Learning Objectives What is a monopoly? What is market power?
How do these concepts relate to each other? What type of activity is prohibited by Sections 1 and 2 of the Sherman Act? What are the four major provisions of the Clayton Act and what types of activities do these provisions prohibit? What agencies of the federal government enforce the federal antitrust laws? What four activities are exempt from antitrust laws?
Section 1 of the Sherman Act Section 1 regulates what are called “horizontal” and “vertical” restraints. Per se violations vs. the Rule of Reason. Per se violations are blatant and substantially anticompetitive. Rule of reason agreements do not unreasonably restrain trade.
Horizontal Restraints: Price Fixing An agreement between competing firms in the market to set an established price for the goods or services they offer. Price fixing is a per se violation of the Act.
Horizontal Restraints: Horizontal Market Division Occurs when competitors in the same market agree that each will have exclusive rights to operate in a particular geographic area. Horizontal market divisions are per se violations of the Act.
Horizontal Restraints: Trade Associations Industry specific organizations created to
provide for the exchange of information, representation of the business interests before governmental bodies, advertising campaigns, and setting of regulatory standards to govern their industry or profession. Rule of reason is applied to determine if a violation of the Act has occurred. Concentrated Industry: small firms control large percentage of market sales.
Vertical Restraints Vertical restraints are per se anticompetitive agreements imposed by Sellers upon Buyers Buyer (or vice versa) that may include affiliates in the Buyer entire supply chain of production.
Vertical Restraints: Territorial or Customer Restrictions Imposed by manufacturers on the sellers of the products, to insulate dealers from direct competition with each other. Territorial and customer restrictions are judged under the rule of reason.
Vertical Restraints: Resale Price Maintenance Agreements An agreements between a manufacturer and a
distributor or retailer in which the manufacturer specifies the retail price at which retailers must sell products furnished by the manufacturer or distributor. This is a type of vertical restraint and is normally a per se violation. CASE 22.1 Leegin Creative Leather Products, Inc. v. PSKS, Inc. (2007). The Supreme Court held that the per se rule did not apply to “minimum resale prices.”
Monopoly: Relevant Market Before court can determine whether firm has dominant market share, it must define the “relevant market” which consists of two elements: (1) relevant product market, and (2) relevant geographic market.
Section 2: Price Discrimination Price discrimination is the charging of different prices to competing buyers for identical goods. Exceptions: Charge of lower price was temporary and in good faith to meet another seller’s equally low price to the buyer’s competitor. A particular buyer’s purchases saved the seller costs in producing and selling the good.
Section 3: Exclusionary Practices Exclusive Dealing Contracts. A contract under which a seller forbids a buyer to purchase products from the seller’s competitors. Prohibited if the effect of the contract is to “substantially lessen competition or tend to create a monopoly.”
Section 7: Mergers Horizontal Mergers occur between firms at the
same level in the production and distribution chain. CASE 22.3 Chicago Bridge & Iron Co. v. Federal Trade Commission (2008). Using the Herfindahl-Hirschman Index, FTC correctly calculated that CB&I’s acquisition of Pitt-Des Moines violated Section 7 of the Clayton Act. Vertical Mergers occur between firms at different levels in the production and distribution chain.
Section 8: Interlocking Directorates Occurs when an individual serves on the board of directors of two or more competing companies simultaneously. These are prohibited if the two firms meet certain size requirements.
Agency Actions: U.S. Department of Justice. The Federal Trade Commission enforces the FTCA. FTCA provides that: • “Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce are hereby declared illegal.”