Antitrust Regulation • And Creditors RemediesCreated by Pamela S. Evers, Assoc. Prof., UNCW, for Educational Purposes © 2001 (w/updates)Historical Perspective• Late 1800s: Rockefeller creates the Standard Oil Trust, controlling the US oil market • Railroads also began to form trusts to close the market• Political, cultural, and philosophical issues at turn of the century led to the Sherman Act of 1890 to regulate competitionHistorical Perspective• 1911: Supreme Ct. ordered the breakup of Standard Oil (now Amoco, Chevron, Mobil, Exxon; now merged) – Key issue: has a competitor been harmed• 1960s: the Chicago School of economists argued that issue was whether competition was harmed• Post-Chicago School suggests that competition not enough to protect consumersThe Basic Laws• Sherman Act prohibits all agreements “in restraint of trade” and “monopolization”• Clayton Act prohibits anticompetitive mergers, tying arrangements, and exclusive dealing agreements• Robinson-Patman Act prohibits price discrimination that reduces competitionThe Violations• 2 types: per se and rule of reason– Per se violations have no defense; subject to both civil and criminal penalties– Rule of reason violations are illegal only if they have an anticompetitive impact, thus some defenses exist; generally only civil penalties assessedThe Violations• The Dept. of Justice (civil and criminal) and Federal Trade Commission (civil only) enforce antitrust laws; individuals also may file suit Annual Shareholders’ Meeting of Wal-MartPotentially Illegal Strategies• Strategies that may be illegal are either cooperative (companies work together for mutual advantage) or aggressive (plan to create advantage over competitors)“Monopoly is a terrible thing, till you have it.”Rupert Murdoch,The New Yorker (1979)Cooperative Strategies• Horizontal agreements are among competitors– Efforts to divide the market (per se violation)– Price-fixing and bid-rigging (per se violation)– Refusals to Deal (rule of reason)• Vertical agreements are among firms at different stages of production process– Reciprocal dealing agreements (rule of reason)– Price discrimination (Robinson-Patman Act; enforcement now virtually abandoned)Cooperative Strategies• Mergers and joint ventures combine competitors to strengthen advantage– Horizontal mergers involve firms in same market (e.g., Exxon-Mobil)– Vertical mergers involve firms at different stages of production (strategy for industry conglomerates)– JVs for single purpose are common and almost always permitted (e.g., Navistar & Caterpillar JV)Cases• Toys “R” Us, Inc. v. FTC (2000):– TRU felt competition from discount clubs– TRU asked major suppliers (Mattel, Hasbro, Fisher Price) to sell clubs only unique items or combo packs not sold to other customers, thus clubs wouldn’t have same items as TRU– Manufacturers reluctant, but agreed if all mfrs agreed• TRU acted as coordinator for manufacturer agreementCases• Toys “R” Us, Inc. v. FTC (2000):– Result: share of market slipped for clubs and FTC ruled that TRU engaged in illegal boycott (refusal to deal)– Affirmed: TRU’s efforts anticompetitive and illegalCases• US v. Waste Management (1984):– Waste Mgmnt (WMI) acquired Texas Industrial Disposal (TIDI); both firms in refuse business– Acquisition resulted in almost 50% market share in Dallas, and generally such a large share is a prima facie illegality under prior case lawCases• US v. Waste Management (1984):– Issue: did WMI violate Clayton Act by acquisition? – Holding: In this particular industry, because of ease of entry into the market, the merger doesn’t violate the Clayton ActAggressive Strategies• Monopolization• Predatory pricing• Tying arrangements• Allocating customers/territory• Exclusive dealing agreements• Resale price maintenance (RPM)• Price-fixingAMD suing Intel for tyingMonopoly• Three questions: • What’s the market? – How high can your price go?• Does the company control the market? – No monopoly unless you exclude competitors or control prices• How did the company acquire control?– Possessing monopoly isn’t illegal, but using misconduct to acquire monopoly is illegalPredatory Pricing & Tying• Predatory pricing is when a firm lowers prices below cost to drive competitors out of market– International law calls this act “dumping,” a serious offense in international trade law• Tying is an agreement to sell a product on the condition that the buyer must also purchase a different (tied) product– Franchisors routinely sued for tying arrangements – Film distributors have often been sued for tying• Kodak tied service and parts & Image Tech & others filed an antitrust claim against Kodak• Supreme Court held Kodak had the market power to raise prices and drive out after-market competititors, and remanded case to trialEastman Kodak v. Image Technical Svcs• Unanimous jury returned verdict for plaintiffs of $23 M• Clayton Act trebled damages, resulting in $71.7 million awardControlling Distributors/Retailers• Sup. Ct. has ruled that a vertical allocation of customers or territory is illegal only if it adversely affects competition in the market, thus it is a rule of reason violation– Common in the apparel and food processing industries (remember Nike and Federal Pants?) • Exclusive dealing contracts require distributor or retailer to not carry products of any other supplierControlling Distributors/Retailers• Resale price maintenance (RPM) or verticle minimum price fixing is when manufacturer sets minimum prices retailers may charge to (prevent discounts)– Per se illegal, but DOJ rarely pursues RPM cases, thus RPM is quite common• Maximum price fixing, which benefits consumers, is a rule of reason violationControlling Distributors/Retailers• Horizontal price-fixing is attempt by competitors to alter market forces by price control and per se illegalDenny’s Marina, Inc. v. Renfro Productions, Inc. is about price-fixing at boat showsControlling Distributors/Retailers• A boycott or refusal to deal often takes form of a manufacturer terminating a distributor for discounting, or a business association expelling a member for activities contrary to interests of group– Law unsettled whether these are per se illegal or rule of reason violationsU.S. v. Syufy (1990)• Syufy entered cinema market in Las Vegas leading to
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