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School:Duke University School of Law

Course:Antitrust

Year:Fall, 2005

Professor:Barak D. Richman

Text:Trade Regulation Cases and Materials (University Casebook Series), 5th Ed.
Text Authors:Robert Pitofsky, Harvey J. Goldschmid, Diane P. Wood

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Antitrust

Prof. Richman, Fall 2005

Causes of Action:

Restraint / Harm
Monopoly / P>MC; rent-seeking
Horizontal agreements / collusion (i.e., cartels)
Horizontal mergers / facilitate collusion, unilateral exercises of market power
Vertical agreements
Distribution agreements / facilitate dealer cartels
Tying agreements / raise barriers to entry
Vertical mergers / raise barriers to entry
  1. Monopolization
  2. Attempted monopolization
  3. Horizontalagreements
  4. Vertical(distribution) agreements
  5. Tyingarrangements
  6. Horizontal mergers
  7. Vertical mergers

Defenses

  1. Comity
  2. State action immunity
  3. Municipal immunity
  4. Petitioner immunity

Authority for the Principles of Antitrust

The two critical questions. The answers to these two questions define one’s antitrust ideology: (1) How well do markets function? I.e., how often do markets deviate from the perfect competition model? (2) How well can courts intervene to correct market failures? I.e., how well can courts understand the economy and then prescribe solutions? (Imagine a Cartesian plane of answer sets.)

Possible norms. Maximize allocative efficiency. Prevent wealth transfers from consumers. Protect the independence of small business. Disperse economic (and thus political) power.(“Another goal of the framers of the Sherman Act was to protect the right of any person to enter and pursue a line of work or business.”). Sullivan & Grimes, The Law of Antirust CB 3-4; but see Sylvanian.33.

ChicagoSchool norms. Before Bork and Co., antitrust was incoherent. The ChicagoSchool defined the norms of antitrust. Slyvania n. 33. Antitrust is concerned with “the policy of advancing consumer welfare.” Bork, A Policy at War with Itself, CB5. Apparently, “advancing consumer welfare” means maximizing allocative efficiency, with little if any attention to dynamic efficiency. Sherman Act did not intend antitrust policy include political values (see infra). Id. The reason to obsess about allocative efficiency, at the expense of other values, is that the judiciary cannot be trusted to balance so many values. That balance is just too legislative in nature.

Post-ChicagoSchool critique. “[I]t argues that many formulations of the past twenty years [i.e., the Chicago School] are too reliant on theory – and simplistic theory at that – with the result that important issues are overlooked and incorrect conclusions are drawn. It contends that many practices must be evaluated in light of facts specific to the case, rather than being pigeon-holed into some tidy theoretical box. [Tying arrangements are a perfect example of the hazards of typing into pigeon-holes.] And it is far more skeptical of the ability of the market to discipline firms and thereby negate the anticompetitive potential of mergers and various practices.” Kwoka & White, The Antitrust Revolution, CB12. These [a]lternative goals may on occasion be used as tie-breakers when considerations of efficiency alone do not discriminate between one result and another.” Sullivan, Book Review, Trade Regulation.

Political values as antitrust policy. “It is bad history, bad policy, and bad law to exclude certain political values in interpreting the antitrust laws.” Pitofsky, The Political Content of Antitrust, CB7. Antitrust should be concerned that (1) concentration of economic power will cause antidemocratic political pressures [e.g., Ford, GM], (2) concentration of economic power threatens individual autonomy [i.e., the Individual qua Attempter], (3) popular backlash against economic concentration will cause greater state involvement in economy [e.g. the early 20th-century trust-busting bonanza]. Id.

Stare decisis and precedent in antitrust. Precedent is less important in antitrust. Antitrust doctrine effectively rests on judicial notice of legislative facts about how the economy works. When the Supreme Court discovers that one of its judicially-noticed facts was false, it must adjust its precedent accordingly without regard to stare decisis. State Oil (overturning Albrechtper se rule on maximum price maintenance after a detailed competitiveness analysis). Jefferson Parish (questioning International Salt’s understanding that “tying arrangements serve hardly any purpose beyond the suppression of competition”, with O’Connor most directly challenging the Salt legislative fact); Northwest Wholesale (carving out an exception to per se illegality of concerted refusals to deal by distinguishing types of agreements); Sylvania (overturning Schwin and reinstating the rule of reason for non-price vertical agreements, recognizing the tradeoff between harm to intrabrand competition and benefits to interbrand competition from the agreements).

Institutional competence. The Judiciary is capable of doing good economic analysis (i.e., competitiveness analysis). State Oil (rejecting Albrecht doctrine after involved competitiveness analysis); NCAA (analyzing whether Δ’s proffered procompetitive justifications were an economic reality); Northwest Wholesale (analyzing the effects of wholesale cooperatives to deem them procompetitive); CDA (placing faith in the ability of lower courts to weigh the procompetitive justifications against the anticompetitive effects); Goldfarb (asserting that professional services are different and that courts are capable of determining when a professional organization goes too far); Sylvania (subjecting non-price vertical agreements to rule of reason, commissioning courts to weigh the harm to intrabrand competition against the benefit to interbrand competition from such agreements). On the other hand, too much analysis “sucks the judiciary into an economic riptide of contrived market forces.” Visa at 398.

Autonomy of independent businessmen. Antitrust is not concerned with the freedom of independent businessmen. Sylvanian. 33 (rejecting White’s dissent, which argued antitrust should consider the interests of businessmen qua independent actors); but see Business Electronics at 698 (“[T]he per se illegality of vertical restraints would create a perverse incentive for manufactures to integrate vertically into distribution, an outcome hardly conductive to fostering the creation and maintenance of small business.”).

The stability of cartels. “Cartels are neither easy to form nor easy to maintain.” Business Electronics at 699. A key difference between Chicago and Post-ChicagoSchools is their assumption of the stability of cartels (a critical motif of the class). E.g., this difference rationalizes the schools’ departure on null hypothesis on effects of RPM agreements.Cartels are stable if the negotiation and policing of a cartel is not costly, i.e., if there are few competitors, market demand is inelastic, there are high barriers to entry (see supra), there is perfect market information (e.g., prices are publicly announced), products are homogenous, and the cartel members control a large market share, are the same size, and have the same production technology.

Barriers to entry. Another key difference between Chicago and Post-ChicagoSchools is their assumption on the pervasiveness of barriers to entry. Barriers to entry include:government-entry restrictions (e.g., licenses, patents); sunk costs; economies of scale; network/lock-in effects; customer loyalty; slow speed of entry (due to nature of production function); product differentiation;

Non-efficiency considerations matter. BrownUniversity. NCAA. Push on this authority as support for the proposition that the mom and pop qua little guys matter, e.g. as cultural artifacts, the harm of which creates a negative externality that should be cognizable at antitrust law.

Information costs matter. Costs of collecting information / information asymmetries are an important fact of which the Court must take judicial notice when doing competitiveness analysis. Kodak (finding that life-cycle pricing was too expensive for consumers to do, causing a deviation from the perfect competition model, thereby opening a space for judicial intervention); CDA at 282 (noticing the information asymmetries disadvantaging consumers as a possible rationale for professional organization’s ban on competitive advertising).

Reluctance to adopt per se rules. We should only attachper se liability to a practice after sufficient judicial experience to be well-acquainted with the likely effects of the practice. Business Electrics at 699 (“there is a presumption in favor of a rule-of-reason standard”). White Motor (holding S.Ct. did not know yet enough about the nature of non-price vertical restraints, here an exclusive territorial market, to adopt a per se rule against such agreements). State Oil at 636 (“[W]e have expressed reluctance to adopt per se rules with regard to ‘restraints imposed in the context of business relationships where the economic impact of certain practices is not immediately obvious.’”) (quoting IFD). Sylvaniaat 658 n. 28 (“Per se rules thus require the Court to make broad generalizations about the social utility of particular commercial practices. The probability that anticompetitive consequences will result from a practice and the severity of those consequences must be balanced against the procompetitive consequences. Cases that do not fit the generalization may arise, but a per se rule reflects the judgment that such cases are not sufficiently common or important to justify the time and expense necessary to identify them. Once established, per se rules tend to provide guidance to the business community and to minimize the burdens on litigants and the judicial system of the more complex rule of reason trials, but those advantages are not sufficient in themselves to justify the creation of per se rules. If it were otherwise, all antitrust would be reduce to per se rules, thus introducing an unintended and undesirable rigidity in the law.”).

Rationale for per se rules. Per se rules cabin in judicial discretion, helping us to navigate and limit the “sea of doubt.” Where a practice usually results in significant adverse competitive effects, rarely is justified by significant redeeming virtues, and when there are often less restrictive alternatives available, there is no reason for an extended trial. The importance of the per se rules should not be underestimated. SCTLAat 374 (“The administrative efficiency interests in antitrust regulation are unusually compelling. The per se rules avoid ‘the necessity for an incredibly complicated and prolonged economic investigation … to determine at large whether a particular restraint is unreasonable.”). The per se rule is not merely a product of administrative convenience. SCTLA at 375 (“The per se rules also reflect a long-standing judgment that the prohibited practices by their nature have a ‘substantial potential for impact on competition.’”). SCTLA at 376 (“In part, the justification for these per se rules is rooted in administrative convenience. They are also supported, however, by the observation that every speeder and every stunt pilot poses some threat to the community.”). Northwest Wholesalers at 357 (“This per se approach permits categorical judgments with respect to certain business practices that have proved to be predominantly anticompetitive. Courts can thereby avoid the ‘significant costs’ in ‘business certainty and litigation efficiency’ that a full-fledged rule-of-reason inquiry entails.”). Generally, beware analysis that “sucks the judiciary into an economic riptide of contrived market forces.” Visa at 398.

Monopolization (Sherman § 2)

Δ is liable for monopolization if Δ (I) possesses monopoly power in the relevant market and (II) engaged in exclusionary conduct to acquire or maintain that monopoly power. Grinnell (S.Ct.1966); Aspen Skiing (S.Ct.1985).[1]

Policy. (1) Monopolies cause allocative inefficiency (P > MC). (That deadweight loss is small, often less than antitrust enforcement costs. Romer.[2]) (2) A second deleterious effectis rent seeking: an aspiring monopolist will expend resources to acquire and maintain a monopoly. Baxter (discussing Posner).[3] (3) The shift of consumer surplus to the producer is relevant if distribution matters to antitrust. (4) Also, the costs of monopolies might be greater in a “second-best world with fixed costs.” Romer, New goods, Old theory.[4] (5) Last, monopolies might discourage innovation, i.e.,cause dynamic inefficiency. Porter, Competition and Antitrust.[5] Despite all this, antitrust policy should remain circumspect in attacking monopolies. (6) Economies of scale sometimes lead to “natural monopolies” so that allocative efficiency is in tension with the above policies. (7) Moreover, the pervasiveness of barriers to entry is questionable, meaning monopolies might not be stable (e.g. IBM), and thus the return on scarce law enforcement resources might be small (because monopolies cause little consumer welfare loss, but enforcement is expensive). There is thus an ambivalence about vigorous competition. That ambivalence pervades all antitrust. The goal is to filter out the bad competition while encouraging the good competition.

I. Does Δ have monopoly power in the relevant market?

Rule. A firm has “monopoly power” if it can profitably raise price“substantially” above the competitive level. E.I. du Pontat 152 (“Monopoly power is the power to control prices or exclude competition.”).

Policy. It is key to understand that the determination is not whether Δ is “big.” The determination is whether Δ can profitably raise prices. There are lots of big firms without monopoly power.

Evidence. Monopoly power can be proven by direct or circumstantial evidence. Direct evidence that the firm has substantially raised price above the competitive level proves the existence of monopoly power. Alternatively, in the absence of such direct evidence, market structure is circumstantial evidence of monopoly power. Proof by circumstantial evidence starts with (A) a definition of the “relevant market,” followed by (B) a finding of the firm’s market share. Grinnell (The “existence of [monopoly] power can be inferred from the predominant share of the market”). However, any inference of monopoly power on the basis of market share can be precluded by (C) a showing of other relevant evidence, e.g., low barriers to entry. Ball Memorial; Microsoft at 772.

A. What is the relevant market?

See infra Market Share.

B. Does D have a predominant market share in the relevant market?

Rule. 70% - 80% is probably the minimum. Alcoa implies that 60% is “doubtful” and 33% is certainly not enough. Grinnell found monopoly power when 87%.

C. If yes, does other evidence preclude an inference of monopoly power?

Rule. (1) The absence of barriers to entry precludes an inference of monopoly power on the basis of market share. Ball Memorial; Microsoft at 772. (2) Countervailing buying power, e.g. a monopsony, precludes an inference of monopoly power.

Policy. Without barriers to entry, market share does not imply monopoly power. If Δ attempts to raise price above competitive level, i.e., exercise monopoly power, then entrants will enter to undercut Δ. Buying power resists monopoly power.

Evidence of barriers to entry. Has there been frequent entry in the past? Do market participants have specialized technology functions so that entry is difficult?

Abnormal profits. Alternatively, Δ’s excessive profits in the past would rebut any evidence tending to preclude an inference of monopoly power on the basis of market share.

II. Did D engage in“exclusionary conduct”[6](to acquire or maintain monopoly power)?

Rule. An act is exclusionary if its anticompetitive effects outweigh any legitimate procompetitive justifications.” A determination of whether conduct is “exclusionary” follows a three-step burden shifting approach. Microsoft. (A) First, Π must establish that the conduct had an anticompetitive effect. (B) If Π meets this threshold, Δ may rebut with a showing that the act had a procompetitive justification, e.g. increased efficiency. (C)If Δ meets this burden, Π may then show that the procompetitive benefit was outweighed by the act’s anticompetitive effect under an balancing test similar to § 1 “rule of reason.” Microsoft;Standard Oil. Throughout this analysis, only the conduct’s effect, and not its intent, are relevant, although intent is probative of the conduct’s probable effect. Aspen Skiing.

Policy. Monopolizing conduct, not monopoly status, is illegal. The central problem is to sort good vigorous competition from monopolizing conduct. This ambivalence toward vigorous competition pervades all antitrust doctrine, especially § 2.

Natural monopolies. Whether Δ was “the passive beneficiary of a monopoly,” Alcoa at 139, is relevant to whether there was “exclusionary conduct.” Grinnell (S.Ct.1966) at 175 (defining exclusionary conduct as “the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of superior product, business acumen, or historic accident”); Alcoa at 138 (“[I]t is unquestionably true from the very outset the courts have at least kept in the reserve the possibility that the origin of a monopoly may be critical in determining its legality.”).

A. Π: Did the conduct have an anticompetitive effect?

Rule. An act has an “anticompetitive effect” if it harms the competitive process by making it more difficult for competitors to operate or enter. The relevant harm is harm to consumers; harm to competitors is irrelevant. Spectrum Sports[7]; Brooke Group.

These types of conduct have been found “anticompetitive”:

  • Below-cost predatory pricing.