Dan Davis – Antitrust 2000
Antitrust Outline
I. Introduction to Antitrust and Restraints of Trade
A. Cases
1. Trans-Missouri Freight – J. Peckham embraces a plain meaning approach to Section 1 that gives it a limitless scope.
2. Addyston Pipe
B. Economics
1. Private Ordering and Empty Cores – The theory of the core suggests that lumpiness in production coupled with fixed costs may prevent the existence of a stable outcome.
2. Measure of Social Welfare: Consumer Surplus + Producer Surplus. Competitive Outcome v. Monopoly Outcome.
II. Historical Cases: The Creation of the Rule of Reason
A. Cases
1. Standard Oil – Rule of Reason
B. Economics
1. Social Welfare Consequences of Monopoly
a. Consumer Welfare is reduced (Monopoly prices)
b. ½ * base * height
III. Price Fixing and Per Se Violations
A. Cases
1. Chicago Board of Trade – (spot market and future market, member to member transactions, call rule: could only purchase at the Closing Bid from the call session) J. Brandeis says you have to use rule of reason analysis to trading rules. “The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition. Look at facts peculiar to the business, it’s condition before and after the restraint.
2. Socony-Vacuum Oil – (major oil companies buy “distressed” gas, bilateral sales that didn’t show up in the market) clear statement that price-fixing agreements are per se unlawful under Section 1 of the Sherman Act.
3. Appalachian Coals (1933) – Supreme Court approves joint selling agency for 137 coal producers. The change would be in mitigation of recognized evils and would not impair, but rather foster, fair competitive opportunities. Greater includes lesser: could merge, joint sales agency subsumed within that.
B. Economics –
1. Liquidity in the market – liquidity and depth necessary for quality price-setting.
2. Prices in public market are public goods: incentive to free-ride
3. Call rule reduces free riding incentives
IV. Characterizing Horizontal Agreements
A. Cases
1. BMI – (Collective Rights organizations in music, bundle copyrighted music and license them to users) - The efficiency benefits of this arrangement were substantial, but also created the risk of an exercise of market power, as this was essentially an agreement among competitors. Want them to use rule of reason analysis. Court says this is a new product added on top of the market and doesn’t affect other products and enhances overall welfare.
B. Economics
1. Block Booking – Distributing movies. Sell movies together or separately.
2. Licensing with Fixed Costs – Going over the bridge. Two-part pricing. The license fee is a device for recovering fixed costs and daily use helps cover variable costs and pay for wear and tear.
V. Updating the Rule of Reason
A. Cases
1. California Dental – (Dentists belong to society with advertising rules) Most recent iteration on the framework for analysis in antitrust cases. The method of analysis must meet the case, as informed by the case and economic theory. In this case, the FTC has to bring forth empirical evidence of the actual consequences.
B. Economics
1. Breyer dissent – four classical subsidiary antitrust questions
i. What is the specific restraint at issue?
ii. What are its likely anticompetitive effects?
iii. Are there any procompetitive justifications?
iv. Do the parties have sufficient market power to make a difference?
VI. Finding the Agreement
A. Cases
1. Interstate Circuit – (movie distributors, sent letter to 8 distributors demanding minimum prices) Applies a presumption that allows agreement to be inferred based upon knowledge of parallel offers and resulting parallel behavior. “Acceptance by competitors, without previous agreement, of an invitation to participate in a plan, the necessary consequence of which, if carried out, is restraint of interstate commerce, is sufficient to establish an unlawful conspiract under the Sherman Act.”
2. Theatre Enterprises – Cuts against Interstate Circuit. Conscious parallelism is not enough to prove agreement for Section 1.
3. American Column (1921) – The trade association cases focus on the activities of groups devoted typically to the sharing of information about market conditions. Again, the question here is what suffices to establish a price agreement.
B. Economics
1. Parallel Price Moves - We should have little confidence that pricing patterns tell us anything essential about the level of competition.
2. Gasoline station – prices may move in perfect synchronization under either competition or collusion.
3. Production of Property: The Great American Novel. Two copies should be produced but won’t because you can only sell at one cost. Consumers value it differently. Authors recover too little value.
4. Great American Novel II: Too many authors. Tragedy of the Commons. Solution: Optimal property rights? The scope of property rights protection is one instrument for influencing incentives for behavior. Strengthen property rights to increase investment, weaken property rights to diminish it.
VII. Refusals to Deal and Joint Ventures
A. Cases
1. Fashion Originators – (agreements with retailers not to sell pirated designs, private property rights system) Section 3 of Clayton Act. Court treats this group boycott as per se violation.
2. Klors – (Sold electronic goods in SF, alleged conspiracy among BH and manufacturers to deny goods to Klors) must be understood in the context of the Court’s desire to protect small dealers.
3. Radiant Burners – (ceramic gas burner that sought “seal of approval” of American Gas Ass’n, twice submitted, twice denied) Group boycotts violate Section 1 of Sherman Act. Makes clear the scope of protection given for group refusals to deal.
4. Northwest Wholesale Stationers – (100 office supply retailers create wholesale purchasing cooperative, anyone can buy, but only members get rebates. Pacific Stationary operated at retail and wholesale, eventually excluded from the Coop). Court moves away from per se analysis for group boycotts. Given the substantial possible efficiencies associated with purchasing cooperatives, it would be a mistake to categorically forbid such efforts. A plaintiff must make a showing of denial of access to an essential facility or that the cooperative has market power. Put differently, absent an essential facility, rule of reason analysis would apply.
5. Associated Press – (membership rules for news organizations who pool stories, can’t supply info to anyone outside the network, veto over admission of direct competitors) limitations on membership rules for joint ventures. Court imposes non-discrimination in membership rule very similar to that seen in a regulated industry.
B. Economics
1. Bylaws as an entry barrier? Very difficult for local entrant, as can’t access outside news network.
2. Bylaws as facilitating local competition? Local quarantine would solve the problem.
3. Natural monopoly/public utility?
4. Creates nondiscrimination duty
VIII. Efforts to Influence the Government
A. Cases
1. Noerr – (public campaign against truckers) An antitrust immunity for collective efforts to influence government policy.
2. Allied Tube – (NEC steel industry stacked vote against PVC) private standard setting under National Electrical Code. Court takes a narrow view of Noerr-Pennington immunity.
3. Parker – (Calif Agric Prorate Act authorized establishment of raisin marketing program) Important federalism considerations will narrow the scope of the Sherman Act.
4. Midcal – (CA established retail liquor program, but played no direct role in setting or evaluating prices) The two part test
a. The challenged restraint must be one clearly articulated as part of state policy
b. The State must actively supervise the program
In this case, there was no oversight by the state and they failed part 2 of the test
5. Southern Motor Carriers – (motor common carriers create collective rate bureaus, rates become effective if commission takes no action within specified period) addresses the specificity required for a state articulation of policy. Negative option case. Government conceded “active supervision.” Probably would have been different if government had not conceded. However, state was fairly clear in its regulatory program.
6. Ticor – (title insurance rating bureau licensed by state to establish joint rates, negative option adoption) Concludes that the possibility of a veto by the state after delegation to rating bureaus is not sufficient supervision to meet the Midcal test. State supervision must be actual, and not merely possible or hypothetical.
IX. Vertical Arrangements
A. Cases
1. Dr. Miles – Condemning minimum resale price maintenance as a per se violation of Section 1.
2. Colgate – Section 1 only triggered by a contract. Hence, an announcement by a manufacturer that any retailer selling below a particular price would be terminated did not violate Section 1.
3. Schwinn – If title remained with the manufacturer, the retailer should be understood simply to be an agent of the manufacturer and, this would be subject to rule of reason. If title passed, per se test: “It is unreasonable without more for a manufacturer to seek to restrict and confine areas or persons with whom an article may be traded after the manufacturer has parted with dominion over it.”
4. GTE Sylvania – (Sylvania has program that limits where retailers can market geographically) Non-price vertical restraints are now treated under rule of reason analysis. The case emphasizes the free-riding issues that can arise among retailers, and the need for a manufacturer to create incentives at retail level for the provision of services.
5. Monsanto – (Small soybean producer does new distribution program, terminates Spray-Rite) illustrates the jurisprudential difficulties of maintaining Dr. Miles and Colgate in its examination of the evidentiary showing required when manufacturer has terminated a dealer after complaints by other dealers. Court emphasizes that there must be evidence that excludes the possibility of independent action by the manufacturer.
6. Sharp Electronics – (Hartwell complains to sharp about BEC’s pricing, and Sharp terminates BEC) Non-price vertical restraints are to be looked at under the rule of reason in a case looking at exclusive distribution agreements.
7. State Oil Co – Maximum resale price maintenance should be subject to rule of reason analysis. Overrules Albrecht.
B. Economics
1. Marginal Revenue – TR = P x Q, take derivative with respect to Q.
2. Stacked Monopolies – Double Marginalization – this is the harm of stacked monopolies. What drives this is that the retailer makes its decisions based on the costs it faces – the wholesale price plus its marginal retail costs – rather than the actual cost of producing a unit of a good. It ignores the profits that that difference creates for the monopolist manufacturer when it makes its purchasing decisions. Our monopolist manufacturer is indifferent between an integrated vertical monopoly and a manufacturing monopoly coupled with a competitive retail sector, but loses much if we stack separate monopolies.
X. Single Firms: Monopolization and Market Definition
A. Cases
1. Alcoa – (huge case, virgin and secondary ingot, builds large plants to process ingot in anticipation of demand) J. Hand is careful to distinguish monopoly from monopolizing under Section 2. He blames Alcoa for anticipating market demand and building plants ahead of that demand. J. Hand says in footnote that 90 percent is a monopoly, 30 percent is not, but fuzzy in between. “It may not have achieved monopoly; monopoly has been thrust upon it.” “Origin of monopoly may be critical in determining its legality.” “Size does not determine guilt” . . . “there must be some exclusion of competitors.” The successful competitor, having been urged to compete, must not be turned upon when he wins.”
2. Dupont (Cellophane) – (Dupont has 75% of cellophane market. Cellophane is 20% of flexible packaging materials market) How should a market be defined? Court focused on the cross-elasticity of demand between cellophane and other flexible packaging materials. That focus is too limited. It ignores the fact that products may appear to be good substitutes in part because the good in question is priced at monopoly levels. This also ignores the possible supply response. The Court focuses, in the end, on the functional characteristics of cellophane and other flexible packaging materials.
B. Economics
1. Strategic Entry Deterrence – An incumbent commits to capacity by sinking costs in an effort to deter entry that would otherwise result. The potential entrant may be conferring a benefit on consumers, but may have little ability to recover a chunk of that benefits, especially in the face of committed capacity.
2. Cross-Elasticity of Demand – the percentage change in quantity of good 1 divided by the percentage change in price of good 2.
3. Lerner Index – Understanding Market power – “Monopoly power is the power to control prices or exclude competition.” L = P-MC/P = 1/E. In a competitive market, price should equal average cost that should equal long-run marginal cost, so the Lerner Index would be zero. Put differently, in a competitive market, the demand curve is quite elastic, and this pushes the Lerner Index to zero.
XI. Predatory Pricing
A. Cases
1. Brooke Group – (ogilopolistic cigarette industry with six firms, lock step increases, twice a year, competition in generic market) Brown’s conduct could not injure competition in that it was unlikely to result in price coordination and sustained above-competitive pricing in the generic segment. As a lockstep price increase pattern was ultimately established in the generic segment, this is difficult to understand.
a. Price below “appropriate” measure of costs
i. Parties use “average variable cost”
ii. Court again declines to resolve circuit split on this
b. Dangerous probability of “recouping” investment in below-cost prices.
B. Economics
1. A firm with monopoly power reduces prices in the short run below some measure of cost to drive a competitor from the market with the plan of raising prices after exit to recoup the first-stage losses.
2. Average variable cost is generally used.
3. Error costs imposed by aggressive predatory pricing regime.
4. Railroad as a Business Proposition – difficulties of assigning common costs. True of common costs and of common variable costs.
5. Two-Period Reputation Model – Crazy firms and sane firms. Outcomes depend on parameter values. In some cases, we would not observe predation by rational firms. In other cases, rational firms would predate to mimic the crazy firm and this would be expected to work. Key assumption: multiple types of firms exist and Entrant cannot identify the incumbent’s type.
XII. Tying and Forcing
A. Cases
1. Jefferson Parish – (Exclusive contract for anesthsiological services between hospital and Assoc, drop exclusivity in 1976 but both remain exclusive). The fact that they aren’t sold separately isn’t enough. The Court focuses on the character of the demand for the services. See if there is a distinct product market in which it is efficient to offer anesthesiological services separately from hospital services. Do consumers want to create the combined product themselves or do they just want to purchase an integrated package from the hospital? Separateness. “Thus, in this case no tying arrangement can exist unless there is a sufficient demand for the purchase of anesthesiological services separate from hospital services to identify a distinct product market in which it is efficient to offer anesthesiological services separately from hospital services.”