Antitrust Checklist & Outline
Antitrust Checklist & Outline
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2. "CONCERTED ACTION" PER SHERMAN ACT § 1
Circumstantial Evidence of Concerted Action to Infer Conspiracy?
○ Direct Evidence ALWAYS OK
• [A] coordination by non‐direct exchanges of assurances: Interstate ("hub and spoke" conspiracy )
○ "Accepted" by participating after invite
○ Refusal to testify reinforces inference
• [B1] conscious parallelism: American Tobacco
○ Acts maybe legal OR illegal [by itself] =/= inference of conspiracy: Matsushita
‐AND‐
• [B2] plus factors: American Tobacco
○ Industry conducive to coordination: Blomkest (background factors necessary, insufficient)
○ Agreement ‐>
Opportunity to communicate
Facilitating practices
□ American Tobacco (abrupt identical $ increase by all competitors on same day)
Irrational conduct
□ Toys R Us (no economic/business justification => suspicious)
□ Matsushita (predatory pricing scheme not economically plausible b/c impossible to
overcome cartel problems)
• [C] survive MOTD + SJ if Δs || actions more likely result of joint decision: Monsanto (tends to exclude
independent action by Δ)
○ Bare assertion of conspiracy not enough: Bell Atlantic v. Twombly
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Monopolies [Sherman Act § 2]
1. MONOPOLIZATION PER SHERMAN ACT § 2
Monopolization?
• Monopoly not bad, only abuse of dominant position => power + conduct, Grinnell
○ Must consider abuse, not just size: Alcoa (BAD decision of "no fault" offense)
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• Standards Setting:
○ [1] lying when setting standard, royalties later: Unocal
○ [2] but need causation: Rambus (but for not disclosing . . .)
• Refusals to License IP Rights:
○ [1] asserting IPR => "presumptively valid business justification": CSU v. Xerox
‐UNLESS‐
○ [B1] obtained by fraud
○ [B2] only pretext to fuck rival: Kodak (IPR => post facto justification; real intent => exclude)
• Product Innovation:
○ [1] freedom to design, even if goal partly exclusion: Berkey Photo
○ [2] but not if ONLY goal is incompatibility w/o improvements/cost reductions: C.R. Bard (only for
preventing entry => predatory)
• Essential Facilities: MCI
SCOTUS DOESN'T endorse: Trinko
K: not distinct + evaluate same (not below) as ordinary refusal to deal
○ [1] control by monopolist
○ [2] rival can't duplicate
○ [3] rival denied access
○ [4] no valid business reason: Aspen
○ [5] rival's access feasible
• Leveraging Monopoly in Another Market: Spectrum Sports
○ [1] Use monopoly in Market A as leverage in Market B => OK
○ [2] ONLY bad when monopolizes/attempts to in a specific market
2. ATTEMPTED MONOPOLIZATION PER SHERMAN ACT § 2
• Attempted Monopolization: Spectrum Sports; K in class
○ [1] predatory/anticompetitive conduct
○ [2] intent to monopolize
Even if offer declined: American Airlines
○ [3] dangerous probability success (difficult entry)
No inference from bad conduct alone
Need market power >50%
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Vertical Agreements/Restraints [Sherman Act § 1 / Clayton Act § 3]
1. VERTICAL AGREEMENTS
Vertical Agreement?
• Vert. Agreements [between 1 buyer + 1 supplier]: SCTLA
○ [1] NOT between competitors
○ [2] NOT group boycotts [per se]
○ [3] ALL vertical restraints => rule of reason
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Horizontal Mergers Among Competitors [Clayton Act § 7]
1. STRUCTURAL PRESUMPTION OF ANTICOMPETITIVE EFFECTS IN HORIZONTAL MERGER
• Anticompetitive Effect Presumed:
○ [1] merged firm controls undue % market: Brown Shoe (4% + spiral); Philadelphia Bank (30%+)
○ [2] big in concentration: Philadelphia Bank (33% owned by 1, foreclosing rivals)
○ [3] rebut ‐>
Market power unlikely to (no anticompetitive effects): General Dynamics ( impossible)
Inaccurate predictions: Baker Hughes (coordination in THIS industry impossible)
2. LIKELIHOOD MERGER WILL HARM COMPETITION UNDER HMG 5‐STEP ANALYSIS
[1] Market Power?
• OLD Market Power Analysis:
○ [i] define market by buyer substitutions: Du Pont
○ [ii] high market % = circumstantial evidence of market power (infer anticompetitive effect): NCAA
• NEW Market Power Analysis:
○ [i] define market w/direct measurements of close substitutes [customer's POV]: HMG § 4
Submarkets
Hypothetical Monopolist Test (HMT) ‐> where customers migrate
○ [ii] directly measure demand elasticity: HMG § 5.2
SSNIP Test ‐> price that drives away customers
Market Share % ‐> proxy only
[2] Anticompetitive Effects?
○ [i] Adverse Effects: HMG § 2
□ Unilateral effects: HMG § 6; Staples (directly measure resulting price)
□ Coordinated effects: HMG § 7; HCA (big market % facilitates collusion)
Price
□ UPP (upward pressure on price) ‐> price due to removing rival: Staples
□ Value of diverted sales
Quality
Innovation
○ [ii] Market Concentration:
Sales in market, shipments, etc
Large HHI ‐> "prima facie" case [presumed anticompetitive]
HHI safe harbors: HMG § 1.51
But CANNOT rely on concentration alone: Baker Hughes (rebutted)
[3] Effect of Entry?
• Constraining Entries [preventing harm] must be: HMG § 9
○ [i] timely
○ [ii] likely: HCA (unlikely due to hospital licensing)
○ [iii] sufficient to push prices
[4] Procompetive Justifications [Efficiencies]?
• Cognizable Efficiencies: HMG § 9 (harming competition => not cognizable)
○ [i] substantiated + verified: Heinz (need for merger too speculative)
○ [ii] merger specific: Heinz (use less restrictive means)
[5] Failing Firm?
• Merger OK even if possible harm, IF [ALL]: HMG § 111
○ [i] bankrupt + can't reorganize
○ [ii] unsuccessful finding less harmful buyer
○ [iii]assets would exit market w/o merger
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Vertical Mergers Between Firms & Suppliers [Clayton Act § 7]
1. VERTICAL MERGERS
• Vertical Mergers: Brown Shoe
○ [1] likely forecloses competition in substantial % market
20% foreclosure ‐> always OK
40% foreclosure by itself ‐> probably OK
○ [2] market trend to integration (strong entry barriers)
[i] effects
[ii] alternatives for retailers/manufacturers
[iii] efficiency claims
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Statutes & Enforcement
1. US ANTITRUST STATUTES
• Sherman Act (1890)
○ § 1: "concerted actions" (N/A to unilateral action) that restrain trade
"Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the
several States, or with foreign nations, is declared to be illegal."
○ § 2: monopolization + attempts to (unilateral actions OK)
"Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or
persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations,
shall be deemed guilty of a felony [. . . ]"
○ Civil and criminal with prosecutorial discretion, see, e.g. Andreas
• Clayton Act (1914)
○ § 2: price discrimination . . . that may lessen competition or create a monopoly
○ § 3: sales based on exclusive dealing + tying . . . that may lessen competition or create a monopoly
○ § 7: mergers . . . that may lessen competition or create a monopoly
○ Mostly civil prosecution
• FTC Act (1914)
○ § 5: unfair methods of competition + unfair/deceptive acts/practices in or affecting commerce
○ Civil prosecution
• Various State Laws
○ Civil and criminal prosecution
Unilateral price discrimination is clearly outside the reach of Section 1 of the Sherman Act, which only
extended to "concerted activities" (agreements). Exclusive dealing, tying, and mergers are all
agreements, and theoretically, within the reach of Section 1 of the Sherman Act. Likewise, mergers that
create monopolies would be actionable under Sherman Act Section 2.
Section 7 of the Clayton Act allows greater regulation of mergers than just Sherman Act Section 2, since
it does not require a merger‐to‐monopoly before there is a violation.
2. ENFORCEMENT
• Decentralized Prosecution in US
○ Department of Justice/FTC
Other countries besides US and China do not use dual federal enforcement system
○ Collateral Regulators
FCC
Federal Energy Regulatory Commission
Department of Defense
State Public Utility Commissions
○ State Governments
Private Rights of Action
○ Result: Inefficiency b/c no single gatekeeper controls introduction of ideas
I.e. ATT + T‐Mobile had to first clear FCC competition review to transfer the licenses from T‐
Mobile to ATT, in addition to review by FTC, state governments, etc
The crucial decision was up to the FCC in the ATT case, and the order of the FCC could be
appealed to the DC circuit but takes years and in effect shoot the deal dead (billions in
financing is not going to wait 3‐4 years for approval)
• Civil Remedies
○ [i] structural relief (i.e. splitting company apart)
○ [ii] damages ‐> mandatory trebling
Policy is to rely on private lawsuits for enforcement, and treble damages incentives
(Vitamins case resulted in billions paid in private lawsuits)
EU civil fines are still strongest, Intel was fined ~$1.XB
○ [iii] disgorgement of profits
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• Criminal Prosecution
○ Main idea behind criminal prosecution is that $ is not enough, must have enough consequences
Fines and prison sentences up to 10 years for individuals
Legal persons can get $100M fine or 2X loss to victims, 2X gains the firm made
□ Top fines ~1.4B dollars, but rarely contested
○ But see Vitamins case the main guy served his time (18 months) in a U.S. prison, but then went
back to the Vitamin company with lucrative pay ‐> theory is that the main dude was told to take
the fall for the company and "paid off" / rewarded
○ Mostly civil prosecution, only criminal prosecution for cases like Andreas when extreme
misconduct
Behavior in Microsoft is at worst ambiguous, but not blatant violations
• Immunity
○ Justice Department gives leniency to the first member of the cartel to come forward, and grants
immunity from criminal prosecution (both the company and its people will be immune)
○ Had some leniency policy before 1993, but DoJ really incentivized this and extended it to
companies AND people (but only the first one in the door ‐ "no prize for second place"
○ Policy is to help catch people the DoJ would have never found out about
○ Ringleader cannot get immunity, but other than that there are no qualifications ‐ prisoner's
dilemma in game theory, will incentivize people to defect first
But you have to tell everything ‐ DoJ will ask you if you're a member of any other cartels
○ I.e. in Vitamins a junior associate in M&A came across a document named "Vitamins Inc" that was
the budget for the cartel ‐> the doc showed extensive management, over watch over the cartel, its
shipments
○ DoJ leaks story to WSJ, sparks extra prisoner's dilemma and a cab race in DC to DoJ between
Rhone‐Poulenc, Roche, and BASF
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I. Policy & Goals of Antitrust
1. OPEN TEXT OF STATUTES
• Consciously Evolutionary Scheme: required b/c goals of anti‐competition law changes over time
No definitions for "restraint of trade" or monopolize"
○ Must understand economic, historical, and political trends
○ Leaves to judges to make decisions like the Constitution, to interpret in context
○ Same as Constitution, how are judges being guided ‐> look at goals of the acts, text
• Historical Backdrop of Sherman Antitrust Act: telephone, telegraph, railroads ‐> these were the things
changing America and the way companies do business
○ Firms back then served regional markets and a large firm was maybe 100 people
○ Larger business to drive down the scale of economies, and means little refineries are going to be
blown away by large companies like Standard Oil (and other key areas of manufacturing)
○ Faced with possibility that local (no domestic) firms are being crushed so that politicians are trying
to preserve small industries, small companies, preserve local control over enterprises, maintain
political independence
○ But have to balance efficient markets with saying goodbye to small local firms
○ In 1890 Congress would have said that companies cannot stay efficient be becoming bigger, versus
theory today ‐> scale economies are really thought to operate better
I.e., AT&T + T‐Mobile ("let us merge and you can have service anywhere in the world")
But back then Congress / SCOTUS said "we are stopping mergers even at the sacrifice of
efficiency/lower prices for consumers"
• Evolution to New Economics & Legal Theory:
○ So in 1975 SCOTUS changes its position based on Japan's industrial growth, very similar to China
today, knockoffs changed to high end electronics, cars (Ford ‐> Toyota)
○ All that IBM, Xerox, etc had to do was to argue "look outside judge, the same Axis powers that lost
in WWII have rebounded to make all those VWs and Toyotas parked outside"
○ So courts are told that we (America) had to win the race, and if the Big 3 had only innovated like
IBM, we would all be driving cars that get 1000 mpg
○ So the wonderful era of US economic dominance was over and innovation, efficiency, new product
development were more important now ‐ "we don't care what is fair for the small guy, because
the U.S. was losing"
• International Trends
○ Used to be US, today US, EU, China, India have a lot of power to set standards, mostly in the area
of merger control ‐> thus firms must accommodate themselves to the strongest standards in order
to operate in that economy
2. ANALYTICAL TENSIONS AS ANTITRUST LAWS EVOLVE
• Bright Line Rules v. Reasonableness Tests
○ i.e. bright line rule: Andreas
Defense argued NO HARM ‐> that even though Ds talked a lot about setting prices, they
never did, and even when they did, they cheated on the agreement
No need to prove actual harm, the only issue was if there was an agreement between you
and your rivals to set prices and production levels
• Changing Interpretations When Dealing With Dynamism
○ I.e. Google, Facebook are making different technologies, question is how to define new markets
(K: "how do people buy books, what is the market, wtf is a 'Amazon'")
○ Change in social preferences are going to change the way firms behave now and in near future,
difficult to predict ‐> everyone thought that IBM was on its way to complete market dominance
with respect to computers
○ Very difficult for system to judge market power, who's important now, who's going to be
important
• "Equilibrating Tendencies" (Continuing Adjustments by Courts)
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○ From categories to concepts
○ With treble damages, etc ‐ courts, including SCOTUS, changes its perception based on current
social norms ‐> their discretion to change liability standards, remedies, procedure
○ I.e. what is the distinction between Andreas and a typical law firm partnership (same type of price
setting between all the firm partners as how much they charge clients)?
3. WHAT CONDUCT [THAT IMPAIRS COMPETITIVE MARKETS] DOES ANTITRUST LAW PROTECT AGAINST
• Competition Is Based On:
Price
Quality
Innovation
○ K: competition creates tremendous consumer benefits but also upheaval
Competition is a powerfully destructive force
Innovation is good but also kills companies, i.e. the entertainment industry, paper books
○ Case: Brunswick Corp. v. Pueblo Bowl‐O‐Mat ‐> powerful case where SCOTUS makes a major
change in policy, to focus on larger economic effects of competition law
K: most important phrase philosophically laid out by SCOTUS (almost a cliché now) ‐>
"antitrust laws are meant to protect competition, not competitors"
□ Businesses get rubbed out everyday ‐> competition is good for society, not bad
□ Antitrust suits successful only when a business can prove that they were damaged by
anticompetitive behavior, NOT just normal competitive behavior
Facts: Pueblo sues Brunswick when Brunswick comes and buys one of Pueblo's competitors
who was about to go bankrupt
P's Claim: "but for the merger, I [Pueblo] would have been the only provider of bowling
alley, thus Brunswick owes me 3 times the profit I would have made"
SCOTUS: Pueblo is an idiot for trying to claim damages due to a competitor's behavior that
increased competition
□ Pueblo has terrible argument ‐> "but for Brunswick, we would have had a monopoly"
□ SCOTUS ‐> "wait, you want damages for MONOPOLY profits??"
• Anticompetitive Conduct:
○ Generally divided into 2 broad categories, based on the nature of the effects they can cause:
[1] collusive effects (on own output): directly impair market due to coordinated action
(price‐setting or output‐restricting) between competitors
□ See Andreas (good conditions for collusion led to price‐setting agreement between
direct competitors to fix lysine prices); see also U.S. v. Brown University
[2] exclusionary effects (on others' output): if you don't join us, we will destroy you by
forcing you to produce less output
□ See JTC Petroleum (exclusionary agreement between cartel and its suppliers to
exclude cartel's competitor from a vital input);
○ Case: Andreas ‐> cartel drove price up using a collusive agreement to restrict price + output by
cartel collectively decided each firm's production (output) share and selling price
Good conditions for collusion?
□ Lysine is "fungible" product ‐> commodity where quality, how it's made etc, is
indistinguishable
□ Inelastic demand ‐> changes in price were not going to drive away agricultural
customers, i.e. Tyson's Chicken, who needed the product
□ Cartel had control of market
○ Case: U.S. v. Brown University (SCOTUS) ‐> NOT technically a price‐setting agreement per se, but
agreement as to how much they would pay for an input that was essential to the universities ‐>
can't justify price‐setting agreement was needed due to dangers of competition b/c quality gets
better with increased competition
Facts: each school agreed to give every commonly admitted student the same $ package so
that tuition would be less of an influence in the student's decision where to attend
Δ's Justification: by fixing price, the students can choose on real quality and focus financial
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aid more on students who need it; just like industries setting prices for public safety:
□ Society of Civil Engineers ‐> rules preventing bidding on construction contracts for
public safety
□ Doctors ‐> ethics code did not allow x‐rays to be given to insurance companies b/c
allowing insurance adjusters to set rates would drive doctors to cut corners
Holding: SCOTUS replies "GTFO, you can't argue that competition is dangerous b/c the
reverse is actually true ‐> quality gets better with increased competition"
○ Case: JTC Petroleum Co. v. Piasa Motor Fuels ‐> SJ reversed by 7th Cir. (J. Posner) b/c even though
producers were not directly part of the cartel, "agreement" is defined broadly, thus covers this
type of exclusionary arrangement [where cartel gets suppliers to exclude a competitor/maverick]
Facts: JTC is a "maverick" asphalt applicator that does not join cartel, sues other applicators
and asphalt producers (allegedly in cahoots w/cartel of other applicators)
□ Cartel gets with producers and incentivizes them not to sell to JTC in exchange for
paying the producers a little more for their raw product
□ Good conditions for collusion?
Product is fungible product so only way to increase volume is to cut prices, but
there is inelastic demand for this product so the effect of price competition
lowers profits
Market is very small, everyone knows each others bids
Holding: denying JTC an essential input into its business is exclusionary tactic, not
necessarily to cut them off completely, but to drive up your competitors costs ‐> thus
qualified as an agreement
□ I.e., Microsoft made it harder to download and install Netscape
□ Basically "if you won't join us, we will make life really hard for you"
• "Cartel Problems" [That Anticompetitive Conduct is Often Meant to Solve]:
○ Competitive Products ‐> substitute + complimentary products
Substitutes directly threaten your cartel
Sometimes complimentary products do too
□ I.e. Microsoft saw other web browsers (Chrome) as threats to Windows (not direct
substitute) b/c through the browser the customers could get access to other
applications making Microsoft applications obsolete
○ Potential Entrants
□ Especially for commodity products ‐> big concern from overseas
□ Especially in North America, you are worried that other entrants will drop your prices
□ Protected by lobbying ("buy American"), anti‐dumping suits
Suppliers ‐> who might enter your market to steal your business
□ i.e. can make competing products or simply buy one of the smaller members of your
cartel and break the cartel price‐fixing agreement
Customers ‐> need to be tightly controlled
□ i.e. customers / internal sales people who might not know you are trying to run a
price‐setting cartel and leak out info
○ Case: Andreas ‐> cartel drove price up using a collusive agreement to restrict price + output by
cartel collectively deciding each firm's production (output) share and selling price
Cartel Problems?
□ No competitors ‐> no other [big] producers of lysine or other alternative products that
the customers could switch to
□ Suppliers could have demanded cartel pay higher prices if they see market going up
□ New entry by your suppliers/customers
□ Cheating by firms lowering their price ‐> solved by keeping close accounting +
agreeing that if any firm does not get the slice they expected, the cartel would buy
back lysine to make up for the slice
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4. MODERN ANTITRUST GOALS ‐> CONSIDERING ECONOMICS, INNOVATION, & PUBLIC WELFARE
• Efficiency definitions and graph ‐> Figure 1‐8, Williamson Diagram (pg. 73)
• [Dynamic] Efficiencies ‐>
How do we maximize production efficiency gain > allocative efficiency loss + wealth transfer?
○ Productive Efficiency:
The firm's productivity gains associated with lower marginal costs
Argument is that this will benefit total welfare (see below)
○ Allocative Efficiency:
Benefits to society that are lost when demand is not met
I.e. "that sandwich was so good I would have paid $6 instead of the $4 that I was charged"
○ Wealth Transfer:
The extra $ society must pay more for same product b/c cost shifted from sellers to buyers
Largest allocative efficiency loss in monopolies b/c company not meeting demand but able
to charge more solely due to monopoly ‐> increase in $ is just transfer from buyer to sellers
• Wealth Distribution ‐>
How should we distribute consumer surplus/who gets benefit [of the rectangle on the diagram]?
○ Consumer Surplus: when firms offer prices at less than what each individual buyer would pay
I.e., business travelers on airlines are inelastic customers vs. travelers who are elastic
This is price discrimination, adjusting the price with respect to the demographics of the
consumer ("figure out how much each individual customer will pay for the trip")
All firms would like to engage in one form of price discrimination or another ‐> the surplus
rectangle shifts to either consumer or the firm
○ Consumer Welfare:
Should to go to consumers, not firms
See, e.g., Brunswick (competition, not competitors)
Most agencies will say they are focused on this (sounds better to help consumers, right?)
○ Total Welfare:
Should go to firms b/c cost reduction and productivity improvements lead to gradual
improvements into the larger economy (i.e. increased employment)
• Market Access ‐>
How do we increase innovation but minimize disruptions on the market?
○ K: the "innovation gene" is distributed equally in the world, but problem is that public/private
restraints and artificial obstacles prevent people from releasing innovation
Steve Jobs successful b/c didn't have a lot of barriers that said "you can or cannot do this"
And problem is competition laws that add obstacles tend to stifle competition
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○ Point: thus competition laws should allow people to try any ideas that come into the market, even
ones that are not popular and not from people you expect
The breakthrough ideas might come from the least expected, so a successful economy is
based on allowing good ideas to flourish, no matter who came up with the idea
I.e. starting a business in VA takes a couple hours by filling out proper form; whereas in
Vietnam you have your application reviewed and if it competes with a state‐owned
enterprise, you're shit out of luck
Imagine Bill Gates in the Vietnam trying to convince government to approve of Microsoft
○ Counter‐Point: stability vs. instability
○ Spurring innovation is great for public but tremendous disruption on market
○ I.e. the downfall of Borders and the rise of Amazon.com
• Political Impacts ‐>
○ Wartime mobilization
○ Political decentralization
○ Protecting small and medium enterprises can prevent political and economic powers from
joining up and dominating
○ Much less of a goal now ‐> mostly focused on economics
○ Recent economic collapse ‐> not enough regulation?
○ Capitalism fail?
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II. Horizontal Agreements Among Competitors [Sherman Act § 1]
1. "UNREASONABLE" RESTRAINT UNDER SHERMAN ACT § 1
• Sherman Act § 1: prohibits [1] concerted action ("every contract, combination, or conspiracy") in [2]
[unreasonable]* restraint of trade
"Concerted action" in § 1 requires agreement b/w 2 actors (vs. §2's unilateral action) ‐> [SEE
NEXT SECTION ON EVIDENCE OF CONCERTED ACTION]
○ First interpretation ‐> plain and ordinary meaning of 'every contract'" shows Congress was
absolute in its prohibition, see Trans‐Missouri Freight (1897) (early cases ‐> no effort to hide the
agreement "sure we have an agreement")
○ But every contract is by definition some sort of restraint (the point of any K is to make sure parties
do some action); thus *unreasonable restraint of trade standard is adopted, see Standard Oil
(1911) (new standard ‐> "every unreasonable contract that restrains trade"); Chicago Board of
Trade (1918)
Unreasonable Restraint
Less Analysis =
"Per Se" Rules More Analysis =
Chicago Board of Trade
SUMMARY OF HISTORIC SHERMAN ACT RULES (1890‐1927): FIGURE 2‐1 (PG 93)
• 2 approaches to per se condemnation
○ Trans‐Missouri Freight (1897): Literal Per Se Rule
"every" restraint of trade unlawful [no longer relevant]
○ Addyston Pipe (1899): Judge Taft's Per Se Rule
No purpose/effect other than restraint
Not related to any legitimate purpose
• 2 approaches to the rule of reason
○ Standard Oil (1911) & Board of Trade of Chicago (1918): Unstructured Rule of Reason
Look at purpose nature, and effect of restraint
○ Addyston Pipe (1899): Judge Taft's Limited Rule of Reason
Only ancillary restraints can be justified as reasonable
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(clarifying ‐> detrimental effect is what needs to be proved and market power can show that, but
market power is irrelevant when there is evidence of actual detrimental effects)
Case: Socony Vacuum Oil (1940) ‐> once found in violation [per se], the Court will not look at
the reasonableness of prices ‐ what is reasonable today may not be tomorrow, not legal
justification
□ Even if there are hundreds of other competitors and there was no way that your price
fixing agreement could have affected the market price, you are still in violation
• Conduct that Qualifies as "Price‐Fixing": two partners setting the price of their goods may be literally
"price fixing" but they are NOT in per se violation of the Sherman Act unless their conduct falls into the
category labeled as "per se price fixing", see BMI (the "joint selling agreement" OK b/c it made a "new
product by reaping otherwise unattainable efficiencies")
○ In‐Class Hypo: law firm partnership business model accepted within antitrust law for same reason
as BMI ‐> the law firm is offering a different type of service (big general practice provides a
supermarket of legal services that individual lawyers could not offer)
○ Case: BMI (1979) ‐> BMI and ASCAP set their price in literal sense but not per se price fixing b/c
they are not offering the same product
ASCAP and BMI are taking raw material (individual licenses) and making a bigger (but
different) product that has extra added value
Policy argument also is that there are huge transaction costs for both the authors and end‐
users to negotiate each license individually
In this case the restriction was necessary to have the product at all, without it, society
wouldn't have this beneficial product at all "increased economic efficiency and render
markets more, rather than less, competitive"
K: basically this case falls into a justification SCOTUS will listen to, vs. other arguments that
SCOTUS will NOT listen to:
□ Competition is bad, Standard Oil
□ Prices are reasonable, Trenton Potteries
□ Small market share so doesn't affect actual market, Socony Vacuum Oil
The Court's framework is to first characterize the conduct as "per se" or something more
elaborate, and in this case this was not per se restraint so remand to D. Ct. for further
proceedings under rule of reason
K: this is the Court's first invitation allowing arguments to characterize conduct, suggesting
there is something in the middle between per se and full blown ‐ as eventually fully
established by NCAA
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4. PER SE BAN ON CONCERTED REFUSALS TO DEAL?
• Concerted Refusals to Deal ‐> are similar to "group boycotts" that result in collusive effects (effects that
directly restrict output or raise price), thus a species of price‐fixing that is subject to per se treatment,
see SCTLA (1990) ‐> SCTLA agreement to boycott trial appointments unless they got paid more violated
FTC Act b/c the lawyers were direct competitors who entered into a horizontal arrangement, which was
unquestionably a "naked restraint on price and output"
○ Distinguished from boycotters in NAACP v. Claiborne Hardware, who sought no personal gain, only
equal rights; versus SCTLA boycott which was "conducted by business competitors who stand to
profit financially from a lessening of competition in the boycotted market"
• Exclusionary Group Boycotts ‐> evaluated under the per se approach only when:
[1] firms join efforts to disadvantage competitors by cutting off access to supply, facility,
market necessary to enable the boycotted firm to compete (exclusionary conduct)
[2] boycotting firms have dominant position in relevant market (market power) OR
exclusive access to an element essential to effective competition
[3] and no plausible arguments that the boycott enhanced overall efficiency (no
procompetitive justification)
○ . . . otherwise [4] the "structured rule of reason" reasonableness test applies, see Northwest
Wholesale Stationers (1985) ‐> Π is required to prove Δ had "market power or access to an
element essential to effective competition" for the per se group boycott test to apply; otherwise
the "structured rule of reason" reasonableness test applies
SUMMARY OF TRADITIONAL HORIZONTAL PER SE RULES: FIGURE 2‐5 (PG 153)
Price Fixing Division of Markets Concerted Refusals to Deal
Foundation Cases: Foundation Cases: Foundation Cases:
• Trenton Potteries (1927) • Timken (1951) • Eastern States (1914)
• Socony‐Vacuum Oil (1940) • Sealy (1967) • FOGA (1941)
• Topco (1972) • Klor's (1959)
5. COLLUSIVE EFFECTS UNDER THE RULE OF REASON
• Judge Taft's Limited Rule of Reason: a restraint can be justified as reasonable only if: [1] pro‐
competitive main purpose; [2] restraint is "ancillary" to main purpose but necessary; and [3] the
restraint is no greater than necessary to facilitate the pro‐competitive main purpose, Addyston Pipe
○ Distinguished "naked restraints" (per se unreasonable) from ancillary restraints
• "Full Blown" Rule of Reason: "true test of legality is whether the restraint imposed merely regulates
(thereby promoting competition), OR whether it may suppress or even destroy competition"
Compare Chicago Board of Trade (1918) (Figure 2‐6, PG 157) ‐> every trade org. imposes
some restraint on its members conducting business, but this restraint (relating to hours in
which business may be done) merely regulates doesn't hurt competition
With Nat'l Society of Prof. Engineers (1978) ‐ while not price fixing per se, the engineering
society's ban on discussing price until after an engineer has been selected effectively
removes all competitive bidding, and they cannot meet the Rule of Reason by arguing
competition itself is harmful to public
○ Considerations w/r/t the restriction: [1] nature; [2] scope; and [3] effect of restriction
+
Page 3
○ [4] evaluate these relevant factors:
Facts peculiar to business
□ Conditions of business before and after restraint was imposed
Nature of restraint
□ Its effect, actual or probable
History and purpose of restraint
□ Evil believed to exist
□ Reason for adopting particular remedy
□ Purpose or end sought to be obtained
• "Quick Look" or "Truncated" Rule of Reason [NCAA]: a court will shift the burden of production to the
Δs to justify their conduct without undertaking a full blown rule of reason analysis
[1] when Δ shows a plausible efficiency claim of the restraint, per se treatment is
unwarranted, BMI
‐ AND ‐
[2] there is "intuitively obvious " evidence of actual anticompetitive effects, CDA
○ Case: NCAA ‐> even though NCAA agreement was a horizontal restraint on price and output, the
per se rule is not applied b/c this case involves an industry where horizontal restraints are
essential if the product is to be available at all, i.e. BMI ‐> so apply "quick look" rule of reason, but
NCAA agreement still doesn't pass muster b/c [2] unable to rebut presumption of
unreasonableness due to strong evidence of actual harm to competition
[1] protecting live college games is not a justification ‐> basically saying "we need to restrict
competition so we can still get top $ for live games" is inapposite to policy of Sherman Act
□ Distinguished BMI b/c the blanket license was necessary to "market the product at
all", but NCAA members could sell rights individually no problem
□ BMI also did not restrain individual member's right to sell it on its own, like the NCAA
agreement
[2] NCAA tries to characterize agreement as necessary to compete with all of
TV/entertainment market ‐ argues for really broad market where NCAA has no market
power (no adverse effects)
□ But Court limits to smaller market characterization, where NCAA restriction does in
fact have actual adverse effects (b/c without it there would be 100x more college
games on TV) ‐> thus market power is not required
□ K: how is it pro‐competition to limit the number of games that are televised?
○ Case: California Dental Association (CDA) v. FTC (1999) ‐> the disputed anti‐competitive effects
were not "intuitively obvious", thus courts were required to do more than the abbreviated rule‐
of‐reason analysis
So cannot use "quick look" when there is:
□ [1] the presence of plausible efficiency claims by the Δ
‐ AND ‐
□ [2] the absence of evidence of actual anticompetitive effects (i.e. actual
anticompetitive effects were present in NCAA and IFD so quick look was OK in those
cases)
CDA argued that professional dental code required to regulate misleading dental ads
In most industries, regulating "bad" advertising is normal and almost necessary conduct, i.e.
early professional cases where laws prohibiting doctors from false advertising
But in this case the ads weren't just regulating the bad shit, but also effectively eliminates
truthful advertising completely (FTC says sure code is not categorical prohibition, but as
applied it operates as a complete ban)
There is also an information gap between dentists and patients ‐> patients only rely on the
provider telling them what dentist is good, what services are required, etc
K: like eyewear prescriptions ‐> before the doctors wouldn't give you the prescription, but
an empirical study found that the states that allowed the doctors to give prescriptions freely
not only allowed customers to get 20‐30% cheaper glasses, but also increased quality
□ This has brought down price of standard eyewear down over time
Page 4
□ Also driving up innovation ("the glasses I wear used to have to made in a laboratory
that made telescope lens")
○ Case: Polygram Holding v. FTC (DC Cir. 2004) ‐> 3 CDs, first 2 good but 3rd was shit so recording
companies agree not to promote the first 2 CDs during the release of the 3rd shit CD
[1] "Oh come on, it's just a little restriction" that's necessary like BMI (reasonably related to
new product 3rd CD), but Court says no ‐ this is more like NCAA (can't justify the restrictions)
□ Argument ‐> "we need to restrict sales of 1 and 2 b/c we have a shitty 3rd product"
□ Court ‐> your argument sucks ("if 3rd product really that awesome, why do you need
to restrict sales of the first 2?")
SUMMARY OF UNREASONABLE RESTRAINT OF TRADE: MODIFIED FIGURE 2‐9 (PG 210)
Per Se Rule Quick Look Full Blown Rule of
Reason
Step 1: Π's "Naked restraints" (a) if Π shows actual anticompetitive Anticompetitive effects
Burden to Prove are obviously effect, Π does NOT need to prove shown by direct evidence
Anticompetitive anticompetitive so market power, NCAA, CDA OR inferred from proof of
Effects effects presumed ‐ OR ‐ market power
(b) if inherently suspect b/c
anticompetitive effect intuitively
obvious, Π NOT required [but may]
prove actual anticompetitive effect
OR market power, Polygram
Step 2: Δ's Presumption of Plausible efficiencies (which may be Plausible efficiencies
Burden to Prove anticompetitive reason not per se violation) so Δ (which may be reason
Efficiencies effects is needs to rebut by presenting not per se violation) so Δ
(BMI) irrebuttable; justification evidence (ideally not needs to rebut by
evidence of just circumstantial) of: conduct showing:
justification unlikely to harm consumers OR (a) cognizable efficiency
irrelevant competitive benefit outweighs harm ‐OR‐
(b) restraint is reasonably
necessary to achieve a
legitimate objective
Likely Outcome: Violation if actual anticompetitive effects Violation if:
demonstrated by Π, very difficult to (a) efficiency is
rebut almost certain violation insufficient to offset
‐ OR ‐ anticompetitive effects
if anticompetitive effect is only ‐ OR ‐
intuitively suspect, difficult to rebut (b) restraint was greater
likely violation than necessary
Examples: ADM, Socony, BRG, NCAA, CDA (theory indorsed, but Chicago Bd. Of Trade
SCTLA rejected applying to facts in case),
Polygram
Page 5
III. Evidence of Concerted Action [Sherman Act § 1]
1. "CONCERTED ACTION" PER SHERMAN ACT § 1
• Sherman Act § 1: prohibits [1] concerted action ("contract, combination, or conspiracy") in [2]
[unreasonable] restraint of trade
○ Concerted action in § 1 requires an agreement between two actors (§ 2 is about unilateral action),
see Copperweld (parent and wholly‐owned subsidiary cannot provide the plurality of actors
necessary to meet the "concerted action" requirement of § 1)
○ Company can curb its own output to raise prices as much as it wants, but only illegal if working in
concert (regardless if prices actually raised)
2. DIRECT EVIDENCE OF CONCERTED ACTION?
• Direct Evidence: is often hard to find b/c cartels try very hard to keep shit secret (K: example of
clerkship LoR open to the public, or emails, etc), but SJ not appropriate if coherent theory of agreement,
see In Re Brand Name Prescription Drugs Antitrust Litigation (7th Cir. 1997) ‐ Posner* opinion there was
sufficient evidence [of a coherent theory as to agreement between firms] for the case to proceed to
trial (SJ for Δs inappropriate)
○ In‐Class Hypo: gas station owners on the same block observing one another changing prices and
following suit, without ANY communication on price
Gas Station A ‐ $3.95 Gas Station C ‐ $3.95
○ *Posner's response to hypo: if Gas Station A raised its prices, it was like an "offer" in a K, and Gas
Station B raising its prices to match was an "acceptance"
○ Criticism ‐> you can't use ambiguous shit like this to send people to jail or to impose treble millions
of dollars in damages
○ K: even though Posner has never gone back to his first academic paper ‐> he has always had a
broad interpretation on what can count as evidence of "concerted action"
3. CIRCUMSTANTIAL EVIDENCE TO INFER CONSPIRACY?
○ Sometimes only circumstantial evidence is available to infer concerted action because: (i) secret illegal
agreements, (ii) agreements only adopting "facilitating practices", (iii) engaging only in "conscious
parallelism"
○ Especially evidence that is consistent with shit firms need to do in order to start and maintain a cartel
(i.e., reaching consensus, deterring cheating, punishing members, and preventing new competition)
○ 3 "Cartel Problems":
○ Reaching consensus: OPEC members agreed to cut production but wanted other members to do it
○ Deterring cheating by cartel members: prisoner's dilemma in game theory ‐ if everyone
cooperates, everyone wins; but if 1 cheats, everybody else loses, so everyone cheats
○ Preventing new competition, see ADM ("come and look at our facilities, if you don't give us more
market share, we'll flood the world market with our super capacity" ‐ note this is only strong hand
in ONE member's hands, but excess capacity in everyone's hands nullifies this threat)
New external threats:
□ Customers ‐> in Vitamins, producers noticed that the re‐mixers (who put vitamins into
their products for animals, etc) where engaging in arbitrage and thus bought them
□ Suppliers ‐> often makers of complimentary products that learn a ton of info that is
necessary to supply the cartel firm
Page 1
Arbitrage ‐> taking advantage of price difference between 2 markets, simply
put ‐ making profit at zero cost and risk
□ Entrants ‐> can see this concern in "Buy America" policy, anti‐dumping lawsuits, etc
(K: "nothing better than stifling competition than by getting the government to do it
for you")
□ Hold‐outs ‐> see, e.g., JTC Petroleum
Different/changing product ‐> same product makes it easy to see if something is needed
(could anyone predict demand of iPhone?)
• Circumstantial Evidence of Concerted Action: can be used to infer concerted action when:
○ [1] there is evidence of coordination accomplished by non‐direct exchange of assurances, see
Interstate ("hub and spoke" conspiracy where each distributor knew the concerted action was
contemplated and invited, then gave adherence by participating in the plan); see Toys R Us
(circumstantial evidence of horizontal agreement between toy suppliers was that each agreed to
join the boycott "on the condition that their competitors [other toy suppliers] would do the same")
○ [2] there is evidence of "conscious parallelism" (when Δs MERELY recognized interdependence
and mimicked competitor's conduct), BUT "plus factors" are required, see American Tobacco
(evidence of "plus factors" required to prove conspiracy when only evidence was Δs "conscious
parallelism"), accord Matsushita ("[conduct] consistent with permissible activity [OR] illegal
conspiracy does not, standing alone, support an inference of antitrust conspiracy")
○ * Plus Factors (see chart below and *):
□ Toys R Us
Abrupt stop was big change from past
Suspicious for toy supplier to deprive itself of a good profit source
□ American Tobacco
Abrupt identical increase in price by all competitors on same day
Suspicious b/c no economic justification
□ Matsushita
Motive super important in this case b/c: if [i] Δs had no rational economic
motive to conspire and [ii] their conduct is consistent with other equally
plausible explanations ‐> the conduct cannot give rise to an inference of
conspiracy
○ [3] to survive summary judgment, the Δs parallel actions must be more likely than not the result
of joint decision, see Monsanto (but in order to survive SJ, Π's must present evidence that "tends
to exclude the possibility of independent action by the Δs")
See also Bell Atlantic v. Twombly (2007) ‐> SCOTUS extended Matsushita to the pleading
stage (motion to dismiss) by finding that "bare assertion of conspiracy not enough" not
enough allegations of plus factors to permit inference of an agreement (K hates this)
Compare Blomkest Fertilizer v. Potash Corp. (8th Cir. 2000) (SJ for Δs was OK b/c Πs did not
prove enough plus factors: few inter‐firm communications, does not exclude possibility of
independent action, no actions against self‐interest b/c had independent business
justifications)
With Brand Name Prescription Drugs Antitrust Litigation (7th Cir. 1997) (SJ for Δs not OK b/c
Posner: "absurd . . . to require Πs to exclude ALL possibility that Δs conduct was unilateral
rather than collusive") and High Fructose Corn Antitrust Litigation (7th Cir. 2002) (SJ for Δs
not OK b/c "the evidence is no conclusive by any means . . . there are alternative
interpretations of every little bit ‐ but it is still highly suggestive of [an secret agreement]"
• [1] Case: Interstate Circuit (1939) ‐> no direct evidence that the exhibitors agreed with each other to
impose the restrictions which fucked over other exhibitors, but OK to infer horizontal agreements
between distributors in a "hub and spoke" conspiracy using only circumstantial evidence that each
distributor knew the concerted action was contemplated and invited, then gave adherence by
participating in the plan
○ Court reasons "the framework gives us the inference is that what you've done is a result of
collective action, but here's your chance to tell us why this is not anticompetitive behavior"
○ Could have responded "we all independently decided to leave the theater 10 min into the film b/c
Page 2
there was a fucking fire"
○ But instead every single member declines to testify ‐> which leads the Court to say "your refusal
to testify just reinforces the inference that there was an agreement"
○ K: this is what the Court found most suspicious ‐> they gave chance for each to explain away the
inference and they ALL actively chose not too
• [1] Case: Toys R Us (7th Cir. 2000) ‐ Toys R Us used a series of vertical agreements with its top 10
suppliers to orchestrate a horizontal agreement between the suppliers to boycott other discounting toy
retailers ‐> circumstantial evidence of horizontal agreement between toy suppliers was that each agreed
to join the boycott "on the condition that their competitors [other toy suppliers] would do the same"
○ Toys R Us tells supplies "we won't carry your shit if you sell to other toy stores" and "give us
assurances you won't sell, we'll be the hub and make sure your competitors all agree too"
○ Modern day adoption of Interstate where each toy supplier was afraid to boycott by itself b/c
other suppliers could cheat and get all the profits from the discount toy retailers
• [2 & 3] Case: Matsushita Electric (1986) ‐> in showing the existence of a horizontal agreement, there
must be evidence that tends to exclude the possibility of independent action in order to survive SJ
○ Motive super important in this case b/c: if [1] Δs had no rational economic motive to conspire
and [2] their conduct is consistent with other equally plausible explanations ‐> then the conduct
cannot give rise to an inference of conspiracy
○ This was a 2‐stage conspiracy ‐> a high cost price‐raising conspiracy in Japan to fund the price‐
cutting conspiracy in the U.S.
Alleged predatory pricing by a single firm (market power =< cost in order to knock out
competitors from the market)
K: when people are charging less its harder to prove anticompetitive effects
But Court says this is not an economically plausible predatory pricing scheme ("who would
spend 20 fruitless years subsidizing prices in America just to try to drive out Zenith") ‐> no
recoupment, see Predatory Pricing Section (practically impossible to overcome "cartel
problems" due to massive collective effort required)
○ K: little did they know historically this was Japan's plan supported by government and Korean and
Chinese manufacturers used this same tactic to defeat Japanese companies in recent years
○ "Mistaken inferences like this are especially costly, because they chill the very conduct that
antitrust laws are designed to protect" pg. 275
Reflects Harvard school of thought that policy should be "take the lower price today, don't
care about possibility of higher price tomorrow"
○ Error Costs Analysis
○ "False positives"
○ "False negatives"
○ The Masushita Court was afraid the message they were sending out was to charge higher
prices
The was a false positive, and in Court's opinion, the more damaging result
Thus Court chooses a rule where there could be false negatives, but the general signal
we want to send is [K:] lower prices, OK
• [3] Case: Bell Atlantic v. Twombly (2007) ‐ antitrust complaint dismissed b/c it only alleged conscious
parallelism but not allegations of sufficient plus factors to permit inference of an agreement ‐> SCOTUS
extended Matsushita to the pleading stage by finding that "bare assertion of conspiracy not enough"
○ Poller for motion for SJ
○ Twombly takes heightened pleading standards even further to motion to dismiss stage
○ Π's Claim in Pleading: there is an agreement between Bell South and North not to compete
SCOTUS: your theory of liability have to be economically plausible
Δ's Defense: there are all kinds of reasons why we haven't migrated into different areas and
the Π has not ruled out EVERY one of those
○ K: SCOTUS basically makes a decision to lower error costs, since civil litigation is out of control, but
ignores the fact district judges have all the power to control shit and not certify large class actions
K: SCOTUS cites 2 sources for the proposition that civil antitrust litigation shit is out of
control ‐> an Easterbrook article that cites no one except himself, and a student law review
Page 3
note that cites Easterbrook ‐> no fucking empirical evidence at all
Sucks b/c makes this type of case really difficult especially for private Ps (unlike DOJ, no pre‐
litigation discovery, investigators, etc)
SUMMARY OF "PLUS FACTORS" (PARALLEL PRICING + X): FIGURE 3‐4 (PG 310)
Industry is conducive to coordination Agreement, NOT just conscious parallelism
(*ability to solve the 3 cartel "problems")
• Industry structure (e.g. oligopolistic • Opportunity to communicate (e.g. meetings, trade
market, homogeneous products, difficult shows)
entry, large # purchasers)
• Past history of industry collaboration • Facilitating practices (e.g. preannouncement of price
increases, other info exchanged)
• Rational motive to behave collectively • Conduct too complicated to be explained by mere
(e.g. inelastic demand) parallel behavior; irrational behavior absent agreement
(e.g. failing to take advantage of changes in supply and
demand)
• * these "background" plus factors serve as the foundation of circumstantial evidence but does NOT
"tend to exclude the possibility of independent action" necessary but not sufficient, Blomkest
Fertilizer v. Potash Corp. (8th Cir. 2000) (dissenting opinion)
○ Compare Blomkest Fertilizer v. Potash Corp. (8th Cir. 2000) (SJ for Δs was OK b/c Πs did not prove
enough plus factors: inter‐firm communication few and does not exclude possibility of
independent action, no actions against self‐interest b/c had independent business justifications)
○ With Brand Name Prescription Drugs Antitrust Litigation (7th Cir. 1997) (SJ for Δs not OK b/c
Posner: "absurd . . . to require Πs to exclude ALL possibility that Δs conduct was unilateral rather
than collusive") and High Fructose Corn Antitrust Litigation (7th Cir. 2002) (SJ for Δs not OK b/c
"the evidence is no conclusive by any means . . . there are alternative interpretations of every little
bit ‐ but it is still highly suggestive of [an secret agreement]"
Page 4
IV. Monopolies [Sherman Act § 2]
1. MONOPOLIZATION
• Sherman Act § 2: violated by "every person who shall monopolize, or attempt to monopolize, or
combine or conspire with any other person or persons, to monopolize any part of the trade or
commerce . . ."
○ Monopolization (not monopoly, but abuse of dominant position) = power + conduct, Grinnell
[1] substantial market power ‐> what constitutes monopoly power in relevant market?
+
[2] improper conduct ‐> what behavior is sufficiently exclusionary that it qualifies as "willful
acquisition or maintenance of monopoly power (as distinguished from growth due to
superior product, business acumen, or accident)"?
○ [Bad] Case: Alcoa (2d. Cir. 1945) ‐> instead of Δ's abusive practices, focused more on Δ's market
power
K: almost a "no fault" monopolization offense b/c price‐setting by a monopolist is
unavoidable by definition, just an attack on a big ass corporation with monopoly power
• Evolution of Framework:
○ Alcoa (1945) ‐> almost no fault
Economic analysis first used in defining the market ‐> DuPont Cellophane (1956)
○ Kaysen & Turner (1959); Neal (1969)
○ Enforcement policy 1969‐1980
AT&T, Cereal, Oil, Xerography, Bread
○ Judicial retreat (1980 ‐ present)
Berkey Photo v. Kodak (2nd Cir. 1979) ‐> monopolist not required to disclose new product
to competitors b/c otherwise would allow free‐riding + reduce incentives to innovate
IBM (9th Cir. 1979) ‐> IBM didn't violate 2 when they redesigned their mainframes that
wouldn't accept old peripheral shit b/c IBM as no duty to design new shit that had to be
compatible with competitors shit
○ Contemporary law & economics ‐> Aspen Skiing v. Aspen Highlands (1985)
2. SUBSTANTIAL MARKET [MONOPOLY] POWER {PRONG [1]}?
• Direct Evidence:
○ Price and quality effects
Actual effects
Possible future harm (e.g. future innovation/product development)
Past lessons
○ Evidence of intent
General desire to prevail vs. logic and consequences of exclusionary plan
• Circumstantial Evidence:
○ Durable + Substantial Market Share ‐> used to infer market monopoly power
What is durable?
□ Dynamism
Technology
Transportation
Communications
□ Modern Illustrations
Photocopying
Software
Search
What is substantial?
□ Market definition:
Cellophane ‐> market composed of products with reasonable interchangeability
for the purposes they are produced for ‐ considering product [i] price, [i] use,
Page 1
and [iii] qualities
◊ K: "Cellophane fallacy" problem ‐> high demand elasticity helps establish
two products are close substitutes only when both sold at competitive
prices, du Pont may have already been exercising its monopoly power
IBM ‐> market was ALL peripheral products, not just ones compatible with IBM
machines, b/c as the developer, IBM necessarily already had full monopoly
power over IBM‐compatible products
Alcoa ‐> market share could be 33% ‐ 90% depending on whether market
included virgin or secondary (scrap) aluminum
◊ Court excluded ALL secondary aluminum (K: mistake b/c they were
identical substitutes ‐> didn't matter Alcoa originally produced some of it)
◊ Court also included imported virgin aluminum, which cut Alcoa's market
share 10%
□ HMG standards for market share ‐> [SEE ALSO MERGERS SECTION]
◊ Monopolization ~70 %
◊ Attempt to monopolize ~50 %
But see US v. Microsoft ‐> "monopoly power ordinarily may be inferred from
predominant share of market, BUT the possibility of competition from new
entrants could make looking at current market share alone misleading"
3. IMPROPERLY EXCLUSIONARY CONDUCT {PRONG [2]}
• Analysis for distinguishing exclusionary v. competitive conduct [US v. Microsoft*]:
* K loves this analytical structure
○ [i] exclusionary conduct must harm competitive process (thus consumers), harm to competitors is
not enough
○ [ii] Π must show Δ's conduct has anticompetitive effect (any type of evidence)
○ [iii] if Π establishes a prima facie case under § 2, Δ can rebut with a pro‐competitive justification
for its conduct (i.e. efficiency or enhanced consumer appeal)
○ [iv] Π must rebut or show anticompetitive harm of conduct outweighs the pro‐competition
benefits of the justification
• Case: US v. Microsoft (DC Cir. 2001)
○ [1] Substantial Market [Monopoly] Power
Market definition ‐> Intel‐based operating systems (does not include Apple, PDAs,
middleware i.e. Netscape)
Share of Intel‐based operating systems ‐> 90% in < 5 years
○ [2] Bad Conduct
Bill Gates' memo [intent] where he worries about Netscape and Java as potential threats
and the way Microsoft could minimize this threat by limiting their competition's experience
Tying deals with OEM computer makers to only bundle Windows
Bundling Windows apps and deliberately made other apps non‐compatible with Windows
□ Changing interface so that it "pollutes java" making it hard to run Java on Microsoft OS
□ Microsoft argues "the programs are bundled, but people want that; like giving people
radios in their cars" (better product and consumer experience)
□ Didn't deny Netscape 100% access to end users, just A LOT harder ‐> Microsoft said
this is not exclusion (K: "dude can still drive to NYC, even if slower")
4. PRICE‐BASED EXCLUSIONARY CONDUCT?
• Predatory Pricing: Πs who allege predatory pricing as the bad conduct prong [2] of Sherman Act § 2 [OR
pricing discrimination in violation Clayton Act § 2] must:
[A] "prove the prices complained of are below an appropriate measure of its rival's costs"
□ Prices > average total cost (sum of all fixed + variable costs, divided by total output) ‐>
lawful
□ Prices >≈ average variable cost AND < total cost ‐> rebuttable presumption lawful
□ Prices < variable cost ‐> presumptively unlawful only when also structural conditions
Page 2
b/c predatory pricing schemes rarely successful and have to be maintained in order to
recoup costs, see Brooke Group
‐ AND ‐
[B] "demonstrate that the competition had a reasonable probability of recouping its
investment in below‐cost prices", Brooke Group ‐> intent not enough unless the plan was
also feasible, need to show [BOTH]:
□ [i] production capability after driving competitor out
□ [ii] no barriers to entry preventing someone else from taking competitor's shares
○ Economic Principles
No rule ‐> Bork, Easterbrook
Price < avg. total cost ‐> Areeda/Turner; Utah Pie (1967) (price > average total cost + intent)
Recoupment (price‐cost relationships too difficult; the first and only threshold question
should be "if the D destroys its rival, can it take advantage of the opened up market
share?") ‐> Joskow/Klaorick, Elzinga
Game theory ‐> e.g. reputation for toughness, "noisy" predation, multi‐market contact
○ Case: Brooke Group v. Brown Williamson Tobacco (1993) ‐> SCOTUS sustained dismissal of Π's
suit b/c Π (Liggett) failed to show B&W could recoup its investment in below‐cost sales
□ Market power ‐> B&W's market share was only 12% (not significant by itself, but
Liggett accuses all the brand name cigarette makers of "tacit coordination" based on
long history of collusion of tobacco industry and B&W is the hit man for all the brand
name manufacturers)
[A] Court didn't say what measure of cost (average total or average variable) but evidence
that price < average variable cost
[B] needed to show recoupment to demonstrate that "the structure and conditions of the
relevant market" would enable the alleged predator to engage in sustained super
competitive pricing once its prey was subdued
□ Evidence B&W had intent to recoup ‐> 3 periods of internal documents that said "for
every dollar we spend on attacking Liggett in generic sales, we get $1.10 back in
protecting our branded market" + "its working" + "it worked"
□ But intent not enough unless the plan was feasible, needed to show :
[i] B&W had production capability after driving Liggett out
[ii] no barriers to entry that prevent someone else from taking Liggett's shares
instead of B&W
□ Plausible that recoupment was reducing cannibalization of brand name cigarettes by
generics, but not enough evidence B&W's conduct posed "an authentic threat to
competition"
K: dislikes this b/c dismissal of a jury verdict aka no reasonable jury would find
evidence to support verdict
Really permissive rule b/c like in Matsushita, Court was really scared of making
antitrust suits a tool for keeping prices high
□ K: this is a "make‐up call" by a ref trying to contain the Kodak decision and as a result
extremely difficult for Πs to prevail in predatory pricing cases
• Bundling: bundled discounts are anticompetitive only if Π establishes that, after giving the discount on
the entire bundle of products, Δ sold the product below its average variable cost, see Cascade Health v.
Peacehealth (9th Cir. 2007) (relying on SCOTUS in Brooke Group ("above‐cost pricing will NOT be
considered exclusionary conduct for antitrust purposes")
○ Case: Cascade Health v. Peacehealth ‐> rejected 3rd Cir.'s holding in LePage's Inc. v. 3M (more
open‐ended test that does not require showing bundled discounts constituted below‐cost pricing)
as long as price of the product [minus the total discount] is > average variable cost, the
discounting is NOT anticompetitive
○ See also AMD v. Intel ‐> $1B fine from EU b/c Intel said "we need some breathing space to catch
up to AMD's new dual core technology, so we need to set up loyalty program to stall AMD where
computer manufactures got a discount at 80% but nothing if below"
Page 3
5. NON‐PRICE‐BASED EXCLUSIONARY CONDUCT?
• Refusals to Deal: [A] Sherman Act doesn't restrict a private firm's right to deal with whoever they want,
Colgate; [B] but can be held liable if the sole purpose (i.e. no valid business purpose) of the refusal to
deal is to create or maintain a monopoly, compare Aspen and Kodak (a monopolist violates § 2 if it
excludes a rival from the monopolized market by restricting its relationship without an adequate
business justification), with Trinko (limiting Aspen's holding to the termination of pre‐existing
relationship)
○ Case: Aspen Skiing v. Aspen Highlands (1985) ‐> monopolist Δ's refusal to deal was monopolization
b/c Δ's behavior was predatory, not motivated by efficiency concerns but just to exclude its rival
(bad conduct + no justification)
Market Power: only 2 firms in market getting together to set a price
Bad Conduct: joint marketing agreements (collaboration) are OK, but the problem is that
the Δs back out of the agreement after Π loses significant business
□ Shows they are trying to run Highlands into the ground (but anti‐competition law
protects competition not competitors)
□ However, the consumers are being hurt after the dominant firm tries to stop the All
Aspen Pass b/c the consumers LIKED the product (direct and circumstantial evidence)
Justification: needed to get rid of the coupon system b/c it was drawing in unruly college
kids (bad argument)
□ K: better argument ‐> continuing the coupon system was like forced cooperation
("why would we continue to help this dying resort") + safety argument ("Highland was
having serious quality control issues that could be a huge liability"
○ Case: Kodak (1992) ‐> a monopolist may refuse to deal with rivals ONLY IF there are legitimate
competitive reasons for the refusal (i.e. stuff that increases profits is a justified business move)
Market Power: > 80%
Bad Conduct: existing relationship that Kodak withdrew from (unilateral modification) +
injury to consumers
Justification: nothing about quality control, efficiency, etc
○ Case: Verizon v. Curtis Trinko LLP (2004) ‐> Δ not be liable under §2 b/c no evidence of Δ's refusal
to deal being motivated by anticompetitive malice like in Aspen; Δ was compelled to work with
other firms, not voluntarily (so they couldn't have started with an intent to fuck over other firms)
Limits §2 liability under Aspen to the narrow set of facts where a preexisting relationship is
being terminated
• Standards Setting: lying about holding a patent when trying to set an industry standard can be the "bad
exclusionary conduct" for a §2 violation
○ Compare Unocal ‐> Unocal's "bad act" ‐> lying when helping set gasoline standards in CA, then
trying to collect royalties
○ With Rambus ‐> same scenario as Unocal but in private standards setting ‐> DC Cir. came out the
other way and decided for Rambus, holding that the FTC didn't show causation, that but for the
bad act (the failure to disclose pending patents), the standard wouldn't have been set using
Rambus' patent anyways
• Refusals to License IP Rights: [A] unless IPR obtained by fraud, a monopolist's unilateral refusal to
license its IP is generally NOT "exclusionary conduct" ( asserting an IPR is a "presumptively valid
business justification"), [B] but the presumption can be rebutted if asserting IPR is just a pretext to fuck
over competitor
○ Compare Kodak (9th Cir. 1997) ‐> generally a patent holder can exclude/deal with whoever they
want, but that was not Kodak's motivation; protecting IP rights was just a post facto justification
for anti‐competitive practices
○ With CSU v. Xerox (Fed. Cir. 2000) ‐ Fed. Cir. protects patents so they push back at the Kodak
decision, concluding a court shouldn't look for "pretext" ‐> violation ONLY IF the patent is
obtained by fraud
• Product Innovation: [A] design or development activity is immune as long as monopolist can show it
was improving its existing product offerings, EVEN IF one of the firm's goals was to exclude rivals, see
Page 4
Berkey Photo ("any firm, even a monopolist may generally bring its products to market whenever and
however it chooses"); [B] but deliberate efforts to create incompatibility without offering performance
enhancements or cost reductions is actionable, see C.R. Bard (violation b/c Π gave substantial evidence
that manufacturer Δ made changes in the product only for predatory reasons, i.e. preventing entry
instead of improving the product)
○ Case: Berkey Photo v. Kodak (2nd Cir. 1979) ‐> monopolist's disclosure of a new product to
competitors was not required b/c it would allow free‐riding and reduce incentives to innovate
○ K: firms have freedom to design and operate their businesses as they saw fit, but NO OBLIGATION
to design products to fit other people's shit and/or disclose of the changes to competitors
• Essential Facilities: Π must prove [A] control of essential facility by monopolist; [B] competitor's
inability to practically or reasonably duplicate the essential facility; [C] the denial of the use of the
facility to competitor; [D] no valid business reasons for denial of access; and [E] the feasibility of
providing access to the facility, MCI (7th Cir. 1983) + Aspen (adding [D])
○ SCOTUS in Trinko says they don't endorse "essential facilities"
○ K: "essential facilities" is not distinct from ordinary refusals to deal
• Leveraging Monopoly in Another Market: is OK ‐> only unlawful when a firm actually monopolizes or
attempts to monopolize in the specific market, see Spectrum Sports (using monopoly in 1 market as
leverage in another different market is NOT a violation unless actual monopolization or attempt to
monopolize in 2nd market)
6. ATTEMPTED MONOPOLIZATION?
• Sherman Act § 2: violated by "every person who shall monopolize, or attempt to monopolize, or
combine or conspire with any other person or persons, to monopolize any part of the trade or
commerce . . ."
○ Attempted Monopolization, Spectrum Sports
[1] predatory or anticompetitive conduct
+
[2] specific intent to monopolize
+
[3] dangerous probability of achieving monopoly power, see Spectrum Sports (dangerous
probability can't be inferred from predatory conduct alone ‐> must assess market power
and < 50% market share presumed NOT dangerous)
○ K in class:
[1] intent (as to bad conduct)
[2] market power, but relaxed standard ~50%
[3] dangerous probability of success (entry is difficult)
○ Case: US v. American Airlines where CEO of AA tells his rival that "you and I can make a lot more
money if we collude ‐ we can do whatever the fuck we want" ‐> even though the invitation to
collude was declined, the Feds said it was still a form of illegal attempt at monopolization
Page 5
I. Vertical Agreements/Restraints [Sherman Act § 1 / Clayton Act § 3]
1. VERTICAL AGREEMENT
• Vertical agreements: coordination agreements between firms who are not competitors but perform
distinct functions at different stages of complementary products
○ Intrabrand restraints: affect competition between sellers of the same band (i.e. territorial
restrictions on rival Chevy dealers, Burger King franchises, etc)
Concerned about collusive effects
○ Interbrand restraints: limit competition between competing brands (i.e. exclusive dealing
arrangements or "tying" agreements)
Concerned about exclusionary effects
2. VERTICAL AGREEMENT [INCORRECTLY] CHARACTERIZED AS GROUP BOYCOTT?
• Vertical agreements between ONLY 1 buyer + 1 supplier:
○ [1] are NOT subject to [per se ban] b/c they are not the same as group boycotts / concerted
refusals to deal (a species of price‐fixing that are subject to per se treatment, see SCTLA)
○ [2] instead judged under rule of reason, like all other vertical restraints [SEE BELOW]
• See NYNEX v. Discon (1998) ‐> per se group boycott rule does not apply to single buyer + single supplier
b/c freedom to switch vendors is part of the competition antitrust laws encourage
○ Maybe some other liability (BoC, tort fraud, violation of NY state regulations, etc), but freedom to
switch suppliers is not a basis for an antitrust violation
○ SCOTUS concluded group boycotts are more or less "per se illegal" in Klors ‐> K: but SCOTUS really
meant "group boycotts for which there are no justifications are really, really looked down upon"
○ In this case the justification ‐> buyer made a rational choice to switch suppliers (based on a
normal business decision) and the courts won't interfere with that
3. VERTICAL PRICE (RPM) & NON‐PRICE AGREEMENT [INTRABRAND]?
• Vertical price (RPM) & non‐price agreements: are both judged under the rule of reason, Sylvania,
Leegin, with nearly a presumption of legality for all vertical restraints, see, e.g., E&L Consulting, Ltd. v.
Doman Indus. Ltd. (2nd Cir. 2007) (an exclusive distributorship is a vertical restraint on trade but is
presumptively valid unless a Π can show actual adverse effects on competition ‐> in this case already
had full market power so nothing to gain)
○ Guidance Leegin Court provides on RPMs:
[1] situations where RPMs are likely to be anticompetitive:
□ Facilitating manufacturer's cartel
□ Facilitating dealer's cartel
□ Used by manufacturer with market power to protect its power by incentivizing dealers
not to sell products made by smaller rivals
□ Dealer with market power solicits minimum RPM to delay distribution
[2] factors to analyzing RPMs under the rule of reason:
□ Scope of minimum RPM use in market
□ Source of restraint, i.e. originated from dealer or supplier
□ Market power of supplier and dealer
[3] pro‐competitive justifications:
□ Encourage dealers to invest in services/promotional efforts
□ Give consumers more options on goods/level of service
□ Removes free‐riders
□ Efficient way of making dealers provide certain levels of service
Assuring quality to protect manufacturer's reputation
Reduce possible product liability from un‐reputable retailers
□ Help new firms enter/expand in markets
○ Case: Continental T.V. v. Sylvania (1977) ‐> vertical, intrabrand, non‐price restraints should not be
treated under per se ban, instead under the rule of reason
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Under rule of reason the restrictions reducing intrabrand competition might be OK if they
benefited interbrand competition
□ [3] possible justifications for vertical intrabrand restrictions:
Induce retailers to carry and promote new products
Induce retailers to be more competent at such
Assuring quality to protect manufacturer's reputation
Reduce possible product liability from un‐reputable retailers
Reduce free‐riding
K: but practically, almost ALL vertical, intrabrand, non‐price restraints are pro‐competitive in
the interbrand market, thus making them almost never violations
○ Case: Leegin Creative Leather Products, Inc. v. PSKS, Inc. (2007) ‐> overruled Dr. Miles; held that
ALL vertical minimum RPM agreements were to be evaluated by the rule of reason, NOT per se
All the same justifications for allowing intrabrand non‐price restrictions in Sylvania applied
equally to price restrictions
Court reminds there are situations where vertical RPMs are still illegal per se
4. EXCLUSIVE DISTRIBUTOR [VERTICAL INTRABRAND RESTRAINT]?
• Exclusive distributorships: (a commitment by a supplier to limit the number of distributors in a certain
geographic area, limiting intrabrand competition) are vertical restraints on trade, but are presumptively
valid unless a Π can show actual adverse effects on competition: E&L Consulting
○ Exclusive distributorship ‐> constrains SELLER (intrabrand completion limited)
‐NOT‐
○ Exclusive dealing ‐> constrains BUYER (interbrand competition limited by distributor limiting
access between dealers and rival suppliers)
• Case: E&L Consulting, Ltd. v. Doman Indus. Ltd. (2nd Cir. 2007) ‐> presumptively valid unless a Π can
show actual adverse effects on competition and in this case the Δ already had full market power, Δ
had nothing to gain and no injury to competition (Π irrelevant) by switching exclusive distributors
○ Former exclusive distributor (E&L) was butt hurt their supplier (Doman) decided to go with
another exclusive supplier
○ But a dominant supplier 100% OK to switch from a multiple distributor network to a single
distributor (K: look at Amazon.com destroying Barnes and Nobles ‐> Amazon took advantage of
distribution fluidity)
Note we are not talking about ANY horizontal competitors in this scenario
○ When manufacturers are just searching for the best way to get their products to the general
public, they have deference to do what they want
○ In the U.S. the distribution network of companies really fluid and adaptable, thus SCOTUS is not
going to fuck around and mandate laws the could slow down the process and harm general
consumers, see, e.g., NYNEX v. Discon
Page 2
b/c by definition, there is separate demand for the new product
[ii] buyer required to buy tied product to get the tying product
□ Quality control defense ‐> older cases didn't accept this defense (that service from
only Mercedes dealers was needed to give customers confidence in the product)
□ Compare IBM (rejected quality defense b/c other less harmful alternatives available)
□ With Microsoft (~quality argument OK ‐> "integration is so complete that if you take
out Internet Explorer, the whole OS will crash")
[iii] the seller has "appreciable economic power in tying market"
□ See Jefferson Parish (hospital's 30% market power not enough to invoke "per se" rule)
□ K: <30% market power now a "safe harbor" for tying agreements
[iv] tying arrangement affects substantial amount of commerce in the tied product's market
○ Case: Jefferson Parish Hospital v. Hyde (SCOTUS 1984) ‐> per se rule still applies to tying, but
concluding hospital requiring patients to use affiliated anesthesiologists was OK b/c:
[i] surgery and anesthesia were not separate products
[ii] hospital didn't require ("force") buying tied product
[iii] hospital didn't have enough market power (30%) to invoke the "per se" rule
• Exclusive Dealing ‐> may lead to violations of Clayton Act §3 or Sherman Act §1 when a manufacturer
sells on only on the condition that buyer does not deal in a competitors' goods; examined under
modified rule of reason that looks at the effect of foreclosure to other sellers, considering:
[i] extent of market foreclosure ‐> generally no liability if < 30%: Jefferson Parish
[ii] duration of agreement ‐> short periods presumed reasonable: Omega Environmental
[iii] entry ‐> no liability of entry into affected market is easy
○ Exclusive dealing ‐> constrains BUYER (interbrand competition limited by distributor limiting
access between dealers and rival suppliers)
‐NOT‐
○ Exclusive distributorship ‐> constrains SELLER (intrabrand completion limited)
Page 3
VI. Horizontal Mergers Among Competitors [Clayton Act § 7]
1. MERGERS
• 3 types of mergers:
○ Horizontal ‐> between competitors
○ Vertical ‐> between firms and their suppliers/customers
○ Conglomerates ‐> between firms with neither substitutes or complements
• Motives for mergers:
○ Reduce costs or improve products in ways a firm can't do on its own
○ More profit by changing control over acquired assets
○ Tax benefits
○ Desire for market power <‐ only motive that raises antitrust concerns b/c:
Lowering # of competitors can help coordinated collusive conduct
Exclusionary anticompetitive effects (i.e. limiting rivals' access to inputs or distribution)
"Merger to monopoly"
2. CLAYTON ACT STATUTORY FRAMEWORK
• Clayton Act § 7: prohibits [any type of] merger that may substantially lessen competition or tend to
create a monopoly in a relevant market
No person engaged in commerce or in any activity affecting commerce shall acquire, directly or indirectly, the whole or any
part of the stock or . . . assets of another person engaged also in commerce or in any activity affecting commerce, where in any
line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be
substantially to lessen competition, or to tend to create a monopoly.
○ Most mergers (vertical or horizontal) reviewed under Clayton Act § 7 (1950 amendments) b/c an
anticompetitive merger often doesn't involve an "agreement" per Sherman Act § 1
○ Gov. can challenge mergers before any actual anticompetitive effects, i.e. before merger is
consummated due to the word "may"
• HSR: requires pre‐merger notification for transactions above certain $, converting mergers from
litigation to a regulatory review
○ Process required certain mergers to notify FTC and DOJ, then 30 day waiting period to see if
FTC/DOJ objects and issues requests for changes
○ If government issues 2nd request for changes, parties obligated to make changes
○ Then final waiting period
○ Designed to give government chance to sue before merger completed
• K: SCOTUS last look at merger law was in 1975, but Baker Hughes might be a good indication of how the
Court might decide a merger issue today b/c Thomas, Ginsberg, and sat on the Baker Hughes court and
are now the justices
3. STRUCTURAL PRESUMPTION OF ANTICOMPETITIVE EFFECTS IN HORIZONTAL MERGER?
• Anticompetitive effect is presumed: when Π shows the horizontal merger would [1] produce a firm
controlling an undue % of the relevant market, [2] resulting in a significant increase in market
concentration (foreclosing competitors from market), Brown Shoe; US v. Philadelphia Nat'l Bank, [3] but
Δ can rebut presumption by presenting evidence that the merger is unlikely to enhance future market
power / lead to anticompetitive effects, General Dynamics; Baker Hughes
○ Case: Brown Shoe Co. v. US (1962) ‐> SCOTUS affirms D.Ct. in enjoining the merger even when
market share %s are tiny b/c the Court focuses on the general trend toward market
concentration ‐> spiral effect and if 5% OK now, so might be 10%, 20% later (may substantially
lessen competition" as prohibited by Clayton Act §7)
K: political atmosphere REALLY influenced this opinion, doubtful would be same justification
today (SCOTUS probably wouldn't favor protecting small businesses over market efficiency)
○ Case: US v. Philadelphia Nat'l Bank (1963) ‐> proposed consolidation of banks enjoined for
violating Clayton Act § 7 b/c result would "inherently lessen competition substantially" b/c:
□ [1] consolidated bank would control an undue % of the relevant market (at least 30%)
□ [2] consolidation would lead to significant increase in the concentration of
Page 1
commercial banks in the area (33% owned by 1)
○ Case: US v. General Dynamics Corp. (1974) ‐> gov. failed to show anti‐competitive effect b/c
exercise of market power is the central inquiry required by §7, NOT firm size or industry
concentration and impossible for Δ to exercise market power in the future
K: the real question is can you can compete in the next period ‐> so must use a correct
measure when trying to predict the future
General Dynamics had no "uncommitted reserves", thus they effectively had zero chance of
gaining market in the future (their bad business decision not to keep "uncommitted
reserves" turned out to be beneficial for their argument in this case)
○ Case: US v. Baker Hughes (DC Cir. 1990) ‐> Δ rebutted presumption by showing government was
making inaccurate predictions (and actual evidence shows the merger wouldn't actually lead to
anticompetitive effects) b/c: [i] market was tiny (~20 things sold per year); [ii] this was not paving
roads, products are custom shit not conducive to cartel; [iii] buyers were sophisticated so there
are no worries about fucking them over)
Big market share numbers [~70%] only gets a prima facie case but Δ still can rebut
Rebutted with evidence of why the merger won't actually lead to coordinated effects ‐>
explains why coordination in THIS particular industry was impossible as a practical matter
K: unlike previous courts, this court doesn't say it's a set in stone presumption ‐> just a
"starting point" ‐> though SCOTUS makes it much more than just a "starting point"
4. EVOLUTION OF DOJ/FTC HORIZONTAL MERGER GUIDELINES (HMG):
○ K: unlike Brown Shoe, PNB, Heinz, NEW HMG => less reliance on market power presumptions
1992 Guidelines Current 2010 HMG
Argument For: Lawyers argue that Economists argued that the modern techniques for
Cardinal says "MUST first measuring market power more advanced than
define relevant market, defining relevant market and market share ‐> so
then market share . . ." presumptions should not absolutely required
In Practice: Very out of date & HMG takes the middle ground ‐> "when we go to
different than what court we will follow Cardinal and define relevant
agency does in reality market, market shares per precedent, but we will
today not follow the same analysis in house [at the FTC]"
See, e.g., Evanston ‐> hospital cases where FTC says
"we don't have to draw a concrete circle around the
relevant market b/c we already have actual evidence
of market effects of the consummated merger"
5. LIKELIHOOD MERGER WILL HARM COMPETITION UNDER HMG 5‐STEP ANALYSIS?
• [1] Market Power:
Do they have ability to affect prices individually or collectively if they change their output?
○ OLD Market Power Analysis:
□ [i] define market by looking at buyer substitutions: Du Pont
Markets delineated according to the customer's view of which products/
geographic locations were acceptable substitutes
□ [ii] high market share % => circumstantial evidence of market power (infer
anticompetitive effect): NCAA
Definition of market changes Δ's market share
□ See NCAA (market defined as college football broadcasts, so NCAA controlled 100% of
market share, leading to Court to infer market power and anticompetitive effect; but
if market defined as broad entertainment, the NCAA's market share would have been
much lower, and would not have provided inference of market power)
□ See also U.S. v. E. I. Du Pont (1956) ‐> DuPont successful arguing relevant market was
ALL flexible wrapping materials (so DuPont's market share = 25%) instead of ONLY
cellophane market (DuPont's market share = 75%, aka monopoly power, allowing
Page 2
anticompetitive effects to be inferred)
Thus Πs typically argue for narrow markets (so Δs have big % market share) and Δs argue for
broader market definitions
○ NEW Market Power Analysis:
[i] Define Market ‐> directly measuring what customers regard as close substitutes: HMG § 4
K: if you travel from DC to NYC, do you take train, bus, car, walk?
□ Submarkets ‐> Brown Shoe and later case suggests OK change definition to make
market share bigger or smaller
□ Hypothetical Monopolist Test (HMT) ‐> if the merged firm slightly raises prices, the
other products consumers migrate to shows the relevant market
I.e, if Chex and Wheaties cereals merge, raise the price 5‐10%, what other
products will consumers migrate to?
Cherrios, Corn Flakes, but probably not shit like pop tarts, jelly donuts ‐> thus
can figure out the market definition
[ii] Measure Demand Elasticity ‐> directly instead of using market share % (only an indirect
proxy measurement): HMG § 5.2
K: today's technology can get very specific and detailed profile of how each sale
and how adjustments in price affect the amount sold and demanded (preciously
the data needed to directly determine market power)
□ SSNIP Test ‐> price that drives away customers
Will it be easier for the merged firm to engage in price discrimination (i.e.,
charge more for business class airline tickets)?
I.e., small increase that drives large # of customers away => evidence showing
small/weak market power
Small but significant non‐transitory increase in price
• [2] Anticompetitive Effects:
What is the story of why the merger would be harmful from perspective of consumers?
○ [i] Adverse Effects: HMG § 2
□ Unilateral effects: HMG § 6
Directly measure post‐merger price to see effect on consumers
See Staples (court enjoined merger b/c Staples' prices were 11.6% lower when
Office Depot was also in neighborhood + economic analysis showed merger
would raise prices 7% in markets where Staples and Office Depot competed)
□ Coordinated effects: HMG § 7
Post‐merger big market share % facilitates collusion
See HCA (Hospital enjoined from buying 4 others b/c market share 14% ‐> 26%
in concentrated market would make collusion really easy)
Affecting Price / Quality / Innovation
□ Value of diverted sales
□ Upward pressure on price (UPP) ‐> price due to removing rival: Staples; Whole
Foods (merger in niche market would price 25%)
I.e. more concerned about merger between Mercedes + BMW than Mercedes +
Ford due to niche product ‐> merge 2 proximate substitutes creates mega UPP
○ [ii] Market Concentration:
Based on sales in market ‐> measure firms' shipments, production, capacity
Herfindahl‐Hirschman Index (HHI) looks at # and relative size of firms in market
Example: 3‐firm market w/market shares of a, b, c, HHI = a^2 + b^2 + c^2
Monopoly with 100% of market => HHI of 10,000 (100^2)
No firm with more than 1% => HHI close to 0
□ Increase in HHI = pre‐merger HHI ‐ post‐merger HHI
Large HHI # increase => "prima facie" case (merger presumed anticompetitive)
□ But CANNOT rely on concentration alone see Baker Hughes (gov. cannot just prove
market power and win the case when rebutted with evidence the gov.'s data was
misleading + ease of entry)
Page 3
□ HMG § 1.51: safe harbors
Post‐Merger HHI Post‐Merger Increase Market Type
HHI < 1500 Not concerned Unconcentrated
1500 < HHI ΔHHI < 100 OK Moderately
< 2500 ΔHHI > 100 raises concerns/scrutiny Concentrated
HHI > 2500 ΔHHI < 50 OK Highly
100 < ΔHHI < 200 raises concerns/scrutiny Concentrated
ΔHHI > 200 presumed to enhance market power
• [3] Entry:
What is entry's effect on deterring or counteracting adverse effects (how easy it is for firms outside
of market to take away market share?)
○ 1992 HMG ‐> a constraining entry must be an entry that can happen < 2 years
○ NEW HMG § 9 ‐> in order to be constraining entry (preventing competitive harm), must be:
[i] timely entry, determined upon the relevant market (not just < 2 years)
[ii] likely entry
[iii] sufficient entry to actually push prices back
○ Compare HCA (Posner finding entry difficult b/c state had to license new hospitals)
○ With Waste Management ‐> the second we would try to raise prices there would be a million
other firms in the market b/c entry is so easy ("all you need is some trucks")
Court says this is a big gap in the government's argument
Government argues that this is a mob related business so entry is actually a lot harder
("people end up dead trying to enter the market")
○ And US v. Syufy ‐> Judge Kozinski calls government idiots for not considering the fact it was super
easy to enter into the movie market (just buy a building and some licenses)
• [4] Efficiencies:
Are there procompetive justifications to the merger?
○ Baker Hughes and Cardinal ‐> entry and efficiencies cannot be ignored as rebuttal possibilities
(gov. cannot just prove market power, anticompetitive effects and win the case)
Even if shitty argument, lawyers start with this b/c the efficiencies argument is more
accepted today as a rebuttal
○ NEW HMG § 10 ‐> efficiencies must be cognizable ([i] substantiated and verified + [ii] merger
specific, i.e. they could not be achieved by other less anti‐competitive means)
Not cognizable if harms competition by reducing output or service
See Heinz (benefits from better recipes not [ii] "merger specific" b/c can do it other ways
and was [i] too speculative that a certain company size was needed to make new products)
• [5] Failing Firms:
Even if possible harm, is the merger with a failing firm?
○ NEW HMG § 11 ‐> failing firms defense allows the acquisition of a firm even when possible harm
to competition if [ALL]:
[i] firm unable to meet its financial obligations and can't reorganize
[ii] it made unsuccessful good‐faith efforts to find buyer less harmful to competition
[iii] the assets of the failing firm would exit the relevant market without the merger
Page 4
VII. Vertical Mergers Between Firms & Suppliers/Customers
1. MERGERS
• 3 types of mergers:
○ Horizontal ‐> between competitors
○ Vertical ‐> between firms and their suppliers/customers
○ Conglomerates ‐> between firms with neither substitutes or complements
• Motives for mergers:
○ Reduce costs or improve products in ways a firm can't do on its own
○ More profit by changing control over acquired assets
○ Tax benefits
○ Desire for market power <‐ only motive that raises antitrust concerns b/c:
Lowering # of competitors can help coordinated collusive conduct
Exclusionary anticompetitive effects (i.e. limiting rivals' access to inputs or distribution)
"Merger to monopoly"
2. CLAYTON ACT STATUTORY FRAMEWORK
• Clayton Act § 7: prohibits [any type of] merger that may substantially lessen competition or tend to
create a monopoly in a relevant market
No person engaged in commerce or in any activity affecting commerce shall acquire, directly or indirectly, the whole or any
part of the stock or . . . assets of another person engaged also in commerce or in any activity affecting commerce, where in any
line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be
substantially to lessen competition, or to tend to create a monopoly.
○ Most mergers (vertical or horizontal) reviewed under Clayton Act § 7 (1950 amendments) b/c an
anticompetitive merger often doesn't involve an "agreement" per Sherman Act § 1
3. VERTICAL MERGER?
• Vertical Mergers ‐> (either forward integration of a firm buying customer OR backward integration of
firm acquiring a supplier) may violate Clayton Act § 7, so long as:
○ [1] gov. must show a likelihood that the merger forecloses competition in a substantial share of
relevant market: Brown Shoe
BUT 2‐3% foreclosure NOT ENOUGH in newer cases
□ 40% market share foreclosure by itself wasn't even enough
□ Practioners routinely tell clients that 20% market foreclosure is nothing to worry
about for vertical mergers
Post‐1980 cases also require:
□ Looking at effects of merger
□ Alternatives available to other retailers and manufacturers
□ Assessment of efficiency claims
○ [2] and there was a market trend towards integration (suggesting strong entry barriers)
• Case: Brown Shoe (same concerns as other vertical restraints, that vertical integration will foreclose
competitors by limiting their access to supplies/customers)
○ [1] merger between Brown Shoe and Kinney would only affect 2‐3% of the retail outlets (so tiny
effect), but presumption is that having 2‐3% of market foreclosed to other retailers and
wholesalers meant it was anticompetitive, and burden shifted to Ds to rebut how efficiencies
justified the merger
○ [2] but assumption was there was trend of reducing retail outlets, and once merged, they would
stop buying other products
Page 1