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What is antitrust/competition law? What is its purpose? 1 What is antitrust/competition law? What is its purpose? 1

What is antitrust/competition law? What is its purpose? l Concerned with: l Fears of What is antitrust/competition law? What is its purpose? l Concerned with: l Fears of concentrations of economic power in the hands of a few l harmful effects of some forms of business cooperation l misuse of “monopoly” power Simultaneous rise of regulatory agencies and antitrust law l National laws: 1800 s through early 1900 s l EU laws: 1980 s l 2

History of Antitrust How did Standard Oil acquire market power? John D. Rockefeller believed History of Antitrust How did Standard Oil acquire market power? John D. Rockefeller believed that monopoly was beneficial because it protected members of an industry from “destructive competition. ” What does that “destructive competition” mean? Destructive to whom? 3

 • Market divisions • Price fixing & bid rigging • Predatory pricing • • Market divisions • Price fixing & bid rigging • Predatory pricing • Boycotts • Tying arrangements • Mergers • Misuse of monopoly power 4

Overview of Antitrust/Competition Laws Antitrust/Competition laws place faith in the market. l EC Art. Overview of Antitrust/Competition Laws Antitrust/Competition laws place faith in the market. l EC Art. 81: prohibits agreements “which have as their object or effect the prevention, restriction or distortion of competition within the common market” l US Sherman Act: outlaws "every contract, combination. . . , or conspiracy, in restraint of trade" 5

Economic definition of monopoly vs. l Legal definition of monopoly l KEY: market power Economic definition of monopoly vs. l Legal definition of monopoly l KEY: market power 6

Market Power “BAD” ACT Collusion Market share Monopoly power in another market Power to Market Power “BAD” ACT Collusion Market share Monopoly power in another market Power to increase prices above “competitive” price Etc. Is the power to increase the market price sustainable? Ease of entry to market 7

Who decides what is “reasonable” or “unreasonable”? 8 Who decides what is “reasonable” or “unreasonable”? 8

Who decides what is “reasonable” or “unreasonable”? l l l EU: European Comm’n Competition Who decides what is “reasonable” or “unreasonable”? l l l EU: European Comm’n Competition Directorate ECJ US: FTC/Justice Dept US courts Private suits Defining “harm” – “per se” vs. “rule of reason” violations 9

Who decides what is “reasonable” or “unreasonable”? l l l Structural approach Chicago School Who decides what is “reasonable” or “unreasonable”? l l l Structural approach Chicago School IO approach 10

Horizontal Agreements 11 Horizontal Agreements 11

l Horizontal Agreements Price Fixing and Bid Rigging l When competitors agree on the l Horizontal Agreements Price Fixing and Bid Rigging l When competitors agree on the prices at which they will buy or sell, their price-fixing is a per se violation of EC Article 81 and § 1 of the Sherman Act. l Pharmacists l Airline ticket prices / retail gasoline prices l Sports club owners l World steel market and the EU l Beer distributors and credit terms l Trade shows l Bid-rigging – public contracts 12

Horizontal Market Divisions l Any effort by a group of competitors to divide its Horizontal Market Divisions l Any effort by a group of competitors to divide its market is a violation of EC Article 81 and the Sherman Act Section 1. l Customer divisions: l By class (religion) l Geographically (side of town) Supply divisions: l We won’t sell X in competition with you, if you don’t sell Y in competition with us. l E. g. , two hardware stores in a small town agree that one will not stock plumbing equipment while the other will not stock electrical equipment l OPEC production quotas l 13

Horizontal Market Divisions l l l What about joint ventures between competitors? What about Horizontal Market Divisions l l l What about joint ventures between competitors? What about professional codes of conduct: don’t these restrict competition? What about franchising operations? Aren’t these geographic market divisions? 14

Illegal Horizontal Agreements (cont’d) l Refusals to Deal / Boycotts l Concerted refusals to Illegal Horizontal Agreements (cont’d) l Refusals to Deal / Boycotts l Concerted refusals to deal vs. individual refusals l A refusal to deal violates the law if it harms competition. l South Improvement Scheme l U. S. v. Hilton Hotels 15

Illegal Competition: Tying Arrangements l l Selling a product on the condition that the Illegal Competition: Tying Arrangements l l Selling a product on the condition that the buyer also purchases a different (or tied) product. To determine if it is illegal, ask: l Are the two products clearly separate? l Is the seller requiring the buyer to purchase the two products together? l Does the seller have significant power in the market for the tying product? l Is the seller shutting out a significant part of the market for the tied product? 16

Illegal Competition: Predatory Pricing l l Predatory pricing occurs when a company lowers its Illegal Competition: Predatory Pricing l l Predatory pricing occurs when a company lowers its prices below cost to drive competitors out of business. The Walmart problem 17

Illegal Competition: Predatory Pricing l To prove predatory pricing, show: l The defendant is Illegal Competition: Predatory Pricing l To prove predatory pricing, show: l The defendant is selling its products below cost. l The defendant intends that the plaintiff goes out of business, l If the plaintiff does go out of business, the defendant will be able to earn sufficient profits to recoup its prior losses. l Bad intent is not enough; bad intent + fatal damage to competitor may not be enough Why have such a test for predatory pricing? 18

Mergers and Joint Ventures l Horizontal Mergers l. A horizontal merger involves companies that Mergers and Joint Ventures l Horizontal Mergers l. A horizontal merger involves companies that compete in the same market. l FTC and European Commission halt/approve mergers, based on likely impact on competition: l HHI as measure of market concentration: too much concentration creates rebuttable presumption of violation Herfindahl-Hirschman Index Calculator = sum of the squares of the market shares of firms in industry. Threshold inquiry. 19

Mergers and Joint Ventures l Horizontal Mergers l FTC and European Commission halt/approve mergers, Mergers and Joint Ventures l Horizontal Mergers l FTC and European Commission halt/approve mergers, based on likely impact on competition: l HHI as measure of market concentration: too much concentration creates rebuttable presumption of violation l What is market? l Product market: l Geographic market 20

Hewlett-Packard / Compaq merger Product Market? Geographic Market? 21 Hewlett-Packard / Compaq merger Product Market? Geographic Market? 21

Hewlett-Packard / Compaq merger Product Market? Access Devices? HHD Laptops PCs workstations Geographic Market? Hewlett-Packard / Compaq merger Product Market? Access Devices? HHD Laptops PCs workstations Geographic Market? 22

Hewlett-Packard / Compaq merger Product Market? Market shares? • Access devices? • Entry level Hewlett-Packard / Compaq merger Product Market? Market shares? • Access devices? • Entry level servers? Geographic Market? EEA 23

Office Depot/Staples Merger Office Depot Staples Other office supply 24 Office Depot/Staples Merger Office Depot Staples Other office supply 24

Mergers and Joint Ventures (cont’d) l Vertical Mergers l Key is foreclosure of opportunities Mergers and Joint Ventures (cont’d) l Vertical Mergers l Key is foreclosure of opportunities for non-merging firms l Time Warner – Turner Broadcasting l What makes this merger worrisome for regulators? 25