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LAW, BUSINESS, &

SOCIETY
11th
Edition

McGraw-Hill

2015 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part..

Learning Objectives

Recognize the changing goals of


antitrust law
Describe the key antitrust statutes
Explain the meaning of horizontal
restraints of trade
Analyze when an unlawful price-fixing
arrangement has been created
Identify a group boycott
10-2

Learning Objectives

Define resale price maintenance


Explain the requirements for establishing
an unlawful tying arrangement
Describe the commercial advantages
and disadvantages of exclusive dealing
Contrast price discrimination and
predatory pricing
Explain how predatory pricing may be
proved
10-3

Antitrust - Early Goals

Antitrust law is a product of changing


political and economic tides
Early advocates were concerned about:
Preservation of:
Competition
Democracy
Small businesses
Expression of political radicalism

10-4

Antitrust Enforcement and


Statutes

Justice Department and Federal Trade


Commission bring few antitrust actions
Government prefers to avoid litigation
Most cases are settled before going to court
Cooperating defendants are allowed to avoid

criminal prosecution

Private parties can sue under the antitrust


laws
Closely regulated government segments
claim to be immune from antitrust laws
10-5

Antitrust Enforcement and


Statutes

Sherman Antitrust Act, 1890


Section 1 forbids restraint of trade
Section 2 forbids monopolization
Enforcement options available to federal

government
Violation opens participants to criminal
penalties
Injunctive relief is provided under civil law

10-6

Antitrust Enforcement and


Statutes

Clayton Act, 1914


Forbids:
Price discrimination, exclusive dealing, and
tying arrangements
Requirements contracts, and mergers
restraining commerce or tending to create a
monopoly
Interlocking directorates
Criminal law remedies are not available

10-7

Antitrust Enforcement and


Statutes

Federal Trade Commission Act


Created the FTC
Designed to eliminate anticompetitive
practices in American commerce
FTC proceeds under Sherman Act, Clayton

Act, and Section 5 of the FTC Act


Enforcement devices
Cease and desist order
Imposes fines
10-8

Federal Antitrust Law and


Other Regulatory Systems

State law
Most states have developed their own

antitrust laws

Patents, copyrights, and trademarks


Offer limited, government-granted,

government-shielded market strength


Protect and encourage commercial
creativity and product development

10-9

Horizontal Restraints of Trade

Involves competitors colluding,


conspiring, or agreeing among
themselves
Governed by Section 1 of the Sherman
Act
Forbids contracts, combinations, or

conspiracies in restraint of trade


Plaintiff must prove the existence of an
anticompetitive agreement or conduct and
how it harms the competition
10-10

Horizontal Territorial and


Customer Restraints

Sherman Act, Section 1


Every contract or conspiracy, in restraint of

trade or commerce, among the states, or


with foreign nations, is declared to be
illegal

Competitive arrangements are per se


violations of the Sherman Act
Nullify the powerful benefits of competition

10-11

Horizontal Price Fixing

Competitors may not lawfully agree on


prices
Establishing the presence of an unlawful

price-fixing arrangement is not simple

Measure of proof
Should satisfy the requirement of a

contract, combination, or conspiracy

10-12

Horizontal Price Fixing

Methods of proof
Agreement with direct evidence
Agreement without direct evidence
Agreement based on a tacit understanding
Agreement based on mutual observation

Parallel conduct
Conscious parallelism is lawful
Competitors do not agree either explicitly or
by implication to follow same course of action
10-13

Horizontal Price Fixing

Aggressive enforcement
Government intervention, and damage

claims by wronged consumers are


essential to maintain effective competition
Antitrust law is designed to protect the
consumer from a variety of commercial
arrangements

10-14

Case: Cigarette Pricing

Case
Romero and Ferree v. Philip Morris, et al.
2010 N.M. LEXIS 370 (N.M. S.Ct.)
District court

Issue
Plaintiffs filed class action lawsuit against

defendants
Alleged that Marlboro Friday and consecutive
price reductions violate New Mexico antitrust
and consumer protection laws
10-15

Refusal to Deal/Group
Boycotts

Horizontal group boycott


Competitors agree not to deal with a

supplier, customer, or another competitor


Per se violations of Sherman I
Showing of market power by those in the
group may be required

Unilateral refusal to deal by a buyer or


seller raises antitrust concerns
Firm should be a monopolist and harm to

competition should be proven


10-16

Vertical Restraints

Restraints involving two or more


members of a supply chain
Imposed by suppliers on their buyers

Resolved under the rule of reason


Harmful and beneficial to competition
Evaluated on a case-by-case basis

10-17

Resale Price Maintenance

Manufacturers and distributors specify


the price at which customers resell
their products
Reasons
To enhance the products reputation
To help retailers make a profit sufficient to
provide customer service
To prevent discount stores from pricing
beneath full-price retail outlets
To prevent free riders
10-18

Resale Price Maintenance

Unilateral specification of a resale price


is permissible
Agreements specifying maximum and
minimum resale prices is not a per se
violation
Should be evaluated under the rule of

reason

10-19

Case: Resale Price


Maintenance

Case
Leegin Creative Leather Products, Inc. v.

PSKS, dba Kays Kloset


127 S.Ct. 2705 (2007)
Supreme Court

Issue
PSKS alleged Leegin had violated antitrust

laws by entering into agreements with


retailers to charge prices fixed by Leegin
10-20

Leegin in Practice (Law)

Ruling affirms the Supreme Courts


preference for:
Free-market principles
Reduced judicial intervention in business

practice

Several states treat resale price


maintenance as a per se violation of
law

10-21

Leegin in Practice (Business


Response)

Product suppliers use Leegin decision


to impose strict pricing policies
throughout their distribution chains
Manufacturers worry that price
discounts diminish product image
Look to discourge free-riders and

showrooming

10-22

Vertical Territorial and


Customer Restraints

Manufacturers impose non-price


restraints
Where and to whom their product can be

resold
Prevent distributors from selling to certain
classes of customers
Retard or eliminate intrabrand competition

Territorial and customer allocations are


evaluated under the rule of reason
10-23

Tying Arrangements

Permit a customer to buy or lease a


desired product only if the customer
buys or leases a less desirable product
Raises antitrust concerns
Market power of the tying product is

extended into the tied product market


Competitors in the tied product market are
excluded from equal access to that market

10-24

Tying Arrangements

Violation test
Existence of separate products
Purchase of a product is conditioned on the

purchase of another product


Market power in the tying product
Substantial impact on commerce in the
tied product market

When all ingredients cannot be


satisfied, the analysis proceeds on a
rule of reason basis
10-25

Case: Franchise Tying

Case
Rick-Mik Enterprises, Inc. v. Equilon

Enterprises, LLC
532 F.3d 963 (9th Cir. 2008)
District court

Issue
Franchisees alleged that Equilon violated

antitrust laws by illegally tying two distinct


productsfranchises and credit-card
processing services
10-26

Exclusive Dealing and


Requirements Contracts

Exclusive dealing contract - A buyer


commits to deal only with a specific
seller
Results in market foreclosure

Requirements contract
Seller agrees to supply all of a buyers

needs, or a buyer agrees to purchase all of


a sellers output, or both

10-27

Price Discrimination

Involves selling identical goods at the


same time to different purchasers at
different prices
Harms competition

Defenses to resist RobinsonPatman


charge
Price differential is attributable to cost

savings

10-28

Price Discrimination
Price differential is attributable to a good

faith effort
Certain transactions are exempt from the
act

Criticized as an attack on common,


consumer-friendly pricing practices

10-29

Case: Robinson-Patman
Action

Case
Drug Mart Pharmacy Corp. v. American

Home Products
U.S. District Court for the Eastern District of
New York, 2012 U.S. Dist. LEXIS 115882

Issue
Plaintiffs allege that defendants offered

discounts to competitors but not to plaintiffs


Constitutes price discrimination in violation of
the Robinson-Patman Act
10-30

Predatory Pricing

Legally reducing prices below


operating costs until the competitor
drops out of the market
Subsequently prices are increased to

supracompetitive levels

Test for establishing predatory pricing


Pricing below cost
Dangerous probability of recouping the

losses suffered from the below-cost pricing


10-31

Antitrust Confronts
Intellectual Property

Law provides patents and copyrights in


order to preserve the innovators rights
Encourages and protects intellectual

property innovations
Confers power, can lead to antitrust abuse

Conflicts between antitrust law and


intellectual property rights are
increasing
Supreme court has ruled that patents are not

to be treated as monopolies
10-32