IntroductionVertical Price-FixingNon-price Vertical RestraintsRefusals to DealEconomic ConsiderationsMarket PowerBarriers to EntryPower of PurchasersEvidence of Price CollusionMerger Review ProcessHorizontal Merger GuidelinesVertical Merger GuidelinesAccording to the DOJ, its policy is "to exercise caution in taking actions against vertical transactions to avoid chilling efficiency-enhancing mergers that pose little risk of harm to competition." Vertical mergers can harm competition "under fairly limDegree of EnforcementIllustrative Exclusionary PracticesAreeda-Turner TestOther TacticsIP Licensing GuidelinesEuropean Community Competition PolicyBackgroundComparison to U.S. Antitrust LawArticle 85Article 861990 Merger RegulationNegative ClearanceEnforcementExampleJapanese Competition PolicyAdditional ReadingDo -Don’t -Forget that the laws of Europe and other international jurisdictions may apply. Business combinations in particular are now exercises in international law.NotesAntitrust and Competition Policy: A Primer Revised: October 15, 2001 Introduction Routine business decisions involving prices, terms and conditions of sale, supplier and customer contacts, advertising, acquisitions, divestitures and numerous other activities have implications under federal antitrust laws. These laws are intricate, and even unintentional violations can result in significant penalties. Thus, an understanding of the scope and contours of the antitrust laws is necessary to guard against possible violations. This overview of antitrust law corresponds to the antitrust implications of topics discussed in class. It covers the five topics that are most relevant to the activities and decisions of business leaders: vertical restraints, business combinations, price discrimination, collusion and cartels, and predation and other exclusionary practices. The overview then discusses additional complexities presented by intellectual property and international antitrust law, and concludes with general guidelines designed to reduce antitrust complications from business activity. Links to additional reading and questions for review and discussion are provided in some sections. Firms and MarketsNotesAntitrust Primer Page 2 Vertical Restraints When organizing product distribution, sellers often resort to a variety of restrictions aimed at the orderly marketing of their goods. These “vertical restraints” may range from agreements between suppliers and buyers concerning the price at which a buyer may resell (vertical price-fixing) to exclusive dealing agreements and territorial restrictions (non-price vertical restraints) to boycotts of certain buyers (refusals to deal). As with many other business aspects, vertical restraints fall under the scope of antitrust laws. In reviewing vertical restraints, the United States Justice Department (DOJ) and the Federal Trade Commission (FTC) rely on section one of the Sherman Act, enacted in 1890, which prohibits contracts, combinations, or conspiracies between companies that unreasonably restrain trade or commerce. Section three of the Clayton Act, enacted in 1914, which prohibits certain agreements that would substantially reduce competition, sometimes applies as well. Vertical Price-Fixing Vertical price-fixing agreements, in which a seller and buyer agree on the price at which the buyer will resell, have typically been considered per se illegal. The reasonableness or wisdom of the agreed-upon price is irrelevant. The only exception to this general rule is that of fixing a maximum price: in reviewing the State Oil vs Kahn case in 1997, the Supreme Court decided that such restraint is not per se illegal and should instead be judged on a case by case basis (rule of reason). To fall within the per se prohibition, an agreement between the buyer and the seller that the buyer will resell at a specified price or price level must exist. Unlike horizontal agreements (discussed under Collusion and Cartels), the per se prohibition does not apply to vertical agreements that merely affect prices. For liability purposes, the crucial question is whether an agreement exists. The courts have indicated clearly that a seller may properly suggest a resale price to its vendee. The vendee’s use of the suggested price is not sufficient to demonstrate that a conspiracy exists. Thus, manufacturers or other suppliers would be well-advised to use the word "suggested" when mentioning resale prices to clarify their intent. Consignment Sales For many years it was accepted antitrust doctrine that, in consignments to a true agent (as opposed to an agency relationship created by a mere formal arrangement), a seller was free to set the price at which "its" products were sold, even though the agent was otherwise independent in other respects. The United States Supreme Court has seriously questioned the continuing validity of this freedom. Vertical price fixing under the guise of consignment is apparently dangerous whenever the seller is able, by using economicAntitrust Primer Page 3 leverage, to "coerce" compliance by the consignees. The prudent course is to use consignment selling only if there is a good nonprice reason for doing so and, whenever such a method is employed, to treat the consignee as a true agent—the seller should pay taxes and insurance, maintain inventory control, and approve significant decisions. Non-price Vertical Restraints Provided marketing arrangements do not involve unlawful vertical price fixing, they are governed by the “rule of reason,” which condemns such arrangements only when they are deemed unreasonable in the totality of the market’s economic circumstances. Exclusive selling agreements Sellers may grant an exclusive franchise to a particular dealer in a specified territory by agreeing to sell only to that dealer within its area of responsibility. Such restraints, which are limitations upon the seller's freedom, are governed by the rule of reason and are typically valid. Even if the seller is induced to grant such an "exclusive" franchise by the dealer, the courts have not found an illegal concert of action. Territorial and customer restrictions Orderly marketing plans have often used arrangements whereby dealers agree to resell the product only within specified territories and to solicit business only from specified classes of customers. These arrangements restrict the dealers’ freedoms with respect to the buyers. Such