Introduction to Antitrust Law

Always two questions in any antitrust case:– What is prohibited according to the

antitrust statutes?– Will the actions the firm is taking/has taken

result in these prohibited things? Legal side of antitrust is answering the

first question.

Economic Side of Antitrust

Determine whether a firm’s actions will have specific effects that have been determined to be illegal.– For the most part, a postitive question -- a

question of fact.– But ultimately the courts will decide

because inevitably different economists will have different opinions.

Sherman Act - 1890 Earliest antitrust act by any country. Outlaws "every contract, combination . . . or

conspiracy, in restraint of trade,”– Supreme Court decided it only prohibits contracts that

restrain trade unreasonably. What is unreasonable is up to the courts.

Makes it unlawful to monopolize, or attempt to monopolize a market. – As interpreted by the courts, the law is violated only if

the company tries to maintain or acquire a monopoly position through unreasonable methods. Courts decide what is unreasonable.

Clayton Act - 1914 Prohibits mergers and acquisitions where the

effect "may be substantially to lessen competition, or to tend to create a monopoly." – Determining whether a merger will have such an

effect requires a thorough economic evaluation or market study.

Also interpreted as limiting the use of tying and exclusive contracts.

Passed partly in response to perceived shortcomings in the Sherman Act as interpreted by the courts.

Federal Trade Commission Act -1914 Outlaws "unfair methods of competition.”

– Does not define unfair. The courts must decide.

– The Supreme Court has ruled that violations of the Sherman Act also are violations of FTC Act, but the FTC Act covers some practices that are beyond the scope of the Sherman Act.

Robinson-Patman Act - 1936

Price discrimination that lessens competition is illegal.– In general, price discrimination is lawful. Must hurt

competition to be illegal.

“Chicago School”

A group of academics, primarily at the University of Chicago.

Belief that markets will eventually erode most monopolies quickly and more effectively than governments.

Post-Chicago School

Revival of interest in antitrust law and economics.– Development of new theories that show

persistent existence of market power. Additional increase in interest due to

increase in merger activity.

History of Industrial Organization

Structure-Conduct-Performance Paradigm– First formal theory of industrial organization– Developed in the 1940’s by Mason and

Bain– Assumes a causal relationship:

Structure Conduct Performance

S-C-P

Structure: characteristics of the market.– number of firms, distribution of market share,

degree of product differentiation, entry conditions, Conduct: choices of firms.

– price, quantity, investments, service, quality. Performance: how firms do.

– price, consumer surplus, product variety, technological progress.

New Industrial Organization

Focuses on models of firm behavior. Uses game theory as a basic tool.

– Explicitly incorporates strategic interaction among firms

New Empirical Industrial Organization (NEIO)– Based on theoretical models.– Econometric analysis, not case studies.

Major Questions in Industrial Organization Is there market power? How do firms acquire and maintain

market power? What are the implications of market

power? Is there a role for public policy regarding

market power?