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Author: Anonymous

School: University of Chicago Law School

Course: Antitrust

Year: Autumn 2003

Professor: Diane P. Wood

Text: Trade Regulation: Cases and Materials, 5th Ed.

Text Authors: Robert Pitofsky, Harvey J. Goldschmid, Diane P. Wood


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Reasons for antitrust

  1. Economic

    1. Allocative efficiency (enough output to satisfy all demand of consumers who value product above cost of producing) – Chicago School (often maps onto consumer welfare, but not always)

    2. Technological innovation, dynamic efficiencies

    3. Post-Chicago: neoclassical price theory too simple + efficiency may not be sole goal of AT;

  2. political

    1. decentralized power

    2. income distribution effects (M charging supracomp price effects wealth transfer from consumer to M)

    3. impersonal nature of market removes political element

    4. freedom of opportunity to enter and compete

    5. autonomy, freedom of K

    6. populism – but at tension w/ economic reasons b/c tradition favors small bus.

  3. Moral

Antitrust-ish regulation in history

  1. law on monopoly power

    1. Case of Monopolies –Darcy v. Allen (~1603)– held there was no cognizable wrong to the monopolist card manufacturer from new entrant’s lower prices (queen wrong in thinking could give exclusive right to make cards); rationale for disfavoring a patent on the cards:

      1. Higher prices

      2. Decreased quality of goods (not obviously correct)

      3. Competitor loses jobs (maybe not, could be competitor has room b/c charges less

    2. 1624 statute of Monopolies essentially allowed Parliament to grant monopolies (but not Queen);  modern idea in public utility regulation that leg. Is proper source of monopoly authority

    3. No right to recover where M faces having to lower prices b/c of new competition – Schoolmaster’s case (like Pueblo Bowl-o-mat) – not the injury law protects

  2. law on distribution offenses (forestalling, engrossing, regrating considered profiteering)

  3. law on Ks in restraint of trade

    1. Dyer’s case = presumption that covenants not to compete are restraints of trade

    2. Combinations in restraint of trade

      1. Once used against organized labor; now there is an exception – labor of person is not an article of commerce

    3. Restraint may be reasonable where scope is limited in time and place and is ancillary to primary contract – Mitchel v. Reynolds (1711)

      1. + bare or naked restraints are unlawful;

  4. Translation into US law

    1. 19th c. states not effective where big picture of industrialization (trusts form and just move to other states if chased out)

    2. 1890 – the SHERMAN ACT passed; legislative history reflects populist sentiment against big trusts; distaste for power and privilege of M, need for national action, ending oppressively high prices

Sherman Act is born – 1890 – Now how to apply it..?

  1. SA forbids ALL contracts in restraint of trade – broader than common law, which made unreasonable restraints illegal – 1897, US v. Trans-Missouri Freight (association had set rates for transport from Mississippi to West Coast)

  2. US v. Addyston Pipe & Steel Co. (6th Cir 1898) – six iron pipe makers agreed to assigned territories, fixed prices, fictitious bids, re-allocation of profits, rate manipulation; Held unlawful under SA b/c the common law would prohibit; Naked restraints are unlawful.

    1. SCT in affirming reversed EC Knight reasoning that manufacturing not covered under “commerce” language of the statute

      1. Interstate commerce requirement rarely an issue now, post-Commerce Clause revolution in the 1920s

  3. Applies to mergers? A continuing debate

    1. Northern Securities (1904) (holding company had control previously sep Northern Pacific and Great Northern); Held: merger violates SA because it is a direct restraint on competition (since the two companies would otherwise compete)

  4. Economics matter – Rule of Reason analysis is born

    1. Standard Oil Co. of New Jersey v. US (1911) D held to violate both §§ 1 and 2 – it was a combination and conspiracy to monopolize and restrain trade; Where Standard Oil group acquired all oil refineries near Cleveland and the oil pipelines from East, controlled ~ 90% of trade in refined products. Problems: price-fixing; limits on production; deterioration in quality; cut prices against small local cos; Restraints unlawful because unreasonable.

      1. Section 2 an extension of 1 – ensures no way to circumvent;

      2. Monopolization does not mean all monopolies – only improperly gained/maintained ones

      3. Company ordered dissolved

    2. Rule of reason goes: C would not have written an unreasonable statute/ Interpret statute in light of reason/ only unreasonable restraints violative.

II. Markets and Monopoly

Illegal either b/c of illegal origin or b/c of illegal protection of monopoly (sometimes hard to distinguish from good competition)

  • exclusionary acts to protect monopoly not necessarily illegal in themselves

A. § 2 inquiry (from Grinnell) is

        1. monopoly power in relevant mkt (can profitably raise prices subst. above competitive level)

        2. willful acquisition or maintenance of that power (not growth b/c of superior product, business acumen or historical accident)

  1. Economic model demonstrates monopolies do result in social loss

    1. Costs (how much to produce)

      1. Fixed (plant built) vs. variable (raw materials, etc. – depends on how much used)

      2. marginal – cost of producing the last unit

        1. the perfectly competitive price is equal to the marginal cost

        2. monopoly overcharge is amount paid by consumers over the competitive price

      3. consumers who value unit at more than competitive price but at less than monopoly price do not purchase at M price; consumers lose, in the amount willing to pay minus competitive price would have paid = deadweight loss, a loss in economic efficiency

      4. marginal revenue curve – the additional amount of $ company gets by selling last unit; if only firm in mkt, incentive is to equate marginal cost and marginal revenue – causes reduced output and higher price

  2. Measuring monopoly – look at market power – power to increase prices, restrict output (= firm’s ability to profitably deviate from pricing at the marginal cost)

    1. Measure market power directly: if know elasticity of demand (how much of an effect on demand that 1% increase in price has); hard to get this number, but if know it, could stop here??

    2. Indirect measurement of market power – the usual way have to approach:

      1. Define the relevant market

        1. what is the product market? Try to pin down range of things where consumer’s welfare substantially reduced by being forced to go to something else; ‘reasonably interchangeable’

      2. Ascertain the company’s mkt share;

      3. Take into account ease of entry into mkt (production facilities, licenses needed, raw materials available, transportation {geographic expansion})

    3. (Ask whether unlawfully acquired or maintained)

  3. US v. Alcoa (2d Cir 1945) Held monopoly power alone not a violation of SA2, but exclusion of competition and exercise of monopoly power to do so does bring Alcoa w/in § 2 for monopolization of the virgin ingot market.

    1. Exclusionary practices: patent license (looks OK), capacity expansions (arguably just good business); exclusive Ks with electricity utilities (could be big problem); price squeeze of sales to independent fabricators; cartel arrangements w/ foreign ingot makers

      1. Interesting mkt definition problems (virgin vs. secondary ingot)

      2. “The successful competitor, having been urged to compete, must not be turned upon when he wins.” – there is a difference b/n having a lawful monopoly and monopolizing

      3. Accidental monopolist is ok (Alcoa)

        1. No intent to end existing competition or to prevent new competition

        2. Natural monopoly

        3. Changes in taste, cost drive others out

        4. Superior skill, foresight and industry

  4. Intent in § 2;

    1. Not much intent required for monopolization

    2. Specific intent to monopolize required for attempt to monopolize offense –Swift

  5. M has NO duty to disclose technology/know-how, no duty not to take advantage of technology

    1. Berkey Photo (2nd Cir, 1979) Held monopolist Kodak did not have duty to disclose to Berkey the Instamatic Camera’s plan

    2. In re DuPont (FTC 1980) held D did not violate AT laws in aggressive production expansion strategy even though effect was dramatic increase in mkt share

  6. Market definition is critical in importance

    1. Cellophane case; § 2 charges brought against DuPont for monopolization of cellophane manufacture (has the exclusive right in North/Central America to make by secret processes); Defense argues that the proper market definition is “flexible packaging materials” (D: less than 20% mkt share), not cellophane (D, 75% share).

      1. Legal test for monopolization: Monopoly power where firm can control prices or exclude competition (Chicago School skeptical on latter b/c difficult to distinguish from good competition.

    2. The ‘cream’ may be a different mkt

      1. Int’l Boxing Club case – court settles on “championship matches” as relevant product mkt rather than all professional boxing contests b/c of much bigger revenues, audience size, movie rights  not reasonably interchangeable

      2. Syufy Enterprises – anticipated high grossing movies is relevant market where price increases/constricted supply in those movies does not cause shift in consumption to others

    3. NCAA case looks different if NCAA succeeds in having mkt defined as all entertainment programs on TV?

    4. Cellophane case got the market wrong – important factors in deciding market, whether monopoly power:

      1. Elasticity of demand can be helpful (from firm POV, rate of decrease of sales in response to increased price;

        1. Cross-elasticity – rate at which consumers change consumption of one product (ex. Coke) in response to price change in another (ex. Pepsi, juice, water);

        2. Very high C-E of demand implies products belong in same mkt and v-v

        3. In Cellophane case, only the other maker of cellophane’s prices changed when DuPont changed prices

        4. (assumption with the curves is that everyone is charged same amount – not a reasonable assumption e.g. w/ attorney’s fees)

      2. when evaluating substitute products: don’t need physically identical products; an empirical inquiry of who users are and when they will switch to in response to price change; here, cellophane priced 2-3 times more than the so-called substitutes, but still sells well.

      3. Should worry about M power especially when the product is only a small portion of cost for buyer’s total product (like wrapping around cigarette carton?) – b/c then less likely that buyers will be vigilant about costs

      4. consider whether different users have varied elasticities of demand; could be that some will substitute while others will not; if most will not substitute = buy nothing when price too high  mkt power

      5. profit levels in abstract not helpful, but where get seemingly high profits and no new firms entering, starts to look like mkt power

    5. US v. Grinnell (charged w/ §§ 1 and 2 violations); court settles on national, accredited central station service as the relevant market; Held: correct mkt, violates § 2;

      1. Service mkt different from product mkts:

        1. possible to charge different prices to different buyers, and buyers can’t take service to market and resell at a higher price (arbitrage)  potential for monopolizing is higher

      2. might be that ct gets it right as to accreditation; if it’s true that insurance companies are the ultimate buyer of alarm systems, etc and they vote w/ feet saying CS is better; supports substitutes being less effective and more expensive = proper to exclude from mkt def’n

      3. dissent: not national market (consumers only going to look within 25 miles to find their alarm service – should look at the different local markets and have area-by-area remedial decrees; court disregards economic facts and instead chooses the market to fit the defendants;)

    6. Remedies available

      1. From Grinnell

        1. prohibition on behavior that is monopolizing

        2. filing of information w/ DOJ for compliance monitoring

        3. injunction prohibiting acquisitions

        4. divestiture

        5. restriction on employment of officers

        6. sell and lease

III Competitors Collaboration

  1. Cartels

    • Illegal association of firms cooperating to fix price or terms of comp

    • Direct competitors (producing substitutes, not complements)

    • Agreements to:

      • Fix price

      • Suppress other aspects of competition

    • No efficiency potential: the reason the cartel is profitable is b/c restrict output and increase price

    • Factors making cartelization likely:

      • Costs of organizing and maintaining very low (approaching zero)

      • Small number of firms

      • Low price elasticity of demand at competitive price so that when the cartel tries to raise prices, it won’t drive away customers to substitutes

      • Methods to assure durability

        • Punish defections and cheating

        • Deter new entry: price above marginal cost but not so high as to attract new entry

        • Payoff mechanisms among members: Addyston Pipe & Steel; transfer payments to satisfy the cartel member that wants to be earning more, but is letting the cartel work

      • High entry barriers (beyond normal entry constraints – above what existing companies had to do to get started)

        • Restrictive supply of necessary licenses, etc.

        • Long start up time - In the commercial airframe market, it would take a long time to get the capital, facilities, and personnel together to be a credible competitor to Boeing and Airbus

        • Cost, Demand disadvantages

          • Higher cost of capital

          • IP rights (patents, copyrights, etc.)

          • Licenses or franchises

          • Product differentiation – customer loyalty to what is there means have to charge less, advertise more, etc.

        • Economies of scale – if have to be really big even to enter

  2. Should cartels be illegal?

    • Yes : Mimic the M’s deadweight loss; inefficiencies in “transfer” rents, because of organizational costs; Often persist over time; certain industries are repeat players in the antitrust world (ready-mix cement, paper/paperboard)

    • No: inherently unstable because of cheating phenomena; Market will eventually self-correct (but, probably not quickly enough to address consumer welfare)

        • Technological innovation may destroy the cartel

        • Maybe new entry prohibitions will collapse;

Risks of deterring pro-competitive behavior

        • Argument made during Microsoft case; you may be mistaken and deter good competition

  1. price fixing by cartels

    • Use ROR analysis b/c of beneficial effect in promoting efficiency (= restrictions on competition can promote competition)

      • Chicago Board of Trade (1918) (NO violation where CBOT’s “call rule” set the price that would be charged for certain commodities of grain “to arrive,” during period after the closing of the call and before the session opens the nest day

        • Purpose of rule: convenience of members and break up a Chicago cartel

    • Excused by depressed conditions? Appalachian Coals – 1933 - (where industry depressed, group of 137 bituminous coal producers formed association with exclusive seller (commissioned), held not to violate even though price fixing);

      • Understandable in context of the Great Depression and the NIRA; if Ct had been honest in Socony, should have reversed (rather than distinguish)

    • Per Se Illegal: Socony-Vacuum Oil Co. (1940) Buying program of major oil companies’ organization to decide who would buy gas from independent producers (who were selling at distress prices); since the members of organization controlled wholesale and retail supply, able to actually raise price.

      • CT took broad view of SA prohibition and denied any consideration of proffered justifications;

        • Irrelevant that trying to stabilize depressed industry (distinguished Coals on grounds that purpose there was not to price fix)

        • Sufficient to show that price increase would not have happened w/o price fixing and that a substantial part of commerce affected.

    • Tests for legality

      • Addyston: must be ancillary to primary object of agreement

      • Standard Oil & CBOT: Rule of Reason; consider:

        • Market power of parties

          • Individually

          • Collectively

        • Purpose

        • Anticompetitive effect

          • Historical evidence? + predictions

        • Justifications – parties should know why adopted the restrictions; which make competitive sense vs. just diversionary?

      • Socony: Per se illegal (but does not overrule CBOT or coals?)

        • Limited per se rule has focused on certain practices:

          • Price fixing, quantity limitation, division of mkts, tying arrangements, group boycotts, vertical price maintenance

        • PS rule risks condemning benign or neutral arrangements; not worried if get it wrong when poorly understood devices or an arrangement w/ no mkt power

        • Advantages in ease of avoiding AT problems, court application

      • Modern take on the PS/ROR dichotomy – no longer case that P wins every time under PS, D wins every time under ROR;

        • Using more rigorous economics, characterizing the arrangements more carefully

        • All that is left under PS now are “raw price fixing” deals

  2. 1Characterization of arrangements – a first inquiry before choosing ROR or PS rule

    • Ask: likely effect to restrict competition? Purpose of arrangement?

    • Broadcast Music, Inc. v. CBS (1979) blanket license granting licensees a full access to Ds repertory properly considered under ROR (on remand, dismissed) –

      • not facially anticompetitive where

        • made available a different product;

        • DOJ permitted in consent decrees

        • Congress permitted in Copyright Act

        • blanket license a good answer to high transactions costs of many license seekers and many copyright holders doing business;

        • not exclusive licenses – could K w/ individual copyright holders

      • Purpose? BL an ancillary restraint; accompanies integration of sales, monitoring and enforcement of copyrights; developed in response to real mkt problem; lower cost than individual sales

    • Once decide BMI is competing w/ individual copyright holders, ask:

      • Output increased/decreased?

      • Is there a new product, R&D, combination of product? (ex. blanket license, auto company’s technology to meet envtl standards)

      • Cost of producing lower?

      • Creation of entry barriers? (important in BMI that it was nonexclusive license)

    • United States Gypsum Co. (1978) considered under ROR b/c Gypsum claimed R-P Act defense (charging a particular customer a lower price in order to meet competition’s lower price) meant it had to use interseller price verification by calling round to its competitors.

      • In criminal case, need showing of both anticompetitive effect and intent

    • Replace old water fountains by agreement to divide mkt based on original install base: no reason to think that market would do it that way  illegal

    • Use quick look ROR – something in between PS and full blown ROR?
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