978-0078023866 Chapter 11 Internet Exercise and Supplements Part 1

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Chapter 11 – Antitrust Law—Monopolies and Mergers

Internet Exercise and Supplements

Answer to Internet Exercise (p. 495)

1. On the site, http://www.justice.gov/atr/public/div_stats/antitrust-enfor-consumer.pdf, the

Department of Justice has listed eight “telltale” signs, including evidence that competitors have

agreed to “price their products a certain way, to sell only a certain amount of their product or to

Student Project

1. Find an example of a merger (proposed or completed) between two or more corporations. Is it a

horizontal, vertical, or conglomerate merger? Is any government or agency required to approve

the merger? What dangers to customers or competitors does the merger raise, if any? What

interests is the government trying to protect?

Supplemental Web Addresses

http://www.mintz.com/publications.php (Articles on the Hart-Scott-Rodino Act; locate by putting Act

name into search engine)

http://www.lectlaw.com/tant.htm (Online library on antitrust and unfair trade law)

Answers

Answers to ‘Introduction—Google, Microsoft, and Monopoly’ Questions (p. 469)

1. This is a discussion based question. Therefore, students’ answers may vary. Some may say that

the concentration of wealth and power may lead to threats on long-term welfare. Gates is arguing

2. According to federal antitrust law, size alone is not enough to produce a violation. There must

a. One argument is that the growth in technology fosters rapid innovation, and in a climate of

rapid innovation it is very hard for any company (including Microsoft) to maintain a monopoly.

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Chapter 11 – Antitrust Law—Monopolies and Mergers

b. The argument here is that, once a standard is set, competition declines and innovation can

stagnate, in part because consumers often feel a need to buy the product that everyone else

Answers to ‘Apple a Monopoly’ Questions (p. 471)

1. Typically, a 70 percent market share is the minimum at which the government begins to express

concerns about monopoly problems so the 69% share probably is generally in the ballpark.

2. By free market standards, lawfully crushing the competition normally would not be considered an

ethical wrong. If Apple has secured its market power lawfully, it is, from an egoist perspective, free

to exercise that power as it sees fit so long as it remains within the law. But some would regard

Answer to ‘Is Bob Marley a Product Market’ Questions (p. 474)

1. The Court concluded that Bob Marley’s music as a market “is too narrow to be relevant for

antitrust purposes.” Other music may reasonably substitute for reggae suggesting that it is not a

2. The absence of barriers to entry suggests that the market is healthy and free of unlawful

3. Universal won because of Rock River’s failure to define the relevant market and to present

meaningful evidence of market share and of market power.

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Chapter 11 – Antitrust Law—Monopolies and Mergers

Answers to ‘Christy Sports v. Deer Valley Resort Company’ Questions (p. 477)

a. Destination skiers at Deer Valley or Deer Valley’s mid-mountain village is considered too

small a market for antitrust purposes. “[W]e find it not implausible that destination skiers who

b. The Court said “The true product in these cases is the overall experience. Deer Valley offers a

a. The plaintiff must establish both power in a relevant market and anticompetitive conduct. The

court rejected the plaintiff’s market definition by “finding implausible a market definition that

b. Since the ski resort industry being competitive, many families who contemplate vacations

3. “[I]t is not anticompetitive conduct for a resort owner to refuse to invite competitors to supply

ancillary services within its resort.” “We agree with the defendant that the creator of a resort has

a. In this case it is difficult to untwine basically because the product—rental skies is closely

b. Because of the interchangeability with various other materials, Cellophane made it a part of

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Chapter 11 – Antitrust Law—Monopolies and Mergers

Answers to ‘U.S. v. Syufy Enterprises’ Questions (p. 480)

1. An opportunity for entry remained. By early 1988, Syufy‘s exclusive rights had declined to 39% of

2. The opinion focused on issues of conduct—harm to consumers and harm to movie distributors.

3. Apparently, none. The key was that Syufy’s conduct did not result in excluding competitors from

4. Raises the cross-elasticity of demand test. It suggests, but certainly does not prove, that rolled

5. The Supreme Court treated championship boxing as a market separate from other boxing

a. The NCAA offered as the relevant product market, “markets for the sale of certain athletic

b. The court said that Adidas failed to explain why other similar forms of advertising, such as

Answers to ‘Break Up the Biggest Banks?’ Questions (p. 480)

1. This is an opinion-based question. Students can go to their local bankers and find out the ethical

2. Students’ answers may vary. Big organizations (such as Bank of America, Citigroup, and

Goldman Sachs) sometimes grow so big that they are unbound by laws. Some students may

Answers to Questions—Part One (p. 481)

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Chapter 11 – Antitrust Law—Monopolies and Mergers

a. In the new, digital, intellectual property economy, some experts believe monopoly may

actually be necessary because all, or virtually all, of the costs are up front in development.

b. This can be a discussion question. Perhaps the special conditions of intellectual property will

a. The NCAA argues the rule is academic in nature. The promoters say the rule involves a

restraint of trade. The court’s conclusion: “We think it is apparent that the Two in Four rule

b. According to the circuit court, the district court, at one point, said that the relevant market

was all of Division I basketball. At another point, the district court said the market was

a. A firm in a competitive market may have its innovations copied by others before it can recoup

b. The consumer substitutes products that must cost society more to produce than the

4. In essence, Justice sued on the grounds that Stilwell was abusing its monopoly power in water

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Chapter 11 – Antitrust Law—Monopolies and Mergers

5. Presumably students will either join hands in worrying over the threat of bigness, or sound a call

a. The plaintiff’s’ theory was that the CRSs were essential to competition in the airline industry

b. The defendants’ argument was rooted in simple economics. American and United could not

charge an excessive fee to other airlines for use of their CRSs because if they did, the

Answers to ‘Mergers That Abuse Customers?’ Questions (p. 483)

1. It would be fair if Comcast would place the Tennis Channel on par with the Golf Channel and the

NBC Sports Network since it’s the merger’s responsibility. Merely remind the students of the role

2. Students’ answers may vary. In a business, it shows equality to all customers by treating them in

3. Students’ answers vary. A ruling was reached that 3-2 commission voted along the lines requiring

Answers to ‘Federal Trade Commission v. Staples, Inc. and Office Depot, Inc.’

Questions (p. 493)

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Chapter 11 – Antitrust Law—Monopolies and Mergers

a. The outer boundaries of the product market are determined by reasonable interchangeability

b. Several items of evidence supported that conclusion, including evidence of a low

cross-elasticity of demand between consumable office supplies sold by superstores and

a. The concentration statistics, the HHIs and the parties’ own pricing practices indicating that

b. The consolidation plans of the combined company would preclude effective division later if

the merger were determined to violate the antitrust law and the lack of an injunction would

3. Those analysts pointed to the fact that the two companies made up only 5-10% of the total sales

of office supplies in the U.S. and stated that the notion that superstores were a market in

a. This is an opinion-based question. Ask students to come up with certain facts that would

b. The aid would prohibit any merger participants from arguing the failing firm defense to

support a merger.

c. The Circuit Court found that: (1) collusion among the three resulting market leaders would be

possible, and (2) neither the “government’s tiny proposed market” nor the ten-county area

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Chapter 11 – Antitrust Law—Monopolies and Mergers

5. The Court excused the government from showing that regional market shares were the

meaningful geographic market in the Pabst case due to transportation costs and other factors that

Cases and Answers

Christy Sports v. Deer Valley Resort Company 555 F. 3d 1188 (10th Cir. 2009) (p.

475)

Syllabus

Christy Sports, a Utah ski rental company, that Deer Valley Resort Company, a ski resort developer,

had monopoly power over the Resort’s ski rental business and that the Deer Valley abused that power

to harm Christy Sports. Christy Sports claimed that the relevant market, was the market for ski rentals

to destination skiers in the resort in general or, even more narrowly, the market for ski rentals in the

mid-mountain village. The alleged anticompetitive conduct was the enforcement of a restrictive

covenant. The court found that having created a resort destination, Deer Valley Resort Company could

not be made to share its internal profit-making opportunities with competitors. The court also found

implausible a market definition that singled out a small component, the ski rentals. Further, refusing

access to competitors did not meet the anticompetitive conduct requirement.

U.S. v. Syufy Enterprises, 903 F. 2d 659 (9th Cir. 1990) (p. 478)

Syllabus

The government brought an antitrust action against the owner of certain movie theatres. After

an eight and one-half day trial, the district court dismissed this case. The government

appealed. The Court of Appeals held that the evidence demonstrated that the movie theatre

operator did not have the power to exclude competition or to determine prices and that

therefore the government could not show a violation of the antitrust laws.

Syufy entered the Las Vegas movie market in 1981 by opening a six-screen theatre. Syufy

“gained the upper hand” in the market and bought his rivals, Mann Theatres and Plitt

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Chapter 11 – Antitrust Law—Monopolies and Mergers

Theatres. Then in 1984 Syufy bought his largest remaining competitor for first-run movies,

Cragin Industries. For a time, Syufy controlled 100% of the first-run market. Soon Syufy’s

remaining rival, Roberts Company, moved from its second-run niche to competing with Syufy

in the first-run market. By 1986 Roberts had 28 screens to 23 for Syufy. Roberts had captured

a “healthy portion” of the first-run market. In 1985 Syufy had exclusive exhibition rights to 91%

of the first-run movies in Las Vegas. By 1988, that percentage had fallen to 39. In 1985, Syufy

had 93% of the first-run box office receipts. By 1988 that figure fell to 75.

The government brought suit charging Syufy with monopoly. The lower court and the Court of

Appeals found for Syufy essentially on the grounds that Syufy caused injury neither to

consumers nor to distributors. While Syufy’s share was large, the market remained

competitive and entry was quite possible as Roberts had demonstrated. Hence Syufy did not

have the power to control prices or exclude the competition.

Federal Trade Commission v. Staples, Inc. and Office Depot, Inc., 970 F. Supp.

1066 (D.D.C. 1997) (p. 490)

Syllabus

Staples is the second largest office superstore chain in the U.S.; Office Depot is the largest.

They proposed merging in 1996. The only other office superstore chain in the U.S. is Office

Max. They filed a premerger notification with the FTC, which spent seven months investigating

the proposed merger and then voted 3-2 to reject the proposed consent decree and started

this litigation seeking a preliminary injunction against the merger.

All parties agreed that the appropriate geographic market was metropolitan areas and the FTC

identified 42 such markets which could suffer anticompetitive effects. The FTC defined the

relevant product market as the sale of consumable office supplies through office superstores.

The corporations objected, saying that the market was simply the overall sale of office

products, of which they accounting for only 5.5%. The court indicated that interchangeability of

use and cross-elasticity of demand should be used to identify substitute commodities. The

FTC argued that a slight, but significant increase their prices would not cause a considerable

number of their customers to shop away from superstore alternatives; although an increase in

price from one of them would send their customers to the other of them. The FTC compared

prices of the stores in markets where they had superstore competitors and where they did not

and found higher prices where the three superstores did not compete. The court found that the

evidence suggested that office superstore prices are affected primarily by other office

superstores and not other types of competitors; this in turn suggests a low cross-elasticity of

demand. Thus, the court adopted the FTC’s product market definition.

In determining the probably effect of the merger on competition, the court looked at HHI

scores. In all of the defined geographic markets, premerger the scores were between 3597

and 6944. After the merger, those would be 5003 to 10000 (the highest possible score). The

average increase in the HHI would be 2715. In 15 metropolitan areas, the merged entity would

have 100% of the market and even the lowest score indicates a highly concentrated market.

The court concluded that the merger may substantially lessen competition.

There was also evidence that entering the office superstore market by a new competitor would

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Chapter 11 – Antitrust Law—Monopolies and Mergers

be quite difficult. One chain tried to do so and went bankrupt in five years. The court found it

extremely unlikely that another competitor would enter the market.

When the court balanced the public and private equities, it found the equities proposed by the

corporations insufficient to overcome the granting of a preliminary injunction. In other words,

the court found the FTC had shown a likelihood that it would succeed in proving after a full trial

that the proposed merger would violate the antitrust laws. Thus, the court granted the

preliminary injunction.

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