Chapter Chapter 4747

Antitrust LawAntitrust Law

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Exhibit 47-1: Antitrust Law Exhibit 47-1: Antitrust Law RationaleRationale

Traditional Antitrust Traditional Antitrust TheoriesTheories

To foster competition, a few To foster competition, a few powerful sellers should not powerful sellers should not dominate the economy; dominate the economy; there should be many buyers there should be many buyers and sellers in the marketand sellers in the market

Accumulation of economic Accumulation of economic power leads to accumulation power leads to accumulation of political power, which of political power, which leads to political leads to political consequences for consumersconsequences for consumers

Efficiency should not be the Efficiency should not be the only or most important goal only or most important goal of antitrust lawof antitrust law

Chicago SchoolChicago School

TheoriesTheories

Do not argue that Do not argue that concentrated economic concentrated economic power leads to political power leads to political consequencesconsequences

If a company held great If a company held great economic power and if the economic power and if the power led to efficiency, power led to efficiency, company should be left company should be left alonealone

Purpose of antitrust law is to Purpose of antitrust law is to encourage economic encourage economic efficiencyefficiency

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The Sherman The Sherman Antitrust ActAntitrust Act

Applies to business practices that Applies to business practices that restrain trade/commercerestrain trade/commerce

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Sherman Antitrust Act “Section 1” Sherman Antitrust Act “Section 1” ViolationsViolations

Elements of violation:Elements of violation:

Agreement between partiesAgreement between parties

Unreasonable restraint on tradeUnreasonable restraint on trade

Restraint affects interstate commerceRestraint affects interstate commerce

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Sherman Antitrust Act Section 1 Sherman Antitrust Act Section 1 ViolationsViolations

Horizontal Restraint of Trade: When two competitors in Horizontal Restraint of Trade: When two competitors in same market make an agreement to restrain tradesame market make an agreement to restrain trade

Price Fixing: When two or more competitors agree to set Price Fixing: When two or more competitors agree to set prices for a product/serviceprices for a product/service

Horizontal Division of Markets: Agreement between two Horizontal Division of Markets: Agreement between two or more competitors to divide among themselves markets or more competitors to divide among themselves markets by geography, customers, or productsby geography, customers, or products

Vertical Restraint of Trade: When two parties at different Vertical Restraint of Trade: When two parties at different levels in manufacturing and distribution process make an levels in manufacturing and distribution process make an agreement that retrains tradeagreement that retrains trade

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Sherman Antitrust Act “Section 2” Sherman Antitrust Act “Section 2” ViolationsViolations

Occur when companies with monopoly power use their Occur when companies with monopoly power use their economic power to limit production and raise priceseconomic power to limit production and raise prices

““Monopolization”: Occurs when company:Monopolization”: Occurs when company:

Possesses market power; andPossesses market power; and Unfairly achieved this market power/uses this market Unfairly achieved this market power/uses this market

power for abusepower for abuse

““Attempt to Monopolize”: Occurs if company intends its Attempt to Monopolize”: Occurs if company intends its behavior to:behavior to:

Exclude competitors; andExclude competitors; and Allow company to gain monopoly powerAllow company to gain monopoly power

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The Clayton ActThe Clayton Act

Section 2: Prohibits price discrimination: Occurs when Section 2: Prohibits price discrimination: Occurs when company sells same goods to competing buyers for different company sells same goods to competing buyers for different pricesprices

Section 3: Prohibits exclusionary practices, including exclusive Section 3: Prohibits exclusionary practices, including exclusive dealing and tying arrangementsdealing and tying arrangements

Section 7: Prohibits Anti-competitive mergers and acquisitionsSection 7: Prohibits Anti-competitive mergers and acquisitions

Horizontal Merger: Merger between two or more Horizontal Merger: Merger between two or more companies producing same/similar productscompanies producing same/similar products

Vertical Merger: Occurs when one company at one level of Vertical Merger: Occurs when one company at one level of manufacturing-distribution system acquires company at manufacturing-distribution system acquires company at another level of systemanother level of system

Conglomerate Merger: Occurs when company merges with Conglomerate Merger: Occurs when company merges with another company that is not a competitor or a buyer/seller another company that is not a competitor or a buyer/seller to the companyto the company

Section 8: Prohibits person from becoming director in two or Section 8: Prohibits person from becoming director in two or more competing companiesmore competing companies

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The Federal Trade Commission ActThe Federal Trade Commission Act

Prohibits unfair and deceptive methods of Prohibits unfair and deceptive methods of competitioncompetition

Any anti-competitive behavior not Any anti-competitive behavior not prohibited by Sherman Act/Clayton Act is prohibited by Sherman Act/Clayton Act is potentially illegal under Federal Trade potentially illegal under Federal Trade Commission ActCommission Act

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The Robinson-Patman ActThe Robinson-Patman Act

As originally written, the Clayton Act did As originally written, the Clayton Act did not apply to buyersnot apply to buyers

In effort to limit buyers’ power (in In effort to limit buyers’ power (in addition to sellers’), Congress adopted addition to sellers’), Congress adopted The Robinson-Patman ActThe Robinson-Patman Act

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