Sept - University of Chicagoblsa.uchicago.edu/upper class/antitrust/Antitrust... · Web viewCA 7: prohibit transaction resulting in harm to competition in any area of commerce ( assess

Picker Antitrust Fall 2002

Introduction to Antitrust

What is a market? How do you define a market?What are we trying to accomplish? –producers, consumers, large/small

Modes of analysis: per se, rule of reason, California Dental (“quick look”)

FTC Act: unfair methods of competitionClayton Act: price discriminationSherman Act 1: combination in the form of a trust … in restraint of tradeSherman Act 2: monopolization

“Rule of Reason”: born in Standard Oil (1911)

competitive outcome: P = MC monopoly outcome: MR = MC

US: consumer-oriented EU: producer-oriented (see GE-Honeywell)Statutes: SA1 - literalism (Trans-Missouri) rule of reason (Standard Oil)

SA2 - separate monopoly from monopolize (Alcoa)

The central harm of monopoly is incentive for monopolist to produce less than would be produced in a competitive situation.

Modes of AnalysisPer se: categories of illegal conduct (shrinking year-by year)Rule of Reason: everything else

California Dental Association v. FTC (1999) p1Facts: -CA found CDA’s ad restrictions (misrepresentation) anti-competitive under FTC Act §5

using “abbreviated rule of reason”Decision: -need greater inquiry to determine whether regulations anti-competitiveDissent (Breyer): [performs de novo review, finds anticompetitive violation]

FTC Process: ALJ FTC CA

Summary: “quick look” insufficient spectrum of analytical rigor

BMI v. CBS (1979) p15Facts: -bundling of copyrights for “blanket license” to users by BMI & ASCAPDecision: -reverse CA b/c bundling not per se violation

blanket license ~ buffets: create waste b/c people take more than they can eatbut music is a non-rivalrous good

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Defining Markets-reasonable interchangeability for purposes produced—based on price, use, qualities considered

e.g. cellophane aluminum foil, wax paper, Ziploc bags

DuPont: cross-elasticity of demand

Market Definition (Demand): smallest market such that hypothetical monopolist would find it in his interest to increase prices on a permanent basis (iterative circles)

(Geographic): same iterative process for each location of merging firms(Supply): market share, potential entrants(Functional): identify relevant attributes for goods in question

Visa’s Relevant Market: (attributes: credit, acceptability, security, TC, services)1. Visa & MC2. Visa, MC, Proprietary Cards3. Visa, MC, cash, debit cards4. Visa, MC, Prop. Cards, cash, debit cards, checks

United States v. Visa USA (S.D.N.Y. 2001)Decision: -dual governance not a problem, but exclusionary rules are (network services market)

effectively limits consumer choice b/c Amex & Discover don’t have same access

**exclusionary rules OK (otherwise free rider problems, etc.) if no anti-competitive effects**

Acceptance: merchants—don’t want to spend money on something nobody usescustomers—want widely accepted cards

Key Idea: Substitution, Both on Demand & Supply Side

Approaches: cross-elasticity of demand, hypo-monopolist & concentric circlesAlternatives: -Coke, Pepsi, Gatorade, Water

-Visa, MC, debit cards, checks, cash-network services, ?

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Economics of IP & Price Discrimination

Windtalkers: VHS $48, DVD $16 price discrimination (video stores, consumers)Spiderman: VHS $16, DVD $17

Hypo: -novelist expends $12 to write, $1/copy -two consumers: one at $10, one at $5 price discrimination creates social value: hardcover at $10, softcover at $5

Hypo2: -500 people, 2 sectors ($10 each or $1000 for one) optimal 499x10 + 1x1000 = $5990 equilibrium 400x10 + 1x1000 (b/c expected value when n=100 is 10) = $5000

Inferring Agreement from Parallel Behavior

Hypo: -Amoco & Shell in Hyde Park always have same price parallel price movesHypo2: -airline pricing price levels very visible, everyone tries to competeHypo3: -amazon.com BN, bn.com Borders

Finding the AgreementInterstate Circuit v. United States (1939) p56Facts: -price discrimination based on first- & second-run theaters

-D sent letter to distributors seeking agreement setting 2nd-run price level, etc.Decision: -conspiracy to fix prices, D abused monopoly power

If this was about recovery of optimal level of price from product itself, you would expect this to come from the distributors, not Interstate (unless peculiarities of TX market). Interstate is organizing a cartel…

Theatre Enterprises v. Paramount Film Distributing Corp. (1954) p64--up to jury, can’t determine outcome on the law

High Fructose Corn Syrup (7th Cir. 2002) p66Decision (Posner): explicit evidence of price-fixing necessary; up to jury to determine

Hard to fix prices if: many sellers, heterogenous product, good prod/cons substitutes

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Group Refusals to Deal, Joint Ventures

Fashion Originators’ Guild of America v. FTC (1941) p75Facts: -FPGA organized private property system, claim over design/style piracy

registration system, private tribunals, sanctions, etc.-agreements with retailers not to sell pirated-design dresses (not copyright-protected)

Decision: -antitrust violations (anti-competitive restraint of trade) reasonableness of system irrelevant (good intent not a defense)

Private property rights? Invasion of gov’t monopoly re: same?Harm to consumers? Increased price? Reduced Output?

Court treats group boycott as per se violation

Associated Press v. United States (1945) p78Facts: -AP restricted selling of news to new papers difficult for new entrantsDecision: -AP must redesign its By-Laws; open membership obligation

Klor’s v. Broadway-Hale Stores (1959) p83Facts: -electro-domestic manufacturers, in conspiracy with D, refuse to deal with PDecision: -per se unlawful restraint of trade tends to create monopoly for D

structure of competition very important (but other retailers around)

Radiant Burners v. Peoples Gas Light & Coke Co. (1961) p85Facts: -P’s burner not given “seal of approval” by AGA, D doesn’t give gas to non-AGA burnersDecision: -restraint on trade has monopolistic character

Northwest Wholesale Stationers v. Pacific Stationery (1985) p86Facts: -expulsion of PS by NWWS (purchasing coop) w/o giving reasons or chance for appeal

-economies of scale for retailers, less wasteful inventory creates social welfareDecision: -remand; need to use rule of reason analysis rather than per se refusal to deal

unless coop has market power/exclusive access essential to competition, not per se

Hypo: -FOGA raises money from group, lobbies Congress to amend copyright statute not illegal b/c Noerr-Pennington immunity (one/more people petitioning Congess)

Allied Tube & Conduit Corp. v. Indian Head (1988) p90Facts: -ATCC organized mass vote against IH’s PVC conduits at Nat’l Fire Protection Ass’n

JNOV granted on basis of Noerr immunityDecision: -no Noerr immunity; ATC tried to “stack” private standard-setting bodyDissent: -effective tax on participating in political process b/c delegation by legislature to NFPA

opens door to potential antitrust liability

New Idea: immunity from antitrust liability Noerr, State Action (Parker v. Brown)

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Vertical Restraints

Dr. Miles (1911): -minimum resale price maintenance a per se violationColgate (1919): -unilateral restriction (not agreement) doesn’t trigger SA violationSchwinn (1967): -rule turns on location of title to the goods (if title passes, per se violation)

Bork: Continental v. Sylvania was watershed (using economic analysis on vertical restraints)

Continental TV v. GTE Sylvania (1977) p97Facts: -Sylvania has new distribution plan; retailers can only sell at given places

-one licensed retailer wants to sell elsewhere, D terminates agreementDecision: -must apply rule of reason, not clear that this vertical restraint is violation

Hypo1: -Sharp asks BEC & Hartwell to adhere to minimum retail prices, they agree per se violation under Dr. Miles

Hypo2: -Sharp announces suggested retail prices, terminates BEC when doesn’t adhere OK under Colgate

Hypo3: -Sharp gives exclusive franchise to Hartwell apply rule of reason as per SylvaniaHypo4: -BEC/Hartwell get together to set prices per se price fixing under Socony-VacuumHypo5: -BEC/Hartwell agree that education requires, only way to solve is to agree on prices

good motive doesn’t excuse price fixingHypo6: -Sharp suggests min. prices, terminates BEC after Hartwell complains of price-cutting

probably OK under Colgate

Standard Fashion v. Magrane-Houston (1922) p104Facts: -SF K’d with MH to sell patterns exclusively in its store, with penalty clause for breach

-MH discontinued sale of SF’s patterns, started selling competitor’s-SF sued MH for breach of K

Decision: -K one of sale, not agency, SF can’t restrain MH w/ too restrictive covenant socially inefficient for MH to buy from SF if cheaper supplier available

-violates Clayton Act §3 b/c deal lessens competition, create monopoly

-different rules in different locales? different application, sensitivity to prior competition

Toys “R” Us v. FTC (7th Cir. 2000) p106Facts: -concerted policy by TRU to prevent its suppliers from selling to warehouse clubs

-10 bilateral vertical restraint agreementsDecision (Wood): -anti-competitive vertical/horizontal restraint of trade: STOP IT

no creative behavior, just manufacturer boycott (Northwest Wholesale)

Free riding? –advertising, full-line product stocking fees both paid by manufacturer-market info on what’s hot, what’s not?

What is the market? –dept. stores & traditional toy stores: 40-50% markup-specialized discount stores (TRU): 30% markup-general discounters (Wal-Mart, Target): 22% markup-warehouse clubs (Costco, Pace): 9% markup

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Monopolization under §2

United States v. Aluminum Co. of America [Alcoa] (2d Cir. 1945) p118Facts: -D holds various patents, builds up aluminum production

-various practices maintaining monopoly in virgin ingot (90%)-secondary ingot competes with virgin (Alcoa has 64% of combined)-only real competitors are international (whose activities limited by tariffs, TCs, etc.)

Decision (Hand): -violation b/c huge market share (origins of monopoly irrelevant) remand: situation different during war, appearance of Olin, Reynolds

“The successful competitor, having been urged to compete, must not be turned upon when he wins.”

Strategic Entry Deterrence--sequence matters a lot: for simultaneous moves, multiple Nash equilibria

-when sequential, know what will happen, can predict

Alcoa expanded, built up capacity to deter entrants; patent determines sequence

Tying & ForcingWith fixed proportions, no advantage to tying/monopolization leverage.With variable proportions, can leverage monopoly power to sell competitive product (but this

could sometimes raise social welfare, so can’t treat as per se illegal).

Jefferson Parish Hospital Dist. No. 2 v. Hyde (1984) p127Facts: -closed anesthesiology dept. at hospital, exclusivity K with anesthesiologist firm

-Hyde sought admission to hospital staff, was deniedProc.: -DC ruled anticompetitive effects < improvements in patient care

-CA reversed b/c K per se illegalIssue: -whether tying involves use of market power to force buying otherwise unwanted servicesDecision: -reverse; no showing that market as a whole affected by K (P, Q, supply/demand)Concur (O’Connor + 3): -apply rule of reason: a) does seller have power in tying-product markt?

b) does tying arrangement erect barriers to entry in tied-product market?c) is there an economic basis for treating the relevant products as distinct?

Per se illegal: “if substantial volume of commerce is foreclosed hereby”

Kodak v. Image Technical Services (1992) p140Facts: -Kodak restricts access to parts get Kodak parts only if use Kodak service (ISOs mad)Issue: -whether D’s lack of market power in primary market precludes the possibility of market

power in derivative after-marketsDecision: -no summary judgment for Kodak; entry barriers market is Kodak parts & servicesDissent: -no per se tying (so no §1 claim), insufficient market power for §2 claim

parts : service = fixed proportions market so why does Kodak want to sell services if ISOs can do it at lower cost?

Jefferson Parish: self-bundling possible can single brand be a market? (brand consistency)

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Individual Refusals to Deal & Attempted Monopolization

Lorain Journal Co. v. United States (1951) p153Facts: -small OH paper has monopoly, exclusive ad policy to stop WEOL radio station

what’s the market? Lorain itself (expensive to advertise in Cleveland paper) output restriction? Yes, of ads (this is force, not incentive)

Decision: -§2 violation; attempt to leverage monopoly power over mass media in Lorain

Aspen Skiing Co. v. Aspen Highlands Skiing Corp. (1985) p157Facts: -4 Aspen mountains used to be independent, then Skiing Co. controlled 3

-popular 4-area ticket developed; Skiing Co. forces Highlands out of the ticketDecision: -§2 violation; D has no efficiency concerns, pure monopolization

does intent matter?

Obligations of monopolist to competitors? –don’t have to engage in joint marketing (nor can you fix prices)-essential facilities doctrine: must have sharing situation (Terminal RR)-can’t act against own business interests in short-term for long-term rival elimination

Spectrum Sports v. McQuillan (1993) p166Decision: -monopolization = 1. predatory/anti-competitive power

2. specific intent to monopolize3. dangerous probability of achieving monopoly power

Predatory Pricing

Brooke Group v. Brown & Williamson (1993)Decision: predatory pricing = 1. pricing below appropriate measure of cost (AVC)

2. realistic prospect of recouping losses by supra-compet. pricing

United States v. AMR Corp. [American Airlines] (D. Kan. 2001) p167Facts: -AA dropped prices, increased routes to compete with low cost carriers

-once low cost carriers dropped off, AA returned to previous business/pricing strategyDecision: -no evidence of predatory pricing b/c not pricing below cost, no recoupment strategy

NB: -maximizing short-term profits is not the test for predatory pricing

to what extent are there genuine economies to having more routes? to what extent can you leverage monopoly on one route to compete on other route? lower prices are generally a good thing (engine of competition) hard to understand case against AA unless you buy the reputational argument (wants to

preserve reputation as always fighting entrants to prevent future entry)

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Horizontal Mergers

savings vs. deadweight losses ● efficiencies vs. market power with HSR, switch from ex post regulation (lawsuits) to ex ante regulation (filings) absent consent decrees, most parties abandon proposed mergers

Market ConcentrationHerfindahl-Hirschman Index (HHI) = sum of squares of all individual market shares

increase in concentration post-merger = 2 * S1 * S2

if market highly concentrated & CHHI increase > 100pts, merger unlawful

Market DefinitionFind the smallest product market allowing monopoly power in the smallest geographic market.

Merger Guidelines1. whether merger significantly increases concentration2. whether merger raises concerns about potential adverse competitive effects3. whether entry would be timely, likely, and sufficient to deter/counteract comp. effects4. assessment of efficiency gains not reasonably achievable through other means5. whether, w/o merger, either party would fail (thus decreasing competition)

CA 7: prohibit transaction resulting in harm to competition in any area of commerce assess for all relevant markets

The Winner’s Curse: -under-informed buyer w/ little power, auction winner overly optimistic

AOL-Time Warner: hardly any overlap, but concern over future markets (e.g., interactive TV)

FTC v. Staples (D.D.C. 1997) p207Issue: -merger of Staples & Office Depot (#1, #2 in office supply superstores-OSS)Facts: -Staples only reduces prices when OD reduces, doesn’t feel comp. from Wal-Mart

-internal documents only refer to each other, never to Kmart, Wal-Mart, etc.-Staples offered to sell OD stores to Office Max, but FTC didn’t buy it

Decision: -affirm FTC block b/c proper market determined by consumers’ perceptions (OSS) market is “consumable office supplies” sold by “office superstores” low possibility of entry (see Office 1; Best Buy, Wal-Mart) in a sense punishing their success, success of office superstore model

How to assess the market?-functionality -eyes of producers -eyes of customers -direct economic evidence

FTC v. H.J. Heinz [Beech-Nut] (D.C. Cir. 2001) p219Facts: -merger of #2 & 3 baby food manufacturers Heinz (17.4%) & Beech-Nut (15.4%)

-both sell nationwide, but Heinz focuses on NE, S, MW, Beech sells NY, NJ, CA, FL-Beech-Nut sells for one cent less than Gerber, Heinz several cents less

Decision: -blocked b/c reduces competition, Heinz had other options, high entry barriers

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Robinson-Patman--can’t price discriminate in a way that will lessen competition

can’t charge less in Utah than nationwide just to put Mom& Pop out of business can’t charge Mom & Pop more than national retailer (secondary-line)but no problem with volume discounts/fidelity rebates

Antitrust InjuryGov’t Actions: SA §§4, 4A, 4C Private Actions: CA §4 (damages), §16 (injunctions)

Private/Public Interplay : final judgment or consent decree = prima facie evidence against D

Brunswick Corp. v. Pueblo Bowl-O-Mat (1977) p228Facts: -D acquires 2% interest in bowling machines nationwide when takes over failing lanes

-alleged damages = lost profits from more competitionDecision: -can’t recover damages for increased competition even if antitrust violation

P must prove antitrust injury, reflect anticompetitive effect of violation

Standing & DamagesKansas v. Utilicorp United (1990) p232Facts: -suppliers to utility violated antitrust acts, utility passed on costs to consumersDecision: -only direct purchaser can bring claim for damages, not states as parens patriae

Hanover Shoe (1968): rejection of “passing on” costs defenseIllinois Brick (1977): ban on indirect purchaser suits (prevents multiple recovery)

Calculating damages: deterrence (simple disgorge of profits or DWL insufficient), so 3x Prudential concerns: multiple recovery, incentive to sue, relative costs to sue & allocate recovery

Setting Patent Royalties--patent pools help “double marginalization” problem (like dual vertical monopolies)--benefit of cross-licensing is better “internalization” of externality problem

RemediesUS v. Glaxo (1973) p240Facts: -Glaxo & ICI have complementary patterns, form patent poolsDecision: -can consider patent issues together with antitrust action, ct orders mandatory licensing

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The Tunney Act (Antitrust Procedures & Penalties Act)-determine whether entry of antitrust consent decree is “in the public interest”

Bridge Hypo: -when no per-use cost, shouldn’t charge per-use fee (license fee more efficient) use per-use charge to track marginal cost

Operating System Economics: -large fixed costs, low marginal costs (classic natural monopoly)Demand-Side Externalities –network externalities (e.g., single-phone network is useless)

want to avoid excess inertia/momentum (shouldn’t assume no market failure)

Microsoft Consent Decree (1994) p245--covers MS-DOS, Win3.11, Win95, + predecessors/successors--limitation on bundling, but allowed to develop integrated products

does this conflict with IE bundling?--limitation on non-disclosure agreements--no per-processor licensing but isn’t this what we want?

US v. Microsoft [Microsoft I] (DC Cir. 1995) p252Facts: -DC (Sporkin) refused to enter consent decree b/c not in public interest

thought decree should’ve included NTDecision: -reverse; decree not ambiguous nor hard to implement; remand to diff’t DC judge

[Microsoft II]: -action to hold MS in contempt for violating consent decree

US v. Microsoft [Microsoft III] (DC Cir. 2001) p261Issue: -DC finds tying, monopolization, but no exclusive dealings

-what’s the market? just Windows? + Mac? (not really) + Netscape/Java? (not yet)Analysis: 1. is conduct in question anti-competitive? 2. pro-competitive defenseDecision: -affirm in part, reverse in part; integration OK, tying & exclusionary agreements aren’t

focus on anti-comp. effect of conduct, not intent (+ no pro-competitive justification) MS blocked Netscape from distribution channels (OEMs, IAPs), no pro-comp excuse

instantly achieves ubiquity with relation to underlying software base (API)

NB: -Bill Gates feared that Netscape would commoditize (make generic like water pipes) the underlying operating system; did everything he could to maintain his monopoly

Attempted Monopolization of Web Browser Market--what’s the relevant market? --what prevents entry?

looks like (good) IE competition but anti-competitive activity/consequences in OS market

TyingDC: per se violation CA: do rule of reason (don’t know enough to deal with it per se)

relative effect in secondary market stops short of attempted monopolization

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Remedy1. breakup MS into OS & applications companies (Judge Jackson)2. breakup MS into separate Win + applications companies3. vigilance by technical committee (TC) as per 3rd revised proposed final judgment

bars anti-competitive practices, mandates certain disclosures, protection at OEM level omitted: mandatory distrib of Netscape/Java, open source IE, broader disclosures differences in retaliation provisions

NB: MA, WV appealing, but don’t hold your breathBest remedy: restore point of competition w/o rewarding competitors

Antitrust & The Boundaries of Regulation

Goldwasser v. Ameritech (7th Cir. 2000) p291Issue: -intersection of antitrust & telecom regulation; attempt to expand antitrust standingDecision (Wood): -mere violation of 1996 Telecom Act not antitrust violation

must prove SA/CA claim

Terminal RR: -under certain circumstances, you must share facilities with competitorsIllinois Brick: -only direct purchasers can sue shouldn’t only potential entrants be able to sue?

Trinko v. Bell Atlantic (2nd Cir. 2002) p298Decision: -reverse dismissal of class action

antitrust laws not necessarily preempted by other pro-competitive legislation(same action can violate both Telecom Act & SA)

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International Antitrust

Extraterritorial Application of the Sherman Act

Hypo: UK insurers price fix in UK; US insurance policies re-insured in UK fine, sue them in US ct.

Hypo2: UK behavior or illegal under UK law

Hartford Fire Insurance v. California (1993) p303Facts: -allegations of unlawful conspiracies by London reinsurers to affect US insurance market

-US Ps harmed by UK reinsurers; Ds move to dismiss for lack of jurisdiction-ISO provides standardized forms, actuarial information

Decision (Souter): -jurisdiction OK; no conflict b/c UK law doesn’t require acting against US treat challenges to extraterr. of antitrust law as 12(b)(1) attack on subj. matter juris,Dissent (Scalia): -unreasonable application of Sherman Act (legislative jurisdiction issue)

-presumption against extraterritoriality unless Congress speaks (Aramco) location of market has no relation to interests/harms

FTAIA: insulates anti-competitive behavior as long as it only involves exports

Den Norske v. HeereMac (5th Cir. 2001) p310Facts: -oligopolistic market for heavy-lift barges, allegation of worldwide market division

-P alleges price-fixing, says it overpaid for barge services in North SeaDecision: -no antitrust standing b/c activity not in US, injury not from domestic effect (FTAIA)Dissent: -read FTAIA 6a literally: since Phillips can assert claim, P is not barred

this is a hot international antitrust issue

One Transaction, Two Laws

EU Law: Article 81 (ex 85) –agreements (~SA1) Article 82 (ex 86) –abuse of dominant position (~SA2)

GE-Honeywell (2001)1. DOJ approved with limited changes (e.g., military helicopter engines)2. EC blocked merger due to reduction in competitors this would cause

a. horizontal markets issuesb. mergers of complements but solves double marginalizationc. marriage of any product with new strong owner (financial strength of GECAS)

but can get at them after the fact with antitrust litigation3. Kolasky, It’s a Long Way from Chicago to Brussels protect comp., not competitors

a. differences in judicial review mechanismsb. fundamental different views of markets vs. gov’t regulation

Summary1. What is the relevant market?

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2. What is the anti-competitive harm?

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Documents

Sept - University of Chicagoblsa.uchicago.edu/upper class/antitrust/Antitrust... · Web viewCA 7: prohibit transaction resulting in harm to competition in any area of commerce ( assess