Antitrust
“Is there not a causal connection
between the development of these
huge, indomitable trusts and the
horrible crimes now under
investigation? …Is it not irony to
speak of the equality of opportunity in
a country cursed with bigness?”
Louis D. Brandeis,
Supreme Court Justice

Sherman Act - Passed in 1890
◦ To prevent extreme concentrations of economic
power

Chicago School
◦ Adherents argued that the market should decide
the most efficient size for each industry

Post Chicago School
◦ Competition alone may not be enough to protect
consumers

Major provisions of the antitrust law:
◦ Section 1 of the Sherman Act prohibits all
agreement “in restraint of trade”
◦ Section 2 of the Sherman Act bans
“monopolization”—the wrongful acquisition of a
monopoly
◦ The Clayton Act prohibits anticompetitive mergers,
tying arrangements, and exclusive dealing
agreements
◦ The Robinson-Patman Act bans price discrimination
that reduces competition

Violations of antitrust laws are divided into:
◦ Per se: An automatic breach of antitrust laws
◦ Rule of reason: An action that breaches antitrust
laws only if it has an anticompetitive impact

Any conduct overseas that has an
anticompetitive impact in the United States is
a violation of U.S. law provided that the:
◦ Foreign actor intended to affect the U.S. market
◦ Foreign conduct has a direct and substantial effect
on the U.S. market

In developing a competitive strategy,
managers consider two approaches:
◦ Cooperative strategies that allow companies to
work together to their mutual advantage
◦ Aggressive strategies - Designed to create an
advantage over competitors

Potentially illegal types:
◦ Horizontal agreements: An agreement among
competitors
◦ Vertical agreements: An agreement among
participants operating at different stages of the
production process
◦ Mergers and joint ventures

Market division
◦ Any effort by a group of competitors to divide its
market is a per se violation of §1 of the Sherman
Act

Price fixing and bid rigging
◦ When competitors agree on the prices at which they
will buy or sell products or services, their price
fixing is a per se violation of §1 of the Sherman Act
 Bid-rigging is a per se violation
 Conscious parallelism: When competitors who do not
have an explicit agreement nonetheless all make the
same competitive decisions

Refusals to deal
◦ A refusal to deal violates the Sherman Act if it
harms competition

Reciprocal dealing agreements:
◦ A buyer refuses to purchase goods from a supplier
unless the supplier also purchases items from the
buyer

Price discrimination
◦ Under the Robinson-Patman Act, it is illegal to
charge different prices to different purchasers if:
 The items are the same
 The price discrimination lessens competition
◦ It is legal to charge a lower price to a particular
buyer if:
 The costs of serving this buyer are lower
 The seller is simply meeting competition

The Clayton Act prohibits mergers that are
anticompetitive
◦ Horizontal mergers: Involve companies that
compete in the same market
◦ Vertical mergers: Involve companies at different
stages of the production process
◦ Joint ventures
 A partnership for a limited purpose—the companies do
not combine permanently, they simply work together
on a specific project

Monopolization
◦ Under §2 of the Act, it is illegal to monopolize or
attempt to monopolize

To determine if a defendant has illegally
monopolized, ask:
◦ What is the market?
 Product market: Consists of other items that a
purchaser can buy
 Geographic market: Other areas where a purchase
could be made
◦ Does the company control the market?
 No matter where your market share, you do not have a
monopoly unless you can exclude competitors or
control prices
◦ How did they acquire or maintain control?
 Possessing a monopoly is not necessarily illegal
 Using bad acts to acquire or maintain one is


Occurs when a company lowers its prices
below cost to drive competitors out of
business
To win a predatory pricing case, the plaintiff
must prove three elements:
◦ The defendant is selling its products below cost
◦ The defendant intends that the plaintiff goes out of
business
◦ If the plaintiff does go out of business, the
defendant will be able to earn sufficient profits to
recoup its prior losses
Tying Arrangement
• An agreement to sell a product on the condition that a
buyer also purchases another, usually less desirable,
product

Illegal under §3 of the Clayton Act and §1of
the Sherman Act if:
◦ The two products are clearly separate
◦ The seller requires the buyer to purchase the two
products together
◦ The seller has significant power in the market for
the tying product
◦ The seller is shutting out a significant part of the
market for the tied product
Tying Product
• In a tying arrangement, the product offered for sale on
the condition that another product be purchased as well
Tied Product
• In a tying arrangement, the product that a buyer must
purchase as the condition for being allowed to buy
another product

Allocating customers and territory
◦ Vertical allocation is illegal when it adversely affects
competition in the market as a whole

Exclusive dealing agreements: A contract in
which a distributor or retailer agrees with a
supplier not to carry the products of any
other supplier
◦ Under §1 of the Sherman Act and §3 of the Clayton
Act, exclusive dealing contracts are subject to a rule
of reason
 Are illegal only if they have an anticompetitive effect

The manufacturer sets minimum prices that
retailers may charge
◦ Also called vertical price fixing
◦ Prevents retailers from discounting
◦ Rule of reason violation

When a manufacturer sets maximum prices
◦ A rule of reason violation of the Sherman Act
“Although managers sometimes resent the
constraints imposed on them by antitrust
laws, it is these laws that ensure the fair
and open competition necessary for a
healthy economy. In the end, the antitrust
laws benefit us all.”