Chapter 23 Promoting Competition Chapter Objectives 1

Chapter 23 Promoting Competition

Chapter Objectives 1. Explain the purpose of antitrust laws, and identify the major federal antitrust statutes. 2. Summarize the types of activities prohibited by Sections 1 and 2 of the Sherman Act, respectively. 3. Indicate why the Clayton Act was passed, and describe the types of activities prohibited by this act. 4. Describe how the antitrust laws are enforced. 5. Name several exemptions to the antitrust laws. 2

The Sherman Antitrust Act In 1890, Congress passed “An Act to Protect Trade and Commerce against Unlawful Restraints and Monopolies”—commonly known as the Sherman Act. The Sherman Act was and remains one of the government’s most powerful weapons in the struggle to maintain a competitive economy. 3

Major Provisions of the Sherman Act Section 1 - Prohibits contracts, combinations, and conspiracies in restraint of trade. § Horizontal restraints subject to Section 1 include price-fixing agreements, group boycotts, horizontal market division, trade association agreements, and joint ventures. § Vertical restraints subject to Section 1 include resale price maintenance agreements, territorial or customer restrictions, and refusals to deal. Section 2 - Prohibits monopolies and attempts to monopolize. 4

The Sherman Antitrust Act of 1890 Henry Lloyd, a young journalist, published an article in the Atlantic Monthly which discussed the success of the Standard Oil Company. The article marked the beginning of the public’s growing awareness and concern over the growth of monopolies that eventually led to the passage of the Sherman Act of 1890. Is monopoly power (the ability to control a particular market) necessarily harmful to society’s interests? 5

Jurisdictional Requirements The Sherman Act applies only to activities that have a “significant” impact on interstate commerce. 6

Section 1 of the Sherman Act The underlying assumption of Section 1 of the Sherman Act is that society’s welfare is harmed if rival firms are permitted to join in an agreement that consolidates their market power or otherwise restrains competition. 7

Per Se Violations vs. the Rule of Reason Per se Rule § Applied to restraints on trade that are so inherently anticompetitive that they cannot be justified and are deemed illegal as a matter of law. Rule of Reason § Applied when an anticompetitive agreement may be justified by legitimate benefits. § Under the rule of reason, the lawfulness of a trade restraint will be determined by the purpose and effects of the restraint. 8

Section 1 - Horizontal Restraints A horizontal restraint is any agreement that in some way restrains competition between rival firms competing in the same market. 9

Case 23. 1 Blackburn v. Sweeney When the law partnership of Blackburn, Green, Sweeney, and Pfeiffer split, they signed an agreement that restricted the geographical area within which each resulting partnership could advertise. Later, the Blackburn firm filed a suit against the Sweeney firm alleging that the restriction was a per se violation of the Sherman Act. The court ruled in favor of Sweeney and Blackburn appealed. Why didn’t the court see the agreement to limit advertising as a reasonable covenant not to compete? 10

Section 1 - Vertical Restraints A vertical restraint of trade is one that results from an agreement between firms at different levels in the manufacturing and distribution process. Vertical relationships encompass the entire chain of production: § § the purchase of inventory basic manufacturing distribution to wholesalers eventual sale of a product at the retail level 11

Case 23. 2 State Oil Co. v. Khan Under a contract with a gas station lessor (Khan), State Oil would set a suggested retail price and sell gas to Khan for 3. 25 cents per gallon less than that price. When State Oil terminated the contract for nonpayment of rent, Khan filed a suit alleging price fixing in violation of the Sherman Act. The court ruled in State Oil’s favor, but was reversed on appeal. State Oil appealed to the U. S. Supreme Court. Should all “commercial arrangements subject to the antitrust laws” be evaluated under the rule of reason? 12

Section 2 of the Sherman Act Section 2 condemns “every person who shall monopolize, or attempt to monopolize. ” There are two distinct types of behavior that are subject to sanction under Section 2: Monopolization Attempts to Monopolize 13

Monopolization The possession of monopoly power in the relevant market and the willful acquisition or maintenance of the power, as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident. A violation of Section 2 of the Sherman Act requires that both of these elements be established. 14

Attempts to Monopolize Definition: § Any activity by a firm to eliminate competition and gain monopoly power. 15

The Clayton Act In 1914, Congress attempted to strengthen federal antitrust laws by enacting the Clayton Act. The Clayton Act was aimed at specific anticompetitive or monopolistic practices that the Sherman Act did not cover such as: § § Price Discrimination Exclusionary Practices Mergers Interlocking Directorates 16

Section 2 – Price Discrimination As amended in 1936 by the Robinson. Patman Act, prohibits price discrimination that substantially lessens competition and prohibits a seller engaged in interstate commerce from selling goods of similar grade and quality to two or more buyers at different prices when the result is a substantial lessening of competition or the creation of a competitive injury. 17

Section 3 – Exclusionary Practices Prohibits exclusionary practices, such as exclusivedealing contracts and tying arrangements, when the effect may be to substantially lessen competition. 18

Price Discrimination The Bell Brothers felt they were incurring extra costs when they were refused delivery of their feed from Fur Breeders Agricultural Cooperative. The Bells sued the cooperative alleging price discrimination. The court ruled that a plaintiff’s “competitive opportunities may be harmed when it is forced to incur $16, 000 to $17, 000 in costs each year to pick up feed that its competitors have delivered at no cost. ” Suppose that a business offered free delivery services to customers within a certain geographical area but not to customers located outside that area. Would this practice constitute price discrimination? 19

Case 23. 3 Datagate, Inc. v. Hewlett-Packard Co. HP offered support for those who used its software but refused to provide support for those who did not buy its hardware service. Datagate, who provided hardware service, filed a suit claiming that HP’s practice constituted an illegal tying arrangement. Since the arrangement had been imposed on only one customer, a judgment in favor of HP was entered and Datagate appealed. Did Rockwell International have an alternative to the tying arrangement required by HP? 20

Section 7 - Mergers Prohibits mergers when the effect may be to substantially lessen competition or to tend to create a monopoly. 21

Horizontal Mergers The acquisition by merger or consolidation of a competing firm engaged in the same relevant market. Will be unlawful only when a merger results in the merging firms holding a disproportionate share of the market, resulting in a substantial lessening of competition, and if the merger does not enhance consumer welfare by increasing efficiency of production or marketing. 22

Vertical Mergers The acquisition by a seller of one of its buyers or vice versa. Will be unlawful if the merger prevents competitors of either merging firm from competing in a segment of the market that otherwise would be open to them, resulting in a substantial lessening of competition. 23

Conglomerate Mergers The acquisition of a noncompeting business. 24

Section 8 – Interlocking Directorates Prohibits individuals from serving as directors on the boards of two or more competing companies simultaneously. 25

The Federal Trade Commission Act It provides: “Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce are hereby declared illegal. ” 26

Enforcement of Antitrust Laws Antitrust laws are enforced by: § Department of Justice § Federal Trade Commission § Private Parties, who may be awarded treble damages and attorneys’ fees 27

Reach of U. S. Antitrust Laws The DOJ or the FTC and private parties may bring an action against a foreign party that has violated Section 1 of the Sherman Act. The FTC act may also be applied to foreign trade, and foreign mergers may also be brought within the jurisdiction of U. S. courts. Do antitrust laws place too great a burden on commerce in the global marketplace? 28

Exemptions from Antitrust Laws Labor unions Agricultural associations and fisheries Insurance—when state regulation exists Export trading companies Professional baseball Oil marketing Cooperative research and production Joint efforts by businesspersons to obtain legislative or executive action Other activities, including certain national defense actions, state actions, and actions of certain regulated industries 29

Baseball’s Exemption from Antitrust Laws The U. S. Supreme Court held in 1922 that baseball is not subject to antitrust laws because baseball leagues’ activities did not involve interstate commerce—and thus did not meet the requirements for federal jurisdiction. How can you explain professional baseball’s continued exempt status under the antitrust laws? 30

For Review 1. What is a monopoly? What is market power? How do these concepts relate to each other? 2. What type of activity is prohibited by Section 1 of the Sherman Act? What type of activity is prohibited by Section 2 of the Sherman Act? 3. What are the four major provisions of the Clayton Act, and what types of activities do these provisions prohibit? 4. What federal agencies enforce the federal antitrust laws? 5. Name four activities that are exempt from the antitrust laws. 31