Antitrust Outline
Fall 2006
1)Introduction
a)The U.S. Statutory Framework: The Sherman Act (1890)
i)§ 1 Sherman Act: Collusion
(1)Every contract, combination . . ., or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony.
ii)§ 2 Sherman Act: Monopolization
(1)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. . .
(a)Fine for corporation: $100,000,000
(b)Fine for individual: $1,000,000; 10 years in prison
iii)Clayton Act
(1)Robinson-Patman Act (a): It shall be unlawful for any person engaged in commerce,… to discriminate in price between different purchasers of commodities of like grade and quality, …where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line of commerce, or to injure, destroy, or prevent competition with any person who either grants or knowingly receives the benefit of such discrimination, or with customers of either of them
b)Why Antitrust (Competition) Law?
i)Hand—social and moral effect—good for economy to be diverse and everybody doesn’t have to work for somebody else. They can be creative and have the satisfaction of being one’s own boss. Looking at the pervasive impact on society, not consumer choice, efficiency.
ii)Lande—economic but concerned about the distribution of wealth rather than efficiency (excessive prices). He was concerned about the transfer of wealth from consumers to producers (decrease consumer surplus/increase producer surplus).
iii)Posner—monopolists may incur higher costs in order to maintain a monopoly → these costs do not go to benefit consumers but to maintain the monopoly. (lobbying costs, preventing others, etc.)
iv)Bork—concern for consumer welfare and productive efficiency dominated the original intent of Congress in making competition laws.
v)Pitofsky—believed Congresses intent was not purely economic, but that Congress feared that excessive concentration of economic power will breed antidemocratic political pressures; did not want private discretion by a few in the economic sphere to control the welfare of all.
2)Single Firm Conduct:
a)Market Power: Monopolization and Abuse of Dominant Position
i)Microsoft Litigation in the U.S.
(1)U.S. v. Microsoft (monopoly maintenance [OS], attempted monopoly [IE], Tying [OS and IE])
(a)Attempted monopoly
(i)The offense of monopolization has 2 elements: (1) the possession of monopoly power in the relevant market; and (2) the willful acquisition or maintenance of that power. U.S. v. Grinnell Corp. (1966)
- Monopoly power may be inferred from a firm’s possession of a dominant share of a relevant market that is protected by entry barriers (factors that prevent new rivals from timely responding to an increase in price above the competitive level).
- Applications barrier to entry
(ii)§ 2 violation proof structure:
- Monopolists act must have an anticompetitive effect
- P has burden of showing that the conduct has the requisite anticompetitive effect (harm competition, not just a competitor)
- Δ may proffer a procompetitive justification for its conduct
- If this justification goes unrebutted, P must show that the harm outweighs the procompetitive benefit
(iii)Causation
- P doesn’t have to provide direct proof.
- Causation may be inferred when exclusionary conduct is aimed at potential competitors.
(b)Attempted monopoly—P didn’t really make this case.
(2)Market Definition
(a)Market Definition Problem
(b)U.S. v. E.I. DuPont de Nemours & Co.
(i)The relevant market includes all products reasonably interchangeable by consumers for the same purposes.
- Cellophane fallacy: opinion has been criticized for starting at the wrong cost benchmark for analyzing substitutionability. SC failed to consider the firm has already exercised monopoly power by raising the prices above the competitive level.
(c)Eastman Kodak Co. v. Image Technical Services Inc. (1992)
(i)A single brand can constitute a relevant market.
ii)Microsoft Litigation in the European Community
(1)European Competition Law: The EC Treaty (1975)
(a)Article 81:
(i)All agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between MemberStates and which have as their object or effect the prevention, restriction or distortion of competition within the common market shall be prohibited.
(b)Article 82:
(i)Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited
(2)European Competition Law: The European Commission
(a)Microsoft before European Commission (Sun Interoperability and WMP Bundling)
(i)Market definition:
- Look at demand side sub (determined by products characteristics, prices, and intended use) and, when its effects are equal to those of demand sub in terms of effectiveness and immediacy,
- Consider supply side sub (suppliers can respond to SSNIP of the relevant product in the short term—SSNIP test and consider barriers to entry).
- Geographic market—the area in which the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogenous and which can be distinguished from neighboring areas because of the conditions of competition are appreciably different in those areas.
- Network effects
(b)United Brands v. Comm’n (1978)
(i)Dominant position—position of econ strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, its customers, and ultimately of the consumers.
(c)Hoffman-la Roche & Co. v. Comm’n (1979)
(i)Dominant position different than a monopoly because it doesn’t necessarily preclude competition, but enables the undertaking to have a significant influence on the conditions under which competition develops.
(ii)AKZO—market shares of 50% or more are evidence of a dominant position.
(d)Europemballage Corporation v. Comm’n(Continental Can) (1973)
(i)ECJ reversed Commission decision for failing to take into account the ease of entry for other suppliers in the market (supply side sub)
b)Anticompetitive Conduct
i)U.S.
(1)U.S. v. Aluminum Co. of America (ALCOA)
(a)The origin of a monopoly may be critical to determining its legality.
(b)Must be active—can’t be punished for superior skill, foresight, and industry.
(c)To fall within § 2, a monopolist must have both the power and the intent (but not specific intent because no monopolist monopolizes unconscious of what it is doing) to monopolize.
(2)U.S. v. Griffith—a person has violated § 2 if it has (a) the power to exclude competition; and (b) has exercised it, or has the purpose to exercise it.
c)Tying
i)U.S.v. Microsoft (IE tied to OS)
(1)Examined § 1 tying violation under R of R rather than per se since it is a new technology.
(a)R of R lets the Δ of newly integrated products show that an efficiency gain from its tie offsets any distortion of consumer choice.
(2)4 elements to a per se tying violation:
(a)Tying and tied goods are two separate products
(i)Jefferson Parish (consumer demand test)—there must be separate demand for the two products so that it may be efficient to offer the two separately.
- The less of a separate demand, the more it can be assumed that the tying arrangement increases efficiency (balancing against the reduction in consumer choice).
(ii)Indirect cindustry custom test—look at firms who, unlike Δ, have not integrated the tying and tied goods and balance the efficiencies.
(iii)The consumer demand test is backward looking, so it is not appropriate when new and innovative integration is in question.
(b)Δ’s have market power in the tying product
(c)Δ affords consumers no choice but to purchase the tied product from it; and
(i)Either by literally only selling the two products together or through pricing.
(d)The tying arrangement forecloses a substantial volume of commerce.
ii)Microsoft before European Commission (WMP tied to OS)
(1)4 elements of tying Art. 82 violation:
(a)2 separate products;
(i)Comm’n rejects MS’s integrative approach argument saying there are two separate markets where there are independent manufacturers of the two products indicating separate consumer demand and a distinct market.
(ii)The non-insignificant consumer demand for media players overcame MS’s argument that this was a new innovation with unexplored efficiencies.
(b)Dominance in the tying market;
(c)Undertaking doesn’t give customers choice to obtain the products untied; and
(d)Tying forecloses competition.
(2)MS got to offer procompetitive justifications, but they were not enough
iii)Eurofix-Bauco v. Hilti (1987)
(1)Tying case (nails to nail guns—one: many tying arrangement)
(a)The concern is mainly about metering prices.
(b)Preserved dominant position in nails by leveraging its dominant position in nail guns.
(c)Allowed to present justifications, but still found in violation.
d)Exclusionary Practices and Abuses
i)Refusals to Deal—“essential facilities doctrine”: Single firms usually have an option to choose whether and with whom to deal, but the essential facilities doctrine is a (very narrow) exception to this rule; however concerted refusals to deal (“group boycotts”) are presumed to be anticompetitive and thus subject to the per se rule under § 1 Sherman Act.
(1)U.S. v. Colgate
(a)The Colgate Doctrine: “[I]n the absence of any purpose to create or maintain a monopoly a manufacturer engaged in private business may exercise his discretion as to parties with whom he will deal, and may refuse to sell to those who will not maintain specified resale prices.”
(2)MS before EC (interoperability)
(a)Although the Commission did not explicitly state it, its decision that MS abused its dominant position by refusing to provide information necessary for competing server software providers to interact with Windows was based on the “essential facilities doctrine.”
(3)U.S. v. Terminal Railroad Ass’n (1912)—Origin of the EFD
(a)Facts: Ass’n of 14 RR’s acquired access to all Mississippi River bridges, car ferries, and terminal facilities at STL. Ass’n determined the conditions under which access would be granted, but nonmember RR’s had not been excluded or charged more.
(b)Claim: Gov’t sought dissolution of ass’n as a combination in restraint of trade in violation of § 1 Sherman Act.
(c)Terminal Railroad “transcended its heritage as a combination (Section1) case. It became the paradigm for essential facility duties… it had the duty to grant reasonable access to competing railroads. If it denied such access, it could only be to impose costs on competitors.”
(d)This case could have been a characterized as a “concerted refusal to deal” or classic boycott case or as an unlawful combination (what the gov’t argued).
(4)Otter Tail Power Co. v. U.S.—EFD applied to single firm
(a)Public Utility was a natural monopoly (marginal costs declined over a substantial range of output so that duplication of facilities would have raised unit costs of output)
(b)OT’s lines were needed to transmit power into municipalities it wasn’t serving; it refused to do so.
(c)Found in violation of § 2 holding access to those lines were necessary.
(5)Hecht v. Pro-Football, Inc.—first U.S. case in which the term “essential facility” was actually used.
(a)Redskins RFK stadium case.
(b)“Within the "essential facility" doctrine, to be ‘essential,’ a facility need not be indispensable; it is sufficient if duplication of the facility would be economically infeasible and if denial of its use inflicts a severe handicap on potential market entrants.”
(6)MCI Communication Corp. v. AT&T—first serious effort to delineate the elements of this doctrine.
(a)Another natural monopoly case where AT&T denied MCI access to its lines which were necessary to connect some of MCI’s users.
(b)“Elements necessary to establish liability under the essential-facilities doctrine for a refusal to deal are:(1) control of the essential facility by a monopolist; (2) competitor's inability practically or reasonably to duplicate the essential facility (Hecht);(3) denial of the use of the facility to a competitor; and (4) feasibility of providing the facility to the competitor.”
(c)“Monopolist's refusal to deal may be unlawful because its control of an essential facility can extend its monopoly power from one stage of production to another and from one market to another.”
(7)Aspen Skiing Company v. Aspen Highlands Skiing Corporation
(a)“The offense of monopolization under § 2 of the Sherman Act has two elements: (1) the possession of monopoly power in a relevant market, and (2) the willful acquisition, maintenance, or use of that power by anticompetitive or exclusionary means or for anticompetitive or exclusionary purposes.”
(i)First element not challenged by Aspen Skiing.
(ii)Second element: Ski Co’s “exclusionary" or "anticompetitive "predatory" act? Refusal to continue joint arrangement with competitor
(b)Lorain Journal Co. v. U.S.—discussing limitations to the (qualified) right of refusal to deal (newspaper advertising scheme): “The right claimed by the publisher is neither absolute nor exempt from regulation. Its exercise as a purposeful means of monopolizing interstate commerce is prohibited by the Sherman Act.” (Cf.Colgate Doctrine)
(c)Intent: “[E]vidence of intent is merely relevant to the question whether the challenged conduct is fairly characterized as ‘exclusionary’ or ‘anticompetitive’--to use the words in the trial court's instructions--or ‘predatory,’” but, "no monopolist monopolizes unconscious of what he is doing."
(d)Rule from Aspen/Kodak: a firm with monopoly power violates Sherman Act § 2 if it excludes rivals from the monopolized market by restricting a complementary or collaborative relationship without an adequate business justification.
(i)This rule does not require proof of harm to competition; harm is inferred if the dominant firm exploits a complementary or collaborative relationship to exclude and the dominant firm's proffered business justification is insufficient.” (cf. predator pricing)
(e)Court says in FN: “Given our conclusion that the evidence amply supports the verdict under the instructions as given by the trial court, we find it unnecessary to consider the possible relevance of the ‘essential facilities’ doctrine….”
(8)Verizon Communications v. Trinko
(a)DOJ and FTC amicus brief supporting: “some courts of appeals have developed an ‘essential facilities’ doctrine divorced from traditional antitrust requirements, including proof of exclusionary conduct,”
(b)Distinguishes Aspen—in that case Δ unilaterally terminated voluntary (thus presumably profitable) course of dealing with rivals and were unwilling to renew the ticket even if compensated at retail price.
(i)“In Aspen Skiing, what the defendant refused to provide to its competitor was a product that it already sold at retail…. In the present case, by contrast, the services allegedly withheld are not otherwise marketed or available to the public.”
(ii)Monopolists must engage in anticompetitive conduct to be found unlawful (but cf. MS interoperability issue in EC).
(iii)Court worried about lessening incentives to invest in economically beneficial facilities.
(c)Put EFD on life support: “We have never recognized such a doctrine… and we find no need either to recognize it or to repudiate it here.”
(9)Refusal to Supply in the EU
(a)Microsoft: Interoperability issue: MS abused dominant position by refusing to provide the information necessary for competing sever software providers to interact with Windows.
(i)Did not use term “EFD” but relied on case law embodying it
(ii)MS’s refusal to supply constituted a disruption of previous levels of supply.
- Two key elements of MS’s behavior being anticompetitive:
- MS enjoys a position of extraordinary market strength;
- Access to the supply in question is of significant competitive importance in this market (there are no substitutes).
- (Not necessary probably, but important) Refusal to deal enabled MS to gain a dominant position in the w-g server market.
(b)Commercial Solvents
(i)Abuse of dominant position if:
- Has a dominant position; and
- Refusal to supply risks eliminating all competition on the part of the person that is being refused.
(c)Magill (see Antitrust and IP below)
ii)Predatory Pricing
(1)United States
(a)Barry Wright Corp. v. ITT Grinnell Corp. (1st Cir.)
(i)Facts: Snubbers; looking at whether Pacific maintained its monopoly position against the threat of Barry’s entry through improper means (exclusionary conduct).
- Barry points to Pacific’s: (1) offer of special discounts to Grinnell; (2) its insistence on a long-term large-volume contract: (3) and its inclusion of the special non-cancellation clause--which it claims show that Pacific acted in an exclusionary manner.
(ii)Predatory Pricing
- The difficulty in measuring costs, discerning intent, and predicting future market conditions makes it difficult to detect predatory price cutting.
- Separating goats from sheeps
- A firm has incentive if it knows (1) that it can cut prices deeply enough to outlast and to drive away all competitors, and (2) that it can then raise prices high enough to recoup lost profits (and then some) before new competitors again enter the market.
(iii)Intent—The standard is not in intent but the relation of the suspect price to the firm's costs; modern antitrust courts look to the relation of price to "avoidable" or "incremental" costs as a way of segregating price cuts that are "suspect" from those that are not.
- When costs of additional unit > price, clearly low price cannot be maintained and equally efficient competitors cannot permanently match this price and stay in business.
- Wouldn’t do this unless thought could recoup losses.
(iv) If prices are above both AC and MC they are lawful. WilliamInglis& Sons Baking Co. v. ITT Continental Baking Co., Inc. (9th Cir.)—exception to this rule: price cut is unlawful if
made to discipline or eliminate competition and enhance the firm's long-term ability to reap the benefits of monopoly power.
- p < avc presumption predatory
- p > avc, < atc P must show by preponderance of the evidence that Δ’s pricing policy is exclusionary
- p > atc plaintiff clear convincing exclusionary (Transamerica)
- Not followed here: “law is an administrative system the effects of which depend upon the content of rule and precedents only as they are applied by judges and juries in courts and by lawyers advising their clients’; i.e. even though there is an economically based argument, it is likely procompetitive price cuts could be struck down (circuit split—see FN in Brook Group SC opinion sounds like it is still over turning the 3rd element of Inglis)
- Above-cost price cuts are typically sustainable, normally desirable, and the “disciplinary cut” is difficult to distinguish in practice; so Sherman Act doesn’t make this unlawful.
(v)Court concerned with restricting price cutting too much since low price levels (competitive prices) is part of the aim of antitrust law.
- Birds in the hand v. birds in the bush
(b)Brooke Group Ltd. v. Brown & Williamson Tobacco Corp.