Chapter 39
Promoting Competition
N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows.
N A question new to this edition of the Test Bank.
+ A question modified from the previous edition of the Test Bank.
= A question included in the previous edition of the Test Bank.
TRUE/FALSE QUESTIONS
1. Antitrust legislation was created because of the belief that competition leads to
lower prices.
2. The Sherman Act, the Clayton Act and the Federal Trade Commission Act are
all examples of legislation designed to curb anticompetitive business practices.
3. A restraint of trade is an agreement between firms that has the effect of
reducing competition in the marketplace.
4. The basic purpose of antitrust law is to regulate economic competition.
5. An act must substantially affect interstate commerce to violate antitrust law.
6. An agreement that is deemed a per se violation will be examined by a court to
determine whether the agreement’s benefits outweigh its anticompetitive
effects.
7. A price-fixing agreement is an agreement by two or more sellers to boycott a
particular person or firm.
8. A price-fixing agreement that is reasonable does not violate antitrust law.
9. A group boycott is not a per se violation.
10. A market division by class of customer between rival firms violates antitrust law.
11. Territorial and consumer restrictions are per se violations.
12. Resale price maintenance agreements are subject to analysis under the rule of
reason.
13. A trade association practice or agreement that restrains trade is analyzed under
the rule of reason.
14. Section 1 of the Sherman Act condemns monopolization.
15. Predatory pricing involves selling a product at prices substantially above the fair
market value.
16. Monopoly power may be proved by evidence that a firm used its power to
control prices.
17. The primary measure of monopoly power is a competitor’s assessment of the
acts of a firm under review.
18. Monopoly power is a minor amount of market power.
19. Size alone does not determine whether a firm is a monopoly.
20. For products that are sold nationwide, the relevant geographic market
encompasses the entire United States.
21. The possession of monopoly power alone does not constitute the offense of
monopolization.
22. The Internet is changing the notion of the size and limits of a relevant
geographic market.
23. The offense of monopolization does not require the intent to monopolize.
24. A single seller acting unilaterally is free to deal, or not to deal, with anyone it
chooses.
25. The Clayton Act prohibits certain classes of price discrimination.
26. Charging different prices to different buyers for identical goods is price
discrimination.
27. Under an exclusive-dealing contract, a seller promises a buyer a certain
territory in which the buyer will have no direct competition.
28. Conditioning the sale of one product on the purchase of another is an
exclusive-dealing contract.
29. In determining the legality of a merger, a crucial consideration is market
concentration.
30. Market concentration refers to the number of firms in the market.
31. No person may be a director for two competing corporations at the same time.
32. A divestiture is an order to a company to cease, or divest itself of, its an–
ticompetitive conduct.
33. Labor unions can organize and bargain without violating antitrust law.
34. Insurance companies are exempt from antitrust laws whenever state regulation
exists.
35. Cooperative research by small-business firms is exempt from antitrust law.
MULTIPLE CHOICE QUESTIONS
1. Congress enacts a statute to outlaw a specific type of anticompetitive business
agreement. Like other laws that regulate economic competition, this law is
referred to as
a. a federal trade commission act.
b. an antitrust law.
c. an interstate commerce act.
d. a suppressive restraint on trade.
2. North Mining Company and South Excavation Company agree to abide by the
decisions of East Coast Financial Corporation as to their respective levels of
production, markets, and prices, effectively reducing competition and increasing
profits. This is most likely
a. a common, legal, time-honored type of business arrangement.
b. an illegal restraint on trade.
c. an innovative, legally efficient approach to doing business.
d. an outdated, but legal business trust.
3. To fall under the Sherman Act, an activity must
a. substantially affect interstate commerce.
b. involve monopolization.
c. promote competition.
d. involve international trade.
4. Thermo Gas, Inc., and Uno Oil Corporation refine and sell gasoline and other
petroleum products. To limit the supply of gas on the market and thereby raise
prices, Thermo Gas and Uno Oil agree to buy “excess” supplies from dealers
and “dispose” of it. This is
a. a deal that neither restrains trade or harms competition.
b. a legal restraint of trade.
c. a per se violation of the Sherman Act.
d. subject to analysis under the rule of reason.
5. When applying the rule of reason to determine whether an agreement violates
Section 1 of the Sherman Act, a court will not consider
a. the purpose of the agreement.
b. the parties’ market ability to implement the agreement.
c. the effect of the agreement on international trade.
d. the potential effect of the agreement on competition.
6. A court deems an agreement between Silver Saddles Saddlery and Time
Tested Tack, Inc. to be a per se violation of the Sherman Act. The court is
a. prevented from determining whether the agreement’s benefits outweigh
its anticompetitive effects.
b. required to unanimously decide whether the agreement’s benefits
outweigh its anticompetitive effects.
c. required to apply the rule of reason.
d. required to issue a formal complaint against Silver Saddles and Time
Tested Tack.
Fact Pattern 39-1 (Questions 7–8 apply)
Cardio, Inc., makes and sells Drawdown, the most prescribed name-brand heart
medication. Emitate Corporation has the potential to make a generic version of the
same drug.
7. Refer to Fact Pattern 39-1. Cardio pays Emitate not to sell its product. This is
a. a customer restriction.
b. a joint venture.
c. an exclusive-dealing contract.
d. a price-fixing agreement.
8. Refer to Fact Pattern 39-1. A court would most likely rule that the agreement
between Cardio and Emitate is
CHAPTER 39: PROMOTING COMPETITION 9
a. a deal that neither restrains trade or harms competition.
b. a legal restraint of trade.
c. a per se violation of the Sherman Act.
d. subject to analysis under the rule of reason.
9. Gulf Air, Inc., is the major wholesale distributor of software in the state of
Florida. Its closest competitor is Fluid Systems Company, another Florida firm.
The two firms agree that Gulf Air will operate in south Florida and Fluid
Systems will operate in north Florida. This is
a. a group boycott.
b. a market division.
c. a joint venture.
d. an exclusive-dealing contract.
10. Edgy Engine Components, Inc., a maker of vehicle parts, refuses to sell to
Fidgety Fix-It, Inc., a national vehicle service firm. Edgy Engine convinces
Greasy Motor Parts Company, a competitor, to do the same. This is
a. a group boycott.
b. a market division.
c. a joint venture.
d. an exclusive-dealing contract.
11. Some agreements are so blatantly and substantially anticompetitive that they
are deemed illegal per se under Section 1 of the Sherman Act. Which of the
following is not a per se violation?
a. A price-fixing agreement
b. A group boycott
c. A trade association
d. A market division
12. Lightning Cycles, Inc., makes Lightning-brand motorcycles and accessories,
which are distributed to authorized dealers, including Macho Motors, Inc.
Macho operates dealerships in several locations. Lightning imposes restrictions
on Macho to limit the areas in which they sell the bikes and insulate other
dealers from direct competition. This is
a. a territorial restriction.
b. a resale price maintenance agreement.
c. a refusal to deal.
d. a price-fixing agreement.
13. Organic Cheeses, Inc., Fine & Fresh Foods Company, and Healthy Whole
Foods, Inc. organize together to exchange information and share advertising.
This is an example of a
a. trade association.
b. resale price maintenance agreement.
c. monopoly.
d. territorial restriction.
14. A trade association
a. is always a per se violation of Section 1 of the Sherman Act.
b. may be legal if it is sufficiently beneficial to both the association and the
public.
c. is an innovative, legally efficient approach to doing business.
d. always creates illegal territorial or customer restrictions.
15. Spa Selectiva Company makes and sells beauty salon supplies. By selling its
product at prices substantially below the normal cost of production, Spa
Selectiva hopes to drive its competitors from the market. This is
a. market power.
b. predatory pricing.
c. price discrimination.
d. price-fixing.
16. Gourmet Foods, Inc., requires all distributors of its products to sell them at a
specified minimum price. Under the Sherman Act, this is a violation
a. if the anticompetitive effects outweigh the competitive benefits.
b. if the competitive benefits outweigh the anticompetitive effects.
c. under any circumstances.
d. under no circumstances.
17. Marvin is a very good businessman. He starts Marvin’s Bike Company in the
small town of Wheatland, South Dakota. There is one other bike store in
Wheatland. Through good business management, Marvin’s Bike Company
obtains a great deal of market power in Wheatland. This acquisition of
monopoly power is
a. a per se violation of Section 1 of the Sherman Act.
b. an illegal restraint on trade.
c. not an antitrust violation.
d. a per se violation of Section 2 of the Sherman Act.
18. Imperio Caffeine Corporation makes and sells coffee under a variety of brand
names. Imperio wants to merge with Java Company, its main competitor. In
weighing a challenge to the deal, a court looks at the relevant product market.
This most likely includes coffee and
a. no other products.
b. products that are not identical but are related, such as spin-offs.
c. products that are sometimes substituted for coffee.
d. products with identical attributes only.
19. A suit is filed against Adroit Drilling Tools Corporation, alleging that the firm
committed the offense of monopolization. To determine whether Adroit has
monopoly power requires looking at
a. the definition of monopoly in the Sherman Act.
b. Adroit’s size alone.
c. Adroit’s production methods and marketing techniques.
d. the relevant market.
20. Listen Up! Corporation books and promotes concerts and other entertainment
events, for which Listen Up! also sells tickets. In weighing a challenge to Listen
Up!’s “monopolistic” ticket prices, a court looks at the relevant geographic
market. This encompasses
CHAPTER 39: PROMOTING COMPETITION 13
a. only areas in which Listen Up! does not have monopoly power.
b. only areas in which Listen Up! has monopoly power.
c. the area in which Listen Up! and its competitors sell, and their customers
buy, the tickets.
d. the entire United States in all cases.
21. A suit is filed against Dormroom Furniture Unlimited, Inc., alleging that the firm
has committed the offense of monopolization. To determine whether Dormroom
has committed this offense, the court will consider the extent of Dormroom’s
market power and
a. how Dormroom acquired its power.
b. how Dormroom makes its products.
c. Dormroom’s customers.
d. Dormroom’s suppliers.
22. Master Manufacturing Corporation has exclusive control over the market for its
product. Under the Sherman Act, this is
a. a per se violation.
b. a violation if it acquired this power through “business acumen.”
c. a violation if it acquired this power through “anticompetitive means.”
d. not a violation.
23. To acquire monopoly power in its market, Perfect Plastics, Inc., sets its prices
lower than its competitors. Under the Sherman Act, this is
a. a per se violation.
b. a violation if its competitors make similar deals.
c. a violation if it thereby acquires monopoly power.
d. not a violation.
24. Rally Speedboat Corporation refuses to sell its products to Super Weekends,
Inc., a recreational water products dealership. This is
a. an exclusive-dealing contract.
b. a horizontal market division.
c. attempted monopolization.
d. a unilateral refusal to deal.
25. An antitrust action is brought against Tri-State Transport Company, alleging the
offense of attempted monopolization. To be guilty of this offense, Tri-State’s
attempt must have
a. a dangerous probability of success.
b. a deadly guaranty of success.
c. a distant possibility of success.
d. a distinct improbability of success.
26. Fresh Vegetables, Inc., a wholesaler, refuses to sell its produce to Good Mart
Stores, Inc., a retailer. This is
a. “an unfair or deceptive act or practice.”
b. a per se violation.
c. not a violation.
d. subject to analysis under the rule of reason.
27. A unilateral refusal to deal can violate antitrust laws if the refusal
a. is likely to have an anticompetitive effect on a particular market.
b. results in lower prices for consumers.
c. provides no economic benefits for consumers.
d. is likely to increase competition.
28. Precious Metals Corporation, a raw materials vendor, sells its commodities in
certain quantities to Quarry Refining Company for a certain price but charges
Rich Assets, Inc., a Quarry competitor, a higher price. This is most likely a
violation of
a. the Clayton Act.
b. the Federal Trade Commission Act.
c. the Sherman Act.
d. no antitrust law.
29. HVAC Parts Company charges different buyers different prices for identical
goods. HVAC’s prices are subject to evaluation under
a. the Clayton Act.
b. the Federal Trade Commission Act.
c. the Sherman Act.
d. no antitrust law.
30. To drive its competitors out of a certain geographic segment of its market,
Fryin’ Potatoes, Inc., sets the prices of its products below cost for the buyers in
that area. This is
a. a refusal to deal.
b. business acumen.
c. predatory bidding.
d. price discrimination.
31. City Manufacturing Corporation conditions shipments of its products to Exurb
Stores, Inc., on Exurb’s agreement not to buy products from Regional Works
Company, City’s competitor. This is
a. an exclusive-dealing contract.
b. a tying arrangement.
c. price discrimination.
d. a unilateral refusal to deal.
32. Luminescent Silicon Corporation, which controls 40 percent of the computer-
chip market in the United States, merges with Micro Processors, Inc., which
controls 15 percent of the same market. This merger is a violation
a. only if the result more clearly concentrates the market.
b. only if the result makes it more difficult for potential competitors to enter
the market.
c. if the result more clearly concentrates the market and makes it more
difficult for potential competitors to enter the market.
d. under no circumstances.
33. Global Services Corporation engages in trade practices that may violate
antitrust law. The Federal Trade Commission has the power to act against
unfair trade practices under
a. the Clayton Act.
b. the Federal Trade Commission Act.
c. the Sherman Act.
d. no law.
34. Mango Corporation believes that Melon Corporation engages in anticompetitive
behavior in an attempt to drive Mango and its other competitors out of the
market. Antitrust laws can be enforced against Melon by
a. Mango and its competitors only.
b. Mango, its competitors, and the Federal Trade Commission only.
c. Mango, its competitors, the Federal Trade Commission, and the U.S.
Department of Justice.
d. the Federal Trade Commission and U.S. Department of Justice only.
35. Big U.S. Oil Company joins with a foreign cartel to control the price of oil. If the
cartel has a substantial effect on U.S. commerce
a. both Big U.S. Oil and the foreign cartel can be sued for violation of U.S.
antitrust laws.
18 UNIT SIX: GOVERNMENT REGULATION
b. neither Big U.S. Oil nor the foreign cartel can be sued for violation of
U.S. antitrust laws.
c. only Big U.S. Oil can be sued for violation of U.S. antitrust laws.
d. only the foreign cartel can be sued for violation of U.S. antitrust laws
ESSAY QUESTIONS
1. Java Bean Company imports coffee beans and sells them under two-year
contracts to Mellow Roast, Inc., and other coffeemakers. The contracts require
that during the two–year term a coffeemaker not buy beans from Java Bean’s
competitors. The contracts do not limit the coffeemakers’ purchase of tea or
other beverage ingredients from other suppliers, however. In the second year of
the contract, Mellow Roast protests that this arrangement violates antitrust law.
Is Mellow Roast correct? If not, why not? If so, under which antitrust statute, or
statutes, could these contracts be held illegal?
2. Bubbly Bottling Company is engaged in the soft-drink bottling and distribution
industry in the states of New York and New Jersey. The firm currently has
about 40 percent of the market for these products and related services.
Carbonate Distribution Corporation competes with Bubbly in the same states.
Carbonate has about 35 percent of the market. If Bubbly were to acquire the
CHAPTER 39: PROMOTING COMPETITION 19
stock and assets of Carbonate, would Bubbly be in violation of any of the
antitrust laws? If so, which one? Discuss fully.