Antitrust Powerpoint

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  • 1. What is antitrust/competition law? What is its purpose?
    • Concerned with:
      • Fears of concentrations of economic power in the hands of a few
      • harmful effects of some forms of business cooperation
      • misuse of “monopoly” power
    • Simultaneous rise of regulatory agencies and antitrust law
    • Late 1800s through early 1900s
  • 2. Overview of Antitrust/Competition Laws
    • Antitrust/Competition laws place faith in the market.
    • 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"
  • 3. Sources of Confusion in Antitrust/Competition Law
    • Economic definition of monopoly
    • vs.
    • Legal definition of monopoly
    • KEY: market power
  • 4. What’s wrong with concentrations of market power? How did Standard Oil acquire market power? John D. Rockefeller believed that monopoly was beneficial because it protected members of an industry from the harshness of the market (job losses and other upheavals). Do you agree or disagree? Who was hurt by Standard Oil’s business practices?
  • 5. Sources of Confusion in Antitrust/Competition Law
    • Business competitors that fail to compete with one another (by cooperating illegally) violate the antitrust laws.
    • BUT, businesses that compete too aggressively also violate the antitrust laws
    • Forms of competition that are not illegal for one firm (a non-monopolist) may be illegal for another (a monopolist)
  • 6. Illegal monopolization Illegal restraints of trade Sources of Confusion in Antitrust/Competition Law
  • 7. Sources of Confusion (cont’d)
    • Changing philosophies over time:
      • Movement away from presuming harm to consumer and toward requiring government/plaintiff to prove harm (increasing application of rule of reason)
      • Movement towards greater focus on effect on consumer in the long run
      • European Commission v. US DOJ
  • 8. Competitive vs. Cooperative Strategies
    • Two approaches to doing business:
      • Cooperative strategies , where companies work together to their mutual advantage.
      • Aggressive or competitive strategies , designed to create an advantage over competitors.
    • Some competitive strategies which may be illegal include:
      • Tying arrangements
      • Exclusive dealing contracts
      • Improper monopolistic practices
    • Some cooperative strategies which may be illegal, include:
      • Horizontal agreements
      • Vertical agreements
      • Mergers and joint ventures
  • 9.
    • Cooperative Strategies, Scenario 1:
    • The small town of Fort William has only two pharmacists. One pharmacist is Catholic, the other Protestant. One side of the town is predominantly Catholic; the other predominantly Protestant. The Catholic pharmacist is located on the Catholic side of town; the Protestant pharmacist on the Protestant side of town. But some Catholics shop at the Protestant pharmacist’s shop, and some Protestants at the Catholic pharmacist’s shop.
    • The two pharmacists agree that each will refrain from advertising their products to customers on the other’s side of town.
    • Every Sunday, the two pharmacists meet in the park and arrange to sell their products at identical prices.
    • VIOLATION OF ANTITRUST/COMPETITON LAWS?
  • 10.
    • Horizontal Market Divisions
    • Any effort by a group of competitors to divide its market is a violation of EC Article 81 and the Sherman Act Section 1.
    • Customer divisions:
      • By class (religion)
      • Geographically (side of town)
    • Supply divisions:
      • We won’t sell X in competition with you, if you don’t sell Y in competition with us.
      • E.g., two hardware stores in a small town agree that one will not stock plumbing equipment while the other will not stock electrical equipment
  • 11.
    • Horizontal Agreements (cont’d)
    • Price Fixing and Bid Rigging
      • When competitors agree on the prices at which they will buy or sell, their price-fixing is a per se violation of EC Article 81 and §1 of the Sherman Act.
        • Pharmacists
        • Sports club owners
        • Trade shows
        • Fixers must be able to exert market power
      • Bid-rigging – public contracts
  • 12. I llegal Horizontal Agreements (cont’d)
    • Refusals to Deal / Boycotts
      • Concerted refusals to deal vs. individual refusals
      • A refusal to deal violates the law if it harms competition.
      • U.S. v. Hilton Hotels
  • 13.
    • Vertical Agreements:
    • Acme, the world’s largest producer of auto parts, has a new Wood Products division that manufactures saws and other woodworking tools.
    • Acme has no retail outlets of its own, but sells its products to several major retail chains, who make the retail sales.
    • Acme has worked very hard to produce products that are price-competitive with Black and Decker and other major manufacturers.
    • To gain market share, Acme requires buyers of its auto parts to (1) also purchase for resale Acme’s new wood products, and (2) agree to limit the markup (retail price – wholesale price) to 10% of the wholesale price.
    • VIOLATION OF ANTITRUST LAWS?
  • 14. Vertical Arrangements: Resale Price Maintenance
    • Resale price maintenance (RPM) means that the manufacturer sets minimum prices that retailers may charge, eliminating discounting of certain products.
      • Manufacturers may want to set minimum prices to build loyalty with distributors or to maintain an upscale image or to reduce competition among its distributors.
  • 15. Resale Price Maintenance
    • Resale Price Maintenance is a violation of the law. A manufacturer may not enter into an agreement with distributors to fix prices.
    • Vertical Maximum Price-Fixing
      • Vertical maximum price fixing (manufacturer setting maximum retail price) is only illegal if it has an adverse effect on competition.
  • 16. Illegal Vertical Arrangements: Exclusive Dealing
    • Contract in which buyer agrees not to buy from seller’s competitors
    • Usually between manufacturer/supplier and retailer
    • Illegal if the effect is “to substantially lessen competition”
    • Standard Oil case (1949)
  • 17.
    • Scenario 3:
    • Acme, the world’s largest producer of auto parts, controls 65% of the American auto part market, and 25% of the world market.
    • A British firm, UKAuto, controls 40% of the world market, but only 10% of the American market. UKAuto wants to increase their market share in the U.S.
    • When UKAuto begins to erode Acme’s American market share, the two firms begin merger negotiations, and ultimately decide that Acme will purchase UKAuto.
    • VIOLATION OF ANTITRUST LAWS?
  • 18. Mergers and Joint Ventures
    • Horizontal Mergers
      • FTC and European Commission halt/approve mergers, based on likely impact on competition:
      • HHI as measure of market concentration: too much concentration creates rebuttable presumption of violation
    Herfindahl -Hirschman Index Calculator
  • 19. Mergers and Joint Ventures
    • Horizontal Mergers
      • A horizontal merger involves companies that compete in the same market.
      • FTC and European Commission halt/approve mergers, based on likely impact on competition:
      • HHI as measure of market concentration: too much concentration creates rebuttable presumption of violation
      • What is market? Product market:
        • Flexible wrap case case
      • Geographic market
  • 20.
    • Horizontal Mergers
    • Hewlett-Packard / Compaq merger
  • 21. Mergers and Joint Ventures (cont’d)
    • Vertical Mergers
      • Key is foreclosure of opportunities for non-merging firms
  • 22. Illegal Competition: Predatory Pricing
    • Predatory pricing occurs when a company lowers its prices below cost to drive competitors out of business.
    • To prove predatory pricing, show:
      • 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.
      • Bad intent is not enough; bad intent + fatal damage to competitor may not be enough
  • 23. Illegal Competition: Tying Arrangements
    • Selling a product on the condition that the buyer also purchases a different (or tied) product.
    • To determine if it is illegal, ask:
      • Are the two products clearly separate?
      • Is the seller requiring the buyer to purchase the two products together?
      • Does the seller have significant power in the market for the tying product? U.S. Steel case
      • Is the seller shutting out a significant part of the market for the tied product?
  • 24. Monopolization
    • Under §2 of the Sherman Act, it is illegal to monopolize or attempt to monopolize.
    • EC Art. 82 outlaws “abuse” of a “dominant position in the market”
    • To tell if a monopoly is illegal, ask:
      • What is the market?
      • Does the company control the market?
        • No matter what your market shares, you do not have a monopoly unless you can exclude competitors or control prices.
  • 25. Monopolization (cont’d)
    • How did the monopolist acquire or maintain control?
      • Possessing a monopoly used to be illegal; probably not any more
      • using “bad acts” to acquire or maintain one is.
    • What kind of bad acts? Anticompetitive behavior
      • Other antitrust violations
      • Predatory pricing
      • Tying arrangements
      • Exclusive dealing/refusals to deal
    • KEY: did/will behavior “diminish competition”
  • 26. Microsoft
    • Does defendant have monopoly power?
      • Market share – 70% “rule of thumb”
      • What market?
    • Did defendant misuse it?
      • Microsoft I: Caldera v. Microsoft
      • Microsoft II: The U.S. case - settled
      • Microsoft III: The European case
  • 27.
    • HISTORY:
    • Microsoft used its dominance in the operating system (OS) market to leverage PC makers into using only Microsoft software applications.
    • DOJ and Microsoft entered a consent agreement in which Microsoft agreed not to tie products together in this way.
    • DOJ claimed Microsoft violated the consent agreement: you be the judge.
    Microsoft Example
  • 28. Microsoft Example
    • DISTRICT COURT DECISION/ ISSUE #1: RELEVANT MARKET:
    • “ Microsoft possesses a dominant, persistent, and increasing share of the world- wide market for Intel-compatible PC operating systems . Every year for the last decade, Microsoft's share of the market for Intel-compatible PC operating systems has stood above ninety percent.
    • Even if Apple's Mac OS were included in the relevant market, Microsoft's share would still stand well above eighty percent. …”
  • 29.
    • MICROSOFT ARGUMENT:
    • Our monopoly cannot hurt consumers for two reasons:
    • Innovation in the computer industry is so fast that any monopoly is inherently unstable. If we are inefficient, we will lose our monopoly.
    • Our industry is characterized by “network effects” – i.e., the value of the product increases as it is more widely used.
    • These two characteristics mean that consumers benefit (and costs of production decrease) from a monopoly, AND that the monopoly nevertheless must be efficient (keep costs down) to survive.
  • 30.
    • DISTRICT COURT DECISION/ISSUE #1: HOW MICROSOFT DEFENDED ITS OPERATING SYSTEM (WINDOWS) MONOPOLY:
    • Vs. Netscape’s browser’s potential development as an “operating platform” in lieu of Windows:
    • “ As soon as Netscape released Navigator on December 15, 1994, the product began to enjoy dramatic acceptance by the public ... This alarmed Microsoft, which feared that Navigator's enthusiastic reception could embolden Netscape to develop Navigator into an alternative platform for applications development.”
    Microsoft Example
  • 31.
    • ISSUE #1 (cont’d):
    • A. Defending Windows against Netscape (cont’d):
    • Microsoft offered to leave the browser market for non-windows machines to Netscape (i.e., not to develop a version of Internet Explorer for those machines) and to give Netscape preferred access to information about new versions of Windows IF Netscape would refrain from developing its produce as a “platform” that could support applications.
    Microsoft Example
  • 32.
    • ISSUE #1 (cont’d):
    • A. Defending Windows against Netscape (cont’d):
    • When Netscape refused to cooperate with Microsoft, Gates sought to limit other companies’ use of the Netscape Browser.
    • “ Apple was installing Netscape at the default browser on its machines. … Ninety percent of Mac OS users were running a suite of office productivity applications [called] Microsoft's Mac Office.”
    • “ Microsoft threatened to cancel the product unless . . . Apple distributed and promoted Internet Explorer, as opposed to Navigator, with the Mac OS.” Apple agreed.
    Microsoft Example
  • 33.
    • ISSUE #1 (cont’d):
    • Defending Windows against Sun Microsystems:
    • “ The inventors of Java at Sun Microsystems intended the technology to enable applications written in the Java language to run on a variety of platforms . . . [so that] a program written in Java . . . will run on any PC system.”
    • Wanted Java to be windows-compatible, but …
    Microsoft Example
  • 34.
    • ISSUE #1 (cont’d):
    • Defending Windows against Sun Microsystems (cont’d):
    • “ Microsoft designed its Java developer tools to encourage developers to write their Java applications using certain "keywords" and "compiler directives" that could only be executed properly by Microsoft's version of the . . .”
    • “ Microsoft encouraged developers to use these extensions by shipping its developer tools with the extensions enabled by default and by failing to warn developers that their use would result in applications that might not run properly with any [version of Java] other than Microsoft's . . .”
    Microsoft Example
  • 35.
    • ISSUE #2: OTHER MISUSES OF MONOPOLY POWER
    • Vs. Intel
    • “ Although Intel is engaged principally in the design and manufacture of microprocessors, it also develops some software.. . .”
    • At a meeting, “Gates told [Intel CEO] Grove that he had a fundamental problem with Intel using revenues from its microprocessor business to fund the development and distribution of free platform-level software. In fact, Gates said, Intel could not count on Microsoft to support Intel's next generation of microprocessors as long as Intel was developing platform-level software that competed with Windows.”
    Microsoft Example
  • 36.
    • ISSUE #2 (cont’d): MISUSES OF MONOPOLY POWER
    • Vs. Intel (cont’d)
    • “ Intel's senior executives knew full well that Intel would have difficultly selling PC microprocessors if Microsoft stopped cooperating in making them compatible with Windows and if Microsoft stated to [PC manufacturers] that it did not support Intel's chips. Faced with Gates’ threat, Intel agreed to stop developing platform-level interfaces that might draw support away from interfaces exposed by Windows. . .”
    Microsoft Example
  • 37.
    • ISSUE #2 (cont’d): MISUSES OF MONOPOLY POWER
    • B. Vs. Apple
    • “ QuickTime is Apple's software architecture for creating, editing, publishing, and playing back multimedia content. . . . QuickTime competes with Microsoft's own multimedia technologies . . .”
    • “ Microsoft tried to persuade Apple to stop producing a Windows 95 version of its multimedia playback software …” In return, Microsoft offered to cooperate with Apple in a joint multimedia product.
    • “ Microsoft's representatives made it clear that, if Apple continued to market multimedia playback software for Windows 95 that Microsoft would enter the authoring business to ensure that those writing multimedia content for Windows 95 would use Microsoft's product instead of Apple’s.”
    Microsoft Example
  • 38.
    • ISSUE #2 (cont’d): MISUSES OF MONOPOLY POWER
    • C. Vs. IBM
    • IBM makes PCs, operating systems (OS/2) and software.
    • “ Microsoft tried to convince IBM to move its business away from products that themselves competed directly with Windows (OS) and Office (software) . . . . When IBM refused to abate the promotion of those of its own products that competed with Windows and Office, Microsoft punished the IBM PC Company with higher prices, a late license for Windows 95, and the withholding of technical and marketing support.”
    Microsoft Example
  • 39. Microsoft: The EU Case