Chapter 27: Antitrust and Monopoly

©2001 West Legal Studies in Business. All Rights Reserved.1

Chapter 27:Chapter 27:Antitrust and MonopolyAntitrust and Monopoly

Chapter 27:Chapter 27:Antitrust and MonopolyAntitrust and Monopoly


IntroductionIntroduction

• Generally, the law encourages innovation and competition among businesses to develop and sell more appealing products to consumers.

• The law regulates conduct that leads to or tends to produce monopoly power or conduct that is a restraint of trade.

• This chapter will deal with federal laws regulating monopolies; Chapter 28 will deal with federal laws regulating activities that restrain trade.


§1: Market Power§1: Market Power§1: Market Power§1: Market Power

• “Market power” is the power of company to control the market for its product.

• The law does allow for market monopolies when a patent is issued. During the “monopoly” the patent owner is protected from competition in the market to manufacture and sell its patented product or service.


Goals of Antitrust LawGoals of Antitrust LawGoals of Antitrust LawGoals of Antitrust Law

• Market power per se is not “bad.”

• What is bad or illegal is how the market power is acquired and what firms do once they have that power.

• Antitrust laws regulate the market power of companies to promote competition.


§2: Common Law and §2: Common Law and Restraint of TradeRestraint of Trade

§2: Common Law and §2: Common Law and Restraint of TradeRestraint of Trade

• Socially beneficial business activity involves cooperation and competition.

• The law presumes freedom of contract, except when a contract is contrary to public policy, like price fixing and restraint of trade.


§3: Federal Antitrust Laws§3: Federal Antitrust Laws§3: Federal Antitrust Laws§3: Federal Antitrust Laws

• In the late 1800’s, as westward expansion continued, the common law became impotent to meet the challenges of the new industrial age.

• Companies like Standard Oil (Rockefeller) became “trusts” which began to control the entire market.

• Thus the Congress was involved in “anti-trust” legislation.


Federal Antitrust Laws Federal Antitrust Laws [2][2]Federal Antitrust Laws Federal Antitrust Laws [2][2]

• Congress responded with the Interstate Commerce Act of 1887 and the Sherman Act of 1890.

• The Clayton Act.

• The Federal Trade Commission Act authorized to prevent and correct unfair trade practices.


§§ 4: The Sherman Antitrust Act 4: The Sherman Antitrust Act §§ 4: The Sherman Antitrust Act 4: The Sherman Antitrust Act

• Section 1 and 2 contain the main provisions of the Sherman Act:– Section 1.

» Requires two or more persons, as a person cannot contract, combine, or conspire alone.

» Concerned with finding an agreement.

– Section 2.» Applies both to an individual person and to several people,

because it refers to every person.

» Deals with the structure of monopolies in the marketplace.


Restraint of TradeRestraint of Trade Restraint of TradeRestraint of Trade

• Restraint of trade is any agreement between firms that has the effect of reducing competition in the marketplace. (See Chapter 28 for more discussion.)


The Clayton ActThe Clayton ActThe Clayton ActThe Clayton Act• In contrast to the Sherman Acts broad

proscriptions, the Clayton Act deals with very specific practices:– Price Discrimination: When sellers charge

different buyers different prices for the same goods.

– Exclusionary Practices: no exclusive-dealing or “tie-in” sales agreements.

– Corporate Mergers: forbidden if it substantially lessens competition.


Federal Trade Commission ActFederal Trade Commission ActFederal Trade Commission ActFederal Trade Commission Act

• The FTC’ sole substantive area is “unfair methods of competition” or “deceptive acts or practices” affecting commerce.

• The FTC’s act is a “catchall.”


§5: Enforcement of §5: Enforcement of Antitrust LawsAntitrust Laws

§5: Enforcement of §5: Enforcement of Antitrust LawsAntitrust Laws

• The Sherman Act only applies to conduct that has a significant impact on interstate commerce. So courts presumably only have jurisdiction if the commerce is interstate.

• Can the Sherman Act regulate a “local” activity?

• Case 27.1: Summit Health v. Pinhas (1991).• The DOJ enforces the Sherman Act.


Private ActionsPrivate ActionsPrivate ActionsPrivate Actions• Under the Clayton Act a private party can sue for

treble damages (3 times the damages she has suffered) plus attorney’s fees.

• Under the Sherman Act, the Plaintiff must show:– Defendant’s antitrust violations directly or indirectly

caused injury; and

– Defendant’s actions affected protected interests of the Plaintiff.

• Case 27.2: Amarel v. Connell (1997).


§6: U.S. Antitrust Laws §6: U.S. Antitrust Laws in a Global Contextin a Global Context

§6: U.S. Antitrust Laws §6: U.S. Antitrust Laws in a Global Contextin a Global Context

• Foreign “persons” may sue U.S. companies for antitrust violations in U.S. courts, even if the violations occur outside of the U.S..

• These violations occur in the export, trade or commerce with foreign nations.


§ 7: Exemption from § 7: Exemption from Antitrust Laws Antitrust Laws

§ 7: Exemption from § 7: Exemption from Antitrust Laws Antitrust Laws

• Most statutory exemptions to the antitrust laws apply to the following areas:

» Labor.» Agricultural associations and fisheries.» Insurance.» Foreign trade.» Professional baseball.» Cooperative research and production.» Joint efforts y businesspersons to obtain legislative or

executive action.» Other.


§§ 8: Monopolies 8: Monopolies§§ 8: Monopolies 8: Monopolies

• Section 2 of the Sherman Antitrust Act deals with:– Monopolization or attempts to monopolize; and– Predatory pricing which is an attempt by a firm

to drive its competitor from the market by selling its product at prices substantially below the normal costs of production.


MonopolizationMonopolizationMonopolizationMonopolization

• Monopolization in violation of the Sherman Act requires two elements:– The possession of monopoly power; and– The willful acquisition and maintenance of the

power. United States v. Grinnell Corp. (1966)

• The U.S. Supreme Court has defined monopolization as “the power to control prices or exclude competition.”


Monopoly PowerMonopoly PowerMonopoly PowerMonopoly Power

• Exists when one firm has sufficient market power to control prices and exclude competition.


Market PowerMarket PowerMarket PowerMarket Power

• Market power is often assessed by the use of the “Market-Share” test.– As a rule of thumb, if a firm has 70% or more

of a relevant market, it is regarded as having monopoly power.

• Market includes both Product and Geographical Markets.– Case 27.3: Godix Equipment v. Caterpillar, Inc.

(1996).


Anticompetitive BehaviorAnticompetitive BehaviorAnticompetitive BehaviorAnticompetitive Behavior

• Anticompetitive behavior must be “willful acquisition of power.”

• Anticompetitive intent to monopolize is difficult to prove.

• Intent may be inferred from evidence that the firm had monopoly power and engaged in anticompetitive behavior.

• Case 27.4: Aspen Skiing Co v. Aspen Highlands Skiing Corp. (1985).


Predatory PricingPredatory PricingPredatory PricingPredatory Pricing

• Predatory Pricing is the sale of products below cost. This is problematic for government attorneys because consumers benefit from low prices, giving them greater freedom of choice. – Remember Microsoft giving away its browser?

• Predatory pricing is condemned because ultimately it leads to monopoly by driving competitors out of business.

• Case 27.5: C.B. Trucking v. Waste Management (1996).


Attempts to MonopolizeAttempts to MonopolizeAttempts to MonopolizeAttempts to Monopolize

• Firm actions are scrutinized to determine whether they were intended to exclude competitors and garner monopoly power and had a “dangerous” probability of success.– Case 27.6: Caldera v. Microsoft (1999).


Law on the WebLaw on the WebLaw on the WebLaw on the Web

• Protecting Competition in Cyberspace– U.S. v. Microsoft (1999-2000) at Findlaw.com.

• U.S. Department of Justice Antitrust Division.

• American Bar Association’s website on antitrust law.

• Legal Research Exercises on the Web

Documents

Chapter 27: Antitrust and Monopoly