CHAPTER 1: INTRODUCTION TO ANTITRUST Doctrine Sherman Act (1890) Section 1 Every contract, combination or conspiracy In restraint of trade or commerce Among several states or with foreign nations (must have interstate effect) Is declared to be illegal Violation is a felony (originally misdemeanor and becam felony in 1894, max 10 yrs jailtime, average 2-2.5 yrs) Sherman Act- Section 2 Every person who shall monopolize OR attempt to monopolize OR combine/conspire with any other person(s) to monopolize Any part of the trade or commerce among the several states OR foreign nations (jurisdiction) Shall be guilty of a felony Sherman Act Section 4 Gives US ability to use injunctive relief instead of criminal (great discretion given to DOJ) Federal Trade Commission Act (1914) Section 5 (no criminal jurisdiction for FTC or private actions only DOJ) Unfair methods of competition In or affecting commerce And unfair or deceptive acts or practices affecting commerce Are hereby declared unlawful Enforcement (administrative, no criminal, no private right of action) Clayton Act (1914) (requires proof of competitive effects where effect may be to substantially reduce competition) Sec 4 private right of action (can recover cost of lit, attorney fees, and treble damages) Section 3 of the Clayton Act (exclusive dealings and tying contracts) Unlawful for any person engaged in commerce to lease or make a sale or contract of sale of commodities, whether patented or unpatented for use, consumption or resale within the US or any territory or fix a price charged or discount from, or rebate upon such price on the condition, agreement, or understanding that the lessee or purchaser will not use or deal in the goods, wares, merchandise or other commodities of a competitor of competitors of the lessor or seller. Where effect may be to substantially lessen competition or tend to create a monop in any line of commerce. Applies to tying (competitor sells diff product) or exclusive dealing (competitor sells same product) Both are exclusionary pratices Section 7 of the Clayton Act 15 U.S.C.A. 18 (mergers)(II.5) No person engaged in commerce or in any activity affecting commerce shall acquire directly, or indirectly, the whole or any part of the stock or other share capital and no person subject to the jurisdiction of the FTC shall acquire the whole or any part of the assets of another person engaged also in commerce or in any activity affecting commerce, where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such competition may be substantially to lessen competition, or to tend to create a monopoly. (exception for when buying stock is just for investment purposes, no voting power, legit subsidiaries Person (or corp, non-profit) Has effect on interstate commerce Where in any line of commerce (product market) In any section of the country (geographic market) Effect of such merger may be substantially to lessen competition or create a monopoly (competitive effects) may be dealing with probabilities lessen horizontal mergers (65 will always lessen) Section 8 of Clayton Act precludes gaining control of another company not by merger but by interlocking directors: no person shall, at the same time, serve as a director or officer in any two corporations (other than banks, banking assns and trust companies) that are engaged in commerce + competitors with individ profits over 10mil Local Govt Antitrust Act of 1984 eliminates SA monetary damages cases, but not injunctive actions, against local govts EC Treaty by European commission and 27 member states SUM: Who can bring suit? 50 states(+DC) + 4 US territories (on behalf of citizens/company in state) fed law for injunc relief/state law FTC fed law DOJ-Antitrust division fed law Private right of action fed or state law (to have standing: must be within target where affects u already and not projected for future, violation is type that antitrust laws are designed to prevent, Direct purchaser (middleman) can sue even if passes on to other buyers BUT indirect (final) buyers cannot sue bc of possible double liability (but states can give the final buyers right to sue or sue for them, settlement agreements are contracts so can be challenged by other indiviuals for antitrust violation). US sectoral agencies (US attorney) EU (to European Court of First Instance and Appeal to European Court of Justice)

US v Alcoa (and Limited-Canada) (Judge Hand; 2d Cir. 1945) *closest case to saying that just having a monop is a problem but ultimately look to conduct and hold they werent a passively forming monop. violated SA CLAIM: SA-Sec2 (monopolization), SA-sec1 conspiracy, restraint of trade civil (not criminal which is usually reserved for price fixing) JURISDICTION: many can file suit at same time. Here, cldve also been brought by: FTC, individual states, private parties, EU if had effect from conduct [*Foundation of effects doctrine: if had an effect on competition domestically (p19)] FACTS: Alcoa was an aluminum ingot producer. Suit was brought against Alcoa, particularly for monopolizing interstate and foreign commerce, particularly in the manufacture and sale of virgin aluminum ingot. In 1886, aluminum became commercially relevant bc can remove oxygen. Involved 2 patents that allowed alcoa to get head start on monopoly until now bc expire (Hall patent to make pure aluminum without the oxygen AND Bradley process for manufacturing the aluminum) Need water energy for process and contracted with restrictive covenents that limited foreign competition. RULE: In order to fall within $2, the monopolist must have both the power to monopolize, and the intent to monopolize. To read the passage as demanding as specific intent, makes nonsense of it, for no monopolist monopolizes unconscious of what he is doing. (p14) [need to show market share in order to show power to monopolize! Market share + intent] GRINNELL TEST: Proof of possession of monop power in relevant marker (product + geography) maintained by means ought to be condemned (conduct) and not consequence of superior product, business acumen, or historic accident PROCESS Mining raw materials of Bauxite smelted to make Alumina extracted (electricity) into Aluminum element virgin aluminum ingot (brick) Virgin Ingot fabrication consumers discarded as scrap back into aluminum form (to be sold for fabricat) MARKET DEFINITION: 1) AS(VI) Alcoas total domestic sales (on open market)2) AF Alcoas sales of fabricated products (uses itself)3) S Scrap or secondary aluminum4) I imports (manufactured outside but sold in US)5) ROW rest of the world (made and consumed outside)Options for determining market share:1) AS / AS + I + S = 33% (not enough)Whats diff btw AF and S and why not include AF?2) AS + AF / AS + AF + I + S = 64% (doubtful)3) AS + AF / AS + AF + I = 90% (no secondary)(def monop)Which one does crt end up using?

Du Pont Case include secondary ingot in market? Cellophane producers- market included other wrapping materials. Relevant market must include all products reasonably interchangeable by consumers for the same purpose. Microsoft (II.136) quoting du pont. TESTS (1st 2 are demand side):1) Demand-Side substitutability / cross-elasticity - depends on how different from one another are the offered commodities in character or use, how far buyers will go to substitute one commodity for another. [Du Pont] [Ex: Including S in market bc if alcoa raised VI price, consumers wld just switch to S, not so diff (j hand)] Cross-elasticity: how responsive are customers to changes in market? (ex: heart surgery inelastic) % Q (Demand) / % P (price) 2) Hypothetical monopolist (DOJ/FTC Guidelines) / SSNIP (5% and transitory depends on market) what wld happen if a hypo monopolist of that product (narrowly defined to one product, produced or sold) imposed at least a small but signif and nontransitory increase in price, but the terms of sale of all other products remained constant. If, in response to a price increase, the reduction of sales of the product wld be large enuf that a hypo monop wld not find it profitable to impose such increase in price, then the Agency will add to the product group the product that is the next-best substitute for the merging firms product. [1992 Guidelines](other product clearly restrains the price of the monopoly and therefore shld be part of market). [2010 Guidelines: specifically, the test requires that that a hypothetical profit-maximizing firm not subject to price regulation, that was the only present and future seller of those products (hypo monop likely wld impose at least SSNIP on at least one product in the market, including at least one product sold by one of the merging firms. P25] Ex: dont include cars in motorcycle sales.3) Supply-side Substitutability (Telex, 10th Cir. 1975 p27) what wld other sellers do if monopolists raise prices? If company A raised prices, wld company B quickly alter their production processes in response, then included in market (part of what constrains A) [Ex: Including AF in market bc if VI price went up, alcoa cld just make more AF to cover that. In telex, decided that other manufacs cld easily adapt to IBMs plug settings compatible peripheral products] 4) Geographic Market does imported goods restrain prices [Do you include ROW #? Here, alcoa can raise prices bc have advantage of tariffs and importing costs, so even if restrained a bit, ability to raise prices makes it monop]5) Submarkets (Brown Shoe v. US SC 1962 p27) The boundaries of such a submarket may be determined by examining such practical indicia as industry or public recognition of the submarket as a separate economic entity, the products peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes and specialized vendors. MARKET STRUCTURE Seller concentration CR-4 (seller ratio), HHI Index (sums of squares of market shares) Entry Barriers conditions of entry. pure competition (many sellers and each want to sell at cost + small profit = efficient) monopoly single seller with great entry barrier oligopoly unclear and hard to predict how they behave CONDUCT - Whether alcoa guilty of various unlawful practices, ancillary to establishment of a monopoly (p13) size does not determine guilt; that there must be some exclusion of competitors; that the growth must be something else than natural or normal; that there must be a wrongful intent or some other specific intent; or that some unduly coercive means be used (p11) cld be legally forming monop that still can get injunc to disable. Alcoa had also secured power deals from various companies (exclusive contracts) Diff btw monopolies forming bc of foresight, etc (incentive to compete for pot of gold) and anti-competitive conduct. Alcoa seized every opp, had best businessppl, having advantage of experience, trade connections and the elite of personnel, wanted to expand output (rather than restrict w/ usual monopolist), so whats their bad conduct? BUT, entered new markets as developed + price squeeze (and only loosened once govt investigating) + emascalation embracing every opp in predatory manner to deprive others maneuvers not honestly industrial. Kept doubling capacity before others entered field, Whether limited and alcoa were in an unlawful conspiracy. Alliance (swiss company) fixed quota and restricted output on each of its members which then allowed them to raise prices bc of normal supply-demand curve. Restricted output rather than set price bc if had extra surplus wld try to cheat and sell which wld bring price down (Esp bc already extended production costs on it and want to recover that.) Alcoa not part of it. Usually hard to show conspiracy bc: not written (even tho is here) incentive to cheat hard to detect hard to punish and enforce punishment REMEDY: Here, no sec1 violation bc not part of alliance. cld be injunc to break them up but didnt do it IRONIC 1994 WSJ Article: Russia is dumping tons of aluminum at below-market rates and debate abt creating cartel-like agreement among other countries. Dont want to create export restrictions bc: best policy is usually to let markets figure themselves out, cartel wld drive prices up but set dangerous precedent for other govt meddling in other industries, Russia needs this hard money to satisfy their debts, better off for aluminum to be out of country rather than them using it to build warcraft. Russia asked for no export restraints but for production costs agreement to moniter world aluminum supplies and prices. RATIONALE why is monopoly bad? Extortion can raise price and make monop profits (here, only 10% increase but if have power, can be worse) Economic immunity from competition means rivalry and stimulant no incentive to upgrade (but if wanna maximize profits, always wanna innovate. Debate btw Schumpeterian (monops good innovators) vs. arrow (need comp) Social/Political inherent value to small competitors and low entry barriers (but compromises efficiency + deincentivizes growth). perpetuate and preserve for its own sake and in spite of possible cost, an organization of industry in small units which can effectively compete with each other. (Alcoa p11) Consumer Choice is a value (Aspen) ECONOMIC THEORY Descriptive what happens in a particular transaction Predictive what will happen if the situation changes Normative makes good and bad judgment calls based on politics/policy Variable vs. fixed costs and marginal costs/revenue GOALS (preventing concentration of economic power, assuring access to markets so new entrepeneurs can enter and compete, providing consumer choice, providing effciant economic behavior: Allocative allocating goods in best possible way (right amt of shampoo/toothpaste) Consumer surplus and deadweight loss consumers willing to pay more will not pay $80 instead of $60 and cant spend on other things going from their pockets into producers pockets bad bc of: social divide issues, distribution issues, no guarantee of reinvestment by producers, not allocating well bc really more ppl want it just unwilling to pay that much (reservation price) Productive producing as cheaply as possible. With monop profits, for lobbyists, lawyers, corp jets not creating gr8er products rent-seeking if big, can spend a lot of $ in political sphere (lobbyists) to keep power too big to fail want to impose discipline before too late (automobile, financial industries) will just be not as efficient and waste money (BUT not true if always profit-seeking) Innovative proper rate of innovation (even monop will innovate so no new inventor in garage enters). Monop wont wanna innovate bc may make old monop worthless Even if invest in innovating to be more efficient/gives better or cheaper product, if a monop will always make monop profits with consumer deadweight loss even in time 2. Thorelli Govt shld reduce the economic power granted by industrial expansion, which too often tended to be used in the interest of the favored few rather than that of the public. in several instances, it was believed by many, this growth of unwarranted privilage cld be traced back to govt measures, among them especially land grant, monetary and tariff policies and to a less extent patent legislation. Irresposible RR and gas magnates (p100) Bork- Antitrust Paradox when we talk of the desirability of competition we ordinarily have in mind such things as low prices, innovation, choice among different products all things we think of as being good for consumers (p102). Lande congress wasnt trying to distribute wealth or help poor but just wanted to avoid unfair distribution. distributive goal, the goal of preventing unfair acquisitions of consumers wealth by firms with market power. (p102) CHAPTER 2: EXCLUSIONARY PRACTICES Otter Tail Power Co. v. US (SC 1973) (DOJ seeking injunc relief) *Refusal to deal violated SA FACTS: OT provides power at wholesale and resale. Provides retail to 465/510 towns in region and other 12 municipalities buy it wholesale from OT. OT involved in all aspects generating, transmission and retail (vertically integrated.) Bureau of Reclamation makes hydro power from dams (instead of generator) and high speed transmission line. OT has subtransmission lines and thats what Elbow Lake, Minnesota wants to use. Charge: attempted to monopolize and monopolized under SA sec2. Market: At one time, there will only be one provider but want companies to be able to view for that position. Exclusionary practices: Refusal to sell power at wholesale to proposed municipal systems in communities where it had been retailing power Refusal to wheel power (transmit power purchased from other sources by municipal systems) thru OTs transmission lines sham litigation - Litigating to delay establishment of municipal systems (questioning bonds issued by municipalities to acquire a municipal power system) Contracting with potential suppliers of wholesale power made agreements with bureau that they wldnt use lines to provide power for other providers. OT Arg: if didnt exclude, their company wld go downhill (make less money by using lines and selling wholesale) not excuse for monopolist practices. CONDUCT TEST (p4): Use of monopoly power To foreclose competition OR gain a competitive advantage OR destroy a competitor Essential Facility TEST (MCI) Bottleneck of subtransmission lines control of essential facility by a monopolist competitiors inability (practically or reasonably) to duplicate the essential facility denial of the use of the facility to a competitor the feasibility of providing facility (may be possible but not feasible if prohibitively expensive) NOTE: this is prob where u can make arg abt another business interest HOLDING: prices for power are regulated by fed at wholesale level so cant raise prices but that doesnt mean theyre going to get power in most efficient way. Here, use the generator even tho may be cheaper to get it from bureau MCI Communications Corp v. AT&T (7th Cir 1983) MCI wants to compete with AT&T for long distance calls, and got microwave technology from FCC, but needed At&ts infrastructure of local lines. Held that at&t maust make services available to MCI bc of essential facilities- bottleneck US v. Terminal RR Assn (SC 1912) 2 bridges and ferry allowed entry to city but RR bought it. Usually if RR didnt like conditions imposed by terminal system, they cld built their own but here it wasnt a possibility. Govt wanted dissolution but court just demanded that they all have access. [srce of bottleneck idea] Aspen Skiing Co. v. Aspen Highland Skiing Corp. (SC 1985) *outer boundary of sec2 liability! FACTS: 4 mountains exist: 1) ajax 2) highlands 3) buttermilk 4) snowmass there was an interchangeable 6 day pass for all resorts. Ski co buys 1,3,4 and offers 3-mt pass, discontinues full 6 day pass. Highlands makes a 3-day highland, with 3 day vouchers to aspen. Ski co refused to accept vouchers, gave unreasonable revenue offers to highland, made ads that made it look like there were only 3 mountains, and gave reason we will not support out competition. Trial by jury won 2.5bil + trebled HOLDING: ski co violated SA, sec2 bc of essential faciities doctrine, conduct, and actual monopoly. Can infer intent to create monop bc Ski co not motivated by efficiency concerns and willing to forgo short-term benefits and consumer goodwill in exhange for a perceived long-run impact on their smaller rival. MARKET: doesnt even discuss if aspen mt is one market bc not in front of it but assume so. Highlands cld go to another mt but there are high entry barriers bc of anti-growth policies, services from forest dept. HARM: bc private CoA, need to show harm for standing consumers adversely affected bc only 3 mts not 4 and even wealthy dont wanna buy another, more crowded now in ski co mountains, highlands harmed financially, Refusal to deal usually dont need to participate in joint ad campaign BUT Lorain Jounral v. US (SC 1951) journal (which initially was only newsprovider) refused to sell advertising to ppl who patronized new small radio station SA violation: In the absense of any purpose to create or maintain a monopoly, the act does not restrict the long recognized right of trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal. (II.15) but when for purpose of creating monop, may be limits. RULE: If a firm has been attempting to exclude rivals on some basis other than efficiancy (Bork) it is fair to characterize its behavior as predatory. (II.17) dont need to infuse specific intent. Impaired competition in unnecessarily restrictive way (Areeda & Turner) (II.17). look at 2 things: Efficiancy Justification? here, jury instructed that if other business reasons exist for aspen refusing to deal, no violation so assume no other reasons existed. Ski co justifications unconvincing: hard to determine profits of all around ticket over-emphasized desire to associate themselves from inferior skiing conditions at highlands Change? History in prior dealing which is now being stopped for anti-comeptitive reasons? Eastman Kodak Co.(D) v. Image Technical Services Inc. (SC 1992)(II.22) Kodak provides 80-95% of service for Kodak machines but also independent ISOs give service and OEMs produce parts. Some customers purchase their own parts and go to ISOs only for service and some go for both. Kodak implemented policy to selling copy machine replacement parts only to customers who use Kodak repair service (not ISOs) and other policies intended to make it difficult for ISOs to sell service for Kodak machines customers forced to switch to Kodak service even tho preferred ISOs. Focus on history of prior dealing and no efficiency justification. Kodak gives 3 business justifications but unconvincing: to promote interbrand equipment competition by allowing Kodak to stress quality of service (and not responsible for ISOs messing up their products by bad service and treatment of them) but customers prefer ISOs to improve asset management by reducing kodaks inventory costs but doesnt explain Kodaks forcing OEMs, equipment owners, and parts brokers not to sell parts to ISOs which wld have no effect on inventory costs to prevent ISOs from free-riding on Kodaks capital investment in equipment, parts and service but they invest in training their employees and cant require them to make their own parts bc poses entry barriers that are too high. Spectrum Sports (D) v. McQuillan (SC 1993)(II.27) refusal to deal by a firm w/o a monopoly is NOT enough no violation! Parent company gave D exclusive right to market sorbothane in US and told P to stop distributing medical/shoe products with sorbothane, otherwise wld lose right to distribute equestrian products with it (parent company cld do this bc they held the patent for sorbothane so cld stop providing it). Held that cant just have intent to monopolize but must have proximity to success and the potential to do so. TEST: That the defendant has engaged in predatory or anticompetitive conduct with A specific intent to monopolize and A dangerous probability of achieving monopoly power Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP (SC 2004) D wins! *cant just be refusal to deal but monop intent! (brought as class action for ppl that want at&t service but Verizon restricting wld get treble damages + injunc at point of motion to dismiss bc no a-t claim) FACTS: Verizon was exclusive LEC (local network) carrier in NY state. Bc of TCAct - Verizon acts wants to enter long-distance market (which they cldnt do before), but must provide at&t long distance service with access to their UNE (unbundled network elements local switchboard) and has obligation to provide services to customers (thru OSS operations support systems) which ensures quality. W/o access to OSS, rival cant fill its customers orders. There were complaints of Verizon not abiding by regulations (bc discriminate in OSS servuxe as way to rule out competitors) and they got a consent decree. ISSUE: Telecommunications Act of 1996 allows local monopolies to now enter long distance network and makes local phone companies share network to allow long distance competitors to use. Is a company not doing so violation of SA? Act doesnt expand CoA under antitrust law but is it part of previous a-t law? HOLDING- Legal Test Factors: Profit Sacrifice This doesnt fall within limited Aspen exception of refusal to deal. In aspen, D gave up voluntary (and profitable!) arrangement just to rule out competition. Here, defendants prior conduct sheds no light upon the motivation of its refusal to deal upon whether its regulatory lapses were prompted not by competitive zeal but by anticompetitive malice. Want to provide service to their customers 1st and dont need to embrace competition by giving them priority. Prior course of conduct was present in OT and Aspen. Here, may not be allowing others to advance but not taking anything away that they were previously entitled to. Essential facilities doesnt exist at all bc SC never accepted it or doesnt apply here bc even if essential facility (which it isnt here) needs to also be connected to a recognized a-t claim. no duty to aid competitors. (II.35) Institutional Factors affecting holding: Regulation congress has already intervened thru FCC to ward off anticomp behavior dont need judge intervention False positives esp when reg already in place, a-t CoA shldnt be implemented bc hard for judge/jury to really decide, and costs on the market if we are wrong (does this come from political presump that usually markets work themselves out unless theres clear reason for govt/judicial interference????). Enforcement crt doesnt really have power to oversee day-to-day enforcement of consent decree shld go to regs. beyond the practical ability of a judicial tribunal to control. (Brooke group II.37) Leverage using monop of one market to gain monop in another (local call service monop to get long-distance monop) requires dangerous probability of success in the second market + anticomp conduct (and no conduct can be pointed to here bc refusal to deal here isnt enough) (II.37) RULE: if company has no duty to deal with competitors, certainly has no duty to do so on conditions that rivals find advantageous. Conwood Co. v. US Tobacco Company (6th Cir 2002) alleging monopolization of moist snuff market P wins sufficient to show that competition suffered during the relevant period. FACTS: USTC was only seller and slowly raised prices to get higher profit margin. In 1990, new market entrants so USTC makes exclusive seller agreements with retail stores, become managers to stock shelves and only choose their own stuff, gave fraud statements to retailers to convince them that their products selling better than were/better than competitors so wld wanna stock more of theirs, vending rights by losing competing brands and making them the only ones on shelves, other on the spot advertising and being put in the prime locations, when their sales reps serviced racks removed competitor racks and advertising. HOLDING: this wasnt just series of torts but systematic effort to exclude competition from the moist snuff market. (II.43) Isolated tortuous activity does not alone constitute exclusionary conduct for purposes of a $2 violation, absent a significant and more than a temporary effect on competition, and not merely on a competitor or customer. TESTS for Conduct:Otter Tail - use of monopoly power to foreclose competition, gain a competitive advantage, or destroy competitionAspen Ski exclude a competitor on some basis other than effciancy

CHAPTER 2: PREDATION Price Predation Matsushita Elec. Indus. Co.(D) v. Zenith Radio Corp. + NUE (P)(SC 1986) D win sumJ motion- no issue of fact for jury FACTS: Ps are American TV manufacs and Ds are Japanese. Claim that Ds had illegally conspired to drive American firms from the American CEP (consumer electronic product) market by scheming to fix and maintain high prices for TVs in Japan and low prices for those exported and sold in US to drive out American manufacturers. (some ev not admissible bc didnt show that harmed Ps (standing) or that it was anti-competitive rather than just trying to compete in American market.) cross-subsidization arg (agreed among themselves to set low prices in US, driving out domestic producers, then raise to supracompetive prices, and keep Japan prices high in order to fund this plan.) HOLDING: standard for pleading P cant recover a-t damages by just alleging cartelization of Japanese market bc Am a-t laws dont regulate competitive conditions in other nations economies (II.49). even have monop in Japan, activities in US only create more competition cant just point to conspiracy but to harm. Here, alleged conspiracy is economically impractical and technically infeasible. Predatory pricing conspiracy is by nature speculative bc saying that we shld lowr prices for not to have greater ability raise it in future uncertain success bc short-term loss is definite, but long-run gains depends on successfully neutralizing competition therefore these schemes are rarely tried and more rarely successful + incentive for individuals to cheat. Here, cartel wld need to last 30 yrs to be successful. Other factors: Fear of false positives Economic realities tend to make predatory pricing conspiracies self-determining no rational motive to conspire Cartel in Japan even if happening there, not clear that theres effect here or that wld be good for them Even if cld get a monop not clear it wld be worth it to maintain losses along the way. below cost cld be: below Japanese manufac costs, below am manufac (zenith) costs, appropriate measure of cost (vague), below market level cld argue maybe its a loss leader lose money is this sale to make it up in another but zenith can do that too self-deterring conspiracy also bc if become monop and raise prices in US, DOJ will go after and jail them will cheat collusion and lower prices or will go to jail. Dissent: majority assumes theres only issue of fact if they can prove reason/motivation for conspiracy but in discussing unlikelihood of predatory conspiracy assumes Ds valued profit-maximization over growth BUT: 1) may not be their true priorities 2) firms dont always act rationally. (influence of Chicago school of thought that always act rationally) Brooke Group Ltd. (P-Ligett- 6th largest) V. Brown & Williamson Tobacco Corp - *stndrd for predatory pricing in SA-sec2 violation D wins bc P hasnt proven recoupment. both cigarette providers (oligopally 6 all together). Brooke introduces generic and so B&W does too (bc were then losing money off branded bc B&W customers happy to go to generics). B&W offers discounts to largest wholesalers (bc retailers will only carry 1 brand of generics which all sell at same retail price so discounts to wholesalers allows them to get more $ and will only carry ur generic). But, B&W loses money on this (so why do it?) After 18 mos, liggett gives up in price war and brings suit (under Robinson-Patman Act but same) for predatory pricing. ARG: Ps theory is that B&W engaged in predatory pricing to put ligett out of business in generics, then they wld raise prices which wld reduce price gap btw branded and generics and be able to maintain monopoly profits on branded cigarettes which are more profitable. Tacit collusion, sometimes called oligopolistic price coordination or conscious parallelism, describes the process, not in itself unlawful, by which firms in a concentrated market might in effect share monopoly power, setting their prices at a profit-maximizing, supracompetitive level by recognizing their shared economic interests and their interdependence with respectto price and output decisions. (II.73) not illegal but indicative Predatory Pricing TEST: PRONG 1: Price of predators product is below an appropriate measure of the predators cost here, define cost as below the average variable cost (based on areeda and turner suggestion) bc thats what parties agree to but crt doesnt solve conflict - ftnote85). Cld argue that AVC in market is appropriate measure bc then can ensure that only a less efficient producer is being excluded from market (allocative efficiency) instead of just focusing on thats firms production costs. BUT predatory pricing alone (which presumably harms competitors) not enough bc not concerned only with protecting competitors but competition (II.72) PRONG 2: Likely to recoup investment in predation (bc were ultimately worried abt consumer harm and deadweight loss so wld need to find a firm raising prices to supracompetitive levels). Must prove: 2A: Likely to work (tacit coordination to recoup losses is highly speculative so unlikely to work usually) 2B: Must earn back investment with interest by charging price above competitive level sufficient to compensate (for loss AND for time value of money) Here, unlikely to show that B&W cld eventually create oligopolistic price coordination cant show theyd recoup cant show that engaged in predatory pricing for monopolistic reasons. Plus, wld need to show that market is conducive to monopoly post-predation high entry barriers, excess capacity, or other factors that wld deter entry bc otherwise monopoly price wld be eroded by other firms. Must also show that prices wldnt have gone up otherwise, even w/o coordination bc generic sales were going up anyway here, wld need to show they limited output which doesnt do rather than showing price goes up bc of declining demand (so manufacs need to charge more in order for it to be sustainable to keep producing.) Concern here also w/ false positives which is why theres a lot to prove bc otherwise chills competition and very idea that a-t law is supposed to protect (II.102) Dissent: Fact B&W were willing to take losses for 18 months shows predatory behavior and belief they wld be able to recoup. Proof of higher prices to consumers w/o higher prices in production. Price cutting is usually pro-competitive and good for consumers but only so long as reduced prices do not fall below cost. (II.79). Majority is wrong for putting burden on P to show actuality of supracompetitive pricing actuality of tacit collusion. Really, jury cld find based on price increase that it was anticompetitive. Listen to class on predatory pricing worksheet!!! US v. AMR Corp (10th cir 2003) claim that AA (airlines) attempted to monopolize 4-city routes from hub in Dallas faced low cost carriers entering market and responded by 1) matching prices 2) adding capacity 3)making more low-priced seats available eventually drove low cost carriers away. US argued test shld be: If there is clear evidence had available one or more alternative actions that - but for the anti-competitive effect- would have yielded higher profits, then a suspicious sacrifice has occurred. (II.81) BUT, if crt took that position, means that crt turns sacrificing profits into cost condemns activity that may be profitable as predatory.- anytime u decide not to maximize short-term profits, deemed suspicious (even tho AA still made money, wasnt below cost and this is routine thing companies as part of business plan) ultimately chills competition and bad for consumer. US Arg: AA cld recoup not monetarily but by developing predatory reputation so no one messes with them BUT, thats probably not a rational business strategy. Suggested marginal cost may be best for discussing if predatory. HOLDING: SumJ for D-AA Photovest Corp v. Fotomat Corp (D) (7th Cir 1979) (II.83) Fotomat engaged in sale of film, camera products and processing. They sell franchise to P to operate kiosks outside grocery stores. When see their own stores are more profitable than kiosks, saturate the area with their own stores and drive franchises out of business Held predatory but didnt say P had burden to show predatory pricing. AMR case: predatory business behavior that makes no business sense except for its ability to harm competition. NOTE: matsu and brook group assumed its hard to allege predatory pricing bc so speculative, not likely to work. BUT, maybe shld be different with changes in economic theories which make prediction easier and more reliable. Weyerhaeuser Co. v. Ross-Simmons Hardware Lumbar Co, Inc. (SC 2007) *extending Brooke Group test for monopoly to monopsony, the buyer predatory-bidding context from the buyer side bc of same underlying concerns. both companies made lumber out of alder sawlogs in hardwood-lumbar market. P claimed D engaged in predatory bidding (SA sec2) when acquired sawlogs. DC said cld be predatory if: (a) bought more logs than needed or (b) paid higher price than necessary for logs to prevent competitor from getting logs at fair price. AC affirmed, SC vacated jment. legit pro-competitive reasons for why a company may engage in predatory bidding scheme to bid up input prices: bc miscalculate input needs or as a response for increased consumer demand for its outputs to acquire more inputs as part of precompetitive strategy to get more market share in output market to acquire the inputs necessary for its processes if theyve adopted an input-intensive process to acquire excess inputs as a hedge against the risk of future rises in input costs or future input shortages Pacific Bell Telephone Co. v. Linkline Communications Inc (SC 2009, II.105) - *price squeeze context. At&t was reqd to provide wholesale DSL transport and their service lines for internet connectivity (based on a merger agreement in place) and charged a leasing price for their transport service. Plaintiffs sued at&t (sec2) for engaging in price squeeze where they sold DSl transport service to them (wholesale) at a high price while selling DSL internet service in retail at low price. SC granted at&ts motion on the pleadings. Ps ARG: at&t charges a lot for wholesale so they can get these high profits from that and then charge less in retail bc already making a lot of money on he wholesale. At the same time, bc can charge low price for retail, the competitor must compete at that low price but at a severe disadvantage bc has a much higher cost they need to pay so much for the wholesale transport service makes it really hard to actually compete! ISSUE: Generally, firms have no rment to deal unless its to drive out rival and then raise price (brooke) but this case doesnt meet up to that standard, nor a duty to deal (aspen). So, when D has no duty to deal with P at wholesale level under a-t laws (only has duty bc of FCC rment and duty to deal is only in monopoly context and here theres great competion in market), can their price-squeeze be considered a violation of a-t laws? HOLDING: Trinko thus makes clear that if a firm has no antitrust duty to deal with its competitors at wholesale, it certainly has no duty to deal under terms and conditions that rivals find commercially advantageous. (irrelevant that trinko was abt diff/prejudice in quality of service while here its abt diff in price.) same complaint that firm can abuse power in wholesale market to gain advantage in retail market but if have no duty to deal (bc its a competitive market!!!) then not a violation! Ps claim that retail prices are too low but if not below cost, then declaring them too low wld defeat purpose of antitrust laws firms wldnt lower prices to consumers bc wld fear an antitrust violation. Institutional and Administrability concerns not the crts job to monitor btw wholesale and retail prices which creates this squeeze and need ppl to have clear laws of what is too low or too high to be considered antitrust violation (below cost is a clear line). Price squeezes can be used to show that a monopolists power is not bc of skill, foresight, and industry, or for no other efficient justification other than exclusionary conduct (BUT it must first be that they are a monopoly + have prospects of doing so OR have a duty to deal bc theyre a monop OR essential facility (even tho not recognized by SC)) Price squeezes on their own are not a viable claim unless connected to predatory pricing at input or output.

Design Predation Berkey Photo, Inc. v. Eastman Kodak Co. (2nd Cir 1979, II.109) *no duty of disclosure, leverage theory MARKET: nationwide for amateur conventional still cameras, conventional photographic film, photofinishing services, photofinishing equipment and color print paper in film and color paper markets, Kodak has monop but not enuf. To get/keep monop, may do end-predatory pricing, lease-only policies or exclusive buying arrangements. the mere possession of monop power does not ipso facto condemn a market participant. But, to avoid the prescriptions of $2, the firm must refrain at all times from conduct directed at smothering competition. CLAIM:SA sec 2 kodaks introduction of new and smaller cartridge loading camera (110 camera) and new color film to use in it which caused Kodak to pay Kodak excessive prices for it. LEVRAGE THEORY: using monopoly power in one market to gain a competitive advantage in another, albeit without an attempt to monopolize the 2nd market. (II.114) No real reason fro changing the film used in the camera, scientist Zwick feared it was unethical attempt to create a deliberateincompatibility with systems other than Kodak. (II.117). original issues but then fanfare, successful PLAINTIFF ARGs camera market: Disclosure Kodak debated disclosure each time bc may not comoete with auxialiary market warned to predisclose if changing film, did for fee but Berkey for $60K got less than 2 months advance to compete with Kodak for new 110 camera. In general, no duty to disclose (or else n/o wld have incentive to innovate). Wrong jury instructions bc said there is duty if otherwise wld be clear exercise of monop power. An a-t plaintiff urging a predisclosure rule, therefore, bears a heavy burden in justifying his request (II.121) Lag time they shldnt have right to lead time that follows from its success if it creates a monop. PHOTOFINISHING MARKET Large photofinsihers (like berkey) preferred to buy compounds for photofinishing in bulk to save money and get flexibility but here, needed to buy kits from Kodak for 2x price to process new film. Bc of early start, Kodak had advantage over competitors HELD: that didnt monopolize or attempt to monop the photofinishing markets not liable unless used monop power in other segments of the industry to gain competitive advantage remanded for jury to distinguish btw excercises of power as natural result of size and integration vs. specifically intending to create monop power in 2nd market. NOTES: no predisclosure necessary for camera but maybe for photofinishing market- whats diff? If motivated by efficient business/good product vs predatory innovation so others cant figure out new formula Had monopoly power in market already vs. looking to gain monop power (to determine, consider entry barriers) Prior course of dealing had they disclosed in the past and now not which suggests now want to monopolize? FTC complaint on Intel (1998) intel disclosed info to customers so can incorperate intels newest microprocessor. When they introduced new Pentium pro microprocessor, one customer (digital) brought suit for patent infringement and Intel demanded not to provide any more info and return of info even tho available to others using the info they gave as leverage power to be able to infringe their patent Integraph Corp had patents and intel tried getting royalty-free license to them. When integraph refused, intel cut off info and demanded return of microprocessing chips for prototypes even tho available to others Compaq Computer Corp sue Packard for infringing their technology which was supplied by intel. Intel cut of technical info that Compaq needed to develop products accdg to their newest chip. Intels conduct entranches on monopoly power bc their coercive tactics to force customers to license away such [patent] rights diminishes the incentive of any firm dependant on them to develop any competing or auxiliary technologies. (II.128) Photofinsiher price squeeze: Monop profit = total revenue total cost = (P * Q) (cost * Q). Even if they root out all competition at the photofinisher level, the price to consumers will not go up bc they are complimentary products the ideal monopoly profit price will still be the same. They still wont charge more for finishing even if now have monopoly bc finishing price is intertwined in consumers mind and in their demand with the price of film Is linkline still good law for price squeezes after this case? In linkline, competitive market altogether so different case while here assume Kodak is a monop. OR there r no 2 intertwined products being offered to consumer now being constrained in retail by others but if were to root out competition by a price squeeze, nothing stopping them from raising prices to get higher monop profits higher prices for consumer in end? US v. Microsoft (DC Cir. 2001) (20 other states and DC that filed case separately) claim: violation of $2 for willful maintenance of monopoly power- not concern abt getting a monop. Main basis was bundling IE to windows (a) maintenance of monopoly in PC operating system market AND (b) attempted monopolization of internet browser market (netscape cldnt compete bc cldnt enter at OS level). PROCEDURAL HISTORY: DC ruled that MS must be restructured into 2 speerate companies applications and OSs. MARKET: operating systems for intel-compatible personal computers. hardware (monitor) OS (windows) Middleware (browser-navigator/java) Apps (word/excel). GRINNELL TEST: MS has market power Market share uses du pont test reasonably interchangeable in use. MS had 95% of market (considered monopoly under Alcoa) Entry Barriers signif bc of Network Effects - chicken-and-egg (even if some competitors do exist, doesnt mean there arent high entry barriers) - the more ppl use the product, the more useful the product (like social networks)1) Most consumers prefer OSs for which large number of applications have already been written2) Most developers prefer to write for OSs that already have a substantial consumer base. BUT MS arg: Network effects isnt an entry barrier-just shows MS is popular (superior producer) but focus on conduct Entry barrier is cost born by e/o in industry but situation was diff when MS entered market Basically, apps act as entry barrier to OS market (plus more general network effects of demand side benefits consumers benefit from having more users not necessarily from one company being more efficient/better product). Even if ultimately there will only be one provider bc of network effects (which may not necessarily b true look at cell phone/social network providers), we want firms to compete for being the provider (otter tail). MS ARG: even if they have market power, it doesnt behave like a monopoly bc invests heavily in research and development and charges a low price for windows (small % of the price of an intel-compatible PC system and less than price of its rivals.) BUT investment doesnt mean not using monop power bc (a) cld be in their own interest to invest, (b) even if price is lower than short-term monop profits, may not be in long-term profitable, (c) MSs pattern of exclusionary conduct cld only be rational if a firm knew it possessed monop power (DC ruling) MS argues middleware shld be included in market bc may ultimately replace OSs but bc not there yet dont include II.137). And, didnt include all operating systems (Mac OS) but wld wldnt matter bc MS wld still have 80% market share still a monopoly. CONDUCT Exclusionary (bad) acts vs. competitive (good) acts: rule of reason of looking at all actions (but not good guidance for next case when all actions are not there). TEST for exclusionary (II.141)1) anticompetitive effect it must harm the competitive process and thereby harm consumers. Harm to one or more competitors will not suffice.2) P burden to show: monopolists conduct had anticompetitive effect, in way SA sought to restrict (consumer)3) If P shows 1 & 2, D must show precompetitive justification (gr8er efficiency, enhanced consumer appeal) burden to P to rebut precompetitive justification4) P burden to rebut precompetitive justification OR show that anticompetitive harm outweighs any precompetitive benefit balance based on rule of reason with focus on effects of conduct and NOT intent of conduct. (but no clear guidelines for doing correct balancing act.) Application in MS case:1) Browser Integration - IE and Windows integration wasnt to improve browser but makes more difficult for consumers and developers + IE not included in the add/remove programs utility. (originally gave windows disk and IE disk but for windows 98, integrated code, put on one disk, and thats what they gave to OEMs) MS justification: technical efficiency not rebutted bc deferential to software engineers. Real issue wasnt integration but no option of disintegration, OEMs cant remove, add/remove program doesnt actually remove from ure computer. 2) Various dealings with OEMs (original equipment manufacturers), IAPs (internet access providers), ICPs (internet content providers), ISVs (independent software vendors), and Apple Computer Restrictions in licensing agreements of windows and OEM: user cares abt access to apps and not necessarily OSs itself. But, the apps (API-MSword help) are linked to a browser. Developers want to link programs to browsers that are popular. So, by gaining monop in browser (IE) APIs from apps will all link to IE APIs will be made for Windows windows will gain monopoly and no longer a competitive market. MSs efforts to gain market share in browser market kept rival browsers from getting necessary attention of software developers ensured their monop in OS market. P established PF case, specifically bc MS prohibited OEMs from promoting rival browsers, which keeps developers focused upon the APIs in windows. If not for the following MS restrictions, OEMs cld offer consumer choice of many browsers. restrictions: from removing any desktop icons, folders, or start menu entries (aol on desktop but only works with IE) from altering the initial boot sequence, process that occurs 1st time someone turns on computer. MS programmed it to only include IE. Before this restriction, OEM cld change boot sequence so that when user signed on the first time, were directed to services of IAPs and cld choose which browser they wanted and many did choose netscape. from otherwise altering the appearance of the windows desktop. OEMs cant move folders around and make appearance more beneficial to users interests. MS justification: if OS has more than one browser, confuses users many service calls expensive. Since windows comes with IE installed and OEM cant remove from desktop, they wont install another browser, giving IE monopoly. we are just using our copyright licenses for boot process with providers and if we didnt restrict it, wld impeded on our copyright material and netscape can do the same BUT just bc they have a property right, doesnt mean its unlimited netscape is not prohibited from contracting their product also but bc of prices, can never meet MS so can never be comparable? Apple- vertically integrated making OS and hardware. MS makes software (Apps) for Apple, otherwise wldnt be able to compete with PC. Apple was contracting with netscape as default browser and MS threatened to discontinue making them office software (Microsoft office) anticompetitive.3) Its efforts to contain and subvert Java technologies Java was developing as competitor to MS (programming language, programs in that language, compiler which translates code, and JVM that translates codes for OS). Java contracting with Netscape. MS did actions to make it hard for them : MS designed their own JVM (java virtual machine) that allowed Java apps to work much faster than in Suns JVM system. So, program developers will want to create programs for MS platform rather that Sun. programs developed for one platform are not compatible with the other. (actual machine not issue bc its better product and they can compete, but its bc they did so under deceptive premises.) entered contracts first wave agreements requiring major ISVs (the ones who distribute/vend the software to others) to promote MSs JVM. By offering technical support and other things, MS induced them to make their java apps reliant on windows-specific technologies and hence unoperable with Suns standards. deceived Java developers abt windows-specific nature of the tools it distributed to them MS created software development tools to assist ISVs in creating java apps. If they had give full disclosure that tools were windows-specific, prob not an issue, but here developers relied on MS public commitment to cooperate with Sun and used their tools to develop apps that they thought wld be interoperable. Other written docs that show intent to kill cross-platform Java from competing in OS market. coerced intel to stop aiding sun in improving java technologies MS threatened Intel that if they didnt stop aiding Sun on multimedia front, MS wld refuse to distribute intel technologies bundled with windows. They wld refuse to use intel chips in MS computers and wld get instead from competitor. 4) Its course of conduct as a whole Predatory pricing (brooke group) Price: Seemed to be below cost bc free BUT MS ARG: IE and Windows now one product and consumer is getting all benefits of IE for free (software doesnt cost anything (no hardware/cd involved)) BUT: They spent a lot of $ on development and marketing needs to be factored into cost- not really free IE still available independently as it was for MAC OS so didnt need to be one product Recoupment: no evidence they wld be able to raise prices in future but may take chance bc gates said internet wld be future and wld do anything that windows OS was conduit to allow ppl to access. Leverage theory (used in European commission version of MS case) BUT in US wldnt apply bc unlike Kodak, no ev here that 2 are integrated in fixed proportions. CAUSATION plaintiffs never established a causal link btw MSs anticompetitive conduct foreclosing netscape and java distribution channels and maintanance of their OS monopoly. Prof. Areeda dont need direct proof that MS drove those 2 out of business but can infer such, esp for injunc relief. MP: causation is NOT a defense to liability for unlawful actions to preserve monopoly in OS market. HARM: whats the harm after all this? Consumer choice (but consumer cld just pay for another browser), raise prices in future (but comes back to having to prove recoupment and if raise, netscape can come back in), innovation java new technology and MS pushes them away, DC judge message to any potential innovator that MS will use market share to push them down.) *case doesnt focus so much on harm to consumers but on all the anticompetitive conduct w/ no procompetitve justification. SUM: Must find monop power in relevant market + why acts of exclusion are anticompetitive + no competitive justification (looking at each piece of conduct only in order to look at conduct as a whole) EUROPEAN CASE (MS violates EU Treaty, Art 82) leverage theory using monop in PC market to forclose comp in work-group-operating-system market. Sun sold servers and operating systems but needed to connect with PC hardware and asked MS for technical support to properly connectand they refuse to deal. MS argues that under the one monopoly profit theory: under certain conditions (product A and product B are perfect complements with fixed ratios), it is not possible for a firm that is a monopolist in a product market A to increase its profits by securing a monopoly in the related products B. (II.171) its not that monopolists wont enter adjacent markets but just that wont enhance efficiency/allow them to raise prices. BUT: one monop profits relied on assumption that products are complementary with fixed ratios, not case here even when are fixed ratios, theory doesnt hold when keeping a firm in market B in check reinforced the dominants undertakings dominant position in market A, erecting barriers against actual or potential competitive threats in that market. here, by maintaining monop in work group systems, MS maintains monop of PC market bc any new PC producer will need to interconnect with MSs group systems. Now, focus in IT market is on the PC device and operating system but may shift to be more server-centric. By MS monopolizing that market, ensures that will maintain monop with IT standards shifting and then cld demand web servers, database servers and others who want to tap into group-servers to adapt to their standards. MS also claims intellectual prop right over Microsoft BUT doesnt hold up as interest in balancing of interests, forclosing all competition and consumer choices for homogenous MS soln ENDNOTE ON MONOPOLY: focus has shifted from liberty and power to efficiency see efficient values of big firms and less concerned abt monop power but just need to stop certain types of abuses. OUTLINE of Monopoly Analysis:I. Sherman Act section 2: Grinell Test (II.6)a. Posession of monopoly power in relevant marketb. Willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historical accidentII. Product Market Definitiona. Legal Test (use them all together)i. Demand side substitutability (DuPont) reasonably interchangeable in use (cross-elasticity in demand)ii. Supply side substitutability would other competitors quickly change factory to substitute item uve raised price for?iii. Hypothetical monopolist test (DOJ/FTC Guidelines) SSNIP small but signif non-transitory increase in price. If they raised price, and some consumers switched to another product, wld it still be profitable for them?iv. Submarkets test (Brown Shoe) reference factors of case and if shld be subsumedb. Applicationi. Music players equipmentii. Platformsiii. Music (distribution and sale of legal online pre-recorded music)III. Territorial Market DefinitionIV. Monopoly Powera. Market Sharei. Market Structure1. Alcoa: # in 60s may be problematic, 90 def monop2. Kodak: wiling to say 60-64% is monopii. Entry Barriers define (discuss New entry barriers incumbents didnt have to face (MS) vs. ones that all competitors need to face) (especially true in cases where need to enter in 2 stages of production)1. Structural barriers show ppl tried to enter but couldnt 2. Peripheral devices which wld need interoperability (ipod docks, add-ons, etc)3. Scale economies hard for anyone small to compete4. Intertwined products (ipod wld need to create media encoding/store + device)5. Existence of copyrights that precludes other innovators (MS) but can still protect under licensing fees iii. Other Factors may have market share and high entry barriers but not acting as monopoly power1. Natural monopoly bc can reduce costs by reducing production costs (not charging monopoly prices)2. Regulated industry so cant charge monop prices even if wanted? (Trinko BUT OT showed even if price to consumers regulated and amt of profit margin, no impetus to lower costs)3. Innovation since a-t goal is to ensure innovation, can show commitment to innovate (BUT wont want to upset previous monopoly)4. Time Factor- can show monopoly now but bc holding monop is based on innovation, may not keep it BUT MS says to look at current competition and market shares.b. Performance do they act as a monopolist?i. Price are they charging a price much higher?ii. Are they making monopoly profits?iii. Even if not making monop profits now, is it part of larger predatory pricing scheme?iv. Leverage theory even if not making monp profits in this market, is it to gain/maintain monop in other market?V. Conduct (*always refer to Trinko, esp if its refusal to deal, use MSs analytical methodology)a. General legal framework TEST for willful maintenance vs anti-competitivei. OT using monop to forclose competition1. BUT Trinko says only works if its to gain monopoly in 2nd market and not just competitive advantageii. Aspen excluding on some basis other than efficiencyiii. MS rule of reason not just affect on competitors but on competition - back and forth of burdens shiftingiv. Brooke Group on predatory pricing: Below cost + recoupment (reasonable expectation) (mats)b. Specific Legal Rulesi. Essential Facilities Doctrine (OT)(vs. Trinko says doesnt buy it, Aspen cldve but doesnt mention it)ii. Refusal to Deal (Aspen) (vs. trinko generally no duty to deal, linkline hard arg to make, MS can be problematic if several factors exist)(cld include refusal to license)iii. Duty to disclose (Kodak)iv. Profit Sacrifice (Trinko, Aspen Skiing)v. Leverage (OT but Trinko has issues with that arg ftnote 4)vi. Bundling/tying together 2 markets (MS)vii. Price Squeeze/Predatory Pricing (linkline, alcoa, Kodak?)viii. prior course of conduct (Aspen)VI. Policy Considerationsa. Are we more concerned here with false positives or false negatives? What effect will it have on chilling competionb. Will markets be able to cure this faster than courts will? (linkline usually no requirment to deal with competitor)VII. Remedya. Injunctive to deal / license technology fair reasonable and nondiscriminatory licenseb. With apple, cld be not forcing them to deal but precluding them from updating technology to prevent those that develop technology to get around it.

CHAPTER 3: MERGERS Section 7 of the Clayton Act 15 U.S.C.A. 18 Goals: to stop monops in incipancy at merger stage, to proetect small business, to protect values we believe in No crim penalties, FTC enforcement thru hearings so dont need to go to courts. Pre-merger certifications (HSR, FTC, govt) STATUTORY TEXT: (II.5) No person engaged in commerce or in any activity affecting commerce shall acquire directly, or indirectly, the whole or any part of the stock or other share capital and no person subject to the jurisdiction of the FTC shall acquire the whole or any part of the assets of another person engaged also in commerce or in any activity affecting commerce, where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such competition may be substantially to lessen competition, or to tend to create a monopoly. (exception for when buying stock is just for investment purposes, no voting power, legit subsidiaries Person (or corp, non-profit) Has effect on interstate commerce Where in any line of commerce (product market) In any section of the country (geographic market) Effect of such merger may be substantially to lessen competition or create a monopoly (competitive effects) may be dealing with probabilities lessen horizontal mergers (65 will always lessen) Section 8 of Clayton Act precludes gaining control of another company not by merger but by interlocking directors: no person shall, at the same time, serve as a director or officer in any two corporations (other than banks, banking assns and trust companies) that are engaged in commerce + competitors with individ profits over 10mil Response to: Northern Securities v. US(SC 1904) J Harlan - companys ownership in stock of interstate carriers fell within reach of fed legis power, combination was in restraint of interstate commerce, and SA in these circs was not limited to restraints that are unreasonable in their nature, but embraces all direct restraints imposed by any combination J Holmes Dissent SH sec1 only applicable to arrangements which restrain the trade of the contracting parties, and the combination prohibition as applicable only to collaborations designed to restrain trade of other people. Here, RRs seek to merge not to exclude others or become a monopoly but for efficiency that comes with bigger size. Standard Oil Case (SC 1911) reiterated dissent and overall rule of reason. International Shoes Co. v. FTC (SC 1930) read clayton act narrowly with terms of SA unduly restricting competition (instead of substantially), disregarding info on compeititve effect, nave view of product and geographic markets, and included justification for good business reasons amended Sec7 in 1950 Brown Shoe Company v. US (SC 1962) exploring legis intent for revised clayton act. Purposes: to remedy unchecked corporate expansion thru mergers, maintain local control, maintain small businesses. Revised to make clear it applies to: Both asset and stock purchases Both horizontal and vertical or conglomerate mergers Stop threats to competition during its incipancy stage Courts addressing mergers under SA wasnt enough Differentiate between mergers that are pro-competitive Didnt create definition or test for market Must take nature/history of particular industry into account may be to show concern was with probabilities not actualities. Sec 7 ANALYSIS: Whether statute is applicable (whether commerce standard is met and industry isnt governed by regulatory statutes that create an exemption) How the market is defined (what line of commerce) product + geographic Whether requisite anti-competitve effects are shown (helps to define if merger is horizontal, vertical or conglomerate) Whether there are any affirmative defenses that shift the burden of proof. Defining the market Govt willing to accept govt antitrust rules til 1973: US v. Continental Can Company (SC 1964) - continental (2nd largest/22% market of can-producing) acquires Hazel-Atlas (3rd largest in glass bottles) 25% of market. Held glass and metal in 1 market bc of: (a) high degree of existing concentration, (b) long history of previous acquisitions (c) probability of triggering a series of similar mergers. Here, continental sought to gain pro-competitive effect in glass but anti-comp in can markets. well defined submarkets US v. Pabst Brewing Co. (SC 1966) Pabst (10th largest) acquires Blatz (18th largest) govt only needs to prove a-comp effects somewhere in the US. US v. Vons Grocery Co.(SC 1966) 3rd largest grocery store in LA buys out 6th largest. Together, 7.5% of retail grocery business in city. Illegal bc of trend of decline of single-store operators, increase in multiple-store operations -rooting out small competitors in the business. (dissent majority doesnt account for general changes in the industry). 7% market share can be undue!!! (vs. PNB that says 36%) After 1973 harder to make antitrust claim but less litigation bc: (a) 1st goes to crt of appeals, (b) pre-merger reg agencies (approval, Guidelines, growth in large merger transactions). 1976 Hart-Scott-Rodino requires pre-merger notification (but not approval): HORIZONTAL MERGER US v. Philadelphia National Bank (+ Girard Trust) (SC 1963) merger illegal (even in regulated industry diff from Trinko) FACTS: PNB (2nd largest) + Girard (3rd largest) Largest in 4 county area (36% total assets) BACKGROUND: commercial banking industry effectively regulated by state and fed govt: sound business practices, examinations, regulate interest rates - sets minimum interest rates and max is set by usury laws but btw banks can fix their own prices but doesnt regulate other bank services, branching needs approval to make sure it operates at profit. Bank Merger Act of 1960 doesnt bar classic a-t litigation- in approving, didnt look into effect on competition + no hearing even before approval. Banking rules not so intensive general a-t shld be preserved. PRODUCT MARKET: commercial banking distinctive, Helps specify line of commerce and section of country where competitive concern arises + allows agencies to identify market participants demand side substitution(hypo-monop) Cluster markets cluster of products (various kinds of credit) and services (checking accounts and trust admin) Never defined by courts In banking industry, now separate btw products and services Commentators: cluster market occurs when the buying of multiple products from a single firm reduces a consumers transaction costs; these transactional complementaries can occur simultaneously (one-stop shopping) or over time (lock-in to a particular suppliers products.) Small-loan companies not included bc provide very diff interest rates. GEOGRAPHIC MARKET: the area of effective competition in the known line of commerce must be charted by careful selection of the market area in which the seller operates, and to which the purchaser can practicably turn for supplies. (III.25) Question is not where the parties to the merger do business or even where they compete, but where, within the area of competitive overlap, the effect of the merger on competition 4 counties based on location of suppliers (even who ppl not willing to cross the street) + region where sales made Comptroller, DFDIC, FRB all agreed this was appropriate market (endorsement by others) EFFECT ON COMPETITION: undue percentage market share + signif increase in market share (HHI- measures structure, conduct, performance) Theory: 2 competitors merge higher HHI (market share) more concentrated market firms more likely to engage in anticompetitive pricing. [predicting behavior based on market structure] Clarity concern (Linkline): Unless businessmen can assess the legal consequences of a merger with some confidence, sound business planning is retarded. (III.27) but each industry is diff and how many firms necessary to maintain competition WILL depend on industry. TEST: A merger which produces a firm controlling an undue share of the relevant market and resulkts in a significant increase in the concentratration in that market is so inherently likely to lessen competition substantially that it must be enjoined in the absense of evidence clearly showing that the merger is not likely to have such anticompetitive effects (III.27-28) undue share Kaysen and Turner 20% prima facie unlawfulness; Markham 25% increase in market concentration Bok 7-8%. APPLICATION: PNB (21%) Girard (15%) merger wld be 36% market share UNDUE (anything below is dicta) Merger of top 4 retailers: 71% 78% 9% increase Merger of top 2 retailers: 44% 59%... 33% increase Why do they care abt merger of top 4 or top 2 if theres no discussion of those potentially merging?? INAFFECTIVE REBUTTLES: Testimony by competitors that wont affect them act concerned with consumers/competition, not competitors Banking industry intangible so shldnt be as open to a-t law not true. Challenge geographic market if ppl dont like service, they will go to other banks but crt doesnt buy it AFFIRMATIVE JUSTIFICATIONS: Mergers are the only way for banks to follow their customers to the suburbs and retain their business BUT they can just go and open new branches. Increase in lending limit will allow them to compete with NY banks countervailing power (better for consumers bc philly ppl can get loans w/o going to NY) BUT if anti-comp effects in one market cld be justified by precompetitive consequences in another, the logical upshot would be that every firm in an industry could, without violating $7, embark on a series of mergers that would make it in the end as large as the industry leader. (III.31) in any line of commerce means showing anti-comp effect in one market is enough! crt says, gain competitive advantage on merits, not just on merger. no evidence that their entry into NY wld actually increase comp there (may already be heavily competitive) Good for city bc can stimulate economic growth keep providing services to customers (BUT crt focuses on 2 prong test because not economists and cant predict economic effects even tho mayor says wld be good for city.) Dissent (Harlan, Stewert): congress never intended to subject bank mergers to chapter 7, Bank Merger Act was specifically intended to create a different way of enforcing a-t in the banking context. Accdg to agency guidelines of bank merger act, proponents of merger can show that any anti-comp effects are clearly outweighed by the convenience and needs of the community if approved, DOJ can challenge under sec7 within 30 days and reviews de novo (unusual for agency decisions). After 30 days, just SA sec2. NOTE: integration by merger is more suspect than integration by contract, because of the greater permanence of the former. (III.29) US v. General Dynamics (SC 1974) - *signif bc crt not deferential to govt rules; Failing Company Defense FACTS: Materials acquires United; GD acquires Materials. CLAIM: lessened competition in the production and sale of coal in either or both geographic markets. Coal markets very concentrated and general movt toward more concentrated. Market share statistics alone are not always determinative so crt must assess other factors affecting the coal industry. Coal was becoming less able to compete with other forms of energy (dont look at coal market but energy market) bc of greater envt concerns and govt regulations Greater focus in general on electric utilities Most coal was granted to consumers through long-term contracts not so much available to buy on the spot Factors imp bc: companies that have controlled sufficiently of a concentrated market are barred from merger by $7, not bc of their past acts, but bc their past performances imply an ability to continue to dominate with at least equal vigor. but here, wont be able to compete like that in future. Dont look to coal production and ability to keep producing but the uncommitted reserves of recoverable coal that they can contract out in the future. Here, United had depleted resources and most of them already committed under contract. Even tho big producer now, clear that they wld not be able to commit in future. Failing Company Defense acquired firm will no longer be a vital competitive factor in the market. BUT, doctrine can only be used if acquirer who takes company under dominion was only possible acquirer.1) No longer constitutes meaningful competitive force in future (Boeing)2) No economically plausible strategy firm can follow, either as a stand-alone concern, or as part of another concern, that wld change that grim prospect. MP: in determining threat to lessening competition, cant just look to past sales but also to factors of if they will be able to continue being successful in the future. Boeing-McDonnell Douglas Merger (1996) Boe buys Mc which creates 2 major competitors (them and Airbus) instead of 3 lessen competition but Mc was going down anyway. FTC doesnt look at national champion arg that will create more jobs, but only at a-comp effects Boe (60% of market), high entry barriers, spoke to commercial airlines but, even if merger cld be anticompetitive, failing firm kicks in bc Mc cant make comback, no investment in innovation, and Dept of Defense not even buying any planes now. (Pitofskys statement) Disagreement: Mc much smaller but still adds to market competition (Azcuenagas statement) No definitive impediment like we had in GM Creates incentive and strategic action to avoid competitive challenge and overlap. Ultimately EU pursued case, US pressured them not to, pres has power to prohibit acquisitions that threaten to impair the national security. but unclear if extends to economic as well as military. Enforcement Agency Merger Guidelines: Overview: a merger enhances market power if it is likely to encourage one or more firms to raise price, reduce output, diminish innovation, or otherwise harm consumers as a result of diminished competitive constraints or incentives. (III.59) assume adverse affects on direct customers also create adverse affects for final customers 2] Evidence of adverse comp effects (III.60): look at (1) market share and concentration in relevant market and rise in market share, (2) substantial head-to-head competition, (3) disruptive maverick role of merging firm. 3] Targeted Customers and Price Discrim: when sellers can discrim by raising profits to one groups of customers but not others influences market def, measurement of market shares, and eval of competitive effects 4] Market Def: to establish (1) line of commerce and section of of country, (2) market participants, market share, concentrations. The measurement of market shares and market concentration is not an end in itself, but is useful to the extent that it illuminates mergers likely competitive effects. dont always need market def and dont need to start there. Demand side substitution factors + responsive reactions of suppliers (identifying market participants, market share measurements, analysis of comp effects, and entry) Hypothetical monop test not always intuitive and may not align with how industries use it. Basically, wont be able to capture every consumer who will go to a diff product but cant be too narrow to preclude an amply available substitute 1) PRODUCT MARKET: hypo profit-maximizing firm, not subject to price regulation, that was the only present and future seller of those products (hypo monop) wld likely impose at least a small but signif and non-transitory increase in price (SSNIP) on at least one product sold by one of the merging firms. Bc firms overstate substitutes (Want to make u think they compete with more ppl) a-t looks to narrower market SSNIP usually 5% but depends on nature of industry and merging firms positions in it. May consider separate price-discrim markets when theres a high likelihood theyll raise prices there2) GEOGRAPHIC MARKET - Where sales are made impose SSNIP from at least one location, including at least one location of one of the merging firms. 5] Market Participants: all firms that currently earn revenues in the relevant market or do not currently earn revenues but have committed to enter the market in the near future. Rapid entrants wld provide rapid supply responses with direct competitive effects in the event of SSNIP w/o signif sunk costs (entry/exit costs that cant be recovered outside relevant market) BUT if more slowly OR with sunk costs, considered under entry. Rapid entrants who sell relevant product but not in that geographic market OR close geographic market Market shares usually based on historical experience but can be nuanced based on recent/ongoing changes in industry that suggest that a firm may be over/understating their market signif for foreseeable future. (like new technology not available to a particular firm.) sometimes depends on if expansion is possible so uncommitted reserves can be better indicator than revenues. Market Concentration To calculate: (a) Post-merger HHI = (firmA)2 + (firmB)2 + (MergingFirmC + MergingFirmD)2 (b) Look at delta = 2ab = 2 * MergedFirmA * MergedFirmB (c) page III.66 has grid Do HHIs raise concerns? 6] Unilateral Effects: eliminating of 2 firms that result from merger may alone constitute a substantial lessening of comp. 54 firms: most relevant when merging into a monop. If direct competitors (extent) + differentiated products Enables merged firm to profit by unilaterally raising the price of one or both products above the pre-merger level and capturing diverted profit thru the other. Diversion ratio fraction of unit sales lost by productA due to an increase in price that wld be diverted to productB Unil effects unlikely to occur if: dont produce differentiated products, other competing firms can capture diversion or wld enter market (supply-side), or consumers dont view 2 products as being interchangeable (demand-side) Innovation/product variety if merged firm withdraws product that signif # consumers prefer to those tht remain available may constitute consumer harm (even with no price effects) look into efficiency/intent behind it 7] Coordinated Effects: Actual coordinate interaction OR parallel accommodating conduct - each acts rationally (not to retaliate/deterrence) but creates price increases + weakens competitive incentive to offer consumers lowest prices. Likely:1) Increase market concentration to highly concentrated or monop2) Market shows signs of vulnerability to coordinate conduct (not all competitors need to coordinate but signif) more vulnerable if structure of market is such that: transparent and rivals can see conduct 1 firm reward by drawing customers away from rivals is more than threat of competitors responses. Competitor will be deterred to respond if: sales are small / frequent (versus if its only occasional or long-term contracts, theyll want to get their customers back right away) The firm currently raising prices has no stake in status quo so willing to take chance of competitors response making them worse off. few customers will leave as a response to raised prices if 1 firm offers lower price/improved conduct, customers wont retain loyalty once competitrs respond3) Agencies have credible basis to conclude merger may enhance that vulnerability (esp. if maverick is merged BUT maverick claim is hard bc even if was in past, no ev that will continue to serve that role) 8] Powerful Buyers: consider possibility that powerful buyers may constrain the ability of the merging parties to raise prices but DOJ doesnt presume that this alone forestalls adverse comp effects of merger. (If I am citifield and buys tons of coke, I have a constraining power on their ability to raise prices, can boycott etc.) 9] Entry: merger not likely to enhance market power if entry is easy. Easy: Timely rapid enough to make unprofitable overall the actions causing those effects and thus leading to entry Likley depends on: (a) output level new firm is likely to obtain (given wtvr entry barriers) (b) price that wld obtain in post-merger market (including extra costs of new entry) (c) cost per unit scale at which new firm operates Sufficient in magnitude, character, and scope to deter comp effects. must be close enough sustitutes, sufficiently competitive. 10] Efficiancies: results of lower prices, improved quality, enhanced service, or new products. Cld allow merged to become more competitive with bigger firms. BUT only if cldnt have been done thru other ways divestiture, licensing (merger-specific efficiancies). Agency most-likely to credit detailed efficiancies supported by past examples. Cognizable efficiancies reduction in net costs (less transaction costs involved.) internal operation efficiency isnt goal but competition. Efficiency arg can rarely be used for a monop/near-monop. Diff types: lowering incremental cost of production good arg; research and devt moderate; procurement, mngmnt, capital cost usually not merger-specific and can be done thru other means. BUT, SC has never validated efficiency defense and in PNB, rejects it. 11] Failure and Exiting Assets: if firm failing, relevant assets wld otherwise exit the market not harming consumers. Test: failing firm is unable to meet financial obligations in near future (heading to BR anyway) it wld not be able to reorganize under Ch11 of BR act has made good-faith efforts to get reasonable alternative offers that theaten competition less (other buyers) NY v. Kraft General Foods, Inc. (SDNY 1995)- *shows US shift from market concentration to anticomp effects FACTS: US seeks injunction (divestitude/recission) to stop merger (already done) FTC not bringing suit doesnt make a difference but NY state can still bring under parens Patriae (for consumers) MARKET DEF: geography entire US. All RTE cereals vs. adult RTE cereals? Consumer Dynamics like variety, buy on basis of taste, nutrition, price, habit, coupons, type of grain, sugar content. Submarkets all family traditional child simple health nutrition. Even when clarified as kid/adult, ad campaigns show interchangeable. Growing market overall suggests cross-price elasticity, strong substitution Retail customers (keyfood) perspective dont distinguish kid/adult (large end-aisle display/attractive price) Competition from products in other product categories snack foods, hot cereal, bagels on the margin Supply-side substitutability processes to make adult/kid cereals the same so if price for one went up others wld.. Agreed upon expert to define market no clear way of making RTE cereal market smaller Quotes Brown Shoe v. US (III.99) the outer boundaries of a product market are determined by the reasonable interchangability of use or the cross-elasticity of demand btw the product itself and substitutes for it. MARKET SHARE MEASUREMENT: moderately concentrated market (2215), but only delta of 66. Post-Merger HHI for each firm in market, square their market share. Then, add all those market shares together. For increase, multiple: firm A market share * firm B market share * 2 US argues that Nabiscos market share deflated bc will rise in future bc of new plan. BUT, plan they suggest is not actually financially good for them, no proof theyll do it, and no proof competitors wont react to plan. ANTICOMPETITIVE COORDINATED EFFECTS: hard to show bc RTE cereals heterogeneity + multiple forms of competition TEST (III.102): whether the acquisition will make it easier for the firms in the market to collude, expressly or tacitly, and thereby force price above the competition level. No coordination but follower effect. No close coordination of price Kellogg was leader and everyone followed but not necessarily anti-comp. Nabisco was follower not playing a maverick role Industry Structure - Collusion here not possible bc: (transparency, time lag, many products, hard to detect, small purchases, hard to police and stop cheaters in advance, hard to punish cheater w/o effect on whole industry.) Wholesalers - Not likely to have followship collusion bc give-back promotions occur way in advance hard to track and replicate other firms promotions or amt spent on promotions Consumers entice them to try new cereals coupons, in-store sampling, sweepstakes, premiums Hard to track bc of time-lag, learn abt it much later Any tracking is only to remain competitive in industry, not to coordinate. Introducement of new products keeps industry going and bc of it, wld make agreement among firms diffic Improvement of old products collusive arrangement to police product improvements is nearly impossble Advertising diff for all manufacs to decide $ amt to spend AND effectiveness of advertising no suggestion that profit levels in industry show impermissible market power. Retailers (supermarkets) testified theyre not harmed by the acquisition Court appointed expert said no evidence of coordinated effects is credible US has 2 theories for comp being reduced bc of decreasing firms 65 but neither likely to occur Nabisco might decide to resume manufacturing + act as maverick Nabisco cld sell assets to new entrant (newco) who wont reduce comp as much as kraft (bc maverick) ANTICOMPETITIVE UNILATERAL EFFECTS closest competitors - Grape nuts and shredded wheat are not bc: physically dissimilar, associated with diff attributes as seen in advertising, compete w/ broad array of products (not just each other), appeal to diff consumers (from retailers perspective, education level of consumer, study that only 20% of ppl buy both) cross-elasticity very low (increasing grape nuts price is only slightly likely to lead to increase in shredded wheat sale supply responses if raised prices, other brands wld start creating more substitutes to capture diversion SUM: to show unilateral effects, show:1) Diversion ratio how many sales of A will be diverted to B as opposed to another competitior2) Profitability price/cost ratio how profitable will raising price of A be compared to $ u lose from ppl diverting to products other than B3) Elasticity how similar and substitutable are the products to begin with? Direct competitors? Head-to-head compeittiors? (J wood says need to be 1st and 2nd substitutes but guidelines soften this rment) QUESTIONS UNANSWERED: Do u ned to define market? Accdg to unilateral effects, seems like no but yes for any line of commerce Substantially wld 4% increase be enough to say substantial (Veil seems to say 10%) In Veil case, seems like divesting one slope satisfies anti-comp effect CRAZY! Focus on competition being in regard to advertising, not pricing also creates entry barriers How does a divestitude remedy work? US v. Engelhard Co. (11th Cir. 1997) merger of top 2 (40% market share each) of GQA producers (natural clay to finish end products). Because only a small percent is used in the end product and wld need to incur a bunch of other testing and costs, buyers wld not switch btw 2 companies if there was a 5-10% raise in price. Accdg to SSNIP wld be in diff markets but US in DuPont clearly spoke against that. US v. Vail Resorts (DOJ + state of Colorado 1997) - *seemingly define based on submarket, unilateral effects FACTS: Vail (Vail, Beaver Creek) acquires Ralston (Keystone, Breckenridge, Arapo). Market: providing downhill skiing to residents of Colorados front range who will travel 2.5hrs for one-day skiing. If merged firm price 5%, skiers wld not travel further in signif #s to another resort wld raise prices to reep monop profits. Considered differentiated products bc each has diff terrains but close enough substitutes that if Vail raised price, many wld go to Ralston. Once merged, Vail cld raise price and all wld get to Ralston bc dont wanna go 5hrs to next closest resort (high diversion rate). Use of economics allows us to predict how elastic the 2 firms are BUT s/t best price got by trial/error Post merger H