QUESTION TYPE 2: ISSUE SPOTTER
2A.As of 1990, there are five major manufacturers of legal textbooks. They are listed here with their 1989-90 market shares:
Little, Brown 34%
West26%
Foundation Press19%
Matthew Bender11%
Michie 7%
Foundation Press and Little, Brown also manufacture textbooks in other fields. They sell 4% and 3% respectively of all textbooks sold in the U.S. None of the other legal text manufacturers sell more than 1/2 of 1% of American textbooks. None of the five sells more than 1% of all hardcover books.
In the summer of 1990, West decides to purchase the legal textbook division of Foundation Press. It files the appropriate paperwork with the Department of Justice. The government chooses not to challenge the transaction, which becomes effective in August.
Because of the size of its new operation, West is able to reduce its cost per text to approximately $27. While Little, Brown has a comparable per text cost, the smaller companies spend about $35 on average to produce legal texts. Each company prices its texts at an average of about $45.
In December, 1990, a marketing manager at West circulated the following memo to management:
The market shares of Michie and Matthew Bender are vulnerable. We can increase our share at their expense by playing hardball. I suggest the following four-point plan:
1) Lower prices to approximately $38 in subjects like Torts and Property where we compete with the smaller companies. Raise prices slightly in subjects where we are alone or only compete with Little, Brown.
2) Target Michie & Matthew Bender popular authors; see if we can convince them (without illegally tampering with existing contracts) to publish with us.
3) Lobby the state and federal government in favor of changes in complex statutes. We are in a better position than the smaller companies to do revisions of casebooks and statutory supplements.
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4) Do a big advertising push to law professors extolling the virtues of our lower prices, our (hopefully) new authors, and our up-to-date materials.
West adopted the plan for the 1991-92 school year. During the year, West succeeded in luring 3 popular authors away from Michie. In addition, Congress enacted several statutory changes for which West had lobbied, and West immediately published and sold appropriate statutory materials. Meanwhile, Little, Brown chose to adopt the same pricing policy as West (lowering prices where it competed with Michie and Matthew Bender; raising prices where it did not).
The percents of legal textbooks sold in 1991-92 were as follows:
West-Foundation50%
Little, Brown 36%
Matthew Bender 8%
Michie 4%
Identify and analyze the violations of the antitrust laws that arguably arise from this scenario and briefly discuss who might have standing to sue.
2B.Commercial passenger airline transportation is handled within the US by a few major carriers that operate nationwide and several small carriers that operate only in one state or region of the country. The industry has high fixed costs. The cost of aircraft and related servicing equipment and fixed personnel and management costs make up a much greater percent of the airlines' costs than do the fuel and per passenger costs associated with each flight. However, an airline must have quite a few planes to compete success-fully even on just a few routes. On the other hand, once an airline is operating, it can easily shift its planes and personnel around to serve new routes or to provide expanded service for current ones. The main cost in entering a new city is renting gate and hangar space at the airport.
One of the major "byproducts" of the airline industry is the computerized reservation system (CRS). A CRS provides travel agents with information regarding flight times and fares for all airlines and allows them to book tickets online. Four of the major airlines, Divided, National, Gamma, and Southeast, operate CRS's by compiling relevant information, inputting it on to a computer system, and leasing terminals and software to travel agents. Almost all airline bookings currently take place through CRS's.
Early in the development of CRS's, the airlines that operated them used them to gain a competitive edge by displaying their own flights first when travel agents requested information. After a federal investigation, regulations were issued limiting the ability of the carriers to discriminate to their own advantage on CRS's.
In the past few years, the American domestic passenger air transport market has undergone substantial upheaval. Several of the leading players have disappeared via bankruptcy and merger, and others are in severe financial difficulties. By the beginning of 1991, the industry was dominated by two major airlines, Divided and National. However, some individual routes were dominated by other companies. The chart on the last page lists early 1991 market shares of the key players nationwide and on several key routes.
Early in 1991, the management of Trans-America Airlines (TAA) announced that to avoid bankruptcy, it wished to sell its planes and its rights to gate space at US airports. Gamma Airlines agreed to buy the TAA assets. After reviewing the parties' Hart-Scott-Rodino filings, the federal government chose not to challenge the asset sale. Shortly afterward, TAA sold its remaining assets and dissolved.
In the two years following the merger, prices industry-wide stayed about the same on average, but there were some routes that saw changes. Prices for round-trip flights from New York to Los Angeles, for example, dropped from an average of $358 round trip in early 1991 to $298 by 1993. On the other hand, round-trip fares from Atlanta to Los Angeles which had averaged $366 in 1991 rose to about $408 by 1993. The changes in market share over the same period are laid out on the chart on the last page.
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During these same two years, a small competitor, the Grump Shuttle, made a concerted effort to expand its presence on the New York to Chicago route. By using smaller planes, more flights and reduced-price fares, Grump more than doubled its share of passenger miles on the route. The total number of flights on the route for all airlines increased 17% and the average round-trip fare fell from $259 to $198 between 1991 and 1993.
Grump's frequent schedule and fare changes made it a constant problem for CRS's, which had to input new data almost daily. As a result, Divided and Gamma independently notified Grump that they would stop including it on their CRS's unless its operations "stabilized." After several months with no change, in mid-1992 Divided announced that it would no longer carry Grump flights on its CRS. Within days of the public announcement, the other 3 CRS's dropped Grump as well. These cutoffs did not violate any existing regulations regarding CRS's. Despite this setback, Grump continued to increase its market share into early 1993, although not at the rate it had before the CRS cutoff.
It is now Spring 1993 (my, how time flies). Identify and analyze any violations of the antitrust laws that arguably arose from this scenario. The chart on the next page provides market share information and HHI calculations for your convenience. Assume my math is correct!!
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Question 2B: Airline Market Share Figures and HHI's 1991, 1993
Carrier19911993
National Commercial Airline Passenger Miles
Divided31%29%
National 27%28%
Gamma16%27%
Southeast14%11%
TAA8%--
Others 4% 5%
HHI2210 2480
New York-Los Angeles
Divided44%42%
National37%34%
TAA 19%--
Gamma--24%
HHI3666 3496
Atlanta-Los Angeles
Gamma43%67%
Divided22%20%
Southeast19%13%
TAA16%--
HHI2950 5058
New York-Chicago
National 32%26%
Divided 30%24%
Gamma14%29%
TAA14%--
Grump 10%21%
HHI2416 2534
2C.Since its deregulation in 1978, the airline industry has undergone significant changes. One of the most important has been the development of Frequent Flyer programs. Under these programs, air travellers earn bonus points for each mile they fly with a particular airline. When they acquire a specified number of points, they get free tickets or other benefits from the airline running the program. Because higher point totals yield more valuable prizes, air travellers have an incentive to become regular customers on one airline.
One important effect of the frequent flyer programs has been to alter the habits of business travellers. Encouraged by receiving benefits based on air miles they don't them-selves pay for, many business travellers prefer to book flights on their regular airlines (largely ignoring price) in order to build up mileage bonuses. American, United and Delta, which can offer foreign travel as part of their plans, and which fly to more US cities than other airlines, have been particularly successful in attracting business travellers.
An additional effect of deregulation has been the development of the hub system described in your materials. Each airline tends to charge significantly higher fares in and out of cities where it is the only major airline with a hub. A Department of Transportation official was quoted as saying the airlines "compete between their hubs, not at them."
Assume that in early 1993, the Clinton Administration brings a Section 2 action against American, Delta, and United, claiming that their use of frequent flyer programs constitutes monopolization or attempted monopolization of the markets for business travel to and from certain cities (those at which only one airline has a hub). Assume that the government produces the following evidence about conditions in the industry between 1989 and 1992:
1) The three airlines' fares for flights where the passenger stays over Saturday night at the destination city were approximately one-half the fares for flights where the passenger does not stay over Saturday night.
2) The three airlines' fares for passengers booking their flights more than 30 days in advance averaged 30% less than those booked within 30 days of the travel date.
3) At a number of major hub cities, the dominant airline had at least 60% of the domestic flights. These included San Francisco, Denver, and Orlando (United), Atlanta and Cincinnati (Delta), and Nashville, Raleigh-Durham, Dallas and San Jose (American).
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4) Fares for flights from or into each of these cities were 11% higher than the average fare for other flights of the same length.
5) Of passengers flying from or into each of these cities, the dominant airline carried over 70% of those whose travel dates did not include a Saturday night stayover and over 75% of those who booked flights less than 30 days in advance.
Discuss whether the Section 2 action is likely to succeed. Note any other information that you would find helpful in resolving the case.
2D.Americans can purchase clothing and household items from a wide variety of sources. Department stores offer wide selection and service, but charge high prices. Boutiques and specialty shops may have better offerings for consumers who know what they want, but they also can be expensive. Discount stores provide low prices, but less service and selection. Chain drugstores and mom-and-pop groceries often are open long hours, but have fairly limited selections in addition to high prices.
A recent development in American retailing is the "Mega-Warehouse store." Mega-Warehouses are very large retail establishments that sell a wide variety of consumer household products and clothing. They combine low-cost surroundings, very limited service, department store selection, and discount pricing. They maintain low prices by locating further outside urban areas than traditional malls, by limiting service personnel, and by volume purchasing. If consumers are willing to undertake what is often a considerable drive to find them, Mega-Warehouses can provide inexpensive one-stop shopping. Although a few major cities have several Mega-Warehouse outlets, most metropolitan areas have no more than two at the present time.
As of the beginning of 1993, there were several major Mega-Warehouse operations in the U.S. Although between them, they made less than 4% of all retail sales in the U.S., they each did substantial business in terms of the dollar value of merchandise sold. Their relative size is indicated on the chart below, measured as a percentage of the total retail sales made by Mega-Warehouse stores:
Paul-Mart34%
Bergacker's32%
Discount Club16%
Lhota Merchandise 13%
Thus, if Mega-Warehouse sales were defined as a market, the nationwide HHI would be around 2610 when the smaller players are included. If all retail sales constitute the market, the nationwide HHI is under 100.
Early in 1993, Discount Club and Lhota Merchandise decided to merge. They filed appropriate papers and were cleared by the FTC. The new firm, called the Lhota Discount Club (LDC), was able to get greater volume discounts in purchasing both merchandise and advertising. It thus could lower its prices even further.
McKinney's Drugs was an established drug store chain operating in several mid-Western states. Like the Mega-Warehouses, it also sold a variety of household items. Early in 1993, it announced that it was having financial difficulties. Subsequently, without communicating among themselves, Paul-Mart, Bergacker's, and LDC all began having sales on items sold by McKinney's in the areas in which McKinney's operated.
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They accompanied these sales with massive advertising. McKinney's' sales plummeted, and it closed its doors in January, 1994, after a very weak Christmas season. In the ensuing year, all three of the Mega-Warehouse stores raised their prices above pre-sale levels in the areas where McKinney's had been.
Gonzalez & Gonzalez (G&G) is a drugstore chain similar to McKinney's. It operates in the Southwestern United States. Earlier this year, it announced it was having financial difficulties. Shortly thereafter, Paul-Mart, Bergacker's, and LDC all began sales in their stores in and around cities where G&G has stores, accompanied by extensive advertising. G&G felt particularly threatened by LDC because a majority of the Mega-Warehouse stores that seem to compete directly with G&G are LDC stores. Thus, G&G filed suit under Clayton Act Section Seven (15 U.S.C. ss18) challenging the merger that created LDC. The suit was filed within the applicable statute of limitations.
Discuss:
(1) Does G&G have standing to challenge the merger?
(Suggested time allotment: 15-20 minutes)
(2) Assuming G&G has standing, did the merger violate §7?
(Suggested time allotment: 40-45 minutes)
2E.One of the great one-hit wonders of the rock world in the 1980s was the band Smilin’ Salamander. In 1984, the song “No Newts is Good Newts” that the band both wrote and recorded hit the top of the charts. However, although they made four albums, no other song they recorded ever was very popular. When they broke up in 1987, the members of the band sold all rights to their songs to their manager, Les.
In 1993, “No Newts is Good Newts” was used as the theme song for 20th Century Frog’s hit movie, Amphibian Invasion and once again radio stations played the song regularly. Musicians across the U.S. searched for the sheet music, which was out-of-print. Les decided not to reissue the sheet music individually, because it would sell for merely three or four dollars for the one song. Instead, he published a book that included the music for all of the band’s songs, entitled Smilin’ Salamander: Smooth Sounds, Special Songs. Although the book did not sell as many copies as the individual sheet music would have, Les made much greater profits on the book than he would have selling the song individually.
In early 1994, Les set out to organize a sheet music song book called Greatest Hits of 1984. He negotiated with the owners of the rights of the 13 other best selling songs of 1984 to work out the details for producing the album. The rights to the second best selling song of that year, “Orwell That Ends Well,” were owned by record mogul Michael Moore. Michael and Les simultaneously were negotiating a contract for an album for one of Les’s clients on one of Michael’s record labels. The record contract fell through, and Michael instead signed a rival of Les’s client to a major contract. Subsequently, Les convinced the other participants in Greatest Hits of 1984 to exclude “Orwell That Ends Well” from the album. He also got them to agree that they would not allow their songs to be used in any other songbook for at least five years. The songbook proved to be a great best seller. Despite many requests, Les refused to issue individual sheet music for “No Newts is Good Newts” or to allow it to be used in any songbooks except the two noted here.
Although the two songbooks proved popular, they represented only a tiny fraction of the total number of songbooks sold in 1994. And although fans could not get new copies of “No Newts is Good Newts” in stores except by buying the songbooks, they had several other avenues available to them. A few copies of the song remained in circulation from the original publication of the sheet music. Musically adept fans could copy out the music after listening to the song several times. And of course many fans simply photocopied the music to the song illegally. “Orwell That Ends Well” is available to its fans in individual sheet music and in several other songbooks.