Chapter
11
Antitrust Law—Restraints
of Trade
Key Points
• Understand horizontal restraints
•Price-fixing
•Refusal to deal
• Understand vertical restraints
•Resale price maintenance
•Tying arrangements
•Exclusive dealing and requirements contracts
•Price discrimination
Examples
Sale of merchandise at NASCAR professional stock car
races
Collusion on commissions between Sotheby’s and Christie’s
auction houses
Global price-fixing by:
International vitamin manufacturers
Archer Daniels Midland and competitors in the lysine and
citric acid markets
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Horizontal Restraints
Definition: When competitors collude, conspire or agree among
themselves they are engaging in horizontal restraints of trade. Instead of
competing to drive prices down and quality up, they may be fixing
prices, restricting output and dividing territories.
Standard Oil (S. Ct. 1911): Only unreasonable restraints of trade are
prohibited.
The Rule of Reason: Balance the pro- and anti-competitive effects of
the situation in question.
Per se violations: Some antitrust violations such as horizontal price
fixing are perceived to be so injurious to competition that their mere
existence constitutes unlawful conduct. In recent years, the use of the
per se doctrine has declined.
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Horizontal Price-Fixing
Standard: Competitors may not lawfully agree on prices.
Four methods of proof:
Agreement with direct evidence (e.g., writings or testimony).
Agreement without direct evidence (i.e., proven by circumstantial
evidence).
Agreement based on a tacit understanding (e.g., the parties employ
tactics that act as surrogates for direct assurances and thus “tell” each
other that they are, in fact, in agreement).
Agreement based on mutual observation (e.g., competitors anticipate
each other’s future conduct and act accordingly without any direct
collusion but with results akin to those that would have resulted from
a direct agreement).
Contrast: Parallel conduct (i.e., independent but parallel business
behavior) which is legal. Business judgment has led each to
independently follow parallel paths.
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Information Sharing
Information sharing among competitors can be legal or
illegal, based on whether it enhances efficiencies or restrains
trade.
Example: Todd v. Exxon (2d Cir. 2001)
Primary analytical factors:
Structure of the industry
Nature of the exchanged information
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Refusal to Deal (a/k/a Group Boycott)
A horizontal group boycott involving a group with market
power and no purpose other than restricting output or raising
prices will probably be treated as a per se violation. Other
boycotts that have some lawful primary purpose are more
likely to be subject to Rule of Reason analysis.
Examples:
U.S. v. Visa International and MasterCard International (D.C.
2001)
Klors v. Broadway Hale Stores (S. Ct. 1959)
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Vertical Restraints
Types:
Resale price maintenance
Tying arrangement
Exclusive dealing and requirements contracts
Price discrimination
Analysis: Rule of Reason
Example: Pricing of CDs in the ’90s
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Resale Price Maintenance
Legitimate goals of resale price maintenance:
By establishing a minimum prices, the product’s reputation for
quality may be enhanced.
To prevent discount stores form undercutting regular retail outlets.
To prevent free riders (e.g., on national advertising campaigns).
Colgate Doctrine: Sellers may lawfully engage in resale price
maintenance if they do nothing more than specify prices at which their
products are to be sold and unilaterally refuse to deal with anyone who
does not adhere to those prices.
Rule of Reason analysis applies.
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Tying Arrangements
Definition: Customer allowed to lease or buy a desired product (the
tying product) only if she or he also leases or buys another product (the
tied product).
Concerns:
A party who already enjoys market power over the tying product is
able to extend that power into the tied product market.
Competitors in the tied product market are foreclosed from equal
access to that market.
Examples:
Microsoft bundling Internet Explorer with Windows operating
system
Visa/MasterCard requiring vendors to accept their debit, as well as
credit, cards
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Tying Analysis
Proof of the following conditions constitutes a per se tying
violation:
1. The existence of separate products.
2. A requirement that the purchase of one of the products (the
tying product) is conditioned on the purchase of another
product (the tied product).
3. Market power in the tying product.
4. Substantial commerce in the tied product is affected or, for
some courts, a substantial anticompetitive effect in the tied
product market.
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Exclusive Dealing and
Requirements Contracts
Exclusive dealing contract: Agreement in which a buyer
commits itself to deal only with a specific seller, thus cutting
competing sellers out of that share of the market.
Requirements contract: Agreement in which a seller agrees
to supply all of a buyer’s needs, or a buyer agrees to
purchase all of a seller’s output, or both.
Effects:
May reduce or eliminate intrabrand competition
May enhance interbrand competition
Analyzed under the Rule of Reason
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Price Discrimination
Price discrimination (illegal): Selling substantially identical
goods (not services) at reasonably contemporaneous times to
different purchasers at different prices, where the effect may
be to substantially lessen competition or tend to create a
monopoly.
Discounts (legal):
Price differentials attributable to cost savings.
Price differentials attributable to a good faith effort to meet the
equally low prices of a competitor.
Price change made in response to a changing market.
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Predatory Pricing
Definition: Lowering prices to drive out competition with the
expectation that it will recover its losses later by charging
monopoly prices.
Proof:
Prices set below average variable cost
Ability to recoup in future through exercise of market power
Example: American Airlines in Dallas-Fort Worth?
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DuPont’s Ten Don’ts of Antitrust
Don’t discuss prices with competitors.
2. Don’t divide customers, markets or territories with competitors.
3. Don’t agree upon or attempt to control a customer’s resale price.
4. Don’t attempt to restrict a customer’s resale activity.
5. Don’t offer a customer prices or terms more favorable than those
offered competing customers.
6. Don’t require a customer to buy a product only from you.
7. Don’t use one product as bait to sell another.
8. Don’t disparage a competitor's product unless the statements are true.
9. Don’t make sales or purchases conditional on reciprocal purchases or
sales.
10. Don’t hesitate to consult with your legal counsel.
1.
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