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What is antitrust/competition law? What is its purpose?

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What is antitrust/competition law? What is its purpose?

Concerned with:Concerned with:Fears of concentrations of economic power in Fears of concentrations of economic power in

the hands of a few the hands of a few harmful effects of some forms of business harmful effects of some forms of business

cooperationcooperationmisuse of “monopoly” powermisuse of “monopoly” power

Simultaneous rise of regulatory agencies Simultaneous rise of regulatory agencies and antitrust lawand antitrust law

National laws: 1800s through early 1900sNational laws: 1800s through early 1900s EU laws: 1980sEU laws: 1980s

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History of Antitrust

How did Standard Oil acquire market power?

John D. Rockefeller believed that monopoly was beneficial because it protected members of an industry from “destructive competition.” What does that “destructive competition” mean? Destructive to whom?

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• Market divisions

• Price fixing & bid rigging

• Predatory pricing

• Boycotts

• Tying arrangements

• Mergers

• Misuse of monopoly power

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Overview of Antitrust/Competition Laws

Antitrust/Competition laws place faith in Antitrust/Competition laws place faith in the market. the market.

EC Art. 81: EC Art. 81: prohibits agreements “which have as their object or effect the prevention, restriction or distortion of competition within the common market”

US Sherman Act: outlaws "every contract, combination . . . , or conspiracy, in restraint of trade"

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Economic definition of monopoly Economic definition of monopoly

vs.vs.Legal definition of monopolyLegal definition of monopoly

KEY: market power

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Market Power

“BAD” ACT

Collusion

Market share

Monopoly power in another market

Etc.

Power to increase prices above “competitive” price

Is the power to increase the market price sustainable?

Ease of entry to market

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Who decides what is “reasonable” or “unreasonable”?

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Who decides what is “reasonable” or “unreasonable”?

EU: European Comm’n Competition Directorate ECJ

US: FTC/Justice Dept US courts Private suits

Defining “harm” – “per se” vs. “rule of reason” violations

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Who decides what is “reasonable” or “unreasonable”?

Structural approach Chicago School IO approach

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Horizontal Agreements

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Horizontal Agreements Price Fixing and Bid Rigging

When competitors agree on the prices at which When competitors agree on the prices at which they will buy or sell, their price-fixing is a they will buy or sell, their price-fixing is a per seper se violation of EC Article 81 and §1 of the Sherman violation of EC Article 81 and §1 of the Sherman Act. Act. PharmacistsAirline ticket prices / retail gasoline pricesSports club ownersWorld steel market and the EUBeer distributors and credit termsTrade shows

Bid-rigging – public contractsBid-rigging – public contracts

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Horizontal Market Divisions Any effort by a group of competitors to divide Any effort by a group of competitors to divide

its market is a violation of EC Article 81 and its market is a violation of EC Article 81 and the Sherman Act Section 1.the Sherman Act Section 1.

Customer divisions:Customer divisions: By class (religion)By class (religion) Geographically (side of town)Geographically (side of town)

Supply divisions: Supply divisions: We won’t sell X in competition with you, if you don’t We won’t sell X in competition with you, if you don’t

sell Y in competition with us.sell Y in competition with us. E.g., two hardware stores in a small town agree E.g., two hardware stores in a small town agree

that one will not stock plumbing equipment while that one will not stock plumbing equipment while the other will not stock electrical equipmentthe other will not stock electrical equipment

OPEC production quotasOPEC production quotas

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Horizontal Market Divisions

What about joint ventures between What about joint ventures between competitors?competitors?

What about professional codes of What about professional codes of conduct: don’t these restrict conduct: don’t these restrict competition?competition?

What about franchising operations? What about franchising operations? Aren’t these geographic market Aren’t these geographic market divisions?divisions?

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Illegal Horizontal Agreements (cont’d)

Refusals to Deal / BoycottsRefusals to Deal / BoycottsConcerted refusals to deal vs. Concerted refusals to deal vs.

individual refusals individual refusals A refusal to deal violates the law if it A refusal to deal violates the law if it

harms competition.harms competition.South Improvement SchemeU.S. v. Hilton Hotels

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Illegal Competition: Tying Arrangements

Selling a product on the condition that Selling a product on the condition that the buyer also purchases a different (or the buyer also purchases a different (or tied) product. tied) product.

To determine if it is illegal, ask:To determine if it is illegal, ask:Are the two products clearly separate? Are the two products clearly separate? Is the seller requiring the buyer to purchase Is the seller requiring the buyer to purchase

the two products together?the two products together?Does the seller have significant power in the Does the seller have significant power in the

market for the tying product? market for the tying product? Is the seller shutting out a significant part of Is the seller shutting out a significant part of

the market for the tied product? the market for the tied product?

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Illegal Competition: Predatory Pricing

Predatory pricing occurs when a Predatory pricing occurs when a company lowers its prices below company lowers its prices below cost to drive competitors out of cost to drive competitors out of business. business.

The Walmart problem

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Illegal Competition: Predatory Pricing To prove predatory pricing, show:To prove predatory pricing, show:

The defendant is selling its products below cost.The defendant is selling its products below cost.The defendant intends that the plaintiff goes out The defendant intends that the plaintiff goes out

of business,of business, If the plaintiff does go 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.

Bad intent is not enough; bad intent + fatal Bad intent is not enough; bad intent + fatal damage to competitor may not be enoughdamage to competitor may not be enough

Why have such a test for predatory pricing?

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Mergers and Joint Ventures

Horizontal MergersHorizontal MergersA horizontal merger involves companies that A horizontal merger involves companies that

compete in the same market. compete in the same market. FTC and European Commission halt/approve FTC and European Commission halt/approve

mergers, based on likely impact on competition:mergers, based on likely impact on competition:HHI as measure of market concentration: too as measure of market concentration: too

much concentration creates rebuttable much concentration creates rebuttable presumption of violationpresumption of violation

Herfindahl-Hirschman Index Calculator = sum of the squares of the market shares of firms in

industry. Threshold inquiry.

2020

Mergers and Joint Ventures

Horizontal MergersHorizontal Mergers

FTC and European Commission halt/approve FTC and European Commission halt/approve mergers, based on likely impact on competition:mergers, based on likely impact on competition:

HHI as measure of market concentration: too HHI as measure of market concentration: too much concentration creates rebuttable much concentration creates rebuttable presumption of violationpresumption of violation

What is market? What is market? Product market:Product market:Geographic marketGeographic market

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Hewlett-Packard / Compaq mergerProduct Market?

Geographic Market?

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Hewlett-Packard / Compaq mergerProduct Market?

Geographic Market?

Laptops PCs workstations

HHD

Access Devices?

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Hewlett-Packard / Compaq mergerProduct Market?

Market shares?

• Access devices?

• Entry level servers?

Geographic Market? EEA

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Office Depot/Staples MergerOffice Depot Staples Other office supply

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Mergers and Joint Ventures (cont’d)

Vertical MergersKey is foreclosure of opportunities for Key is foreclosure of opportunities for

non-merging firmsnon-merging firmsTime Warner – Turner Broadcasting

What makes this merger worrisome for What makes this merger worrisome for regulators?regulators?