applications market:
Get PowerPoint slides from TWEN

 Exclusive Dealing: The Basis and Limits of Foreclosure Analysis (page 714)
 Tying as Collusive
 Anticompetitive effect of tying on consumers - diminished choice or higher prices
 Being coerced into buying an unwanted product or svc is essentially the same as paying more than you
otherwise wd have
 Tying as Exclusive
 Perspective of rival suppliers of the tied product; potential customers dwindle in number if the tying is
successful
 Indistinguishable (in rival perspective) from an “exclusive dealing” arrangement bc customers (actual
or potential) must agree to buy exclusively from the dominant firm engaged in tying
 Requirements K - exclusive relationship w/ a supplier (stable price, stable demand)
 Not all exclusive dealing arrangements are tying arrangements

 Sidebar 7-3: § 3 of the Clayton Act and the Role of Incipiency

 Clayton Act was designed to augment and strengthen the Sherman Act (agreement)
 Id and prohibit price discrimination (§ 2), vertical exclusionary practices (exclusive dealing and tying)
(§ 3), and mergers § 7
 §§ 2 and 3 exclude svcs and are ltd in scope to sales of goods
 Clayton Act goes beyond the Sherman Act in two ways
 Uses and “incipiency” std: conduct is prohibited if its effects “may” tend to be anticompetitive
 Interpreted as an issue of timing or an adjustment to the substantive std used to prove the offense
 Timing: std can be interpreted as authorizing challenges to certain categories of conduct bf they
lead to actual anticompetitive effects (based on the prediction that the conduct cd lead to
substantial anticompetitive effects)
 Adjustment to the substantive std for establishing a violation: remains critical today solely as a
feature of the analysis of secondary price line discrimination
 How to demonstrate injury?
 16 of the Act authorized suits for injunctive relief against any “threatened loss or damage”
 Clayton Act uses “substantial lessening of competition” instead of “restraint of trade” found in the Sherman

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Act

 Standard Stations and Tampa Electric

 Std Oil (1949)
 Procedural Posture: On direct appeal, appellant (Std Oil) challenged a decree from the DCt (Calif) that
found for the U.S. in its axn under the Sherman Act, and the Clayton Act and that enjoined Std Oil and
its subsidiary from enforcing or entering into exclusive supply Ks w/ any independent dealer in
petroleum products and automobile accessories
 Facts: In the Govt’s suit ag Std Oil charging violations of the Sherman Act and the Clayton Act, Std
Oil challenged a decree from the DCt that enjoined Std from enforcing or entering into exclusive
supply Ks for its products w/ any independent dealer in such products. The SCt affirmed the injunctive
relief granted. The Ct rejected Std’s contention that the req’ment of § 14, that the effect of the Ks may
have been to substantially lessen competition, had to be established by proof that competitive activity
had actually diminished or probably wd. Rather, the Ct ruled that the qualifying clause of § 14 was
satisfied by proof that competition had been foreclosed in a substantial share of the line of commerce
affected by Std’s Ks. The Ct also rejected Std’s contention that sales of products manufactured w/in
Calif and sold to Calif dealers did not affect interstate commerce.
 Holding: SCt affirmed a decree that enjoined Std Oil from entering into and enforcing its supply Ks w/
independent petroleum dealers, bc the DCt properly found the Ks to be violative of the AT laws. The
qualifying clause of the applicable Clayton Act provision was satisfied by the proof that competition
had been foreclosed in a substantial share of the line of commerce affected by Std Oil’s Ks.
 Comments:
 E of the

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 was lacking
 All that was nec to satisfy § 3 was “proof that competition has been foreclosed in a substantial
share of the line of commerce affected”
 The 6.7% foreclosure that resulted form Std’s Ks met this std of substantiality
 Substantial bc only 1.6% of competitiors had this type of arrangement
 Tying and exclusive dealing in the same K
 Duration, alternate distribution channels
 Tampa Electric (1961)
 Procedural Posture: Petitioner Tampa sought review of a decision, by Ct of A (6th C) that held illegal
under Clayton Act, § 3, a req’ments K bt Tampa and Nashville (supplier) providing for Tampa’s
purchase of all the coal it wd require as boiler fuel over a 20yr pd at Tampa’s electric generating plant
 Facts: Tampa had a req’ments K w/ Nashville, wc/ provided for its purchase of all the coal it wd need
as boiler fuel at partic electric plant over a 20yr pd. Ct of A held it was illegal under the Clayton Act
(Act), § 3. On review, the SCt explained that even though a K was found to be an exclusive-dealing
arrangement, it did not violate the Act, § 3 unless it was probable that the performance of the K wd
foreclose competition in a substantial share of the line of commerce affected. That is, the competition
foreclosed (precluded) by the K was req’d to constitute a substantial share of the RL market.
 Holding: Tampa’s K did not violate the Act bc its K req’ments were for less than 1% of the total
marketed production of the 700 coal producers who cd serve Tampa’s K needs. Also, coal producers in
the RL competitive market were eager to sell more coal w/in that market area. Therefore, in the RL
marketing area involved, the K sued upon did not tend to foreclose a substantial volume of
competition. The lower court’s judgment was reversed and remanded
 Comments:

G/R: Only those arrangements whose “probable effect” is to “foreclose competition in a substantial share of the line
of commerce affected” violates § 3 of the Clayton Act. Omega v. Gilbarco (1997, p. 721) Omega did not produce
enough E to support their contention that Gilbarco’s policy actually deterred entry into this market.
 Procedural Posture: Appellant (Gilbarco) mfg of petroleum dispensing equip sought review of an order of
the DCt (Wash), wc/ denied Gilbarco’s motion for JNOV on Omega’s § 3 Clayton Act claims.
 Facts: Omega brought various fed and state AT claims against Gilbarco, specifically § 3 of the Clayton Act.
Gilbarco was the leader in the market for sales of dispensers. Omega sought to develop a national svc and
distribution network by purchasing existing companies. Two of the distributors targeted by Omega were
authorized distributors of Gilbarco. Subsequently, Gilbarco notified these distributors that it was
terminating their distributorship agreements. The jury returned a verdict against Gilbarco. Gilbarco then
moved for JNOV, but the trial ct denied the motion.
 Holding: The Ct of At held that the E, construed in the light most favorable to Omega, did not support the
jury's verdict. Omega had failed to show that Gilbarco had foreclosed competition in the market under the
Clayton Act.
 Comments:
 “virtually every K to buy ‘forecloses’ or ‘excludes’ alternative sellers from some portion of the market,
namely the portion consisting of what was bought.” ITT Grinnell Corp (Judge Breyer)
 Exclusive dealing arrangements imposed on distributors rather than on end-users are generally less
cause for anticompetitive concern
 Direct sales to end-users are an alternative channel in this case
 The short duration and easy terminability of the agreements negate substantially their potential to
foreclose competition (qualitative exclusivity)
 All can be terminated w/in 1 yr and most w/in 60 days notice (not enough duration)
 Dissent (Pregerson): Majority incorrectly defined the RL market (sale of all retail petroleum dispensers
from manufacturers).
 Arguments →Tampa and Jefferson Parish require examination of four critical factors
 (1) the dominance of the seller;
 (2) the existence of an industry-wide practice of exclusive dealing;
 (3) the proportion of affected commerce in comparison to the entire market; and
 (4) the probably effect immediately and in the future of the exclusive dealing, including effects on

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the ability of the consumer to change products

 Majority failed to properly analyze these factors; they shortchanged the req’d analysis by adopting a
blanket presumption that restrictions on distributors shd be treated moreleniently from end-users
 Omega presented substantial E showing that
 (1) the line of commerce is retail petroleum dispensers
 (2) the RL market is the sale of retail petroleum dispensers to small independent buyers;
 (3) Gilbarco dominated the RL market;
 (4) exclusive dealing is widely practived in the RL market
 (5) proportion of the RL market affected by Gilbarco’s exclusive dealing arrangements is very
significant; and
 (6) Gilbarco’s use of exclusive dealing arrangements in the RL market causes serious
anticompetitive effects by keeping the price of retail petroleum dispensers artificially high and
creating entry barriers to the RL market for new entrants
 (7) little guy is getting diff prices and is treated diff by Gilbarco as compared to the larger
companies (no way to get around it)
 Look to ToC

 Sidebar 7-4: Assessing the Contemporary Law and Economics of Exclusive Dealing
 Efficient Uses of Exclusive Dealings by Sellers
 Prevention of interbrand free-riding
 Providing an alternative to more costly vertical intergration by sellers
 Facilitating expansion or entry by a new firm
 Improving the efficacy of intrabrand restraints
 Pro-competitive Reasons for Dealers to Enter Exclusive Dealing Arrangements
 Seek better pricing
 Find a reliable and uninterrupted stream of supply
 Find better quality and product uniformity
 Other cost-related efficiencies
 Traditional Foundations: Foreclosure Analysis and the Role of Inference
 Focal point of exclusive dealing analysis: “foreclosure”
 Is the competition precluded or kept out by the exclusive deal?
 Cts consistently rely on inference to establish the competitive injury (the foreclosure)
 From significant foreclosure, cts infer the requisite harm to competition
 E of restricted output and higher prices are usually not req’d
 Chicago, Post-Chicago and Other Approaches to Analyzing Exclusionary Ks
 Chicago School: exclusive dealing and vertical mergers are just 2 forms of vertical integration that
create efficiencies; neither shd create any restriction of output
 Post-Chicago School: determination of wh a vertical exclusionary practice is anti-competitive shd turn
not on “foreclosure”, in and of itself, but on the practice’s tendency to raise rival’s costs wc/ in turn
may facilitate the exercise of power over price in the supply market
 Modernizing the Foreclosure Framework in the Cts
 Progressively greater burdens of proof on Πs
 No routing inquire directly into either the supplier’s market power or the anti-competitive effects
 They infer anti-competitive effects from the share of the RL market foreclosed by the K challenged
 Inclined to allow Δs to rebut the inference by establishing pro-competitive justifications to challenged
practices or by demonstrating no substantial lessening of competition is likely due to the short duration
of the exclusive dealing agreement (ala Gilbarco)
 The Search for a Modern Legal Synthesis
 From Doug Melamed
 Step One: Are the agreements in fact exclusionary?
 Step Two: If the agreements are exclusionary, are there “plausible efficiencies” associated w/ the
agreements?
 Step Three: If one and two are met then, are the exclusionary agreements likely to create or
preserve market power for the mfg?
 Step Four: If market power is implicated, are some or all of the exclusionary aspects of the

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agreements not R nec to achieve the efficiencies?

 Conclusion
 Analysis of exclusivity if becoming increasingly indistinguishable from the analysis of other forms of
allegedly anti-competitive conduct
 More likely to turn on a rule of reason analysis w/ market power and efficiency playing critical roles

Anti-Competitive Effects of Exclusive Dealing Pro-Competitive Effects of Exclusive Dealing

-exclude or impair access of rivals to most cost-effective
distribution outlets (downstream dealers), leading to
higher prices
-limit consumer choice
-impose costly forward vertical integraton on rivals
-reduce txn costs
-secure dealer loyalty
-prevent interbrand free-riding
And in the case of output and req’ments variants:
-protect buyers and sellers from price fluctuations
-ensure long term supply/customer stability
-ensure consistent operation at efficient scale

CHAPTER 10 ANTITRUST, IP AND THE NEW ECONOMY (Last Assignment)

 Introduction
 When an established producer of conventional products enters into a conspiracy to suppress a competitor’s
new and innovative product, the conspiracy will give rise to liability under §§ 1, 2 – assuming all of the
other elements of the causes of axn under those §§ are present. Impro Products v. Herrick (p.1063).
 Overly-broad IP rts discourage innovation bc they discourage successive innovators from improving, and
seeking returns from supplanting, existing approaches.
 AT rules operate as another limit on the scope of IP rts bc they have, to varying degrees, restricted what an
IP owner can do w/ its IP rts.

 Intellectual Property:
 Broad expanse of common and statutory law patent, copyright, trademark, trade secret, misappropriation
 Internal Themes
 Protect and encourage innovation
 Promote access to ideas
 These two goals in tension w/ each other
 Patent and copyright → create proprietary rights
 Public good aspect → low or zero marginal cost

 Competition Policy & IP

 What shd be focus of competition policy?
 Welfare economics, deadweight loss
 AT’s triangles and rectangles
 Innovation (“dynamic”) focus
 Schumpeter: “Gale of creative destruction”
 Cf. Microsoft decision (tying issue & p.1070)
 Patent/copyright gives proprietary right and right to exclude
 A/T-Patent Law Tension: One body of law creates and protects monopoly power; the other seeks
to proscribe it.
 WAY OVERSTATED
 As an economic matter patent does not equal monopoly
 BUT Old SCt cases and recent CA case says it creates a presumption of market power
 Trade off: monopoly power for innovation

 Harmful Effects from Patent Administration and Other Factors

 Proliferation of patents
 Too easily gotten
 Fraud in obtaining patent? Could be “bad act” for § 2 claim.
 Pay off to “extend” patents?

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 Paying off a competitor to stay out? § 1 case (Bar Bri case)

 Patent thickets harm competition and innovation (i.e., transaction costs)
 Unilateral refusal to use patent

 Theories of Innovation-Based Anticompetitive Effects:

 Manipulation of product standards or certifications (§ 1)
 Suppression of rival innovation by a dominant firm (§ 2)
 Accomplished through product design (introducing new product incompatible w/ competitors’
products and simultaneously pulling old, compatible product off the market).
 US v. Microsoft (2001, p.1070): Causation (causal link bt alleged anticompetitive conduct and
maintenance of monopoly power) can be inferred where exclusionary conduct (exclusive dealing
arrangements, tying, pricing, other anticompetitive strategies) is aimed at producers of nascent
competitive technologies as well as when it is aimed at producers of established substitutes.
 Question is
 (1) wh as a general matter the exclusion of nascent threats is the type of conduct that is R
capable of contributing significantly to a ’s continued monopoly power and
 (2) wh [allegedly suppressed innovations] R constituted nascent threats at the time  engaged
in the anticompetitive conduct at issue.
 Suppression of rival innovation through acquisition (§7 of Clayton Act)
 Intent to suppress innovation through acquisition has exclusionary effects of keeping new entrant out
of market.
 Also has collusive anticompetitive effects by reducing competition for innovation
 Dealing w/ an anticompetitive merger bt competing firms, so analyze whether the merger will have
unilateral or coordinated anticompetitive effects.

 Challenges for Antitrust

 Market defn
 Specifying what is the “harm” to competition (Kodak)
 Use of antitrust tools in changing times (Microsoft)
 Weighing efficiencies (especially for products that are not out on the market yet)
 Role of patent law in defining the nature of the ’s obligation (Kodak)

 Market Definition
 Options:
 Define market narrowly, ltd to mature product or technology
 Treat innovation as its own product market (if new product or technology promises dramatic
improvements in quality or might confer a decisive cost advantage)
 Use hybrid methodology that assigns differing weights to the old and the new, and attributes market
shares to industry participants according to their capability to offer both
 Standard Oil (1931, p.1074):
 s are the oil companies produced by break up of Standard Oil in 1911
 What is a patent pool? How may it benefit competition? All able to use a more efficient process
through patent pool. Each had patents that to some extent ran into each other, so unless they all
got together each would run the risk of infringing another’s patent.
 Govt Theory: Royalty process hurts competition bc it kept price from lowering bc all paid each
other a royalty fixed among themselves rather than competing to get lower royalties.
 SCt. defines market by combining new and old technologies into one market
 Found no domination of market or monopoly power ( only had 26% of market as defined by
ct)
 Held: Where domination exists, a pooling of competing process patents, or an exchange of
licenses for the purpose of curtailing the mfg and supply of an unpatented product, is beyond the
privileges conferred by the patents and constitutes a violation of the Sherman Act.
 Cf. Bayer/Aventis (p.1077)

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 Innovation market: A market for R&D directed to partic new or improved goods or processes, and
the close substitutes for that R&D. May be defined in merger analysis, analysis of collaborations
among rivals, or analysis of alleged monopolization.
 Problem? New products/processes that supplant existing goods/methods can be developed in unrelated
industries.
 Alleged victims of anticompetitive conduct in innovation markets will face hurdle of proving injury
and causation sufficient to ground standing to sue.

 Innovation Market Hypo I

 Firm A has patented the only FDA approved drug to treat a dreaded disease
 Firm B has a new drug in pre-approval testing stage
 Firm A acquires Firm B
 Cause of axn? § 2 – maintaining monopoly, bad act = buying out their only rival OR § 7
(anticompetitive merger)
 Market defn? Treatment of dreaded disease

 Innovation Market Hypo II

 Firms A and B both still developing drug to cure dreaded disease
 A acquires B
 What special problems do you envision as to market defn, market share calculation, ease of entry,
others (for § 2 case: market power & bad act; for § 7 case)?
 There is no product yet, so what is the product market? Innovation market (competition to innovate).
 How do measure market share then? (Resources devoted, etc?)

 Innovation Hypo III

 Same as hypo II
 But instead of merging A & B, A & B just share resources
 § 1 joint venture analysis – is there a market where these two firms are uniquely and dominantly
positioned in? if not, they are just two of many competitors and not an AT threat

 Sidebar 10-2: Antitrust Principles and the “New Economy” (p.1090)

 What Makes the “New Economy” New?
 High fixed cost, low marginal cost industries
 Competitive price = entrant average cost
 Shifting market boundaries (through product upgrades and sale of new generation products before old
generation products are withdrawn from market)
 Network effects
 Leads to “tipping”
 Five Antitrust Principles for Addressing Competition in High-Technology Markets
 (1) Intellectual property is property
 (2) Competition promotes innovation
 (3) Network effects heighten the concern w/ exclusion
 (4) Rapid information exchange cd benefit or harm competition
 (5) Most biz conduct involving innovation does not harm competition
 The Question: What level of IP protection is sufficient to create a substantial incentive to innovate, w/o
creating rights to exclude so broad as to seriously impair competition?
 As a general matter, if IP rts are defined very broadly by the PTO, and if it grants a lot of applications
for IP rts, the greater the possibility that the IP rts system will
 (1) confer greater power to exclude than is necessary to spurt innovation; and
 (2) diminish competition for innovation by facilitating unjustifiable and unnecessary exclusion.
 Equilibrium of IP rts system can also be disrupted by granting IP rts that endure longer than is nec to
attract the investment and effort to innovate.

 Anticompetitive Acts by Patent Holders

 Ancient History: The 9 No-Nos

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 New thinking
 IP usually cannot be priced at MC (marginal cost) (price above MC not indicative of monopoly)
 Network effects (applications barrier to entry in Microsoft) may make exclusion more harmful
 IP is property, so acquisition of property, theft, abuse may have anticompetitive effects
 Entry may be easier; thus harms are short-lived
 Licensing allows IP holders to combine effectively

 Licensing Restrictions
 ABC company develops new copyrighted software for inventory management
 Licenses it under field of use restrictions
 Some only for hospitals
 Others for specialty businesses
 Others only for specific regions
 Others only outside of US
 Analysis: Unilateral vertical decision (not as conspiracies, may be protected by Colgate)
 But what if RPM in licensing (a traditional vertical problem; analyze under Sharp, Dr. Miles)?
 Per se
 Tying? Analysis similar (and as confused) as Jefferson Parish (2 products; market power harm in tied
market; efficiencies [if O’Connor prevails]).

 The Hard Question: Role of Patent Law in Limiting AT Scope

 Kodak on remand: Unilateral refusal to sell or license its patented parts
 Patent law gives them that rt
 AT law says monopolist cannot do things that are unlawful for an ordinary firm
 MS: baseball bat quote
 SCt. said “no absolute immunity due to patent” but left open wh it was “exclusionary” under § 2 in this
case
 Here, failure to act is at the heart of Kodak’s property rts under patent and copyright law
 Presumption that patent is legitimate biz reason to refuse to sell (but only a presumption, can be
defeated, was defeated in the Kodak case)

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